Parliament should scrutinise the taxation proposals in the current Finance Bill with a toothcomb with the singular objective of throwing out all ill-thought-out measures that are likely to undermine post-Covid 19 recovery in the productive and wealth-creating sectors of our economy.
I fully support the views of the chairman of the Kenya Association of Manufacturers (KAM), Mucai Kunyiha, who has raised the alarm over aggressive excise tax increases on the alcohol and beverages sector.
If the proposals in the Finance Bill pass, the government will have in just one year increased excise tax on beer by 45 percent and on spirits by 55 percent.
On top of this, the Bill proposes to increase excise duty on bottles by 25 percent. A new 15 percent excise duty on alcohol advertising has also been proposed. Granted, excise duties are sin taxes that not only bring revenues but also help in controlling excessive drinking.
But everything must be weighed against damage to businesses and disruptions to supply chains. Indeed, the alcohol and beverages sector is a major employer in this economy.
It has a supply chain covering a wide range of players, including beer makers, glass manufacturers, bars, restaurants, transporters, and in the case of Kenya Breweries, an agribusiness business ecosystem that supports hundreds of thousands of barley, wheat, and sorghum farmers.
Clearly, the proposals in the Finance Bill are not based on sound economics. How can you justify a 55 percent excise tax increase on a commodity with an income elastic demand within such a short period? Has the minister considered the likely impact on the broader macro economy: jobs, the price level, and growth?
Excise duties inevitably increase consumer prices of the taxed commodities, thereby lowering consumer demand for the products. Shouldn’t the focus of tax policy right now be to support bar and restaurant businesses and other players in the supply chain to recover from the suffering they went through during Covid-19?
What we need right now is a Finance Bill tailored to promote recovery of the major supply chains and sectors.
Indeed, no sector of the economy of this country suffered from the coronavirus lockdowns and movement restrictions more than pub owners, alcoholic drinks manufacturers and the hospitality industry in general.
During the pandemic, it was open season on the hospitality industry where pub owners were forced to endure overzealous regulations. What is needed right now are tax policies to guide the sector to pre-pandemic levels of production and productivity.
If the proposals are adopted, the implications on regional competitiveness will be dire for Kenya. I say so because, as it is, Kenya imposes the highest excise taxes on alcohol and beverages in the East African region.
We will have to brace for negative economic consequences in terms of regional competitiveness and the incidence of illegal cross-border trade in alcoholic beverages. Manufacturers of bottles and glasses from Comesa countries such as Egypt will be at a competitive advantage over our local factories
Within the region, we are perceived as the front-runners when it comes to tax reform. Yet in reality, the opposite is the case. I see four major weaknesses in the way policy on excise taxes are designed in this country.
First, the tendency to apply excise taxes in ad-hoc manner, almost arbitrarily, whenever we are faced with critical shortfalls in revenues.
A clear distinction needs to be made between measures that are temporary and those that are permanent. Secondly, overreliance on taxes which target a few profitable companies. Thirdly, an excise duty regime riddled with taxes tailored for certain and specific business models.
Fourth, capricious and whimsical changes that only serve to create unstable and unpredictable tax regimes. Parliament should shoot down excise tax increases that don’t make economic sense.
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