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Columnists

Avoid tax raises amid economic storm

Times Tower
Times Tower. FILE PHOTO | NMG 

There is more to economics than tinkering with taxes. I am surprised that even as we continue to grapple with new plans to reshape the post-Covid economy, all our revenue-obsessed makers of tax policy at both the Treasury and Kenya Revenue Authority (KRA) are thinking is how to adjust excise duties upwards.

Recently, the KRA sent a notice to manufacturers and importers of excisable goods that it intends to adjust the rates of excise duty using the average inflation rate for the current financial year. The implication of the plan by the KRA is that excise duty rates are bound to move upwards.

Granted, the law requires the KRA to annually make adjustments on products with specific rates of excise duty rates such as alcohol to cover for inflation.

But does it, really, make economic sense to dogmatically insist on applying the law at a time when manufacturers are yet to recover from lockdowns and other disruptive effects of the coronavirus?

Has the KRA looked at the likely effect of the decision it wants to implement on the broader macro-economy — on jobs, on living standards, on the quality of life.

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The impact of the coronavirus pandemic on the alcohol industry has been devastating — to put it mildly. Bars and restaurants, which are some of the largest employers in the country have been hit hard like no other by the coronavirus pandemic, forcing losses of thousands of jobs.

According to estimates by beer maker East Africa Breweries Ltd (EABL), overall consumption of beer has dropped by 39 percent as from March 23, when sale of alcohol was prohibited as part of measures to control Covid-19.

And, when it comes to the protocols by the Ministry of Health such as limits on congregations and social distancing, the scrutiny on bars and restaurants has been intense. Even after the protocols were relaxed, what you see in places like Nairobi is an environment where seating is restricted to safe distances. I recently visited what used to be a popular bar and restaurant owned by a friend of mine and all I could see were about five lonely seats across, with guests dotted here and there slipping their masks down to sip a drink.

And, all this at time of depression of economic activity — when customers are on half salaries and therefore have far less leisure income to spend. Excise taxes inevitably increase prices of taxed commodities thereby lowering consumer demand for the products. Why do we want to subject bars and restaurant businesses to suffer double jeopardy?

My point is that before we think about increasing excise duties on alcohol or on any other excisable product, we must examine the damage the coronavirus has done to value chains.

In the case of sorghum and barley farmers, livelihood options for thousands of citizens of this country are at stake. EABL has estimated that as a consequence of the current restrictions on sale of alcohol, barley and sorghum demand is projected to plummet by 73 percent in the current financial year.

Going by current prices barley famers are bound to lose Sh 1.2 billion and sorghum farmers Sh809 million. EABL estimates that the number of farmers at stake come to 32,242.

Does it really make sense to put livelihood options of so many citizens of this country at risk because the law says that the KRA must adjust excise duties upwards every year in light of movements with the price level?

In the current circumstances, and as the impact of the coronavirus on the economy continues to be felt, tax policy must aim at reinvigorating the economy and restoring engines of growth. If the KRA has its way, its actions will only serve to roll back the positive effects of the measures President Uhuru Kenyatta announced in June and April to cushion the economy from the impact of the coronavirus.

Indeed, the reductions in corporation and VAT tax rates served to cushion manufacturers of excisable products such as Kenya Breweries by reducing fixed costs thus enabling them to retain employees without having to implement salary cuts.

In South Africa, the National Treasury recently asked legislators to extend relief measures for businesses, including a deferral on excise duties and pay roll levies.

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