A decision by the National Treasury to increase excise tax last year in a bid to increase revenue collection appears to have backfired.
The action, which was also meant to ease the administration of excise taxation, may have had the exact opposite effect, substantially reducing the revenue collected over the first half of the current financial year.
According to the Kenya Revenue Authority (KRA), the tax category had its worst performance in the six months to December, with collections going down nine per cent.
This means the taxman collected Sh74 billion during the first half of the 2017/18 financial year, compared to Sh81.6 billion over a similar half in 2016.
KRA attributed the decline to a drop in collections from the alcohol and tobacco industries, which are among the main targets of excise tax, also referred to as sin tax.
Treasury increased excise stamp fees for cigarettes and wines and spirits to Sh2.80 at the end of March last year, from Sh1.50, which had the impact of pushing up retail prices.
Coupled with the challenges the economy faced last year following a prolonged electioneering period, the prices saw many people cut down on the excisable items, many of them being a luxury. This in turn had the impact of reducing revenues
It was the only tax category whose revenues declined, with the others – Pay as You Earn, customs, corporation, and VAT – going up by an average 7.9 per cent.
“Domestic excise tax recorded the worst performance, declining by 9.0 per cent in the first half compared to annual average growth of 16 per cent over the previous growth years,” said Commissioner-General John Njiraini in a statement issued on Monday.
In addition to the tobacco and alcohol industries, other excisable products include juices, bottled water, mobile phone airtime, and financial services transactions.
Nikhil Hira, tax partner at Deloitte East Africa, said the drop in excise tax revenues was due to the state of the economy last year, where people had to do with less luxury items as disposable income reduced.