Certainty and predictability in policies vital in combating illicit trade

This years' two major seizures of smuggled ethanol have brought to the fore one of the most difficult aspects of the fight against illicit trade. The first was marked by drama: detectives seized a truck believed to have been loaded with 20,000 litres of ethanol; smuggled into Kenya through the Namanga border post.

According media reports, the truck was stopped by traffic police officers at Kitengela, but there was a six-hour stand-off as the police insisted that the vehicle could not be allowed to leave the roadblock.

Eventually, higher authorities in the police service deployed officers from the Flying Squad and after a brief confrontation, the consignment proceeded to the headquarters of the Directorate of Criminal Investigations (DCI). Later, workers peeled off a layer of animal feeds from inside the container to reveal up to 80 drums of the ethanol worth an estimated Sh1.6 million.

In the other incident, authorities tracked smuggled ethanol to a manufacturing plant and eventually uncovered a host of other alleged illegalities that had been taking place there. Both incidents, and many more intelligence-led operations against manufacturers and importers involved in illicit trade, are proof that the Multi-Agency Taskforce set up by the government is working.

As Kenya joins the rest of the world in marking World Anti-Counterfeiting Day, there is no doubt amongst us in the industry that this team needs all the support it can get. But as was evident at the Summit on Illicit Trade organised by the Kenya Association of Manufacturers (KAM) recently, a lot more work is needed if the fight against the dangerous trade, especially in alcohol, is to continue and to eventually become successful. 

Good work

This is doubly important for Kenya. Illicit trade threatens not only lives, as unverified and possibly unsafe goods enter the market and can cause long-term damage to consumers, but robs the country of much-needed revenue.

With manufacturing a top priority for the Government, the smuggling of goods gives illegitimate players and criminals an undue advantage and undermines all the good work that the government has done in its efforts to increase the contribution of this sector to the Gross Domestic Product (GDP).

With ethanol, government officials who attended the Summit on Illicit Trade said Kenya’s neighbours have friendlier policies, which offer a temptation to unscrupulous manufacturers to import it.These policies result in the loss of large volumes of alcohol in the border areas as smugglers bring in and sell cheap alcohol, hurting legitimate players and denying the government revenue.

The policy gap between Kenya and its neighbours is likely to grow over the next few days if MPs approve the proposal by the Cabinet Secretary for the National Treasury to increase Excise Duty on wines and spirits.With Uganda and Tanzania not effecting any increase in tax on alcohol, Kenya remains the country in the region with the highest tax rates. But we see this proposal as dangerously counter-productive: Kenya, the most economically-advanced country also becomes the more lucrative destination for the smuggling of products on which duty has not been paid.

Tax rates

In the region, Kenya has the lowest consumption of alcohol per person in a year – 3.4 litres compared to 9.4 litres in Tanzania and 9.5 litres in Uganda, according to the World Health Organisation (WHO). More worryingly for Kenya, nearly half, or 1.5 litres of the alcohol consumed per person in the country in a year is unrecorded and potentially illicit, with attendant health risks. Past increases in tax rates have proven disastrous to price-sensitive consumers, those to whom even a small increase in the price of their favourite drink means they resort to illicit alcohol, with a similar deleterious effect on society.

On a second level, the proposal by the National Treasury brings back a certain measure of uncertainty regarding taxation. There has been a sense of predictability on taxation of alcoholic beverages since the enactment of the Excise Duty Act, 2015. This law introduced inflationary adjustment, where data from the Kenya National Bureau of Statistics would be used to calculate the average inflation for the past year, which would inform the adjustment of Excise Duty annually.

With the proposal by the Cabinet Secretary to increase tax on spirits by 15 percent, it looked and sounded like the old days, when the price of goods was bound to increase with the reading of the Budget. All this while a premeditated, inflation-adjusted excise tax is expected to kick in for a wider range of alcoholic beverages from July 1, 2019.

There is, of course, some time before the Finance Bill, 2019 is concluded in Parliament, but as we continue in the fight against illicit trade to boost the manufacturing sector, it will be important for that to be supported by the right policies and for there to be a measure of certainty and predictability from policy makers.

Mr Rowlands is the Legal Director at East African Breweries [email protected]