What you need to know about Kenya’s excise duty rates, law

The recent notice by the Kenya Revenue Authority Commissioner General informing the public of the impending inflation adjustment of the specific excise duty rates has been widely circulated on social media, with some commentators asking that "someone explain this to them like they're two-year-olds”.

Having been involved in tax policy over the past 16 years, I shall attempt to explain and hopefully bring some clarity to it.

Excise taxes are levied on specific goods and services, and the list of goods and services subject to excise tax in Kenya are listed in the First Schedule of the Excise Duty Act, 2015. Part I of the schedule covers the goods, whereas Part II covers the services.

Historically, excise duty was viewed as a 'sin tax' levied on goods that were detrimental to health and the environment such as alcohol, tobacco, petroleum products, and sugared and sweetened beverages, in order to increase the prices of these commodities and therefore reduce their consumption and limit their access to children and the youth.

In this instance, additional administrative measures such as licensing, production accounting and tracking and tracing systems, and cargo monitoring are implemented to combat tax evasion. But tax evasion is not necessarily brought about by ‘high taxes’ on these products.

Some economies with lower excise taxes than Kenya have recorded higher rates of evasion due to a lack of other effective administrative mechanisms to fight illicit trade.

Most governments now use excise duty not just as a ‘sin tax’ but also as a tool to collect extra revenue, where charging of the tax may not really reduce consumption of the goods or the service. A good example is airtime. There are three types of excise duty tax rates.

Firstly, we have specific tax rates, wherein you charge a tax per unit of measure, such as Sh335.30 per litre of alcoholic beverages and Sh 3,825.99 per mille of cigarettes with filters (a mille refers to 1,000 sticks).

We then have ad valorem tax rate, which is essentially a percentage, for instance 15 percent of the ex-factory selling price or 15 percent of CIF (cost, insurance, and freight for imports) for cosmetics, and 20 percent of fees charged for excisable services.

Lastly, we have a hybrid of both specific and ad valorem taxes, either both at once where there is a specific plus a percentage of the ex-factory selling price, retail selling price (RSP), or CIF.

Example: Sh 100 plus 30 percent of RSP; or the greater of the two, as was the situation in Kenya prior to the enactment of the Excise Duty Act 2015, where you would pay the greater of specific and ad valorem taxes. For example, 30 percent of CIF or Sh 200, whichever is higher.

The Excise Duty Act, 2015 was enacted in order to attain international best practice, simplicity, certainty, revenue mobilisation, and leverage on technology.

It, therefore, adopted the use of specific tax rates on classes of goods with identical SI units, whereas those with varied units, such as cosmetics and food supplements, have ad valorem tax rates.

Specific taxes are advantageous as they are simpler to calculate and ‘rogue persons’ will not undervalue their products when filing tax returns in order to pay less. It creates certainty for the tax authority, particularly where production accounting systems are in place.

Ad valorem and hybrid systems can be difficult to calculate and may also provide opportunities for individuals to manipulate data to avoid paying taxes.

The government however does not operate in a separate "realm" where things operate differently from the rest of the economy. Inflation occurs, and therefore when a specific rate is levied, it means that the 10 shillings you collect today is worth less than the 10 shillings you collected a year ago.

As a result, it is recommended that governments enact legislation that permit the adjustment of specific tax rates to meet their responsibilities as before. If the government was imposing an ad valorem tax rate of, say, 10 percent and the price rose from Sh100 to Sh120, the tax would increase from Sh10 to Sh12.

This will not be the case when Specific rates are used. Inflation adjustment is thus an international best practice applied by governments.

The Commissioner General (the Commissioner) of the Kenya Revenue Authority (KRA) thus published a notice notifying the public of the impending inflation adjustment of the specific excise duty rates as currently provided in the Excise Duty Act, 2015.

Pursuant to the notice, the excise duty rate on the specified items is proposed to be adjusted using the average inflation rate for the financial year 2021/2022 of 6.3 percent effective 01 October 2022.

The notice provided the members of the public and stakeholders until 16 September 2022 to submit their views on the proposed inflation adjustments. The notice provided the general public and stakeholders until 16 September 2022 to submit their views on the proposed inflation changes.

This notice thus gave an opportunity for those affected by the proposed adjustments to request the Commissioner to reverse the proposed increase in rates.

This is in line with the provisions of the Excise Duty Act, which empowers the Commissioner, by notice in the Gazette and with the approval of the Cabinet Secretary of the National Treasury (the CS), to exempt specified products from inflation adjustment after taking into account the economic conditions prevailing in a given year with regard to such products.

A notice like this one is a classic example of opportunities for public participation in legislative processes as they can give their views within the specified timelines. These views are taken into consideration during the decision-making processes.

Public participation is one of the foundational principles of democracy. Democracy is premised on the idea that all citizens are equally entitled to have a say in decisions affecting their lives. Every citizen, therefore, has an opportunity to participate in discourses that influence legislation.

We should therefore take advantage of such opportunities to participate in government decision making which is fundamental to the functioning of a democratic system of governance as stated in Chapter One of the Constitution of Kenya, 2010.

CPA Karambu Muthaura is a Tax and Policy Expert with over sixteen years’ experience in policy work and provides Technical Assistance in establishing administrative systems to fight illicit trade. She is also a lecturer at the Kenya School of Revenue Administration (KESRA) and a member of the UN Subcommittee on Health Taxes. Karambu can be reached through [email protected].

The ideas expressed in this article are solely my own.