Prices of beer, cigarettes, bottled water and fruit juices will automatically rise every two years if proposed amendments in the Finance Bill set for debate tomorrow in Parliament are passed into law.
The price increases, which will be pegged on the average inflation rate in the 12 months preceding the bi-annual review, could come into force as soon as this July.
The Excise Act currently gives the Treasury and the Kenya Revenue Authority powers to effect inflation-based tax increases every year but the amendment, if passed, will see the adjustment frequency changed to two years.
The inflation tax has never been implemented since the Excise Act was passed in 2013, as the Treasury chose to forego revenue for fear of raising prices of basic commodities beyond consumers’ reach.
The inflation rate has averaged about 7.9 per cent in the past five years, signalling a significant surge in consumer prices if the government chooses to effect the tax this year.
KRA has failed to meet its tax targets in successive years, widening the budget deficit for a government that has been implementing multi-billion shilling infrastructure projects.
The government plans to spend a total of Sh2.62 trillion in the coming national budget, of which excise taxes are expected to jump from Sh180.8 billion in the current budget to Sh199.8 billion as per published budget estimates.
Parliament’s departmental committee on finance, planning and trade has proposed to amend Section 10 of the Excise Duty Act by deleting the word ‘“annually” and substituting it with “every two years”, according to the Finance Bill 2017 that is set for its third reading tomorrow in Parliament.
Analysts say the proposal for a two-year review will offer a reprieve to consumers, distributors and producers of the affected goods such as brewers and cigarette manufacturers.
“Adjusting the prices every two years is expected to effectively reduce the rate at which prices of the affected goods increase considering there would be no inflationary adjustment in some of the years,” said Peter Njenga, a tax manager at Deloitte East Africa.
“The concern among the affected industries was that annual inflationary adjustments would lead to instability in prices of the affected goods and distort the overall inflation. This may further lead to uncertainty in the market making it difficult for investors to make long term investment decisions.”
The proposed amendment does not touch on the computation of the adjustment factor, which is set as the average rate of monthly inflation of the preceding financial year.
The tax, which is chargeable on a long list of commodities such as beer, fruit juice, bottled water, cigarettes, and cosmetics, will rise in line with the average rate of inflation for the 12 months ending June 30, 2017.
The cost of living rose by an average of 7.6 per cent in the ten months to April. The KRA is mandated to publish the applicable rate for the 12 months to June based on a formula in the Excise Act.
“The commissioner shall, by notice in the Gazette, adjust the specific rate of excise duty annually to take into account inflation in accordance with the formula specified in Part I of the First Schedule,” reads part of the law. Beer is currently taxed at Sh100 per litre, cigarette at Sh2,500 per mille, fruit juices at Sh10 per litre and illuminating kerosene at Sh7,205 per 1,000 litres.
Treasury secretary Henry Rotich proposed a special tax rate of Sh1,800 per mille for plain cigarettes, decoupling them from those with filters that will be taxed at the rate of Sh2,500 per mille.
Excise tax on spirits is also to be raised to Sh200 per litre from the current Sh175 per litre. The current and proposed excise rates for the various commodities will form the base on which the inflation factor will be loaded going forward.
Manufacturers had petitioned Parliament to amend the law to allow for the inflation adjustment of excise taxes every three years, fearing a major jump in prices from the annual review as contained in the current law. “Price instability makes it difficult to make long term investment decisions in the value chain,” Kenya Association of Manufacturers (KAM) told the committee.
“In addition, there is need to allow for adequate time for industries to adjust to inflation impositions by government.”
Mr Rotich said in his April Budget Speech the inflation-based adjustment of the excise duty will start in July to help boost revenue collections.
The government argues that the introduction of the cost of living adjustment to the excise taxes is meant to boost its revenue collection.