Fluctuating tax regime is bad for business

With revelations that Kenyan taxpayers are set to contribute Sh254 billion more in the coming fiscal year to finance Treasury’s Sh2.53 trillion budget, and on-going debate about falling revenue collections, there may be no better time to discuss what we need to do as a country to improve our tax pile.

A sound and predictable tax system is a crucial determinant of the effect an industry will have on other fields that have a direct nexus with it. A good example in this case is last month’s revelation by the Kenya Revenue Authority (KRA) that taxes from excisable goods such as beer, spirits and cigarettes fell by nearly Sh4.09 billion in the first nine months of the current financial year, compared to the same time last year.

Awareness campaigns

The tax body attributed the drop to a rise in production and sale of counterfeit and illicit products, a development that prompted the taxman to conduct a three-week awareness campaign that roped in industry players from the alcohol industry early this year.

Provision of more funding to fight illicit trade in alcohol and enhance controls to ensure a level playing field for both imports and locally manufactured goods to support the manufacturing agenda would have been an obvious route for Government to solve social and revenue challenges in the alcohol industry.

The biggest lesson we’ve learnt from unpredictable rise of excise tax on mainstream alcohol and spirits is that every rise leads to a corresponding drop in accounted consumption, especially at the bottom of the pyramid where prices are sensitive. In turn, this leads to a rise in illicit brews.

Indeed, Kenya’s revenue is not growing as fast as the economy, the World Bank has said. In the 2016/17 financial year, tax-to-Gross Domestic Product (GDP) ratio fell to 16.9 per cent, the lowest in a decade.

A clear explanation for this from the alcohol industry perspective is that the volatile tax rates imposed on alcoholic beverages cause drastic changes in the prices. This leaves the consumer with the option of stopping consumption or be forced to look for cheaper, unregulated and unhygienic alcohol outside the tax system.

It is our view that any measurers proposed to increase excise tax should have been kept on hold and come up with a fair tax regime that will protect and grow the economy.

The effect of haphazard tax hikes does not only affect the amount of revenue collected by the KRA in various taxes from various industries, but also has a huge effect on the livelihoods of thousands of people along the value chain.

What ought to be

A fair tax regime should protect consumers, enhance tax compliance, increase tax collection for the government and support business and job creation while ensuring tax compliance by all players. Unfortunately, this cannot be said about annual excise increase as proposed in the Finance Bill 2018.

To realise better revenues, such efforts need to be complemented by a predictable, fair and efficient tax regime. What businesses most want out of a tax system is certainty- they want to know what their tax bills will be so they can plan their strategy and investments accordingly.

A good tax regime is supposed to be predictable and straightforward and allow companies to know exactly, without excessive paperwork, what they need to pay and what input costs they could set off. Instead, we are operating in an environment that is far from clear. It’s now a norm for businesses to collectively hold their breaths and hope for the best during budget reading.

Incessant tax increases on alcohol year on year leads to higher consumer prices that have a negative effect on affordability and resultant demand. This in turn depresses growth across the total value chain, leading to depressed earnings and reduced tax collections.

The net effect on the economy is therefore negative, meaning the government may not achieve the overall objective of growing revenue collection if it insists on increasing excise tax by eight percent. There is need for balanced approach.

It’s still possible that, with good planning, the government can cut down the number of inefficiencies brought about by the structure of the current tax regime and the amount of paperwork required to operationalise systems like the Excisable Goods Management System to enable KRA officers efficiently track excisable goods along the supply chain.

Success will require goodwill from all those involved to look carefully at the existing data, be nimble and ignore temptations to increase tax on whims. The alternative is that we stay where we are and not reform our absurdly complex tax system and stifle growth and productivity.

Mr Mutugi is the Head of Corporate Affairs at KWAL & Chairman Alcohol Beverages Association of Kenya (ABAK)

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