National tax policy could correct lopsided system

The much-anticipated National Tax Policy was made public on July 7, this year. It recommends a review of tax laws every five years to create a predictable tax policy environment.

However, the policy also proposes that specific excise duty rates continue to be subject to periodic adjustments to account for inflation.

This approach, where one recommendation contradicts the other, is just but one example of the counterproductive policies that will need to change if the tax policy is to deliver a predictable, unbiased, pro-manufacturing environment. The unpredictable nature of the taxation, particularly on alcoholic beverages, has led to several court cases.

As the Finance Act 2022 was going through public participation, the Alcoholic Beverage Association of Kenya (ABAK) was among the stakeholders who made submissions to the National Assembly’s Departmental Committee of Finance. It outlined the supply chain value obtained from the manufacturing of alcohol and why excise duty on alcoholic products should not be increased.

Members of the Finance Committee listened and adopted many of the proposals. They also recommended the deletion of the proposed increases from the Finance Bill. The rest of the National Assembly adopted the committee’s report. But on the day of the final processing of the Finance Bill, on June 2, these amendments were not in the Order Paper.

As the House processed the Bill late into that day, the proposals were revised to retain the excise tax rate of beer. This recommendation was backed by several MPs who indicated that high alcohol prices would be detrimental to the industry’s value chain, intra-EAC trade, consumers and government revenue. 

However, the reflection in section 35 of the Act completely disregards the proposals adopted by the National Assembly. The Act increased excise duty on beer from the disputed rate of Sh121.85 per litre to Sh134 per litre, the excise duty rate on wine from Sh208.20 to Sh229 and excise duty rate of spirits from Sh 278.70 per litre to Sh335.30 per litre.

Intriguingly, the excise rate of powdered beer has been retained at Sh121.85. Whether by design or clerical error, the chairperson of the Finance Committee moved to retain the rate of excise for powdered beer — a product that neither exists nor presents any negative economic impact that the industry was trying to mitigate through retention of the tax rates.

In the continuing series of unpredictability in the taxation regime in Kenya, the Finance Act 2022 was gazetted on July 8, while some provisions were indicated to take effect on July 1, 2022. Furthermore, effective this month, Kenya Revenue Authority has adjusted the excise duty rates of alcoholic products, among other products, by 6.3 per cent. This comes barely three months since the Finance Act 2022 increased excise tax rates by between 10 per cent and 20 per cent, effective July 1,  2022, resulting in a massive 16.3 per cent to 26.3 per cent cumulative tax increase in one year.

ABAK has on many occasions raised concerns over the perennial increases in excise tax and the demonstrated devasting impact  on the industry. The drawbacks include increased illicit trade, which currently stands at 44 per cent of alcohol consumed in Kenya, deteriorating health of patrons, loss of income for raw material suppliers (barley and sorghum) , increased unemployment across the value chain, and loss of Government revenue. 

The National Tax Policy is a welcome indicator of the willingness to have a predictable tax environment, but it will need to provide specific rates for each sector.

With the input of all stakeholders, Kenya is now in a position to develop policies that will enable large-scale industries to thrive and SMEs to emerge ... and avoid ideas that continue to inhibit the desired growth. 

Eric Githua is the chairman of the Alcohol Beverage Association of Kenya and can be reached at [email protected]