The UN COP26 Summit 2021 was recently concluded in Glasgow, Scotland, as climate change becomes a key agenda worldwide. The conference was an opportunity for governments to track how they have responded to multiple challenges presented by the climate emergency efforts with two areas of focus, including reducing carbon emissions and changing the use of resources.
Kenya and other East African Community states have over the years adopted tax policy initiatives to control the use of certain products with an effect on the environment. These taxes have ranged from excise duties or environmental taxes to income taxes on corporates. It is anticipated that prioritising tax-related environmental measures will be a great lever for change in the consumption or use of certain products.
Some initiatives and policy measures the Kenyan government has put in place concerning green tax fall into several thematic areas.
Traditionally, petroleum products attract excise duty due to the externality impacts they have on the users and the environment. Importation of used motor vehicles in Kenya is capped at eight years of age.
Any vehicles above eight years are banned from importation into Kenya. Additionally, effective 2016 motor vehicles of tariff 8702, 8703 and 8704 had excise duty imposed at 20 percent and currently, 1,500 cc vehicles pay excise duty at 25 percent, yet those above pay excise duty at 35 percent.
On a positive front, 100 percent electric-powered cars attract a reduced excise duty rate of 10 percent to encourage clean energy and reduced carbon emissions.
In November 2019, Kenya banned the importation or manufacture of plastic shopping bags. Before then these were attracting excise duty at Sh120 per kilogramme. In the same period, Kenya introduced a reduced income tax rate for corporates of 15 percent for five years for businesses operating plastic recycling plants. This was aimed at attracting companies to the plastic recycling business to fast-track environmental conservation.
This was followed by the introduction of a 10 percent excise duty on plastic packaging materials and resins effective July 1, 2021. This has caused a lot of public outcry since plastic packaging and resins are mostly used as inputs.
Business and consumer reactions to government green tax initiatives
It is a fact that some of the government’s green tax initiatives are also imposed to collect more revenues and businesses understand and appreciate the mandate of the government to collect revenue for the provision of services to the citizenry. However, there are some areas of concern around the legislation and implementation of the initiatives.
For instance, since the reduction of excise duty rate (10 percent) on electric-powered vehicles, several consumers have considered the use of electric vehicles. This is also because white petroleum products attract excise duty, which affects the fuel prices as well.
The use of electric vehicles mitigates excise duty impact on both the cost of the car and fuel.
On the other hand, the introduction of a 10 percent excise duty on plastic packaging materials and resins has since caused public outcry since they are mostly used as inputs. This would technically imply that excise duty incurred on these inputs would not be offset against excise duty paid on the final finished excisable products.
Furthermore, some of the finished products from these inputs are not excisable. It should be noted that such non-refundable excise duty expenses by manufacturers on the inputs are absorbed in the ex-factory price of the finished goods, making them expensive.
The introduction of a lower corporate tax rate for businesses operating recycling plants in 2019 and then repealing the law the following year was a blow to those firms that had invested heavily in these ventures to enhance the circular economy initiative. Circular economy models involve businesses to reduce, reuse or repair, remanufacture and recycle plastic products after use by consumers.
Businesses affected by the introduction and repeal of a lower corporate tax rate as well as the 10 percent excise duty on plastic packaging materials and resins decried the failure of the policymakers to give ample time for them to prepare for the changes in the law.
This was termed as businesses being unable to predict taxes in the foreseeable future and plan or forecast the medium to long-term feasibility of their enterprises.
Way forward for stakeholders
The government should work towards incentivising any businesses that operate to enhance a green economy and/or to alleviate climate change. The bloc has, for instance, established the EU Green Deal investment plan, which includes a strategy for plastics, the EU Circular economy action plan as well as financial support at the national and regional levels.
When measures/tax policies are put in place, ample time should be given to the affected taxpayers to put in place systems to implement the measures. When the 10 percent excise duty was introduced on plastic packaging materials and resins the KRA iTax system was not configured in time to allow licensing of affected manufacturers before collection and accounting for the duty.
The business community investing in affected enterprises should put in place circular business models to convince the government that the enterprises will not have climate change effects on the environment. Furthermore, there should be green tax strategies within companies to cushion them from negative effects.
Therefore, as long as climate change continues to be a threat to governments, they will use all avenues, including fiscal policies, to counter the consequences.
The views expressed herein are not necessarily those of EY