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Alcohol: Treasury’s cash cow staggers from Covid-19 effects

BUSINESS
By Wainaina Wambu | June 14th 2021

To understand how the industry has been affected by the pandemic, it is key to look at the performance of EABL. [Courtesy]

Kenya has one of the highest excise tax rates on alcohol, commonly known as “sin tax,” in East Africa.

But amid a persistent coronavirus pandemic that has forced a reduction of legal drinking hours, it is not clear what measures the government will take to protect its key revenue source.

Alcohol maker East African Breweries Ltd (EABL) has already warned of a looming increase in excise duty of between five and 10 per cent in line with inflation.

“The Kenya excise regime is a lot more aggressive than that of Tanzania and Uganda,” said EABL in its 2020 annual report.

“We expect the Kenya government to increase the excise rates in line with 5-10 per cent inflation rate while Tanzania held the prior year excise rates.”

For many years, Kenyans would eagerly wait for the Budget reading to know whether their favourite beer or spirit was set for a price increase. Alcohol firms would also be keenly monitoring anticipated tax hikes.

But the alcohol industry has been hard hit by the pandemic. Bars and entertainment joints remained shut or scaled-down opening hours for the past year. Consumer purchasing power has also gone down.

Whether people are drinking less or more during the pandemic period is another debate altogether.

Sin tax is one of the oldest levies worldwide imposed on certain products viewed as harmful to people’s health and a luxury.

Kenya Revenue Authority lists goods such as tobacco, beer, wines and spirits, soft drinks such as juices, soda and other non-alcoholic beverages, bottled water, sugar confectioneries and chocolates among those that attract excise duty.

Amana Capital Chief Executive Reginald Kadzutu says excise duty is pegged on production and government would still make money even when consumption is low.

“Because excise is on production, not selling, as long as they (alcohol makers) produce or manufacture the government makes its money,” he told The Standard.

But there is value-added tax (VAT) too, which is charged when a customer buys the product.

“Yes, VAT would be affected but is it significant? People might not be drinking in bars but are still buying alcohol from the supermarkets,” Mr Kadzutu said.

To understand how the industry has been affected by the pandemic, it is key to look at the performance of EABL, which controls the largest market share in East Africa.

In its annual report for 2020, EABL noted that with governments facing fiscal pressure, they “continued to experience a volatile regulatory and tax environment especially in Kenya and Uganda.” These might consequently have an impact on the prices of their products. “On the positive side, and to soften the economic blow caused by Covid-19, the Kenyan and Ugandan governments introduced fiscal measures as well as monetary policy changes to support their economies,” the brewer said.

The coronavirus pandemic hit the company’s bottom line, wiping out nearly half its net profits in the first six months of the year to December 31, 2020.

EABL’s profit after tax fell by 47 per cent to Sh3.79 billion for the half year from Sh7.2 billion in the same period of 2019. Net sales fell by three per cent.

Bar closures and restrictions on movement to curb the spread of the virus have greatly reduced on-trade sales. “Off-trade has become a material percentage of our business. This has seen the can beer business double compared to pre-Covid,” the firm said.

Off-trade refers to retail outlets such as supermarkets, liquor stores, and wine and spirits retail joints. 

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