Domestic excise duty collections recorded the worst performance in the first half of the year among all tax classes, declining by nine per cent despite a growing number of alcohol importers and manufacturers.
Latest tax figures released by the Kenya Revenue Authority (KRA) says the drop is a departure from the previous three years that posted an annual average growth of 16 per cent.
The taxman said remittances from the main excise sectors of beer, tobacco and spirits, declined by 8.4 per cent attributed largely to drop in volumes; 16 per cent for tobacco, 11.2 per cent for spirits and 16.3 per cent for beer.
For the first time, despite incessant complains from players that the market was being swamped by unlicensed players, KRA Director-General John Njiraini admitted that there was something ‘unusual’ with the excise tax performance.
“Industry analysts term the performance unusual given what would otherwise have been a strong season given election-related consumption,” Njiraini says in the taxman’s annual statement.
The development now gives credence to industry assertions that despite the country having more than 28 spirit manufacturers, 13 beer manufacturers, two wine manufacturers and more than 200 importers, just a fraction of them are paying their fair share of excise tax.
Players in the industry say that despite some of the suppliers of alcohol operating in the country for almost a decade, the taxman has been slow to bring them into the tax net.
East African Breweries - the biggest beer manufacturer in the region, said that save for Senator Keg, the overall volume of alcohol it sold last year grew eight per cent, driven by the resurgent performance of bottled beer and a double-digit growth in spirits.
It, however, hinted that some of the importers had started eating its lunch given that they are now importing and selling some of its high-end products through the back door such as Johnnie Walker at a cheaper rate.
Tax is the single biggest cost driver for alcohol manufacturers, taking up to 60 per cent of total cost of the product means.
This means that without paying tax, unscrupulous traders are making a kill, walking away with huge profits at the expense of genuine manufacturers.
It is estimated that 50 per cent of the alcohol market is taken up by tax evaders, counterfeiters, second-generation manufacturers and smugglers.
In 2016, the government collected Sh35 billion from Excise tax alone. It is estimated that another Sh50 billion is lost to this tax evasion if you factor in the Value Added Tax (VAT).
The tax evaders also have the headroom to outprice the other players and run them out of business given that they can afford to sell their products below the market price. To deal with the tax headache, the taxman publishes a list of brands manufactured or imported all licensed players.
KRA says in its recent notice that manufacturers and importers of excisable goods other than motor vehicle importers must be licensed or registered with the Commissioner.
“Any person who contravenes the above section of the law shall be liable to prosecution and the subject goods shall be seized and destroyed at the offender’s cost,” KRA says.
The taxman is, however, optimistic about indications of recovery with January 2018 figures showing a reversal of trend with recorded growths of 6.8 per cent and 1.8 per cent for alcohol and tobacco respectively.
The drop in excise tax was one of the challenges that slowed down the taxman from meeting its tax targets at a time the government expenditure appetite is growing faster than its revenues.
Overall revenue for the first half of the 2017/18 financial year grew by Sh62.5 billion to Sh712.2 billion from Sh649.7 billion recorded in the previous year.
KRA said the exchequer revenue grew faster after it posted a 10 per cent growth to reach Sh664.77 billion up from Sh604.27 billion.
The other area where the taxman has been losing taxes is through smuggled ethanol imports. Some unlicensed alcohol manufactures, who are funding the demand for illicit ethanol, have in recent months upped their game to beat authorities.
Local ethanol manufacturers export the product to Tanzania motivated by lower tax regimes.
Ethanol is taxed at Sh60 per liter in Tanzania, a fraction of the Sh200 they would pay in Kenya.
KRA does not tax ethanol meant for export market at the same rate as local products to ensure local companies are competitive in the regional market.
Such incidents are becoming more rampant in the recent months, with some trucks impounded going unreported due to corruption or collusion between customs officials, KRA staff, and the Kenya Bureau of Standards (KEBS).
But even among the licensed players, taxation remains a thorn in the flesh. Keroche Breweries is currently in court over taxation of its biggest brand, Vienna.
The taxman is demanding up to Sh1.3 billion in unpaid taxes attributed to incorrect tax filing as a result of using the wrong tariff. The brewer obtained a court injunction prohibiting KRA from collecting the money it is demanding.
“As would be anticipated, the weakest growth was recorded in the manufacturing sector, while the energy sector performed poorly, a fact mainly attributed to high investment deductions,” KRA said in a statement.
KRA attributes some of its tax collection challenges to a depressed economic climate occasioned by the prolonged election cycle that stretched for the better part of the calendar year 2017. “The prolongation according to knowledgeable business sources adversely affected business confidence and depressed consumer spending, leading to a weak performance in consumption related taxes especially in the non-essential goods sectors including beverages,” the taxman says.
It adds that the delayed normalisation of the Government’s fiscal programme adversely impacted both public and private sector tax remittances, the latter due to the delayed settlement of bills.