Excise duty increase punitive to taxpayers, fuelling illicit trade

Manufacturers fully appreciate that a vital part of every country’s development is the social contract in which companies and citizens pay tax, and in turn, receive public goods and services. But we have noted with concern – and some empathy - a growing sense of frustration among taxpayers who feel that the terms of this deal are being unfairly skewed to their detriment.

We fear that the repercussions could cause far-reaching problems for producers, consumers, and the Treasury coffers. If taxes are felt to be unnecessarily severe, perceived to be collected unfairly or spent unwisely, taxpayers feel punished for being compliant. Unsurprisingly, this effect is amplified in times such as these when everyone is feeling the pinch of the pandemic.

Manufacturers of excisable goods are particularly feeling pressure from the recent decision by Kenya Revenue Authority (KRA) to increase excise rates on at least 30 products while citizens are already struggling to make ends meet.

The excise inflation adjustment has been imposed every year since 2018 as a way of protecting the government’s tax revenues from erosion by rising cost of living. The High Court initially halted this year’s 4.97 per cent hike after petitioners claimed it breached their constitutional rights during these difficult times. But, after removing fuel from the list of excisable goods affected, KRA announced the increases had taken effect for all other goods on November 2. This approach is not only discriminatory, it also suggests that our legislators have lost touch with the people they are supposed to represent.

After a tough 18 months of the Covid-19 pandemic, manufacturers are struggling to get back on track. A negative growth rate of -0.1 per cent registered by the sector in Kenya in 2020 is clear evidence. Inflation and record fuel prices continue to drive up costs, with little margin left to spare. Counterfeiters and smugglers continue to undermine legitimate producers by exploiting vulnerable consumers.

Price increases will reverse the little gains that have been made to turn around the economy and will hurt struggling businesses, which may well end up destroying jobs and impoverishing households. The corresponding cut in legal consumption will result in falling government revenue. With such an unpragmatic fiscal approach, taxpayers have no reason to think that things will get better any time soon.

Excessive tax increases damages investor ability to recoup their expenditure and sends an ominous signal that could deter others from committing to future spending. Perhaps, most worryingly, excise increases encourage even well-off consumers to seek cheaper tax-evaded goods, thereby enriching organised criminal networks that already make billions through smuggling.

What we need is a sustainable and predictable excise tax regime. Not only will this support economic recovery, it will also help to ease the tax burden on Kenyans and protect the exchequer from the impact of illicit trade. Additionally, tax policy uncertainty, excessive taxation and associated negative externalities such as illicit trend will continue to undermine Kenya’s industrialisation agenda.

Ms Wakiaga is the CEO, Kenya Manufacturers Association