Fix alcohol tax compliance risks

Last week, businessman Mohan Galot the owner of London Distillers Kenya, was arraigned for alleged Sh2 billion tax evasion. It was alleged that the company omitted from tax returns production volumes and sales amounts, which ought to have been included contrary to sections of the Tax Procedures Act, and failure to pay taxes.

Between January 2016 and December 2018, the company allegedly activated some 1,610,150 stamps in the Excisable Goods Management System ( EGMS), which represented a production equivalent of 527,250 litres. The company, however, is said to have declared and paid taxes on only 359,162 litres.

This latest case of London Distillers demonstrates that there is a serious tax compliance problem in the formal alcohol industry.

Any tax administrator like the Kenya Revenue Authority (KRA) has to put structures and strategies in place to ensure that non-compliance with tax law is kept to a minimum. But the series of tax evasion cases in the last seven years implicating various alcohol manufacturers paints a picture that non-compliance is not at a minimum within that industry.

In 2019, Keroche Breweries CEO and her husband were charged with evasion of taxes amounting to 14.5 billion.

Keroche argued that the process of making Viena Ice did not amount to manufacture and it should therefore not attract excise duty similar to other brands with alcohol of 15 percent and above.

The KRA argued that the said the process of making Viena Ice was manufacturing according to the Compounding of Denatured Spirits Act, thereby attracting higher excise duty.

Similarly, on their fortified wines the KRA argued that it should attract lower excise duty rate of 40 percent while Keroche’s position was that the classification was for grapes-based wines only whilst their product was from fermented pineapple which is under a different classification.

The Tax Appeal Tribunal last year ruled that Keroche was liable to a tax demand of Sh9 billion.

Before the Keroche case, there was the tax evasion case of Africa Spirits Limited and WOW Beverages where the company was accused of falsifying tax records, omitting VAT records and concealing excise stamp duties, which the KRA claimed led to a tax loss of Sh41 billion.

The company was found to be in possession of 1.2 million bottles of assorted alcoholic beverages affixed with counterfeit excise stamps picked in 41,703 cartons. The company was also found to be in possession of 80 drums of 250 litres each of ethanol valued at Sh7,402,958 without paying tax.

So, in retrospect, the behavioral take-away is that the alcohol industry is facing a tax compliance problem.

Looking at the big amounts of tax demands in these evasion cases, it is right to claim that alcohol taxation in Kenya is quite high and that may be one of the reasons for the compliance problem.

It may well be the case that manufacturers have found it hard to pass the tax burden to the consumer and opted to evade. It is also evident from the trend in these tax evasion cases that the tax system is complicated, giving taxpayers room to play around and underreport their tax liabilities.

Against that backdrop, it is time the KRA changed tack — from the traditional reactive intervention strategies such as audits and verification to trying to understand the underlying non-compliant behaviour through a compliance risk management approach to ensure minimum non-compliance which is the target of any tax administration.

The KRA will defend itself that it is already addressing the compliance risks. But addressing compliance risks is not the same as pursuing a compliance risk management approach.

A compliance risk management approach is about structuring process for the systematic identification, assessment, ranking, and treatment of tax compliance risks.