Economy

Excise taxes hit on reduced beer, cigarette consumption

beer

Excise taxes on beer and cigarettes are on a negative trend, reflecting a slowdown in consumption. PHOTO | SHUTTERSTOCK

Excise taxes on beer and cigarettes – the core products under the tax category— are on a negative trend, reflecting a slowdown in consumption even as revenue from other products under the same tax segment increased.

An excise tax is charged on the sale of a particular good or service.

While excise taxes from beer and cigarettes fell by 0.5 percent and 8.2 percent respectively over the past five years, taxes collected from airtime and financial transactions more than doubled, a Kenya National Bureau of Statistics (KNBS) report shows.

Read: Alcohol, cigarettes spared tax hikes for first time in 5 years

Excise duty on airtime shot up by 117.6 percent to Sh39 billion between 2018 and 2022, with revenues from the tax on financial transactions increasing by 120.6 percent over the same period to Sh40.9 billion.

The trend is being witnessed even as debate rages for the exclusion of non-harmful products from the list of those being charged excise duty, which was created to discourage the consumption of harmful products.

“Excise duty tax was created to target the negative externality or social cost of a product. As such, the tax was designed to target harmful product components or the best available proxy for that externality or cost. This implies that less harmful or less costly substitutes should be excluded from the tax base,” the National Assembly’s Finance Committee noted in a recent report on the proposed National Tax Policy.

MPs observed that the tax was being applied as a revenue-raising measure to fund government budgets, seeing different products with no proven harm being charged excise tax.

“Currently, excise duty taxes are applied on products that have no harmful component such as financial services, water, airtime, and data and this is seen as geared towards revenue generation and this may result in distortions across the value chain. The excise tax on such goods and services works as an additional Value Added Tax which becomes very punitive on final consumers,” the committee stated.

MPs have called for the exclusion of such products from the tax and the protection of other non-harmful products from being taxed excise duty.

But ironically, the products that ought not to be taxed the excise duty are the ones whose revenues have been rising, with Kenya Revenue Authority (KRA) data showing that excise taxes on airtime and financial transactions have more than doubled in just five years.

Excise duty revenues on water, juices, and soft drinks have also increased by 57 percent to Sh6.6 billion since 2018.

The National Treasury, in the draft National Tax Policy, proposes that excise duty should be charged on “luxury goods, communication services and other goods.”

“With time, the imposition and the increase of the excise duty rate may not have yielded additional revenues as expected,” the Finance Committee observed.

Read: Kenya to halt yearly inflation adjustment on excise taxes

“Ensure that excise duty should only be charged on luxury goods, communication services, and other goods as per the policy provided that the ‘other goods’ category as captured in the draft policy should not include essential goods, basic necessities goods, food items whether imported or locally made, medicaments, or agricultural-related products,” MPs recommended in the report.

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