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Hike in excise stamps rate will stifle economic growth

Thursday, February 9th, 2023 01:00 | By
KRA
KRA office. PHOTO/Courtesy

Kenya Revenue Authority (KRA) has proposed an increment in the rates of excise stamps which, as Kenya Association of Manufacturers (KAM), we are deeply concerned about.

KRA’s proposed Excise Duty (Excise Goods Management System) (Amendment) Regulations, 2023, seek to increase the fees of excise stamps for bottled water, juices and any other non-alcoholic drinks, cosmetics, alcoholic beverages, tobacco and nicotine products and export products subject to excise with effect from 1st March.

From the onset, KAM’s position is that using excise stamps as a tool for fighting illicit trade is counterproductive. From the baseline survey conducted by Anti-Counterfeit Agency in 2020, illicit trade rose from Sh726 billion in 2017 to Sh826 billion in 2018, despite the existence of excise duty measures.

On October 19, 2022, KAM members met with the President and a joint Kenya Manufacturing agenda 20BY30 was adopted. This is a plan to high-grade the manufacturing contribution to GDP to 20 per cent by 2030.

This means increasing direct jobs. However, with the ever-increasing and unpredictable taxation regime, uncontrolled increase in power costs, inflation, forex shortage and influx of cheaper goods from COMESA & EAC regions at zero import duty, this dream to grow manufacturing will remain a mirage.

The proposed increment in EGMS stamp fees will have a detrimental effect on consumers and manufacturers due to the increased cost of production and the cost of finished products. The ripple effects on the economy are worse as I will expound on shortly.

Lest we forget, this proposal comes barely four months after a 6.3 per cent inflation adjustment on specific excise tax rates was effected on October 1, 2022. Three months before the inflation adjustment, there was an increase in excise taxes from July 1, 2022, by between 10 per cent and 20 per cent through the Finance Act, 2022.

To begin with, the excise stamp is a revenue assurance tool. It was initiated to deter counterfeiting, ensure the traceability of excisable goods along the supply chain and enable accounting of produced excisable goods manufactured or imported.

Unfortunately, the proposed stamp, while be extremely expensive and does not have the “Track & Trace” capability. Therefore, the proposed drastic increase in the cost of stamps seeks to be a revenue collection mechanism as opposed to an assurance tool.

This is based on the proposal seeking to increase the cost up to levels of over 100 per cent and beyond the current market costs of producing the stamps.

We are also deeply concerned that such an increment to some of the most counterfeited items in Kenya will further encourage counterfeit and illicit trade. This will lead to reduced government revenue and put lives at risk as substandard and dangerous goods infiltrate the market. The ripple effects will be a downside from job creation to job losses.

The government adopted an export-led growth strategy as part of its plan to transform the economy. At the heart of this plan is being globally competitive. The proposed costs will further make Kenyan products uncompetitive in the global market due to the high cost of compliance and unpredictable regulatory environment as exemplified by these amendment Regulations. The increased tax burden will also discourage foreign investment in Kenya. Investors are attracted to countries with favourable and predictable tax regimes. The hike in duty will make Kenya a less attractive destination for investment.

This poses a great risk of suppressing the manufacturing sector’s contribution to the GDP which has been shrinking over the last five years, and our vision of doubling manufacturing contribution in the next eight years will remain a pipe dream.

Whereas taxation is a critical component of any government’s fiscal policy, an over-reliance on this source of income can lead to a decline in competitiveness. We urge the government to retain the current charges on the excise stamps and to finalize and implement the National Tax Policy, with a focus on enhancing certainty and predictability in the tax code.

—The writer is the chairman of KAM —[email protected]

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