Inflation adjustments on excise tax rates hurting businesses, consumers

Food and price inflation rises. [iStockphoto].

Kenya Association of Manufacturers (KAM) identifies with the current government’s manifesto: The Plan – The Bottom-up Economic Transformation Agenda 2022 – 2027. The Plan recognises and appreciates the challenges Kenyans face daily, particularly the high cost of living.

The Plan demonstrates the government's deep understanding and commitment to developing sustainable solutions for all. KAM remains committed to working closely with government to transform the economy.

The Plan has singled out regressive taxation, bureaucracy and regulatory compliance costs as the biggest impediment to getting Kenya out of the “economic hole” we are currently in. The starting point for the economic transformation journey is the commitment to reviewing and rationalising all business licences to cap total licensing costs at 1.5 per cent of turnover fees.

As rightly articulated in the Plan, enacting an administrative burden law analogous to the United States of America’s Reduction of Paperwork Act will ensure that no business spends more than four person-hours a month on tax and regulatory compliance.

Over the years, the ease and cost of doing business continue to be significant roadblocks to economic prosperity. More specifically, the harsh tax regime is a 'zero-sum game' that has shifted manufacturing to our EAC neighbours who are now exporting to Kenya. Unfortunately, as they implement the government’s economic plan, Kenyans are now facing a new regressive taxation challenge - the proposed inflation adjustments on specific excise tax rates.

KRA informed manufacturers, importers of excisable goods and members of the public they shall adjust excise duty rates of petroleum products; motorcycles; alcoholic and non-alcoholic beverages; cosmetics; SIM cards; confectionary; tobacco and nicotine products; and raw hide and skins. The taxes on these products will go up by 6.3 per cent, the average inflation rate for the Financial Year 2021/2022 as determined by Kenya National Bureau of Statistics. The new rates shall be effective from October 1, 2022.

The Finance Act 2022 increased excise tax rates by 10 per cent and 20 per cent, effective July 1, 2022. A further increase of 6.3 per cent within three months will result in a massive 16.3 per cent to 26.3 per cent cumulative tax increase in one year. Such an increase will significantly impact on mwananchi, who is already overburdened by the ever-increasing cost of living. The cost of raw materials and intermediary inputs has increased by 15  per cent to 20 per cent due to global commodity price hikes.

Furthermore, import costs have increased due to the weakening shilling. The inflation adjustment shall also stifle SMEs, the backbone of job creation and our economy.

Implementing the tax increase goes against the government’s intention to reduce the cost of living, support agriculture through agro-industry value chains, support the growth of SMEs and create jobs, especially for the youth. The inflation adjustment is being considered despite several court cases in court challenging KRA’s enforcement of the previous inflation adjustment made under Legal Notice 217 of 2021. The notice sought to adjust the inflation rate of excise duty on excisable goods by 4.97 per cent. 

We appeal to the government to halt the implementation of the inflation adjustment as it is not sustainable. Since 2018, the cumulative increase in annual inflation has risen to 26.56 per cent. SMEs, among other manufacturers, may not be able to survive if the yearly inflation adjustment rate continues to increase.