Proposed tax increase bad for businesses, livelihoods

Businessman jumping over tax. The Kenya Revenue Authority has increased excise rates on at least 31 products.

Photo credit: Shutterstock

What you need to know:

  • Tax increases at this time are likely to reduce government revenue, crucial for providing social amenities, as production of excisable goods declines.
  • KRA’s 2019/2020 full year performance results already show domestic excise tax collections fell 6.4 per cent, a dip from an average growth of 4.3 per cent seen between July 2019 and February 2020.

A survey in May by Kenya Association of Manufacturers (KAM) and KPMG among manufacturers of essential goods showed that demand fell by 74 per cent with 76 per cent suffering severe cashflow problems.

For MSMEs, 86 per cent had cash flow constraints, affecting their ability to pay taxes (64 per cent) and salaries (76 per cent) and meet other operational costs (79 per cent).

The decision by Kenya Revenue Authority (KRA) to increase excise rates from October 1 on at least 31 products not only exacerbates the challenges but also goes against the efforts to cushion mwananchi and businesses against the adverse effects of the raging Covid-19 pandemic.

A tax increase means higher cost of production, which business will inevitably pass on to consumers through price hikes to stay afloat. It will also erode the income of small- and medium-sized retailers, who depend on the sale of excisable goods. Struggling consumers can no longer afford these products; so, businesses will either shrink or, at worst, shut down, and illicit trade will thrive.

Illicit trade

Tax increases at this time are likely to reduce government revenue, crucial for providing social amenities, as production of excisable goods declines. KRA’s 2019/2020 full year performance results already show domestic excise tax collections fell 6.4 per cent, a dip from an average growth of 4.3 per cent seen between July 2019 and February 2020.

Illicit trade in form of smuggled, counterfeit and substandard goods has surged due to supply gaps created by containment measures as criminals took advantage of the increased demand for fast-moving consumer goods, closures and time restriction.

Taxes on excisable goods make up for 40-60 per cent of the retail price, giving a huge financial incentive for traders in illicit goods to evade tax. Besides, the disparity in excise regimes in the East African Community has made Kenya, which has higher rates, a haven for illicit excisable products.

The manufacturing sector has attracted huge investments for new and existing players in the past few years, more so the excisable goods segment. The proposed inflationary adjustment will deter investor’s ability to recoup their investments, reducing the country’s attractiveness.

Excise tax rates

A moratorium against increasing excise tax rates for FY2020/2021 will help the government to realise its objectives for the manufacturing pillar of the “Big Four Agenda”.

A tax rise amid the pandemic will undo the benefits accrued from other Covid-19 interventions and hinder basic services such as education, housing and healthcare. It will destroy the livelihoods of honest workers, including retailers and farmers and, perhaps most worrying of all, it will effectively promote consumer migration to cheaper illicit products.

Our focus should be on building a resilient and sustainable industry that can attain the 15 per cent contribution to gross domestic product (GDP) and create jobs as envisioned by the Big Four.

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