The timing for inflationary excise increase is not right for economy
Businessman jumping over tax. The Kenya Revenue Authority has increased excise rates on at least 31 products.
What you need to know:
- The Excise Duty Act provides for the adjustment, taking into account the rate of inflation.
- The Excise Duty Act provides for the adjustment, taking into account the rate of inflation
KRA intends to adjust the pertinent excise duty rates from this Thursday, October 1
Last month, the Commissioner-General of the Kenya Revenue Authority (KRA) issued a public notice informing manufacturers and importers of excisable goods of the requirement for an annual inflationary excise adjustment. KRA intends to adjust the pertinent excise duty rates from this Thursday, October 1. Stakeholders and members of the public were invited to submit their views to the taxman.
The Excise Duty Act provides for the adjustment, taking into account the rate of inflation. In the past two years, the average inflationary excise adjustment has been five per cent and it is anticipated that the average inflation for the financial year 2019-2020 is going to be 4.5-5 per cent.
There are two main methods of charging excise. Specific rates are based on quantity — for example, Sh100 per litre of the relevant product. The real value of revenues may be maintained under a specific-rate excise tax through regular adjustments of the rate to reflect inflation.
Ad valorem rates are based on a percentage of value — for example, 20 per cent on ex-factory selling price of the product. This ensures that excise duty moves in tandem with inflation without requiring intervention from the policymakers since the duty is based on the price of excisable products. Whichever is better is debatable.
Food supplements
With the Excise Duty Act 2015, Kenya introduced a specific excise duty system for most excisable products — except cosmetics, food supplements and motor vehicles. But with the new law came the requirement for annual inflation adjustment of the specific duty rates.
While excise duty is a tax on consumption borne by the end consumer of the product, there are two distinct collection options.
‘Manufacturers excise’ duties are imposed on the producer or importer of a taxable good and included in the price paid for that good by the final consumer. ‘Retail excise duties’, in contrast, are imposed at the point of sale to the final consumer. Similar to value added tax (VAT), it is not common in developing countries as it requires significant control to mitigate against leakages. Kenya applies manufacturers excise duties; as a result, excise is accounted for when products are released from the factory or upon importation.
A significant percentage of excisable goods are consumed in the local hospitality sector, including alcoholic and non-alcoholic beverages. But the Covid-19 pandemic has adversely affected most economic sectors and the hospitality industry is among the hardest hit.
The government closed the Kenyan airspace to international passenger flights and the land borders in March. It also closed hospitality businesses — hotels, restaurants, clubs and bars to enforce the stay-at-home order and observance of social distance.
Manufacturers and importers of excisable products could not access the market for their products and, hence, many hospitality businesses had to lay off workers or even close down.
Raise revenue
It is difficult to envisage how the government expects to raise additional excise revenues in the current economic environment. The 2020 budget review and outlook paper (BROP) released by the National Treasury a fortnight ago recognises that the pandemic and the resultant containment measures have not only disrupted our way of life and livelihoods but, to a greater extent, business.
Importantly, under the Tax Laws Amendment Act 2020, enacted in April, the taxable value of petroleum products was adjusted to include taxes, levies, fees and charges, resulting in an increase in the final product price. And in July, the government increased Petroleum Development Levy from Sh0.40 to Sh5.40 — an increase of over 1,000 per cent.
Besides, Uganda and Tanzania have not increased excise rates this fiscal year and Kenya’s rates on alcohol and cigarettes are already higher.
The excise tax differentials is an opportunity for arbitrage; one can buy a good from a neighbouring country with lower excise taxes and smuggle it into Kenya. Also, higher excise duties among resource-constrained consumers incentivises illicit trade, already a major challenge in the country.
