Consumers are set for a new round of inflation adjustment on excise duty charged on goods like beer, bottled water, juices and cigarettes as Treasury CS Henry Rotich looks to raise an additional Sh32 billion in sin taxes in the coming fiscal year.
This follows change of the law last year that allows the Kenya Revenue Authority (KRA) Commissioner-General to adjust the specific rate of excise duty every year taking into account inflation.
Excise duty on beer and other alcoholic beverages, cigarettes and tobacco products, and motorcycles attracted the highest adjustment of 5.2 per cent last year, indicating that buyers of these products are likely to be hit hardest when the adjustment is made after July 1.
These products have traditionally been hit with higher excise whenever the government seeks to raise additional taxes, but the government has recently looked to widen the excise net to other popular consumer products such as soft drinks, cosmetics, juice and bottled water.
Excise on bottled water and fruit juice was adjusted by four per cent and five per cent respectively as the KRA bucked expectations that excise would be adjusted upwards uniformly.
In the fiscal year ended June 2018, inflation averaged 5.25 per cent. The cost of living has gone up by an average of 5.1 per cent in the 11 months to May 2019, indicating that the adjustment on excise for 2019/20 is likely to closely track that of the 2018/19 fiscal year.
The annual adjustment of the tax does not require any additional approval from Parliament because it is already in law.
The adjustment has wide reaching effect on the price of goods, since it begins on the factory floor where manufacturers factor in the higher cost of raw materials in affected products before passing on the same to the consumer in the form of higher prices.
Mr Rotich is seeking to raise Sh242.2 billion in excise taxes in the year starting July, compared to a target of Sh210.1 billion in the current fiscal year.
In total, the Treasury expects to raise Sh1.88 trillion in taxes which will go towards financing the Sh3.1 trillion budget.
forcing it to turn to higher borrowing to pug the budget deficit which is expected to stand at Sh578 billion in the coming fiscal year.
Amendments made last year to the Excise Duty Act provided for an annual review of the levy based on the average monthly inflation rate for the preceding financial year, as opposed to the previous regulation which had mandated a biennial adjustment.
The annual inflation adjustment does not, however, affect goods charged ad valorem excise, which is levied as a percentage of the value of goods.
This means the Treasury’s take goes up in tandem with the increase in the price of these goods, which include mobile airtime, motor vehicle imports and money transfer services.