Increasing taxes will be counterproductive

A proposal by the National Treasury will see the price of excise stamp fees increased effective March 1, 2023.

It has become a standard practice for the government to propose raising excise taxes on a variety of luxury commodities. 

The upward review in stamp duty is the first of its kind since 2017 mainly because the Kenya Revenue Authority (KRA) has set its eyes on increasing its tax collection as directed by the sitting government.

This is meant to enable the government to attain its financial goals. The government is determined to cut borrowing and increase its tax collection to fund its Sh3.64 trillion budget.

An increase in excise duty might have counterproductive results.

Excise duty rates have exponentially grown over the years in Kenya. This is further exacerbated by the periodic inflation adjustment on rates that have seen excise duty rates on various products reach peculiarly high levels compared to other countries within the East Africa region.

There is a great risk that we may be taxing ourselves out of regional or global competition. Further increase in excise duty rates deters the manufacturing of products that are excisable.

VAT

It should be further noted that an increase in excise duty has the long-term effect of leading to a decrease in Value-Added-Tax (VAT). This is because higher excise duty rates reduce the popularity of excisable products in the country which would have otherwise also attracted VAT.

The aggregate demand for products will reduce thus consumers will begin weighing the need against available resources to purchase products, especially for non-habitual products such as fruit juices, non-alcoholic beverages and bottled water.

However, products such as cigars, spirits and beers generally have high inelastic demand and large price changes have been seen to only to induce minimal changes in demand. Subsequent increases in excise duty rates do, however, result in a consumer downgrade where consumers may opt for cheaper alternatives. This leads to the proliferation of counterfeit products. 

KRA anticipates selling between 10 and 12 billion stamps annually. They are currently selling only close to 2.9 billion stamps, the rest being counterfeit. If the price of stamp fees increases, will the number of stamps sold decrease or will counterfeit stamps increase in the market? My assumption is, counterfeit stamps will flood the market.

As the cost of living is steadily increasing and inflation rates also rise, the government should focus more on easing the economic burden. Rather than dipping into an already empty pocket, they should seek long-term solutions to help taxpayers and actually increase the tax base by embracing sustainable tax policies. They should understand that the producers, who are employers, will face a major hit. 

Ramsy Wanyama, Nairobi