Secret tax pain in Rotich’s Sh2.1trn budget revealed

Kenyans should get ready to pay significantly higher prices for everything from beer and cigarettes to used cars, juices and even water, tax proposals forwarded to Parliament show.

Worse, the proposals provide for built-in annual increases in tax rates that will keep the pressure on consumer wallets up with every passing year.

The changes, which Treasury secretary Henry Rotich kept muted during his budget statement last Thursday, are contained in the Excise Duty Bill 2015 through which the government hopes to raise Sh25 billion.

Mr Rotich urged Members of Parliament to prioritise the draft law for debate, saying the measures are key to funding the Sh2.1 trillion 2015/16 budget.

“In this simplified Bill, we are imposing excise duty to compensate for the harmful effects caused by production, supply, consumption or use of goods and services, which costs are not reflected in their prices,” said Mr Rotich.

First in line to bear the brunt of the new provisions are car buyers, with the minister having introduced a blanket tax based on a vehicle’s age to replace the current calculation, which relies on its estimated value.

Mr Rotich wants to slap a Sh200,000 excise tax on all vehicles more than three years old from the date of first registration and Sh150,000 for newer vehicles.

This adjustment replaces the existing 20 per cent excise tax based on a vehicle’s value, which is charged alongside customs and VAT.

Both new and second-hand cars are now set to cost more since dealers will inevitably transfer the new charge and higher tax totals to their customers.

Kenya Auto Bazaar Association secretary-general Charles Munyori described the proposal as “outrageous”, warning that it will only lower tax collection.

“Most Kenyans import second-hand cars aged either seven or eight years with just a handful opting for showroom vehicles,” he said. “The government is introducing this to drive second-hand dealers out of business.”

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Motorcycles will also attract excise tax at Sh10,000 a unit, a burden that tax experts say will hit the cycle-taxi (boda boda) industry hard.

“The taxation of motorcycles will have a big effect on the booming boda boda business as the prices will go up and possibly the transport costs,” says Lilian Kubebea, tax director at Deloitte East Africa.

Steeper sin taxes

Mr Rotich, who did not adjust excise taxes in his previous two budgets, also has his eye on the traditional victims of ‘sin taxes’ — manufacturers of alcoholic drinks and cigarettes.

Cigarettes, which are currently taxable at the higher rate of Sh1,200 per 1,000 sticks (mille) or 35 per cent of the retail sales price, will see the applicable rate more than double to Sh2,500 per mille.

Smokers trying to stop can expect to find the taxman waiting with his hand out when they buy electronic cigarettes or cartridges as these, too, now attract taxes at Sh2,000 to Sh3,000 per unit.

Cigarettes with tobacco substitutes also see an increase of about 130 per cent to Sh2,500 per mille.

The new Bill proposes a flat rate of Sh100 per litre for beer, cider and other “fermented and spirituous” beverages whose alcoholic strength is below 10 per cent.

These beverages are currently charged the higher amount between Sh70 per litre and 50 per cent of the ex-factory price, meaning the taxes go up a minimum of 42 per cent.

Wines, including fortified ones, will be subject to an excise duty of Sh150 per litre manufactured, while spirits and spirits liqueurs whose alcohol content is above 10 per cent will be taxed at the rate of Sh175 per litre.

This represents an increase from the higher amount between Sh80 per litre or 50 per cent of the ex-factory selling price for wines, and Sh120 per litre or 35 per cent of the ex-factory price for spirits.

The changes see the tax rates go up at least 87 per cent for wines and 45 per cent for spirits.

Keroche Breweries, a local manufacturer, has over the past year been vocal about the planned tariffs, calling for the imposition of a uniform excise tax on all alcoholic drinks to achieve “fairness” in the sector.

“I have proposed a marginal increase of excise duty on alcoholic beverages to reflect the current effective rates after adjusting for inflation,” Mr Rotich told MPs last week.

Beverages

Fruit juices, water and other non-alcoholic beverages have not been spared.

The Bill suggests that juices be subject to an excise tax of Sh10 per litre, a new rate that will see manufacturers adjust their prices upwards. The current rate is seven per cent of the ex-factory selling price.

Water and other non-alcoholic beverages will be subject to a similar tax, up from Sh3 per litre. The retention of the tax on bottled water in the final copy of the Bill particularly contradicts Mr Rotich’s budget day promise that bottled water — which is now ubiquitous in the society — will not be taxable going forward.

Plastic bags

Shoppers should also be prepared to pay more for the use of plastic paper bags as Mr Rotich has proposed a tax of Sh120 per kilogramme of the item, up from 50 per cent of the ex-factory selling price.

This new measure he said is meant to “address the challenges of environmental degradation caused by careless disposal of (non-biodegradable) plastic bags”.

The Bill, when passed into law, will repeal the Customs and Excise Tax Act and bring the taxation of luxurious items, commonly known as sin tax, in line with the East African Customs Management Act.

“The main objective of this Bill is to consolidate the provisions on the imposition and collection of excise duty into a separate law,” Aden Duale, the Leader of Majority in the National Assembly, notes in its memorandum.

The Economic Survey 2015 shows that the government earned Sh18.99 billion from excise duty levied on beer last year, a 13 per cent increase from the previous year’s Sh16.8 billion.

The government collected excise tax amounting to Sh4.6 billion from wines and spirits, Sh245.3 million from mineral water, Sh10.28 billion from cigarettes and Sh2.7 billion from other commodities.