Tabitha’s biggest test in brewing fight with taxman

Mrs Tabitha Karanja said her firm has been paying excise duty at Sh26.40 per litre, and KRA has always received and acknowledged the payments [Photo: Wilberforce Okwiri/STANDARD]

Tabitha Karanja is staring at her biggest test yet in the all-too-familiar tussles with the taxman relating to a small misunderstanding but with huge implications.

It has been a rather difficult year after she was voted Africa’s businesswoman of the year, her alcohol manufacturing firm Keroche Breweries having been closed for days for alleged non-compliance on taxation. “I find that tax claim to be very ridiculous,” Mrs Karanja told the Standard on Sunday. Her firm had just been slapped with a Sh1.3 billion tax bill relating to its ready-to-drink Vodka Viena Ice, which is only the latest of run-ins with the Kenya Revenue Authority (KRA).

In previous spurs, the brewer was forced to withdraw its fortified wine from the market after changes in the taxation laws imposed heavy duties on the product in 2007. Only four years earlier, the firm that was then a tiny brewer faced an eminent closure after several of its distributors were shut.

Quality tests

A more outrageous claim was made in Parliament with a legislator telling the House that Keroche’s drinks were killing two people in his constituency every single day – a statistic that would easily mean the brewer was responsible for the most deaths in the country.

After the twin struggles separated by four years, the new tax claim could be Karanja’s waterloo with KRA asserting that the outstanding debts must be cleared.

Keroche is now required to pay just over Sh1 billion in excise duty relating to the contested taxation formula which pays little regard to its product Viena Ice which it says is a diluted vodka, and that only fresh water had been added which should not be subject to taxation.

Karanja said it would be unfair to subject the water in the ready to drink vodka to excise duty which is generally levied on non-essential expenditure. “All that we are doing with this product is ensuring it is professionally diluted and ready to drink.” But KRA says the tax claim would be backdated to June 1, 2014, when a review on the applicable laws came into force that brought Viena Ice in the bracket of compounded spirits.

More than 11 million litres of the product has been sold since then, suggesting that the brewer is now required to remit taxes it has not collected. Of the amount arising from the computing, Keroche has paid about Sh300 million under the terms applied in the past. “I would like to reiterate that by 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. Mrs 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 brands retail price, according to Karanja. “...the adjusted retail price would ensure Viena Ice became 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 will likely out-price the target market in the low income bracket.

At the centre of the taxation dispute is the 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.

Compounded spirit

A 500 ml bottle that retails at Sh90, according to the firm, contain 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 would 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 turn that could have devastating impact considering the firm was heavily indebted, especially a recent plant upgrade financed through a Sh5 billion bank loan, before the court order lifted the closure.

Earlier, Keroche had sought intervention of Industrialisation Cabinet Secretary Adan Mohammed from what the management termed a fight instigated by its competitors. Mrs Karanja has said that her firm will move to court in the week to seek protection from KRA in yet another suit.