Manufacturers estimate that Kenya will lose over 35,000 jobs and billions in taxes if the Kenya Revenue Authority (KRA) implements the 6.3 percent inflation adjustment on excise duty expected to push goods out of the reach of many consumers.
The Kenya Association of Manufacturers (KAM) says industries will cut their workforce, terminate supply contracts and reduce remitted taxes if consumption declines as a result of higher prices.
The lobby says sales have already declined due to excise tax increases on spirits and beer in July that have hit barley and sorghum-based beer sales by 21 percent and 32 percent respectively to Covid-19 pandemic levels in just a month and a further increase will lead to collapse as consumers turn to illicit alcohol.
Oil marketers, alcohol and cigarette manufacturers are appealing to National Treasury to defer inflation adjustment on the excise tax, saying it will fuel price increases across the country worsening inflation that currently stands at 8.5 percent beyond the State upper limit target of 7.5 percent.
“Finished goods distribution and retail trade (dominated by MSMEs) will lose Sh4.2 billion in reduction of raw material use, Sh15.7 billion in employment income loss and 35,364 jobs will be lost,” KAM said.
Governments that tax goods in local currency at specific rates find that they lose value as the prices of goods increase.
They have to choose whether to charge ad valorem tax, a proportion of the value of the underlying assets or effect a specific rate but adjust the rate periodically to inflation.
Kenya has chosen the latter, which means the taxman annually moves the tax on excisable goods upwards in line with the price movements of the commodities.
This, however, leads to further price increases creating a cycle of more inflation adjustments that can push prices outside the budget of most consumers and work against tax collection by cutting consumption or tempting business to cheat the taxman.
Manufacturers say if taxes were adjusted to inflation since 2018, the cumulative rise in annual inflation would jump to 26.56 percent, and this would drive them out of business as buyers will either seek cheaper alternatives or abandon some habits altogether.
Petroleum Institute of East Africa (PIEA) has said the inflation adjustment rate set to further increase the cost of fuel and petroleum products, will cut consumers’ purchasing power and threaten the survival of businesses in transportation, manufacturing and agricultural sectors.
PIEA has also called for a review of nine taxes and levies on fuel and petroleum prices such as value-added tax, import declaration fee, rod maintenance levy, and anti-adulteration levy which take up more than 50 percent of the total cost of petrol, diesel and kerosene paid by consumers.
Alcohol manufacturers including Kenya Breweries Limited (KBL), Diageo’s subsidiary UDV Kenya Limited and Kenya Wine Agencies Limited (KWAL) are also seeking a suspension against increasing the excise tax rates, unable to absorb taxes on behalf of the consumers.
They said the increase will lead to a loss of Sh588 million in income to farmers and over 15,000 growers will be affected by reduced uptake of sorghum and barley grain for production besides small businesses in distribution and retail trade losing Sh4.2 billion contracts leading to massive job losses across the value chain.
KAM has warned that further increases in excise rates will frustrate investment and cause shift of industries to other countries, amid business closures.
Audit firm KPMG said the timing of the tax is expected to see SMEs scale down production and lead to job losses.
KRA has the discretion to adjust specific excise rates in line with inflation, with the approval of the CS for the National Treasury who can grant a review by the Parliament.
‘’We have taken the submissions and will have further deliberations with Treasury before we can make a decision. We are going to look at them fairly. Before the end of next week, we will decide whether to publish the adjustment or if there will be any changes,” KRA’s Deputy Commissioner for corporate policy Maurice Oray said during a public participation meeting.