EXCISE DUTY HIKE – Was it justified?

One of the expectations of Kenyans during the budget reading is usually the adjustments of prices for the so-called “sin” goods. It is always expected that the Cabinet secretary would always increase the sin tax on goods such as alcohol and cigarette. This year’s budget was different.

To the common Mwananchi, the CS did not increase the taxes on bottle and the stick. Unknown to them, the adjustment was contained in a sly change of the excise duty act that now allows government to review the excise duty rates every year. Just like the enactment of the finance bill 2018 that subtly came into force through a little known law, KRA has now published the revised excise duty through a legal notice.

In the legal notice published on 13th July, KRA has increased the specific duty on alcoholic products, tobacco products and motorcycles at an average rate of 5.2%. This will see the increase in prices of alcohol and tobacco as the increase takes effect on 1st August 2018. The increase in duty on motorcycles will impact the availability of this necessary means of transport that has virtually taken over in most parts of the country.

Taxes on motorcycles had previously been kept low and this had let to a great uptake of the cheap mode of transport especially in the rural areas. We have witnessed even more conventional taxi companies incorporating the motorbikes in their ranks.

In recognition of the role of motorcycle ambulances that are increasingly becoming common especially in the rural areas, KRA has proposed to exempt them from the excise duty hike. In the same breadth, locally assembled motorbikes will be spared the taxman’s noose as a way to promote local manufacturing and assembly.

Further KRA has increased the duty on water and other non-alcoholic drinks at an average rate of 4%. This comes in the wake of KRA’s attempt to increase the duty on the bottled water, juices, soda in PET, energy drinks, other non-alcoholic beverages, food supplements and cosmetics.

This move was intended to widen the tax bracket by bringing in the manufacturers of non-alcoholic beverages and bottled water whose uptake has been on the upward trend. Manufacturers were expected to install machines in their production lines that would affix excise stamps to the products.

The affixing of stamps would assist KRA deter counterfeiting of products, facilitate tracking of the excisable goods along the supply chain enable accounting for the production or import of the excisable goods and enable any person wishing to authenticate the stamps or quality of the products to do so easily.

This was however quashed by the courts on the premise that there was no adequate public participation before KRA could introduce the stamps. The government appealed the High court decision arguing that besides losing revenue targets, the gains made in the fight against illicit trade in tobacco and alcoholic products risks being reversed. The appeal is yet to be determined.

Another curious increase in duty is on electronic cigarettes which has been hiked by KShs 156 per unit. Due to the harmful effects of the tobacco cigarettes, it would be expected that the government would consider lowering the duties on the electronic cigarettes so as to increase in their uptake. There needs to be a balance between collection of taxes and the effect on critical areas such as health. KRA should consider reversing this increase.

Critically looking at the state of the economy. KRA was not warranted to increase these specific duties on the premise of inflation. Interestingly, data from Kenya National Bureau of statistics shows that inflation has been decreasing from end of last year to date. The average inflation rate dropped from an average of 8% to 5% this year. Therefore the increase is unjustified.

It is critical to note that the taxman has spared petroleum products in the duty hike. This should be interpreted as the calm before the storm as VAT on petroleum kicks in a months’ time. Kenyans should tighten their belts as the taxman is under strict instructions to collect so as to feed the 3 trillion budget read last month.

Going forward, manufacturers and producers of the affected products will have to adjust their accounting systems so as to factor in the anticipated price hikes in August.

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  • Andersen Tax has found a home in Kenya and provides a wide range of tax, valuation, financial advisory and related consulting services to individual and commercial clients.

  • A tax return is a form or forms filed with a tax authority that reports income, expenses, and other pertinent tax information. Tax returns allow taxpayers to calculate their tax liability, schedule tax payments, or request refunds for the overpayment of taxes.