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Why the excise goods system is a scandal

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The Kenya Revenue Authority headquarters in Nairobi. FILE PHOTO | NMG

This month the Kenya Revenue Authority (KRA) is expected to enforce the Excise Goods Management System (EGMS) on non-alcoholic drinks.

By use of excise stamp, the system fitted in the production chain allows the KRA to track the product from incorporation into the production chain of manufacturers as well as authentication by consumers.

The system is to not only boost tax revenue but also enhance compliance and fight counterfeits, enabling fair competition among traders. For example, it is estimated that up to 78 percent of companies in the water sector don’t pay a fair share of taxes. From this perspective, the EGMS looks rosy, belling the cat, until one lifts the lid to the whole project and it’s a can of worms.

Let us start with the procurement of the system. In 2013, the KRA directly awarded the EGMS tender to SICPA, an international company based in Switzerland company at Sh17 billion for five years.

Now, the Public Procurement and Disposal Act provides that an entity shall not commence any tendering procedure until it is satisfied that sufficient funds have been set aside in its budget to meet the obligations of the resulting contracts. But in this case, the taxman did not have the funds to commence this procurement deal, it then opted to redesign the project as self-financing where revenue made through the sale of stamps to manufacturers at a unit cost of 1.50 cents covers all the cost of the contract.

There are two problems in terms of this contract.

First, tax design is primarily a legislative issue whilst KRA is only an administrator, therefore a deal where taxes are going to be used to finance a project, in this case, a procurement obligation, it is Parliament that has the constitutional duty to sanction it but this wasn’t the case — a blatant violation of public management principles.

Second, in the implementation of the EGMS, the company procured in this deal will be collecting Sh45 million daily an amount that will reach Sh81 billion in the five years of the tenure of the contract, when the cost of the contract is 17 billion.

So, the taxpayer will be losing a whopping Sh64 billion. This is according to a 2019 Auditor-General’s special audit report on the procurement of the EGMS presented to the National Assembly Public Investment Committee.

To explain the economic cost, what the KRA is essentially doing is sucking money out of manufacturers in excise duty, and instead of it going to socio-economic investment, it is being transferred to private hands. The company is simply enjoying the hard-earned fruits of manufacturers at the altar of corruption.

Next is looking at the real cost of implementing the EGMS to manufacturers.

According to the Kenya Association of Manufacturers (KAM), Kenya has an installed bottling capacity over 500,000 bottles an hour, which translates to 4.32 billion a year, this is assuming 100 percent capacity utilisation. Now, the estimated actual cost of a stamp is seven cents which when multiplied with the production capacity cost gives 3.02 billion in revenue collection. Whereas in the proposed stamp duty under EGMS, the estimated beverage cost of stamp duty is 60 cents multiplied with the production capacity cost gives 25.9 billion.

This points out the cost of the inefficiency of the system standing at 22.88 billion, which is in actual sense is foregone revenues by beverage manufacturers when technology should be encouraging efficiency.

Coming to the cost of implementing the EGMS, it is the manufacturers and consumers bearing the administrative and compliance costs associated with the implementation and operation while KRA is only providing the cost of the machine.

In the roll-out of the system, manufacturers have to change their designs to conform, which means costs related to retrofitting the production line emerging. The KAM estimates the cost of implementing EGMS from 0.36 to 2.8 per unit, very high and untenable for small industries.