When Financial Standard asked East African Breweries Ltd (EABL) Chief Executive Jane Karuku to paint a picture of a favourable tax regime for businesses such as hers, she quickly pointed out that it should not be about paying less tax.
If anything, she claimed, she would love the brewer to pay more to the Kenya Revenue Authority (KRA). But when it comes to a figure that would be favourable, Ms Karuku is not keen on giving one.
She emphasised that businesses thrive on volumes and that the tax regime should be favourable enough to encourage volume sales. “We want to make sure that policymakers come up with a number, even a reduction, which would encourage the growth of the tax basket,” said Ms Karuku.
This, she said, would enable the industry to pay more tax, which does not necessarily mean a higher percentage, but one driven by increased sales volumes.
This was in light of the periodic increase in excise tax by the government, which affected EABL’s profit for the half-year ending December 2022.
Implementation of the Finance Act, 2022 starting June last year coupled with adjustment of the excise tax to match the inflation rate seem to have eaten into the profits of alcoholic beverage manufacturers. And another adjustment on excise stamps is beckoning, which will substantially increase the cost of beer and other alcoholic drinks, airtime, data, mineral water, cosmetic products and juices.
While affected businesses have aired their concerns, excise duty remains an easy target whenever the taxman needs to raise more revenue.
A discussion paper published by a local think tank, Kenya Institute for Public Policy Research and Analysis (Kippra) notes that beer and airtime are the country’s largest contributors to excise tax.
“Between 2015 and 2019, the contribution of beer to excise tax revenues was stable and averaged 29 per cent, though its share dropped from 31.2 per cent in 2015 to 23.8 per cent in 2019. Airtime revenue as a share of total excise revenue averaged 22.8 per cent between 2015 and 2019, the second largest contributor after beer,” reads the research titled, Excise Taxation in Kenya: A situational Analysis.
Mineral water, jewellery, cosmetic products and locally assembled vehicles made the lowest contribution in this category, according to the paper with an average of 2.4 per cent between 2015 and 2019.
The paper analysed the excise tax administration between 1980 and 2019.
An upward adjustment to any tax will have a ripple effect on the consumption pattern of products or services affected as Kippra notes.
“The study finds negative price elasticities for all the excisable products. However, soft drinks and financial services have the least price elasticities of demand,” the paper reads in part.
Kippra cautions that depending on the policy objective, the levying of excise taxes should be done cautiously as any increases in excise tax rates may result in undesirable outcomes.
Kippra reckons any excise tax review should not be guided by the concept of elasticity alone, a concern shared by players in the alcoholic beverage industry. EABL, the largest alcoholic beverages manufacturer in the region has over the last few years seen its growth graph flatten, as a result, after posting the same profit of Sh8.7 billion for the half-year ending December 2022.
“If the excise (tax) keeps going up, then the price of your favourite beer will also go up,” said EABL boss Ms Karuku during the release of the manufacturers’ half-year results.
Consumer behaviour
An analysis by the consultancy firm Ernst & Young (EY) titled How Governments Are Prolific in Creating Taxes published in 2017 states that there are two reasons behind this trajectory—State’s attempt to regulate consumer behaviour and the need to increase revenue.
“These increases may be partly due to increased evidence of harm to society from these products; however, it may also be that as excisable products tend to have few direct competitors, governments see the high demand for them as an easy way to increase tax revenues without distorting competition,” said EY.
Excise taxes target excisable goods or services. EY notes that excisable products are those items legally traded in the market but cause some harm either to the environment or the health of those who consume them.
Tobacco products like cigarettes and alcohol as well as fuel and cosmetics products fall into this category.
In the case of Kenya, telephone airtime, data services and money transfer services are excisable.
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