Ideas & Debate

Is the KRA justified to increase excise duty?

Bodaboda operators pick passengers in Kisumu.
Bodaboda operators pick passengers in Kisumu. PHOTO | TONNY OMONDI | NMG 

One of the undying expectations Kenyans have during the annual budget making is that there will always be tax adjustments for the so-called “sin” goods.

It is always expected that the Treasury will increase tax on goods such as alcohol and cigarettes. But this year’s budget was different.

To the mwananchi, the Cabinet Secretary did not increase the taxes on the bottle and the stick. But unknown to them, the adjustments were contained in a sly change of the Excise Duty Act that now allows the government to review excise duty rates every year.

Just like the segments of the Finance Bill 2018 that subtly came into force through a little-known law, the KRA has now published the revised excise duty through a legal notice.

In the legal notice published on July 13, the KRA has increased specific duty on alcoholic products, tobacco products and motorcycles at an average rate of 5.2 per cent.

This effectively increased the prices of alcohol and tobacco beginning August 1, 2018. The increase in duty on motorcycles is, no doubt, expected to impact the affordability of this basic means of transport that has virtually taken over in most parts of Kenya.

Taxes on motorcycles had previously been kept low, leading to increased uptake of the low-cost mode of transport, especially in rural areas.

We have witnessed even more conventional taxi companies incorporating motorbikes in their fleets. In recognition of the role of motorcycle ambulances that are increasingly becoming common, especially in the rural areas, the KRA has proposed to exempt them from the excise duty hike.

In the same breadth, locally assembled motorbikes will be spared the taxman’s noose as a way of promoting local manufacturing and assembly.

Further the KRA has increased duty on water and other non-alcoholic drinks at an average rate of four per cent. This comes in the wake of the KRA’s attempt to increase duty on bottled water, juices, soda in PET, energy drinks, other non-alcoholic beverages, food supplements and cosmetics.

That was partly intended to widen the tax bracket by bringing in the manufacturers of non-alcoholic beverages and bottled water, whose uptake has been rising. Manufacturers were expected to instal machines in their production lines in order to affix excise stamps to the products.

The affixing of stamps would help the KRA deter counterfeiting, facilitate the tracking of excisable goods along the supply chain, enable accounting for the production or import of excisable goods and enable any person wishing to authenticate the stamps or quality of the products to do so easily.

Luckily for the consumers, the courts have quashed the levying of these taxes on grounds that there was no adequate public participation before the KRA could introduce the stamps.

The government has appealed the High Court decision arguing that besides losing revenue, the gains made in the fight against illicit trade in tobacco and alcoholic products risk being reversed. The appeal is yet to be determined.

Another curious increase in duty is on electronic cigarettes, which are up Sh156 per unit.

Harmful effects of tobacco cigarettes would create the expectation that the government would consider lowering the duties on electronic cigarettes so as to increase in their uptake.

There needs to be a balance between collection of taxes and targeting of policy effect on critical areas such as health. The taxman should consider reversing this increase.

Critically looking at the state of the economy, the KRA was not justified to increase these specific duties on the premise of inflation.

Interestingly, data from Kenya National Bureau of Statistics shows that inflation has been falling from end of last year.

The average inflation rate dropped from eight per cent to five per cent this year, making the increase unjustifiable.

It is critical to note that the taxman has spared petroleum products the duty hike.

This should be interpreted as the calm before the storm as VAT on petroleum kicks in in a months’ time.

Kenyans should tighten their belts as the taxman is under strict instructions to collect so as to feed the Sh3 trillion budget.

Going forward, manufacturers and producers of the affected products will have to adjust their accounting systems so as to factor in the anticipated price hikes in August.

Omayio is a Senior Tax Consultant at Andersen Tax, Kenya. [email protected]