Rethink excise duty killing local pubs

Me thinks that we have reached a point where makers of tax policy in this country must urgently go back to the drawing board to carry out a comprehensive and empirical study on the implications of high excise duties on illicit cross-border trade, especially with regard to alcohol and petroleum products.

Today, the trend you will observe is that persistent increases in excise rates on beer, wine and spirits that have been going on since 2015 have had the effect of fuelling cross-border beer smuggling especially between Kenya and Uganda.

Excise rates on beer in Tanzania are three times less than they are in Kenya. In Uganda, excise rates on beer are five times less.

As a result, consumer prices of beer in Kenya are way higher than the prevailing prices for beer, wines and spirits in the two neighbouring states.

Does it surprise that cases of increased entry of contraband into Kenya have been lately dominating the news headlines?

This week, there have been several stories in the newspapers about how consumers of beer and petroleum products in places like Busia, Malaba and Tarime have — instead of shopping at home — resorted to crossing borders in large numbers to access cheaper products in the neighbouring tax jurisdictions?

The government is killing local pubs. Indeed, the beneficiaries of the high excise duties on beers, spirits and wines are Ugandan and Tanzanian pubs and supermarkets.

We read in theory that when tax-driven price differentials exist between neighbouring countries, rationalisation of tax rates and subsidies should follow so as to ensure that the differentials in consumer prices do not incentivise illicit trade.

We forget that excisable goods such as alcohol and tobacco are traditionally vulnerable to illicit trade and that smuggling and other forms of tax evasion are encouraged by sizeable differences in tax burdens.

Putting our excise duties at par with neighbouring countries has now become an imperative for makers of tax policy in Kenya. Today, statistics show that excise duty rates as a percentage of GDP in Kenya are higher than in other more affluent countries such as South Africa and Nigeria.

The signal out there is that these countries, unlike us, are supporting their manufacturers. It shows that they are keener than we at attrcating investments.

Last year, the indication given by the government was that the practice of annual increases in excise duties as stipulated in the in Finance Act 2020 would not be mandatory because the matter was still being legislated at the High Court.

However, there was a major twist when the Kenya Revenue Authority recently announced new excise rate adjustments will take effect from October 1, 2021.

It was a strange twist indeed because the expectation created by the KRA was that the public would be invited to provide their views before any changes were effected. It seems that legal obligations for public participation are now being more honoured in breach than in practice.

The statistics from the 2021 Economic Survey have clearly shown why countries must pay attention to the level of prices charged in neighbouring countries when setting excise rates.

According to the survey, revenue levied on beer, wines and spirits in 2020 fell to Sh34.8 billion from Sh41.4 billion in 2019, representing a decline of 19 percent.

Admittedly, excise taxes on alcohol and tobacco are a dependable and significant source of revenue for the government. But we also remember that sin taxes do more than just generating revenues. Implemented well, they can reduce the incidences of alcoholism in society.

But we must also appreciate that where we are now, the pub industry is on the verge of collapse having been hit hard by the impact of Covid-19.

Only a foolish tax policy maker will set its excise tax rates in isolation and without looking at rates applied in jurisdictions to which domestic consumers have access.