High taxation ‘driving illegal alcohol trade’

Job Wanjohi, Head of Policy, Research and Advocacy- Kenya Association of Manufacturers and the Deputy Head of Public Service and National Coordinator for the Multi-Agency-Team against illicit trade Wanyama Musiambo unveil the white paper on the unintended effects of Kenya's Alcohol and Regulation Policies. [Wilberforce Okwiri/Standard]

Kenya’s high taxes have made the trade in illicit alcohol lucrative, industry stakeholders have said.

Kenya Association of Manufacturers (KAM) Chairman Sachen Gudka warned that the tax burden on the formal sector, especially alcohol makers, was leading to revenue declines.

“The affordability of beer and spirits in this market is defined by the level of taxation,” said Gudka.

“Over-taxation of the formal sector is leading to revenue declines and the informal sector is thriving.”

Mr Gudka was speaking Tuesday at the Anti-Illicit Trade Summit held in Nairobi where a White Paper on the trade in illicit alcohol beverages prepared by the Institute of Economic Affairs (IEA) was also launched.

The paper, dubbed The Unintended Effect of Kenya’s Alcohol Regulation Policies, puts the alcohol market size of the formal sector at 56 per cent and the illicit trade at 44 per cent.

It says the expansion of the informal sector would lead to a loss in Government revenue, job losses, reduce industry competitiveness and health effects.

“Reduced production in the formal sector could turn into jobs losses within the industry because it remains untenable and impossible to maintain a bigger workforce,” says the report.

Regulatory model

The paper also blames Kenya’s alcohol regulatory model for failing to recognise the existence of formal and informal markets.

It says the formal sector was heavily regulated, making the informal sector thrive as a substitute.

“Excessive regulation can generate the unintended consequences of driving demand for alcoholic beverages in the informal sector and generate worse health outcomes owing to the production methods employed in the latter,” adds the report.

One of the “unintended consequences” of the excise tax regime is described by the report as increased excise tax revenues over the years as compared to inflation and economic growth.

The excise duty, according to the paper, has also affected the pricing of alcohol.

Speaking at the function, Kenya Revenue Authority Commissioner for Intelligence and Strategic Operations Githii Mburu said there was need to comprehensively review the tax policy, but said that the National Treasury was best placed to talk about it.

“We look at some of the countries where this ethanol and other products are coming from such as Tanzania and it is primarily because the tax regime there is friendlier,” he said.