The prices of a wide range of goods including fuel, bottled water, juice and beer will increase from July 1 following imposition of new taxes on the products, which will be a blow to consumers already hurt by job cuts and unpaid leave in the wake of the Covid-19 pandemic.
The Kenya Revenue Authority (KRA) will increased excise duty chargeable on at least 31 goods by about 5.5 percent, setting the stage for higher retail prices from next month.
The adjustment is in line with the law that demands excise duty be revised upwards in tandem with the cost of living measure or the average rate of inflation in the 12 months through June.
The tax increase will hit consumers hard as households and traders reel from the impact of the Coronavirus disease, which has reduced shoppers’ purchasing power due to job cuts and movement restrictions, forcing businesses to cut down their activities.
Super petrol is expected to increase by Sh1.16 at the pump as dealers’ inflation adjusted excise duty rises to Sh22.07 a litre from the current Sh20.91. Kerosene and diesel prices are set to increase by Sh0.60 a litre.
Fuel prices have a big effect on inflation because Kenya’s economy depends heavily on diesel and petrol for transport, power generation and agriculture, while kerosene is used by many households for cooking and lighting.
Last year, the taxman adjusted excise duty by 5.17 percent on inflation, from 5.2 percent in 2018, and the Treasury expects the levy at about 5.3 percent.
The average inflation for the 11 months to May stood at 5.51 percent. This will see the excise duty on beer increase Sh6.10 a litre with the tax currently at Sh110.62 a litre or Sh55.31 a bottle, giving Kenya one of the highest tax rates on alcohol in Africa.
The excise on spirits is set to go up by about Sh13.40 from Sh253 per litre, while wine will attract an additional Sh10.41 tax from the current Sh189 per litre.
Firms like East African Breweries Limited (EABL) have been raising beer prices by Sh10 per bottle in response to the inflation adjusted tax.
The listed brewer has issued a profit warning for the year ended June on reduced sales following the closure of bars to limit the spread of Covid-19, and had previously warned of tax-induced drop in beer demand.
Other items that are set to attract higher taxation include cigarettes, cigars, fruit juices and motorcycles.
Before 2018, the affected goods had fixed excise rates, and the new inflation adjustment is seen as a means of protecting the government’s spending power from being eroded by the rising cost of living.
“The inflation adjustment implies that the manufacturers and importers will incur more excise duty per unit of their products and they will seek to recover the additional costs from consumers through higher retail prices,” said Nikhil Hira, a tax consultant at Nairobi law firm Bowman’s Coulson Harney LLP Kenya.
“The subdued consumer demand will lower its impact on KRA collection,” he added.
Economic growth is projected to drop to 2.5 percent this year, from a pre-pandemic forecast of 5.4 percent.
The Treasury hopes the excise duty and removal of a range of tax exemptions including for oil and gas exploration, like hiring of helicopters and purchase of planes as well importation of car and tractors will help to make up for revenue lost to the impact of the coronavirus crisis.
As well as a drop in tax collection caused by reduced business activities in the wake the Covid-19 pandemic, Kenya also cut the corporate and personal income tax rates in April to boost demand and help firms keep workers on their payrolls.
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. The firms 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.
Tax collections are set to cover just half of the Sh3.23 trillion budget for the year starting July, setting the stage for increased borrowing.
The projected revenue from the KRA is expected at Sh1.621 trillion, leaving another Sh1.6 trillion to be raised through borrowing and internal State revenues like fees and fines.
“A slower revenue momentum, could easily see upward pressure on the outlined fiscal deficit and borrowing requirement,” said Razia Khan, head of research for Africa at Standard Chartered.
The Treasury has set a budget deficit of 7.5 percent of GDP, saying the crisis had upset the government’s plan to reduce borrowing.
Kenya had pledged to cut its deficit to 4.9 percent of annual economic output, but a locust invasion, the pandemic and floods forced it to ditch the plan.