The government stands to lose close to Sh70 billion in the next decade under a proposed tax policy on cigarettes, a report by the Institute for Legislative Affairs (ILA) says.
The study on cigarette tax regime by the Christian lobby says the proposed tax laws that charge excise duty based on the quality of cigarettes as opposed to a single rate for all products will result in lower revenue for the State.
The Excise Duty Bill, 2015 had proposed a flat duty of Sh2,500 per 1,000 sticks but Parliament made an amendment that would charge a tax of between Sh900 and Sh2,800 per 1,000 sticks, depending on the flavour or brand of the cigarette.
President Uhuru Kenyatta has since rejected the changes. The current tax rate is Sh1,500 per 1,000 sticks. The ILA study says that should the amendments go through they will make cigarettes cheaper which will increase consumption but in the long run the government will collect lower taxes since the tax charged has reduced.
“These simulation results demonstrate that if the tiered specific excise proposed in the amendment were to be implemented as opposed to the originally proposed uniform specific excise, the Kenyan economy would suffer in two ways: (1) greater health cost burden from increased cigarette smoking, and (2) substantially lower revenue potential, which could be, according to our estimates, as large as nearly Sh67 billion over the ten-year period,” says the report.
The amendments go against the spirit of the Tobacco Control Act which is meant to deter the vice, it added. Furthermore the amendments complicate tax calculation and revenue collection leading to the rejection.
“The proposed change will make revenue collection complex through the application of multiple rates to similar excisable goods contrary to the provisions of section 40(5)(b) of the Public Finance Management Act, 2012.
That provision requires that any proposals adopted by the House on revenue matters take into account, inter alia, the principle of ease in revenue collection,” said Mr Kenyatta last month.
He also rejected amendments to tax charged on vehicle importation. The Treasury expects that simplifying the Excise Duty Bill will result in collecting Sh25 billion in the 2015-2016 fiscal year.
Early last month listed cigarette manufacturer British American Tobacco (BAT) Kenya said the proposed amendments would complicate computation of taxes and reduce transparency in the industry which will in turn reduce revenues for the government.
BAT Kenya supports a flat rate for all cigarette brands.