Prices of beer, bottled water, petroleum products and cigarettes will be going up every year after the Treasury changed the biennial inflation adjustment on excise duty chargeable to an annual increment.
The changes, which are contained in the Finance Bill 2018, will affect goods that are charged specific excise taxes that are levied based on the quantity of goods.
Annual increments of the sin tax on beer and cigarettes have long been a feature of Kenyan budgets but the blanket annual inflation adjustment is expected to hit consumers of the non-luxury goods hard, including households that use kerosene, motorists and buyers of motorcycles.
The excise tax law currently allows the Kenya Revenue Authority (KRA) commissioner-general to adjust the specific rate of duty every two years to take into account inflation.
But the proposed amendment, if passed, will make the adjustment annual.
“Section 10 of the Excise Duty Act, 2015 is amended by deleting the expression ‘every two years’ and substituting thereof the word ‘once every year’,” the Finance Bill says.
So far, determination of the inflation period has proved a headache for the Treasury, which only last year changed it to two years from one year, before making the latest about-turn to an annual increase.
The taxman has, however, yet to make a single adjustment since the law was passed in December 2015.
Inflation averaged 5.7 per cent in the past 12 months, signalling a significant rise in consumer prices if the rate is applied on excise tax this year.
The average inflation for the past five years stands at 6.7 per cent.
The annual inflation adjustment does not, however, affect goods charged ad valorem excise, which is levied as a percentage of the value of goods, meaning the Treasury’s take goes up in tandem with the increase in the price of these goods.
Tax experts said that the decision to switch back to annual adjustment of the tax is an indicator of the Treasury’s readiness to start applying the inflation component, which does not require any additional approval from Parliament because it is already in law.
The change in the Finance Bill, they said, is only meant to give room for another increment next year, which would not have been possible once the adjustment is made this year under the current terms set in the law.
“The Cabinet Secretary was conspicuously silent on the excise of goods such as beer and cigarettes in the budget. We wouldn’t be surprised therefore if the inflation adjustment comes through this year,” said PriceWaterhouseCoopers (PwC) partner and director Job Kabochi.
“The question is whether Kenyans will continue to afford the goods that will be affected by the annual increase. Historically excise changes have affected beer and cigarettes, but the scope of the inflation adjustment means there will be price changes every year affecting other goods such as bottled water, kerosene and even motorcycles.”
Beer is currently charged excise at Sh100 per litre, spirits at Sh200 per litre, wines at Sh150 per litre, bottled water and other non-alcoholic beverages (excluding fruit juice) at Sh5 per litre.
Plain cigarettes attract duty of Sh1,800 per mille, and filtered cigarettes at Sh2,500 per mille.
Mr Rotich raised excise duty on kerosene from Sh7,205 per 1,000 litres to Sh10,305, fixing it at par with diesel.
Petrol is levied Sh19,895 per 1000 litres.
Motorcycles attract excise of Sh10,000 per unit, except those assembled locally and those meant to be used as motorcycle ambulances.
The return to the annual inflation increase is also likely to open a new battle between manufacturers and the government.
Companies affected by excise taxes have argued since the changes were gazetted in 2015 that annual inflationary adjustments would lead to instability in the prices of goods and distort the overall inflation.
The manufacturers have instead been pushing for the inflation adjustment to be spread over three years, arguing that there is need to allow adequate time for industry to adjust to inflation driven levies.
They have also argued that uncertainty around the rate of annual changes would make it difficult for them to make long-term investment decisions.
The government, for its part, has defended the changes, saying that the introduction of the cost of living adjustment to the excise taxes is meant to boost its revenue collection.