Kenya to halt yearly inflation adjustment on excise taxes


Nearly 16 percent of the urban population rely on bottled water compared to less than one percent of the people living in rural areas. FILE PHOTO | SHUTTERSTOCK

The government is set to pause the annual adjustment for inflation on specific excise taxes in new proposals meant to make the duty more predictable for manufacturers and consumers.

A brief from the State House on Thursday indicated that the Treasury will in the Finance Bill 2023 ask Parliament to stop the Kenya Revenue Authority (KRA) from making the adjustment, which was introduced in 2018 to protect the government’s spending power from erosion by rising cost of living.

“To improve the predictability of excise duty rate, the Bill proposes to remove the provision that allows the Commissioner General to adjust specific excise duty annually on account of inflation,” noted the State House brief on the budget.

The Finance Bill 2023 itself was, however, yet to be tabled in Parliament by Thursday.

Goods that are charged a specific rate of excise include petroleum products, alcoholic beverages, cigarettes, bottled water, fruit juices, motorcycles and confectionery.

Given that their excise is set as a specific amount, the adjustment was introduced to protect the government’s share in duty once the prices of the products go up due to inflation.

The annual inflation adjustment does not, however, affect goods charged ad valorem excise, which is levied as a percentage of the value of goods.

This means the Treasury’s take goes up in tandem with the increase in the price of these goods, which include mobile airtime, motor vehicle imports and money transfer services.

At present, the KRA is allowed to adjust the inflation once every year with the approval of the National Treasury Cabinet Secretary through a notice in the gazette.

The National Assembly also considers the notice for excise adjustment within 28 sitting days of the receipt of the notice, with MPs making a resolution which either approves or rejects the notice.

Manufacturers affected by the excise taxes have over the years opposed the annual inflation adjustment, arguing that it leads to price instability and distorts the overall inflation.

They have on several occasions raised proposals that the increment be spread over three years to give them enough time to adjust.

The firms have also argued that uncertainty around the rate of annual changes would make it difficult for them to make long-term investment decisions.

Last year, the KRA adjusted the rates upwards by 6.3 percent, which was the average rate of inflation in the 12 months through June 2022.

The adjustment, however, excluded petroleum products, liquid nicotine for electronic cigarettes and imported ready-to-use SIM cards.

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