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Why our tax regime is not sustainable

tax

Kenya has an unsustainable tax policy regime that can’t inform investors’ decision making. FILE PHOTO | NMG

One of the outstanding indictments of the government's economic governance, apart from blatant corruption and mismanagement, is incoherent and ransom-targeting like tax regime.

In 2003, the informal alcohol market was around 56 percent of the total market share, with informal here meaning not within formal structures to be captured in the tax bracket. So, in 2004 EABL launched Senator Keg, an affordable alternative to illicit alcohol targeting low income consumers and was supported by government through an excise tax remission.

By 2011, it was the second-most popular beer in Kenya and had grabbed 40 percent market share from illicit and traditional liquor. The success story of Senator Keg was applauded as an anecdote of how governments can influences policy outcomes through favourable tax policies.

Kenya had managed to fight illicit alcohol by bringing 50 percent to consume a safe and regulated product, increase tax revenues as well as create a thriving value chain with more than 12,000 sorghum farmers and 12,000 retail outlets. But this success became a problem at the same time, a situation where informal businesses intentionally became a prime target for taxation in every budget. Senator Keg has been shuffled around in many budgets since in what looks like a ransom-targeting exercise.

In the Budget Statement tabled before Parliament, the government intends to cut its excise tax remission from 80 percent to 60 percent, and the Treasury has been explaining that this decision is based on alcohol having inelastic demand.

To say that Senator Keg has inelastic demand means consumer demand is not sensitive to changes in price, which is factually incorrect.

In 2013, the government reduced excise duty remission from 100 percent to 50 percent doubling the price of keg and the consumer demand drastically plummeted. The number of sale outlets selling keg fell from 12,900 to 6,750 within six months and overall consumption dropped by 59 percent within one year.

By 2015, keg consumption had dropped by 82.3 percent whilst illicit brew consumption increased to unprecedented levels of 60 percent. These facts are not new, Kenya Breweries Limited had presented them to the Treasury during public participation when drafting the Budget.

It is a well-known fact that the price of alcohol can influence consumption levels and governments use taxes to influence consumption, heavy drinking and other alcohol harmful effects.

But that is not our case where government is simply trying to increase tax revenue collection. Increasing taxes will in fact shrink tax collection.

In 2015, the government after witnessing the negative impact of the tax increase moved the remission to 90 percent, which brought prices back to Sh23. Retail outlet numbers selling keg more than doubled to 13,500 by the end of the year, showing clearly the price elasticity of keg.

Keg has a high price elasticity because its consumers are very responsive to price changes, and this is entirely about price affordability. So, if government intends to raise more revenue from keg, it should keep the price affordable so as to expand that tax base

It is certain that in markets of alcoholic drinks that are price inelastic consumers are not sensitive to price changes, and these are the high-income consumers who are after quality and will imbibe in drinks like wine, whiskey and other drinks in that calibre.

In fact there is a cohort that attaches quality with price, the more expensive it is the more interested they are to consume it, particularly if the value of tax is unknown to them. This is not the category of keg consumers

To conclude, this ransom-targeting like tax regime is hampering investor confidence. In 2017, Diageo invested in a Sh 15 billion Senator Keg brewery in Kisumu and now government plans to increase taxes. From an investors perspective, Kenya has an unsustainable tax policy regime that can’t inform investors’ decision making.