Kenya Revenue Authority slaps Keroche Breweries with Sh1.3b backdated tax bill

Keroche Breweries has been slapped with a Sh1.3 billion tax bill relating to its ready-to-drink vodka, in a fresh twist to a long-running battle between the firm and the Kenya Revenue Authority (KRA).

The taxman has informed the brewer that a new taxation formula will be applied to its 'Viena Ice' brand to be backdated to June last year. More than 11 million litres of the product have  been sold since then, suggesting the brewer is now required to remit taxes it has not collected.

Keroche Breweries CEO Tabitha Karanja addresses the Press on threats by a Member of Parliament to storm the brewery in Naivasha recently. She is flanked by Managing Director Kabutha Nduati. 

(PHOTO: TABITHA OTWORI/STANDARD)

Of the amount arising from the computing, Keroche has paid over Sh300 million under the terms applied in the past, leaving it with 1 billion in disputed back taxes.

"I would like to reiterate that continuing to remit taxes at Sh13.20 per 500ml or Sh26.40 per litre, is contrary to the legal requirement of charging Sh120 per litre or Sh60 per 500 ml less any actual rebates paid on the spirit lifted," Pancrasius Nyaga, the commissioner for domestic taxes wrote to Keroche last week.

KRA has asked the firm to consider resolving the tax dispute through the Tax Appeals Tribunal while holding that the new assessment was accurate as per the taxation regime.

"While there is no doubt on the likely impact on the operations of the company arising from the current taxation regime, we recommend that such concerns are best addressed from a policy perspective."

The letter followed a shut-down order issued by the revenue authority over the ongoing dispute on the taxation guidelines of the ready-to-drink vodka. Keroche has since obtained a court order stopping the closure.

Keroche Chief Executive Tabitha Karanja said her firm has been paying excise duty at Sh26.40 per litre, and KRA has always received and acknowledged the payments.

The new tax rate, which is nearly a five-fold increase, would likely result in a 100 per cent increase on the brand's retail price, according to Ms Karanja. "...the adjusted retail price would make Viena Ice Ready-to-Drink Vodka more expensive than beers that target middle and high-end markets," she said. Her immediate options are pulling the brand which contributes about 40 per cent to her company's revenues from the market, since it was likely to be too expensive  for the target market in the low-income bracket.

Diluted spirit

At the centre of the dispute is interpretation of the laws on how spirits should be taxed. Keroche says the drink that has caused the storm is a diluted spirit, with water making up more than three parts in five. A 500 ml bottle, which retails at Sh90, according to the firm, contained six tots of vodka equal to 188ml and is what should be subjected to excise duty.

KRA, however, says Viena Ice fitted the definition of compounded spirit and therefore the applicable tax would not consider the diluting. The vodka used in making the brand in the tax dispute was an intermediary product, KRA argues, in refuting the brewer's assessment of the applicable duty.

Last week, KRA withdrew the brewer's licence in a move that could have a devastating impact considering the firm recently undertook a plant upgrade financed through a Sh5 billion bank loan, before the court order lifted the closure.

Earlier, Keroche had sought the intervention of Industrialisation Cabinet Secretary Adan Mohammed in what the management termed as a fight instigated by its competitors.

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