The government’s flip-flops on taxation of alcohol has cut its revenue collection from the sector, whose value chain stretches into agriculture, retail and logistics.
Over the past few years, the National Treasury has on four occasions been forced back to the drawing board after its taxation measures on one class of alcohol proved counterproductive, with ripple effects on other sectors.
Low-end beer brewed from sorghum, millet and cassava is facing yet another change in taxation, raising questions about the motive for the move, which has been tested and failed before.
Analysts believe that like any other low-end market product, a slight change in price has a high impact on demand. The potential Sh10 increase in the price of the drink, popularly known as “keg”, therefore, could seriously dent its demand.
The government wants to revive a taxation regime similar to the one it put in place in 2013, with negative consequences.
“A sharp decline in keg beer demand was witnessed between June 2013 and September 2015, when the national government reduced the excise duty remission from 100 per cent to 50 per cent. Keg volumes plummeted immediately by 82.3 per cent, with a full-year drop of 59 per cent. Illicit brew consumption increased to the unprecedented levels of 60 per cent of all alcohol consumption in Kenya at the time,” Kenya Breweries Ltd (KBL) wrote to Treasury in response to the looming change of duty remission from the current 80 to 60 per cent.
The frequent changes in taxation are also a major put-off for potential investors.
KBL’s Sh14 billion plant in Kisumu, for example, now faces a bleak future with the change in taxation. A depressed demand for the product after months of no production due to the coronavirus pandemic will be an additional burden for the firm.
Also facing a 2013-like setback are sorghum farmers contracted to supply the brewers, who predict the demand for the produce will fall by about 14,000 tonnes and deny farmers some Sh500 million across the value chain.
In the low-end beers, Treasury had seen an opportunity to collect tax while moving consumers from the illicit brews that are not taxed and pose a health risk.
There was not going to be any excise tax, as brewers had a 100 per cent remission scheme. In November 2013, this was cut by half, doubling the price of the beer to Sh42 per 300ml serving.
The market responded with a huge decline in volumes and a slide back to illicit brews. The government then pushed up the remission to 90 per cent in 2015, which brought the prices down to Sh23.5. Three years later, the remission was cut to 80 per cent.
With the remission being cut to 60 per cent, demand is expected to drop by around 84 per cent, and thousands of jobs in the value chain are at risk, which will inevitably cut government revenues, including from income tax.
These changes in tax for keg beer come after a 25 per cent excise duty on imported bottles was imposed last month, further straining the alcohol sector.
A similar change in taxation of other alcoholic products from one based on the sale price to one based on volumes produced has continued to haunt Treasury since 2015.
Unscrupulous manufacturers have turned the industry into a largely illegal empire as they devise ways to cheat the taxman and undercut those who comply, bleeding the country up to Sh10 billion every year.
In August 2018, inflation adjustment was introduced to excise at a rate of 5.2 per cent. A similar adjustment was loaded onto the price of beer in October last year. For alcoholic spirits, adjustments of 5.2 per cent in both 2018 and 2019 was followed by another 14.8 per cent inflation rate in October 2019.
“We are already losing close to Sh100 million daily in sales revenues and we are struggling to meet our fixed costs including payment of workers. An increase in price now will drain the demand and risk the 330,000 workers we have directly and indirectly in the value chain,” said Mr Thuku Kariuki, the spokesman for the keg distributors.