Excise stamps rate hike threatens economic growth

The Kenya Revenue Authority (KRA) has proposed an increment in the rates of excise stamps which, as Kenya Association of Manufacturers (KAM), we are deeply concerned about.

KRA's proposed Excise Duty (Excise Goods Management System) (Amendment) Regulations, 2023 seek to increase the fees of excise stamps for bottled water, juices and any other non-alcoholic drinks, cosmetics, alcoholic beverages, tobacco and nicotine products and export products subject to excise with effect from March 1, 2023.

From the onset, KAM's position is that using excise stamps as a tool for fighting illicit trade is counterproductive.

From the baseline survey conducted by the Anti-Counterfeit Agency in 2020, illicit trade rose from Sh726 billion in 2017 to Sh826 billion in 2018, despite the existence of excise duty measures.

On October 19, 2022, KAM members met with President William Ruto and a joint Kenya manufacturing agenda - 20BY30 - was adopted. This is a plan to high-grade the manufacturing contribution to gross domestic product (GDP) from the current 7.2 per cent (about Sh1 trillion) to 20 per cent (about Sh5 trillion) by 2030.

This means increasing direct jobs from 348,000 now to around 980,000. But with the ever-increasing and unpredictable taxation regime, uncontrolled increase in power costs, inflation, forex shortage and influx of cheaper goods from Comesa & EAC regions at zero import duty, this dream to grow manufacturing will remain a mirage as it has happened over the decades.

The proposed increment in the EGMS stamp fees shall have a detrimental effect on consumers and manufacturers due to the increased cost of production and the cost of finished products amid the rising cost of living. The ripple effects on the economy are worse as I will expound on shortly.

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Lest we forget, this proposal comes barely four months after a 6.3 per cent inflation adjustment on specific excise tax rates was effected on October 1, 2022, impacting cosmetics, confectionary, alcoholic and non-alcoholic beverages including bottled water, and tobacco and nicotine products, among other products.

Three months before the inflation adjustment, there was an increase in excise taxes from July 1, 2022 by between 10 per cent and 20 per cent through the Finance Act, 2022.

To begin with, the excise stamp is a revenue assurance tool. It was initiated to deter counterfeiting, ensure the traceability of excisable goods along the supply chain, and enable accounting of produced excisable goods manufactured or imported.

Unfortunately, the proposed stamp, while extremely expensive, does not have the "track & trace" capability. Therefore, the proposed drastic increase in the cost of stamps seeks to be a revenue collection mechanism as opposed to an assurance tool.

This is based on the proposal seeking to increase the cost up to levels of over 100 per cent and beyond the current market costs of producing the stamps.

Despite the efforts to support the economy's push to lower the cost of living, manufacturers will, therefore, be forced to pass this new cost to mwananchi, exacerbating an already dire situation as Kenyans try to make ends meet. We are also deeply concerned about the diverse effects that such a move will lead to in terms of compliance. We are afraid that such an increment to some of the most counterfeited items in Kenya will further encourage counterfeit and illicit trade.

This will lead to reduced government revenue and put lives at risk as substandard and highly dangerous goods infiltrate the market.

Additionally, it will result in low sales and in turn have a negative effect to other revenue streams from manufacturers such as value added tax, Pay As You Earn and income tax, among others.

The ripple effects will be a downside from job creation to job losses, which shall affect many livelihoods.

The government adopted an export-led growth strategy as part of its plan to transform the economy. At the heart of this plan is being globally competitive.

The proposed costs will further make Kenyan products uncompetitive in the global market due to the high cost of compliance and unpredictable regulatory environment as exemplified by these amendment Regulations.

We, therefore, urge the government to retain the current charges on the excise stamps and to finalise and implement the National Tax Policy, with a focus on enhancing certainty and predictability in the tax code.

Some of our members who are in the regional markets and have established manufacturing industries in other African countries are already reporting a cost of production deficit of up to 23 per cent for the same finished products manufactured in Kenya vis a vis producing in other countries such as Egypt and importing to Kenya.

We cannot afford to lose these kinds of investments to our regional neighbours.

The increased tax burden will also discourage foreign investment in Kenya. Investors are attracted to countries with favourable and predictable tax regimes.

The hike in duty will make Kenya a less attractive destination for investment. As a result, we may miss out on the many benefits that come with foreign investment, such as creation of jobs, transfer of technology and stimulation of economic growth.

This poses a great risk of suppressing the manufacturing sector's contribution to GDP, which has been shrinking over the last five years, and our vision of doubling the contribution to GDP in the next eight years will remain a pipe dream.

Whereas taxation is a critical component of any government's fiscal policy, an over-reliance on this source of income can lead to a decline in competitiveness.

We, therefore, urge the government to retain the current charges on the excise stamps and to finalise and implement the National Tax Policy, with a focus on enhancing certainty and predictability in the tax code.

- The writer is the chairman of Kenya Association of Manufacturers. Email: [email protected].