Why new tax formula undermines collections and economic growth

The beginning of the year always comes with a variety of financial demands for most people. The excessive spending from the festive season causes a dearth when January arrives with back-to-school demands and a traditional increase in food prices occasioned by the seasonal dry spell to March.

Things have been much worse this year as the long rains that normally fall from mid-March delayed leading to a dry spell.

It was therefore no surprise to read in the dailies earlier this month that the price of maize flour has increased from Sh85 in February to Sh109 recently – a 22 per cent rise.

Going against the grain

SEE ALSO :Petrol station operators win big in new fuel formula review

Even after increasing the farm gate purchase price, one miller said they can hardly get sufficient stock, diminishing the theory that farmers and middlemen are hoarding to speculate for better amounts. Or that demand influences supply.

Naturally, and sadly, consumers have to bear the increased costs of food.

This is evident in the latest Consumer Price Index (CPI) by the Kenya National Bureau of Statistics. Data shows that of the 13 food items considered, there were price increases in 10 of them.

For More of This and Other Stories, Grab Your Copy of the Standard Newspaper.

While there were marginal drops in the prices of both sifted and loose maize flour, the news report in April shows that this is bound to change in the months to follow.

There are a variety of options that the government,  private investors and farmers float as options for reducing these negative effects on food prices. But there is a different issue that many fail to notice.

In 2018, MPs approved the National Treasury’s inflationary adjustment cycle from biennial to annual.

This means that every year, the Treasury publishes in the Kenya Gazette the average rate of inflation, which in turn informs the Excise Duty rates.

The upshot of this amendment is that the increase in Excise Duty will have a predictable change annually.

The good thing for the National Treasury is that increases in tax revenue become predictable and sustainable and mitigate against the excise shocks that come with an increase in illicit trade.

But there is an inherent flaw in the formula that the Treasury applies here.

Because the adjustment is informed by the CPI, the current inflation adjustment formula in the Excise Duty Act overstates the inflation adjustment factor for excise taxes on excisable goods.

As such, CPI lumps together non-excisable products such as food, which we know is affected more by factors such as the current delay in the long rains, than would be the case with excisable goods.

The trouble for the excisable goods is that making them more expensive because of excess taxation which affects their affordability. This would be especially bad for some sectors, such as the alcohol industry.

Most taxed citizens?

Studies show that Kenya is among countries with a high amount of illicit alcohol, more than 50 per cent, according to a report by the International Alliance for Responsible Drinking last year. Kenya has also seen an increase in cases of tax evasion incidences as evidenced by the crackdown.

Increasing the price of legitimate alcohol has been shown to push drinkers in the direction of the illicit, the bootleg, contraband and the unregulated products, which in turn have adverse effects on the health of the consumers and deny Government much-needed revenue.

That there has not been a major incident related to the consumption of bad alcohol over the past two years should come as a relief to the government- and the general public- and we should certainly work for the elimination of such occurences.  

Already, players in the alcohol industry have been working with the Interior Ministry and agencies such as the National Authority for the Campaign Against Alcohol and Drugs Abuse (NACADA) and the Kenya Police to ensure that alcohol is consumed responsibly and most importantly, it is not sold to minors. That is bearing fruit.

Optimum conditions

By ensuring manufacturers operate in a conducive environment, the government will have created the optimum conditions for the manufacturing sector to thrive and contribute more to economic growth. Therefore, it is paramount that the government prioritises tax stability and increased enforcement as a strategy to improve revenue growth as opposed to tax increases.

Taxing the lowest hanging fruit – simply going for sin tax to quickly shore up the Exchequer – is expediency that ultimately adds to the national health burden by driving more drinkers to the illicit and unregulated territories and costs direct jobs in the regulated markets. Let the taxman strike a blow for the right side of economic growth.

Ms Wangare is a writer and a businesswoman [email protected]

We are undertaking a survey to help us improve our content for you. This will only take 1 minute of your time, please give us your feedback by clicking HERE. All responses will be confidential.

Consumer Price Indexfood pricesExcise Duty ratesThe Standard