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Manufacturers say punitive excise tax stifling their growth

By Peter Theuri | March 15th 2020

The government has been urged to reconsider the model used in levying of excise tax, a charge that has hampered growth of the manufacturing sector.

The tax has been increased four times in the last five years.

Economic analysts say that the model has been stifling manufacturing in the country. Players in the manufacturing industry appeal to the Treasury to “reconsider its approach to taxation” as the budget for the next financial year gets prepared.

Kwame Owino, Chief Executive Officer at the Institute of Economic Affairs-Kenya (IEA) observed that consumption of some of the goods had been declining over time and taxing them extra would amount to adding insult to injury. The consumption’s dip is already due to excise duties levied.

"Retail sales have been weak in the last year and this is the case because of reduced consumer spending. Because incomes did not grow in 2019 and have been flat over the last five years, any further increase on excise rate will be detrimental to growth in this economy. In addition, Kenya’s excise rates are some of the highest in the region, motivating smuggling, especially along border areas,” Mr Owino said.

Carole Karuga, Kenya Private Sector Alliance (KEPSA) CEO said the lobby is in discussions with the government over the levying of excise duty that has been seen to negatively affect manufacturers.

"Our view is that taxation should not be punitive or should not stifle businesses. The focus should be more on revenue generation or stimulation to drive growth momentum. That way, a country gets more businesses and many grow and then government can get revenue much easier," she said.

East African Breweries Limited (EABL) reported a drop of 1 per cent in the volume of beer in its half-year results. This was attributed to the tax increase, which forced the company to pass cost to consumers.

“Industry data shows excise tax rise on alcoholic beverages has resulted in a 100 per cent increase in the price of beer over the last 10 years with the industry’s ‘sin taxes’ viewed as the soft target by the Treasury,” a report released by Alcohol Beverages Association of Kenya (ABAK) shows.

Kenya Breweries feels that the taxation is set to affect many Kenyans whose livelihoods depend on production of alcohol.

“I think we’re getting ever closer into the economic terms of diminishing returns where the government will start getting less returns from some of our categories such as bottled beer.

"In the last five years alone, we have had four excise tax increases. With the real wage declining every year, this is impacting not only consumers but all who depend on our production, including tens of thousands of suppliers and farming communities across Kenya,” said Jane Karuku, the Kenya Breweries Limited Managing Director.

Kenya’s taxation model is also more punitive than that of other countries in the region, the report adds. Kenya’s excise duty is higher than Uganda's and Tanzania's. The excise rates in Kenya are becoming counterproductive, experts say.

Widespread smuggling means that there is a lot of liquor that does not contribute to the taxman’s collection bag. Since manufacturers have to increase their prices to recoup the money that they lose through increasing tax levies, people resort to illicit liquor and cheap alcohol in the informal sector.

"Our industry is almost collapsing on the back of persistent increase of excise tax. The government will have to think very hard about broadening the tax band, rather than ruining gains made in our industry over the years.

"There is every likelihood of the return of illicit brews because consumers can nolonger afford our products,” Gordon Mutugi, the ABAK chairman said.

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