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Alcoholic drinks traders seek relief from excise tax

Business
 Couple shopping for wine in a supermarket. [iStockphoto]

Alcoholic beverages businesses could be the most affected by the Finance Bill 2024 if implemented owing to the compounding effect of previous tax adjustments done in 2022.

The Finance Bill 2024 has already been met with negative reviews from players in the sector who claim its implementation will likely drive alcohol manufacturers out of the country.

Implementing the Bill as is will be the third time the Government is adjusting excise taxes in three years.

In the latest Finance Bill, the Alcoholic Beverages Association of Kenya (ABAK) is protesting against the proposal to amend the Excise Duty Act by repealing Section 14 which now requires excise duty payable on raw materials to be offset against the excise duty payable on the finished goods.

“The net effect of this is that local manufacturers will be subjected to double taxation of the products at the input stage and at the finished goods stage, whereas imported products will only be charged excise tax on the finished goods,” said ABAK chair Eric Githua.

The removal of the relief will increase the cost of locally produced spirits, making them less competitive and potentially stifling local manufacturing initiatives.

“It will turn Kenya into a net importer of excisable products, becoming non-competitive within the East African Community, where significant manufacturers exist thus encouraging cross-border illicit trade as products will be cheaper in the neighbouring regions,” Githua added.

The association said the combined impact of the deletion of Section 14 and a 70 per cent increase in spirits tax as proposed in the Finance Bill 2024 will lead to a collapse of the local spirits production due to a 252 per cent increase in the cost of production and a 166 per cent increase in the recommended retail price.

“This will in turn negatively impact the local sourcing of ethanol, glass and negatively affect employment within the local production spirits value chain,” said Githua.

Preceding the Finance Bill 2024, the sector has been the low-hanging fruit for the taxman with several increments that the players said gave neither them nor the consumers time to adjust.

For example, Excise Duty in 2022 increased twice via the then Finance Act that came into effect in July and inflationary adjustment by Kenya Revenue Authority later in October.

“In July 2022, Excise tax for beer and spirits increased by 10 per cent and 20 per cent respectively, following the 2022/23 budget. In October 2022, there was a further 6.3 per cent tax increase from the inflationary adjustment,” explained Eric Kiniti, Abak Secretary.

“As a result, Excise Duty on beer increased from Sh27 billion in 2022 to Sh32 billion in 2023. On the other hand, Excise Duty on spirits reduced from Sh19 billion in 2022 to Sh18.9 billion in 2023, as per the Economic Survey,” he said.  “Spirits revenue is not growing and increasing tax on spirits will effectively drive the sector down further, at the expense of local manufacturers and a long value chain,” he added.

These unfavourable taxes in 2022 affected East African Breweries Ltd, the largest regional alcoholic beverage manufacturer, revenue as it reported a drop of almost 20 per cent in net sales for the half year ended December 2022.

During the period, net sales in Uganda grew by 19 per cent while in Tanzania by 11 per cent.

He also raised concerns over the proposal to amend the timeline from 24 hours to five working days for remission of Excise Duty.

Githua said in a statement that five days is still not enough as it imposes a significant operational cash flow strain on their businesses and denies them the opportunity to invest in growth.

“Our proposal is that we go back to the provision that required licensed manufacturers to remit Excise Duty not later than the 20th day of the succeeding month,” he said.

Another area of concern, he said, is the proposed revision of Clause 42 (K) on Excise Tax on Spirits which stipulates that all spirits of alcoholic strength exceeding six per cent will now attract a new Excise Duty rate of Sh16 per Centilitre of pure alcohol.

This, he alluded, represents an 80 per cent price increase in the cost of spirituous beverages such that the cost of the cheapest spirit will move from Sh270 as recommended price to Sh770.

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