Consumption taxes have always provided easy pickings for the government in the budget since the 1970s when one of the certainties for every finance minister would be to raise the sales tax on beer.
Value Added Tax (VAT) and excise taxes have also proved to be fertile grounds for the Jubilee government’s push for higher tax revenue in its decade in power, recording faster growth in collections relative to the other tax heads such as import duty and income taxes.
In the fiscal year ending June 2013, which overlapped the regimes of President Kibaki and his successor Uhuru Kenyatta, excise and VAT contributed 36 percent of total tax collections of Sh759.4 billion.
Their share of total taxes collected has risen to 41 percent for the year ended June 2022, when the Kenya Revenue Authority (KRA) realised taxes worth Sh1.889 trillion as part of the total revenue collection of Sh2.03 trillion.
Among the key tax heads, excise collection has registered the highest rate of growth in the Jubilee decade at 191 percent, jumping from Sh88 billion in 2013 to Sh256.3 billion in the 2021/2022 fiscal year.
VAT has grown by 184 percent, from Sh183.2 billion in 2013 to Sh520.4 billion last year, in the process overtaking payroll taxes as the biggest contributor to the taxman’s purse.
Pay as You Earn (PAYE) collections, which led the tax heads at Sh211 billion in 2013, rose by 119 percent to Sh461.8 billion last year.
Tax experts say that the sharp growth in these consumption taxes is a result of several factors, such as natural and legislated inflationary adjustment, the faster growth of the informal job market compared to formal employment and a consumption-led economy.
Kenya has also progressively increased the number of goods and services liable to excise and VAT, while also making significant upward adjustments on rates levied on popular sin tax targets such as beer, cigarettes, bottled beverages and confectionery.
“Legislative tax policy on the excise duty rate is done in a way that it’s supposed to self-adjust upwards due to the inherent inflationary adjustment which kicks in automatically. The upshot of this is that the change in excise duty would ordinarily lead to an upward trajectory on the tax collected,” said Stephen Waweru, senior manager of tax services at KPMG Kenya.
“The economy is more of a consumption economy drawing from the fact VAT and excise duty are consumption taxes. Additionally, the growth of formal employment is not fast-paced as that of informal employment.”
VAT’s biggest change in the past decade has been the introduction of the levy on petroleum products in 2018, which has contributed significantly to the higher pump prices in the country.
After initially being set at 18 percent, a public outcry saw this levy halved to eight percent, but as a final tax, it adjusts upwards naturally whenever excise on these products is raised.
On the excise side, alcohol products have seen some of the highest increments in the 10-year period, and have also been subjected to regular adjustments for inflation since 2018, just like other products which attract a specific rate of excise.
In the 2013 Finance Act, beer and wine were charged excise at the rate of Sh70 and Sh80 per litre respectively. Today, the levy stands at Sh134 per litre of beer and Sh229 per litre of wine.
In the 2012 budget, the government had also started levying excise on the retail price, rather than the factory price of beer, raising the final cost for consumers.
Fruit juice was attracting excise at an ad-valorem (charged as a percentage of price rather than a specific amount) rate of seven percent. Today, this excise is charged at a specific rate of Sh13.30 per litre, while bottled water also attracts a similar levy of Sh6.03 per litre.
The growth in excise has also been helped by the introduction of a levy on mobile money transfer fees and bank fees, initially at 10 per cent in 2013 but now at 15 percent.
Excise duty on airtime and telephone services is levied at 20 percent, while the government has also moved in to cash in on the rising popularity of digital loans by imposing a 20 percent excise duty on fees charged by digital lenders.
Imported mobile phones and SIM cards have also been drawn into the excise net, and from this year are being levied a rate of 10 percent and Sh50 each respectively.
The KRA has also combined these higher rates with tougher enforcement actions on evaders, especially targeting the alcoholic beverage sector. The agency estimates that it loses about Sh12 billion every year on alcohol excise evasion alone, while this segment leads in seizures of illegal goods in the country.
In the six months to March this year, the KRA nabbed Sh844 million worth of untaxed alcohol products, accounting for 67 percent of total seizures worth Sh1.26 billion.