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Economy

Bars closure punches Sh45bn hole in budget

A reveller at a nightclub in Nairobi
A reveller at a nightclub in Nairobi. FILE PHOTO | NMG 

Prolonged closure of bars and night clubs has forced the Treasury to cut its excise tax projections by Sh45.8 billion, giving the government a fresh revenue collection headache three months since the start of the financial year.

Treasury Cabinet Secretary Ukur Yatani has lowered the excise duty target — the bulk of which come from sale of alcohol and cigarettes — to Sh195.6 billion from the Sh241.4 billion set in June despite a scheduled raise on the tax from October 1.

The Treasury has linked the cut to the effects of Covid-19 restrictions, including closure of bars and curbs on mass gathering. More than 30 products attract excise duty, including bottled water, fuel and juices. But alcohol and cigarettes, largely sold in bars and restaurants, account for more than 75 percent of the tax collection.

Kenya shut down bars on March 25 and in July banned restaurants from selling alcohol to contain the virus, which had infected 36,205 people and killed 624 as of Monday.

Alcohol sales have plummeted as businesses continue to reel from the directive that only allows for take-away services, prompting firms like East Africa Breweries Limited (EABL) to announce a 39 percent drop in net profit to Sh7 billion for the year ended June 2020.

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The Treasury had hoped bars would resume operations by September when Kenya was expected to have kept the coronavirus under firm control.

The taxman collects Sh253 per litre of spirit, Sh189 for a litre wine and Sh110.62 for a litre beer, while a stick of a cigarette with filter attracts Sh3.16 duty.

Mr Yatani has cut total tax collection forecast for this financial year ending June 2021 by Sh91.2 billion to Sh1.42 trillion compared with his earlier estimates of Sh1.51 trillion in June.

“The revenue projections for FY 2020/21 have been revised taking into account the revenue performance by end August 2020 and the prolonged effects of Covid-19 pandemic on economic activities and the measures put in place to curb its spread,” the Cabinet Secretary says in the draft Budget Review and Outlook Paper (BROP).

Value Added Tax (VAT), whose standard rate was cut to 14 percent from 16 percent in April, has been revised downwards by Sh37.4 billion to Sh444.2 billion, while collections from import duty are seen thinning Sh22.4 billion to Sh84.4 billion.

“These revisions (on VAT, excise and import duties) mainly reflect the knock on consumption and international trade in the Covid-19 fallout period,” Genghis Capital head of research Churchill Ogutu wrote in a note.

In a surprise move, however, Mr Yatani has revised upwards the income tax estimates by Sh14.4 billion to Sh699.4 billion, signalling a recovery in the corporate Kenya which has shed nearly two million jobs since the pandemic struck in March to protect profits.

The Treasury says economic growth could fall to 2.5 per cent in 2020 but may go lower to 1.8 per cent, compared with 5.4 per cent a year earlier.

Alcohol manufacturers and distributors fear the automatic inflation tax adjustment on the excisable goods, which also include petrol and diesel, at the rate of about 5.43 percent from October 1 will further hit consumption and disrupt their recovery strategies.

The Kenya Association of Manufacturers (KAM) last Thursday wrote to President Uhuru Kenyatta seeking a moratorium on the planned increases in excise taxes on 31 excisable goods after failing to get reassurances from the Kenya Revenue Authority (KRA).

“Most manufacturers have registered between 30-70 percent drops in sales with a resultant drop in excise collections to the exchequer,” KAM chief executive Phyllis Wakiaga said.

Mr Kenyatta last month set the stage for reopening of bars and night clubs after he directed the setting of rules to guide sit-down drinking in public places.

He asked bar owners and the Ministry of Health to jointly develop guidelines that would promote social distancing and hygiene in the quest to strike a balance between promoting the hospitality industry and curbing the spread of Covid-19.

The pubs and cinema theatres will have to reconfigure seating, minimise self-service, cancel live acts and stagger arrivals. EABL has announced a Sh532 million ($5 million) recovery fund to help pubs and bars in Kenya resume trade post-lockdown.

The two-year plan dubbed “Raising the Bar” is part of the Sh10.6 billion ($100 million) fund rolled out from June 1 in different markets through EABL’s parent firm, Diageo.

EABL says the recovery plan will offer targeted support like purchasing equipment such as hygiene kits, permanent sanitiser dispenser units, hand sanitisers, masks, and protection screens for bars that cannot maintain the one-metre social distance. The firm will offer the bars hardware and not cash through the recovery plan that comes in form of a grant.

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