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Tax wars: Is this the end of Keroche's nine lives?

Keroche Breweries CEO Tabitha Karanja when she addressed the media regarding the latest standoff between Keroche breweries and the Kenya Revenue Authority. [Elvis Ogina, Standard]

Keroche Breweries Ltd was founded on love and Sh500,000, it has been told. But its cat and mouse relationship with the taxman has sucked the life out of the 25-year-old company.

The tax battle between Keroche and Kenya Revenue Authority (KRA) has been brewing since 1998, barely a year after the firm was founded in Naivasha as a fortified fruit wines brewery.

Yesterday, Keroche Chief Executive Tabitha Karanja, now turned politician, took to social media to deliver what appeared to be an end-of-the-road statement. “I was thinking aloud on Sunday afternoon and pondering how I will relay the painful message to our (400) employees on Monday that we will be laying them off as a result of KRA’s closure,” tweeted Ms Karanja.

KRA last week closed down the company over the continued chase for tax arrears, marking the sixth time in one year that the taxman has shut down the Sh5.5 billion company.

Over two million litres of beer, valued at about Sh512 million, are still stuck in the fermentation tanks, according to Ms Karanja, who is fearing for the worst unless KRA hears her out.

The CEO has invoked the names of President Uhuru Kenyatta and two leading presidential aspirants—Raila Odinga and William Ruto. She wants their intervention.

But also alert to the fact that Keroche’s solution lies away from the political podiums, she is also climbing down and asking KRA to “once again articulate our predicaments” and give her one more chance to try.

Ms Karanja is juggling between saving her business and wooing voters for the Nakuru Senate seat. Saving the company and winning the election is a possibility, and so is losing both.

Keroche’s battle with KRA is one that has been fought since 1998 and in all the available arenas—courtrooms, mediation tables and social media courts.

In all these, KRA’s voice has been one: “Not a shilling more and not a shilling less.”

But Keroche’s view has been that KRA failed to understand the business model, and has been harsh and hell-bent on ‘killing the goose that lays the golden egg’, according to Ms Karanja.

“KRA have exerted their authority with cavalier approach on a collection of taxes, recklessly disregarding the effects of their actions,” she says.

Now the brewer, whose products can now hardly be found in bars, appears to have run out of the proverbial nine lives of a cat.

It is a moment that Ms Karanja would not want to see, yet keeps inching closer as long as the taxes remain unpaid and the stock in the factory is not being processed into alcohol.

When she tweets about Keroche’s woes, she says, she does so with a bleeding heart because she believes she has fought “every possible battle” to keep the company running for the past 25 years.

“You would think that we have arrived, only to realise you haven’t started the journey. This took 25 years. Where do you go when you get shut down?” Ms Karanja posed on March 9.

Permanently shutting down Keroche will mark a sad end to a classic story of a firm that has for a quarter-century managed to take on multinationals including East African Breweries Ltd (EABL) — a Goliath that has towered over the Kenyan beer industry and whose subsidiary Kenya Breweries toasted to its centenary in March.

Now brands like Summit Lager, Summit Malt, X Double Strength Beer, Valley Wines, Crescent Whisky, Crescent Gin, Crescent Vodka and Viena Ice might become once-upon-a-time tales.

KRA’s tax wars with Keroche started with Viena Fortified wine—a product the taxman in 1997 classified under Harmonised System (HS) code tariff 22.04, attracting 45 per cent excise duty.

But in October 2006, KRA informed Keroche that it was a mistake for the wine to have been classified under HS 22.04 and would now be reclassified under higher HS code Tariff 22.06 which attracted 60 per cent excise duty.

Keroche had just announced a Sh1 billion investment in a beer brewing plant and read mischief in KRA’s move.

The taxman demanded Sh1.1 billion in tax areas from Keroche to cover the period of the ‘erroneous’ tax calculation.

Keroche objected, starting the series of battles with KRA.

It won the battle in court on July 6, 2007, with the judge ruling KRA’s demand as “unfair, oppressive, irrational, unreasonable and constitutes an abuse of power.”

However, Keroche’s victory was short-lived. KRA did not only appeal the ruling but also push for the change of Viena Fortified wine from 45 per cent excise duty to 60 per cent.

This was included in the 2007-08 Finance Bill, forcing Keroche to take the painful decision of retiring Viena Fortified wine, arguing that the newer tax would not make sense to the targeted consumers. Keroche’s pain was its competitor’s gain since in the same year, EABL’s Senator Keg was zero-rated to capture the low-end market.

The same year, Keroche innovated a new ready-to-drink vodka derived from its existing Crescent Vodka.

This, it said, was similar to what a consumer would do – walk into a bar, buy some tots of Crescent Vodka and mix them with water or soda.

Distilled water

Keroche said it was mixing 188 millilitres of Crescent Vodka with 312ml of naturally distilled water to make 500ml of Viena Ice ready-to-drink Vodka.

KRA was observing. In August 2014, seven years later, KRA sent a letter to Keroche disputing the formula of this ready-to-drink Vodka.

KRA informed Keroche that the innovative drink would now attract a tax of Sh101.20 per litre. In addition, it was demanding Sh6.11 billion as backdated tax from Keroche. Again, Keroche objected, saying this would amount to taxing water and making the drink more expensive than other vodkas, whiskies, brandies and gins that were on the market.

The two KRA assessments—one on Viena Fortified wine and another on the ready-to-drink vodka—added up to Sh7.2 billion tax demands. KRA in May 2017 sent a fresh Sh1.1 billion tax demand notice to Keroche over the Viena wine, which the brewer objected to.

The taxman in mid-June 2019 approached Keroche with two demands: either apply a tax of Sh210 per litre on the ready-to-drink vodka or create a product with an alcohol content of below 10 per cent and pay a tax of Sh110 per litre.

None of these alternatives favoured Keroche. The Sh210 per litre tax would have caused a 200 per cent increase in price while alcohol content of below 10 per cent would have made the vodka tasteless.

Keroche chose to object to the matter. Meanwhile, it also tried the 10 per cent alcohol content product, which it said cost it 90 per cent of the market.

The last nail on the ready-to-drink vodka was in June 2020, when KRA issued a circular indicating that the ready-to-drink vodka should not be above six per cent alcohol content.

Such a formula, Keroche said, would make the vodka definitely “taste like water”. It was forced to stop manufacturing the drink in December 2020.

Covid-19 disruptions only served to worsen an already dire situation for Keroche, leading to its near death. The brewer has suffered poor cash flow, making it difficult to fully meet all the cash obligations including taxes, salaries, supplies and utilities like electricity.

This has triggered a battle of survival even as KRA comes knocking for its arrears, but with memories of a client, it has had a bitter-sweet relationship with since 1998.

When KRA came knocking in February last year, Keroche entered into a proposed payment plan but failed to keep it.

The breached payment plan saw KRA shut the Naivasha-based factory on December 7 and issue agency notices to 36 banks.

Shutting operations in December, when sales usually go up in line with end year and New Year festivities, meant Keroche was not going to make money.

While it negotiated for a 24-month resettlement plan, KRA only granted six months.

KRA finally reopened the plant on December 27. Factoring in the logistics, Keroche’s products could only reach the market on December 27. It was a peak season missed.

The taxman shut the plant again on January 10 and reopened it five days later. Keroche started operations on January 22, 2022, after applying and receiving stamps.

It was shut again on January 31 and reopened on March 22 after striking a repayment deal with KRA. However, it was shut again last week putting it at risk of never reopening again.