Illicit trade is hurting tax collection and putting lives at risk

Suspected contraband liquor seized by police and KRA officials in Bureti, Kericho county. [File, Standard] 

The excisable goods trade is a critical revenue mobilisation sector for ordinary revenue collections in excise taxes. During the last financial year, Sh73.624 billion was realised, significantly contributing to the Sh2.407 trillion total revenue collected. This revenue sector comprises of manufacturers of soft drinks, bottled water, beer, and tobacco.

This sector, however, is still marred with various tax evasion schemes which include use of counterfeit excise stamps on excisable products, sale of excisable goods without stamps, manufacturing of excisable products without excise licences, use of proxy companies to procure raw materials and smuggling of goods (raw materials) into the country.

Other schemes include under declaration of production, parallel productions and manipulation of control systems. The rogue traders employ these schemes in an attempt to evade taxes. This poses a considerable risk to revenue collection and national security.

These schemes come into play either during importation of raw materials, manufacturing and also through the sale of the end products. During importation, the traders either misdeclare goods by concealing the raw materials using other goods, under-valuing or misclassifying them in tariffs that have low import duty charges or even that are zero-rated or tax exempt.

To deal with these malpractices, various measures and interventions are in place to monitor, reform and enhance compliance in the excise sector. These include continuous market surveillance in conjunction with partner government agencies in the fight against illicit trade. Another critical strategy is the use of smart technology in production of new generation excise stamps with enhanced security features (covert and semi-covert features).

Illicit trade is common in the manufacture and sale of alcohol products and especially the second generation liquor. Ethanol is the main raw material in the manufacture of liquor and the reason it is the commonly smuggled commodity.

Smuggled ethanol ends up in illegally established distilleries where second generation alcohol are produced and affixed with counterfeit excise stamps. The illegal ethanol business and manufacture and sale of counterfeit alcoholic drinks are therefore intricately linked. Smuggled ethanol avoids payment of excise and VAT.

In two recent incidences, smuggled ethanol was intercepted in Lwakhakha border while concealed in oranges and, in another incident, it was concealed as molasses. Last week, 16,500 litres of smuggled ethanol was intercepted in two separate incidents in Trans Nzoia and Bungoma counties concealed in maize bags and in bricks.

Further, it has been observed that most of the illicit liquor distilling plants are operated from private residential premises in posh estates to avoid detection by the law enforcement agencies. The network also extends widely to retailers, mostly in low income areas, where price is a critical factor for consumers.

As the price differentials show, legal ethanol businesses face competitive disadvantages due to price distortions caused by smuggling, leading to economic losses and market instability.

Mr Mukhweso is the Deputy Commissioner for Investigations in the Investigations and Enforcement Department, KRA