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New inflation tax lifts water, beer prices 5pc

Treasury secretary Henry Rotich
Treasury secretary Henry Rotich. FILE PHOTO | NMG 

Kenya Revenue Authority (KRA) has increased excise duty chargeable on a wide range of goods, including juice, water and beer, setting the stage for higher retail prices beginning next month.

The taxman will start collecting the new levies – up 5.2 per cent -- from August, the first time that excise tax has risen in tandem with the cost of living.

The adjustment is in line with the average rate of inflation in the 12 months through June 2018. Beginning August 1, excise tax per litre on fruit juice will, for instance, rise from Sh10 to Sh10.5 while that on bottled water jumps from Sh5 to Sh5.2. Beer manufacturers are now paying Sh105.2 per litre, up from Sh100, while duty on motorcycles is now set at Sh10,520, up from Sh10,000.

Other items that are set to attract higher taxation include cigarettes, wines and spirits. The affected goods previously had fixed excise rates, and the new inflation adjustment is seen as a means of protecting the government’s spending power from erosion by inflation. Excise tax on such goods will henceforth rise annually in line with the cost of living, meaning that years with high inflation rates will be hardest for consumers as taxes and prices amplify each other.

KRA published the new tax rates last Friday and they are expected to translate to higher retail prices as manufacturers update their prices. “The adjustment implies that the manufacturers and importers will incur more excise duty per unit of their products, which will probably cause an increase in the prices of commodities,” accounting firm PricewaterhouseCoopers (PwC) said in a statement.

“In addition, all imports of excisable goods cleared for home use from that date shall attract new excise duty rates.”

PwC noted that KRA did not adjust the excise duty on petroleum products, adding that the omission may have been informed by the need to avoid further escalation of prices of fuel with the looming introduction of VAT on the products in September. “This could be due to the anticipated increase in price when VAT is introduced on these products in September 2018 with the expiry of the transitional VAT exemption,” PwC said. Implementation of inflation-adjusted excise rates comes after the government shifted from ad valorem system – which charged duty as a percentage of the value of the excisable product — to setting specific levies on some goods. The levies will now keep rising in lockstep with inflation, making the management of cost of living even more critical for the Central Bank of Kenya (CBK). Inflation has trended downwards in recent months as Kenya benefits from lower food prices and subdued demand for durable goods. The average cost of living stood at 5.2 per cent in the 12 months ended June compared to eight per cent a year earlier.

The CBK has warned that high oil prices are a major threat to the current moderate price gains, and the introduction of VAT on fuel starting September is expected to worsen the inflation outlook. Inflation adjustment of excise duty has never been implemented since the Excise Act was passed in 2015. The Treasury chose to forego revenue for fear of raising prices of basic commodities beyond consumers’ reach.

Manufacturers affected by the excise taxes have opposed the annual inflation adjustments, arguing that it will lead to price instability and distort the overall inflation. They have proposed that the increment be spread over three years to give them enough time to adjust. They have also argued that uncertainty around the rate of annual changes would make it difficult for them to make long-term investment decisions.

For the Treasury, the new system simplifies the tax system since the increments are automatic and do not require any additional approval from Parliament because it is already in law.

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