Beer and wine consumers are set to feel the heat of new regulations that will see prices of alcoholic drinks change every three months, as the Treasury seeks to boost the national tax kitty with a bigger cash contribution from merry makers.
Finance minister Njeru Githae on Thursday published a legal notice that will make excise taxes on beer and alcohol payable on retail prices, as opposed to previously when the levies were charged on ex-factory prices.
Mr Githae inserted the detail in a separate gazette notice that was published and tabled in Parliament on the same day, unlike in the past when finance ministers announced increases in taxes on alcoholic products in their main budget speech.
“The commissioner shall determine and publish in the gazette the retail selling price for (beer and wines) on a quarterly basis,” read part of the gazette notice. “Retail selling price means the average selling price, determined in accordance with these regulations, for the purposes of levying ad valorem excise duty,” added the new law which came into force on Friday.
Tax experts and beer manufacturer Keroche Breweries said the new rules are set to trigger a sharp increase in prices, dampening the spirits of consumers who assumed they had escaped the annual “sin tax” that the Treasury habitually loads onto alcohol drinkers.
The quarterly adjustment of retail prices also puts both consumers and manufacturers in an uncertain position with the possibility of up to four price changes in a year.
“The new (tax) model will work like the Value Added Tax and this will inevitably mean that consumers will have to pay more,” said the Keroche Breweries Managing Director Tabitha Karanja, adding that beer manufacturers will now increase their ex-factory prices, starting a chain reaction that will cascade to the consumers.
“Furthermore, if a bar in downtown Nairobi sells its beer at Sh120 per bottle but the retail price is later set at Sh150, the owners will have to adjust their prices upwards,” she added.
Beer consumers will also have to yield to a more robust National Agency for Campaign Against Drug Abuse (Nacada), whose budgetary allocation was increased by Sh1 billion to finance implementation of the Mututho Laws.
The Treasury had already signalled an intention to raise taxes on beer when it factored in a 20 per cent growth in excise tax revenue estimates for the financial year 2012/13.
According to the Treasury projections, taxes on beer are set to increase by Sh14 billion to Sh85 billion in the coming financial year.
Domestic excise duty comprises mainly taxes on alcohol, tobacco, soft drinks and bottled water and plastics, with the first two accounting for over 90 per cent of total collections.
Excise taxes on beer contribute over half of all the entire domestic excise taxes.
Mr Githae had actually already set the stage for the new taxation regime in the Finance Act 2012, but implementation of the changes failed to take off as regulations describing retail selling price (RSP) had not been set.
“The value of locally manufactured goods for purposes of levying ad valorem excise duty shall be the ex-factory selling price except in the case of beer and wine, where the value shall be the retail selling price as determined by the regulations,” read the amendment to Section 127c of the Customs and Excise Act.
The finance minister added that in the cases where the products are sold directly to consumers from the factory, the RSP will be the amount paid by the consumer. Where new brands are being introduced into the market, the manufacturer will declare the maximum RSP to the commissioner.
Beer and wine distributors were in the past not captured in the excise duty bracket, allowing them a free hand in setting their mark up costs once they bought stock at the factory. “The increase in price margins between factory price, dealer selling price and retail price with beer is quite high, justifying the levy at the final stage.” said Ashif Kassam, the Managing Partner at RSM Ashvir, an audit firm.
Tax experts said that other than the inevitable increase of the price of beers and wines, implementation of the law could prove challenging.
They say that if the Kenya Revenue Authority (KRA) settles on an average regional retail price —similar to what is done when setting monthly fuel prices — a problem could arise since retail prices vary widely. For instance, the same brand of beer or wine retails at different prices in various bars in the city – at times even those adjacent to each other.
The disparity gets bigger farther away from the Central Business District, with bars located in estates and upcountry having much lower prices.
Nikhil Hira, a partner with audit firm Deloitte, says the criteria could further complicate the pricing formula.
“Will the average price of these products also include prices sampled from five star hotels whose prices are much higher?” posed Mr Hira, adding that no two regions had the same pricing structure.
Mr Hira suggested that one way of actualising the new system was setting a retail price structure based on volumes of products sold. In last year’s budget, the then finance minister Uhuru Kenyatta imposed a fixed excise tax of Sh70 or 40 per cent a litre, raising malted beer tax by five shillings (or Sh2.50 a bottle) from previous Sh65 and that for non-malt beer by Sh15 from Sh55.