Economy

Taxman targets contraband traders with new duty stamps

KRA-HQ

KRA headquarters. The taxman on Wednesday said that the long-awaited tender for the supply of the new stamps with enhanced security features would be floated this month.. Photo/FILE

The Kenya Revenue Authority (KRA) is betting on second-generation revenue stamps to fight a key segment of the contraband goods market estimated to cost the economy billions of shillings.

READ: KRA dips into red amid a financing row with Treasury

The loss from illegal cigarette and alcoholic drinks is part of a wider national problem involving fake goods estimated to cost the economy Sh70 billion annually besides loss of employment opportunities.

KRA on Wednesday said that the long-awaited tender for the supply of the new stamps with enhanced security features would be floated this month.

The upgraded stickers are expected to be on cigarettes and wines and spirit containers before the end of the financial year in June.

“The specifications for the stamps are ready. We want to issue an international tender before the end of this month,” said Grace Murichu, the KRA deputy commissioner in charge of procurement and supplies.

The tender is one of the largest security printing opportunities in Kenya with the winner of the last bidding, which did not result in an award, having quoted Sh732 million (6.6 million euros) annually.

However, the new stamps could be more expensive due to the enhanced security features. This means the taxman would be constrained in meeting the budget following poor allocation of funds by the Treasury.

The main users of excise stamps in Kenya are cigarette manufacturers British American Tobacco and Mastermind Tobacco, wines and spirit makers East African Breweries Ltd (UDV subsidiary), Keroche Breweries Ltd and London Distillers.

Alcohol and cigarettes are the main sources of excise tax in Kenya, making them a lucrative target for tax evasion running into billions.

Among the most counterfeited goods are dry cell batteries, alcoholic beverages, fruit juices, shoe polish, toothpastes, soaps and detergents, ball point pens, books, electrical and electronic items are some of the most counterfeited products.

Cigarettes top the list of counterfeit products sold in Kenya.

According to a report titled Termites at Work: A report on Transnational Organised Crime and State Erosion in Kenya, the counterfeit industry is worth as much as Sh70 billion, making the country a leader in East Africa.

On Wednesday, BAT area head of corporate and regulatory affairs Joe Muganda estimated that 20 per cent of the cigarette sold locally are contraband.

BAT, with a turnover of Sh13.5 billion last year, accounts for about 80 per cent of the Kenyan market with most of the balance held by Mastermind.

This in turn implies a market of over Sh21 billion with turnover in excess of Sh4 billion going untaxed. The cigarette market is estimated at 6.3 billion sticks in a year.

“Improved stamps are obviously a factor but unless there is enforcement of the law and people are taken to court nothing much will change,” said Mr Muganda.

Keroche Breweries CEO Tabitha Karanja yesterday welcomed KRA’s move.

“People are faking the excise stamps on the street. The move is much welcome as it will make this more difficult and make competition more fair,” she said.

The Kenya Association of Manufacturers has estimated that local manufacturers are losing as much as Sh30 billion a year to illegal traders who also pose a risk to public health.

Indian security printing firm, Madras, has supplied the stamps in the last five years, mostly by default after its rivals contested the award in court meaning a new tender could not be floated.

The firm, if it participates, is expected to face massive competition from global competitors in what normally shapes up into a battle between Asian and European printers.

De La Rue of UK and Canadian Bank Note Company, both of which are major contenders in the currency printing tenders, previously printed the stamps.

Western firms have traditionally dominated the security printing business in Kenya for years but Asian firms have stepped up pressure with their lower cost bases.

Apart from Madras, Nadra, a Pakistani parastatal, has been printing Kenya passports since 2007 after offering a much lower bid than other competitors like De La Rue. The latter has been participating in tenders, including that of currency, both as a local and international operator as it operates a plant at Ruaraka, Nairobi.

Incidentally the new tender comes as its global CEO Tim Cobbold is expected in Nairobi today to meet State officials.

The firm is seeking to sell 40 per cent of its stake at the plant to the government.

De La Rue has been at loggerheads with KRA since the award to Madras which it contested and lost at the Procurement Review Board and later at the High Court.

KRA opted to settle out of court and refloat the tender to upgrade its offer. However, after Sicpa, a Swiss printer, won the technical bid, KRA found itself stuck with the option of a three-year deal costing ¤6.6 million a year and chose not to award the tender after coming to terms with its financial constraints.

This is because, legally, it could not open the nine technically failed bids and compare the financial bids.

“The figure they quoted was way above our budget by about three times but we could not check the others due to Public Procurement Rules’ restrictions,” said Ms Murichu.

KRA views the three-phase Sicpa deal as the most feasible as it came with new features, a hidden photo-magnetic line that can be swiped. It could also relay real-time data to Times Tower, the KRA head office, broadband capacity allowing.

The Sicpa systems have been tested in Brazil which is viewed as the model excise tax collector with its advanced state ICT system.

For instance, it can read electronically 200 containers in a packing line, data which is updated every 15 minutes at the revenue offices.

While KRA for now has no capacity to implement the real-time production phase, it says GSM technology can handle the swiping, which would improve field monitoring by relaying data to the headquarters. Fakes would equally register on servers.

The Madras stamps cost about Sh2 each and their bid according to KRA was at least half of their European counterparts.

It is the second Indian firm to win a major tender at KRA after Tata won the tender for installation of a system accommodating a taxpayer ledger and audit module that now allows ferreting out of inconsistencies and failure to make online filing.

[email protected]