ABAK statement on the tax proposals in the 2019/20 budget reading

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Following the reading of the Budget Statement by the Cabinet Secretary for the National Treasury, Mr Henry Rotich, the Alcoholic Beverages Association of Kenya (ABAK) has noted with dismay the proposal to increase Excise Duty on various alcohol categories.

The proposal to increase excise tax on wines and spirits by 15% while retaining the annual inflation-adjusted tax escalation on all categories is not only detrimental to the industry’s growth but also a drawback on the multi-agency efforts to address illicit alcohol in Kenya

The proposal by the Cabinet Secretary also reverses the desired sense of predictability in taxation for the industry that came about with the introduction of the inflationary adjustment via the Excise Duty Act, 2015.

The introduction of the inflationary adjustment was meant to introduce predictability based on data from the Kenya National Bureau of Statistics (KNBS), providing legitimate players with certainty in their investments and business planning.

With the revision of the tax increase cycle to annual, rather than biennial, the industry had come to expect some level of regularity in the changes to the prices of its products.

While the formula was not perfect, as it considered prices of non-excisable goods, ABAK is of the view that it was a far better way of changing the prices of formal, recorded alcohol than the announcement of price changes that historically used to come with the reading of the Budget.

While ABAK members await to make submissions to the National Assembly on the Finance Bill, the Cabinet Secretary needs to provide clarity on the publication in the Kenya Gazette of the inflation adjustment due from July 2019.

As has been noted before, the approach to regulation of alcohol in Kenya needs to be driven more towards direct interventions and to deal with alcohol-related problems, rather than the current population-driven approach.

The proposal by the Cabinet Secretary therefore undermines the fight against illicit alcohol of all shades and is seen as a big miss, especially when viewed against the impact of illicit alcohol as there is evidence that increasing taxes on formal recorded alcohol drives consumers in the opposite direction.

Data from the World Health Organisation (WHO) shows the per person consumption of alcohol in Kenya stood at 3.4 litres of pure alcohol in 2018, much less than the global average of 6.4 litres per person.

Of the 3.4 litres, says the WHO, 1.9 litres is recorded (legally recognised) while 1.5 litres is unrecorded (not officially recognised).

We are, therefore, not only concerned about the health risk to consumers but by the fact that illicit alcohol trade denies formal players a level-playing ground and the economy billions of revenue over time.

It also undermines the government’s stated objective of seeing manufacturing contributing 20 percent of the Gross Domestic Product (GDP), as well as forming a core part of the Big Four agenda.

Why New Proposals are Detrimental to industry/Kenya’s Economy

  • New Tax Measures undermine efforts to grow economy: Growing the manufacturing industry is a top priority in the current government’s Big Four Agenda, aimed at growing Kenya’s economy. The measures fly in the face of the government’s stated desire to grow Manufacturing sector’s contribution to Gross Domestic (GDP) from 9% to 15%. Worse still, the new tax proposal reverses the industry’s desire for tax predictability, for which the inflation-adjustment was devised to address.
  • Tax Proposals are a Drawback on fight against illicit alcohol: The industry’s view is that outcome of the newest budget proposal is dangerously counterproductive, as it will, in one fell swoop, not only trigger an escalated rise in production and of illicit alcohol in Kenya, as price-sensitive Kenyans shun regulated more expensive regulated alcohol. It was also lead to increase in illegitimate manufactures who will be seeking to evade paying taxes altogether.
  • Proposed Measures Encourage Increase in Contraband Alcohol: our neighbouring countries of Uganda and Tanzania did not effect any tax increases in the budget reading yesterday. The implication of this is that Kenya remains the country with the highest tax rates in the region and by the action to increase taxes further only makes a bad situation worse. Kenya is now set to become a lucrative destination to smuggling of duty-not-paid products from the neighbouring countries at the detriment of the economy, local industry players and revenue collection to the Government.
  • Measures demonstrated Proved Evidence of EGMS Failure: Treasury’s Budget statement indicated that excise tax has fallen progressively over the years from 3% (in 2003/04) to 2% in 2017/18. The implementation of the EGMS was introduced to help collect more excise tax from the targeted products. It therefore makes sense to disband this system which, apart from failing its intended aim, continues to be a costly and unnecessary investment to industry players.
  • Insensitivity to Stakeholder/Public Contributions contrary to Kenya’s Constitution: Ahead of any Budget Reading, the constitution provides for public participation and the Alcohol Beverage industry is the single most engaging stakeholder. However, our proposal on critical issues such as tax collection procedures continue to land on deaf ears. Case in point: the requirement that a Legal Notice be tabled in Parliament, before new tax legislation is fully in place, was totally ignored in the 2018/19 Budget until the middle of the financial year in December, despite stakeholders seeking its legality. This effectively means that that tax collected from the inflation-adjusted excise tax before the passing of this legislation was improper and illegal, and the tax collected should be refunded to the industry players. It also the industry’s position that the tax proposals ignored the danger of illicit alcohol trade, one of the country’s biggest issues in recent years and a hydra-headed problem that supports a raft of criminal activities Kenya.
  • New Tax Proposals Undermine the Industry’s Effort to The Economy: Kenya’s Alcoholic Beverage Industry contributes over Kshs 80 billion in combined taxes to the Exchequer. This is made possible through a sustainable industry value chain that comprises hundreds of thousands of Kenyans including farming communities growing local raw materials, aggregators, distribution networks outlet owners, and direct employees of these companies.

Gordon Mutugi, Chair, Alcoholic Beverage Association of Kenya (ABAK) 

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