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Kenya tobacco firms warn new taxes will lead to job cuts

BUSINESS
By Standard Reporter | June 2nd 2013

By Standard Reporter

NAIROBI, KENYA: Listed cigarette manufacturer BAT Kenya has warned against plans to introduce a raft of taxes that may force tobacco companies to close down.

The firm says such taxes, which aim to reduce tobacco consumption will pave the way for an influx of illicit products in the market as well as underage smoking.

The firm said selling of illicit tobacco in Kenya has been on the rise and that little has been done to reverse the trend.

 This is expected to increase, the  firm added, if the government heeds calls from several anti-smoking lobby groups to hike taxes for tobacco products.

 Other players who are likely to be hurt by additional tobacco taxes include Mastermind, which entered the market close to 20 years ago and Cut Tobacco.

Currently, the industry has been banned from advertising and marketing its products by the Tobacco Law,  in a move that effectively slashed an estimated Sh12 billion annual marketing spend by the players.

Now the industry fears that a concerted effort by anti-smoking lobby groups to increase taxation will not achieve the desired results. BAT Kenya’s head of Corporate and Regulatory Affairs Mr Jerry Gilbert says while the industry has been abiding by existing legal expectations, tax increases allow criminals to penetrate the sale and distribution of tobacco-related products.

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Legitimate business

He estimates that in Kenya alone 12 per cent of the total market or 800 million illegal cigarettes are consumed every year.

 “The ripple effect this has on the Kenyan economy through revenue loss is huge, not to mention the adverse impact on our agricultural sector and general work force,” he said.

 “We believe that the Kenya Revenue Authority loses up to Sh1.45 billion annually,” he said.

If enforced, the biggest fear is that shareholders of the listed cigarette manufacturer would also see earnings going south. In 2012, BAT Kenya’s shareholders earned Sh3.25 billion with the minority shareholders pocketing Sh1.3 billion.

Mr Kingsley Wheaton, British American Tobacco’s Group Head of Corporate and Regulatory Affairs gives a global picture of the industry, saying tobacco is one of the most highly regulated sectors “but governments have failed to show a similar vigour when it comes clamping down illicit trade.”

“The tobacco industry is highly regulated, sells a legal product and we have a legitimate business. We conduct our business in a professional and responsible way, abiding by the laws in all the countries we operate in, often going above and beyond our legal obligations,” he said.

The fear among tobacco companies is that additional regulations and tax increases will lead to job losses within the manufacturing chains and the tobacco farmers. According to Mr Wheaton, BAT alone employs over 55,000 people worldwide.  “And that’s not even including the 250,000 farmers we work with or the hundreds of thousands of workers involved indirectly throughout the supply chain.”

Though the industry is reeling from existing regulations and the expected new conditions, BAT says this will not stop smoking.

 “The reality is that people will continue to smoke. But instead of buying legal taxed cigarettes made by legitimate tobacco companies and sold by reputable retailers, they’ll turn to black market sources to get what they want.”

Various internet sources  indicate the global black market for tobacco accounted for 660 billion cigarettes in 2012, making it roughly equivalent in volume to the world’s third largest multinational tobacco company.

Adult smokers

In Kenya, BAT has contracted more than 5000 farmers in Western, Nyanza and Eastern areas. Increased taxation is also a fertile ground for a raise in illegitimate tobacco industry that is devoid of regulations.

“Our marketing is aimed at informed adult smokers who are aware of the health risks associated with tobacco use. But the same can’t be said for the criminals who are already actively selling tobacco products outside schools, newsagents and play grounds,” Wheaton said.


 

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