Parliament has rejected a bid to change the law and stop the annual review of prices of at least 31 products including fuel, bottled water, juice and beer through an inflation tax.
The MPs overruled the push to have the Kenya Revenue Authority (KRA) review the prices every two or three years to cushion consumers and firms from rising product costs.
Soft drinks giant Coca-Cola had petitioned Parliament to have the review in tandem with the average annual inflation to be done every three years.
Beer maker East Africa Breweries Limited (EABL) #ticker:EABL unsuccessfully lobbied lawmakers to have the price reviews done every two years.
The National Assembly Committee on Finance and National Planning rejected the push to change the law, arguing that checks were introduced last year to ensure the price review factors in other economic indicators beyond inflation.
The existing law demands that the KRA seek the approval of the Treasury Cabinet Secretary before making the specific excise rate adjustment, and thereafter the legal notice will be taken to Parliament within seven days of publication for consideration.
Parliament will, within 28 sitting days of receiving the notice, decide whether to approve or reject the inflation adjustment under changes to the law made last year and which will apply from January 1.
Under the previous law, the KRA Commissioner-General only needed to issue a legal notice stating the adjustment for the new tax to become effective every October.
“The Finance Act, 2020 amended Section 10 of the Excise Duty Act to provide flexibility to the Commissioner-General in consultation with the Cabinet Secretary, National Treasury, and planning to adjust the specific excise duty rate on excisable goods depending on prevailing economic circumstances,” the National Assembly Committee on Finance and National Planning said.
This, therefore, does not require further amendments to the law,” the committee added in reference to Coca-Cola and EABL petitions.
Firms like EABL have been raising beer prices by Sh10 per bottle in response to the inflation-adjusted tax.
Last year, the taxman increased the costs of the products by at least 5.43 percent, a blow to consumers hurt by job cuts and unpaid leave in the wake of the Covid-19 pandemic.
It made the changes before the application of the new law that requires the Treasury and Parliament approval.
The taxman uses the annual inflation adjustment tax that affects excisable goods, as a revenue enhancement tool in a country where less than half of eligible taxpayers are compliant, leaving those in tax net to shoulder most of the burden.
Other items that are set to attract higher taxation are cigarettes, cigars and motorcycles (boda boda).
Before 2018, the affected goods had fixed excise rates, and the new inflation adjustment is seen as a means of protecting the government’s spending power from being eroded by the rising cost of living.
Manufacturers affected by the excise taxes have opposed the annual inflation adjustments, arguing that it leads to price instability and distort the overall inflation.
They have proposed 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.
The Treasury is expected to have raised an additional Sh6 billion from higher taxes imposed on the 31 goods in October last year amid the Covid-19 economic fallout that affected consumption of key commodities affected by the duty.
Treasury secretary Ukur Yatani wrote in a letter to the International Monetary Fund that “inflation adjustments to excise taxes introduced in October 2020… (have) an estimated revenue yield of Sh6 billion in FY2020/21”.
Bars and entertainment joints were the main premises where beers and cigarettes — the major drivers of excise duty receipts — are consumed in the pre-Covid period.
The KRA published the fresh excise duty rates days after public health authorities allowed bars and entertainment joints to reopen under shorter operating hours following a six-month shutdown to stem the spread of the coronavirus infections from April 2020.
Fuel consumption also dropped as vehicles sat idle with drivers staying at home following Covid-19 movement restrictions.