Taxing times for over-taxed retailers

Ismael Onunga a fruits and vegetable vendor at Sokomjinga market in Migori says that business has gone down since the outbreak of Covid-19. [Caleb Kingwara, Standard]

Squeezed from all sides, retailers are reporting very little to be happy about in 2022.

As businesses close their 2021 books and retailers take stock the last few months including what would traditionally have been the busiest time of their year, they are left to count the cost of a difficult period for the sector.

Shop owners have been fighting on the frontline as the Covid-19 pandemic continues to strain the Kenyan economy, even with the easing of safety restrictions.

Slashed salaries are yet to be reviewed, jobs and shattered businesses have yet to recover.

This amounts to less money in the pockets of consumers across the country, hence reduced sales for retailers who are desperately trying to keep their shelves stocked and their shops open.

Meanwhile, the cost of doing business has been on a sharp and contradictory slope for the last ten years! 

There has been a slew of tax increases driving up the price of goods. Retailers are constantly trying to balance extremely thin margins even as some of the increases in costs have to be shared with the consumer, who also has less money to spend.

As an inevitable consequence of this tension, they are losing customers to traders who operate in the shadow economy. 

Stable fiscal regime

The Retail Trade Association of Kenya (Retrak), which serves as the voice of the retail industry, has been hearing the stories of individual small business owners and traders nationwide.

The Chief Executive Officer of Retrak Wambui Mbarire says the Government has put in measures and teams to curb illicit trade, but the impact of this on the ground is very minimal.

Mbarire insists the Government must consistently put more effort into implementing these measures, in response to the distress of law-abiding retailers in the formal sector, and the damage being done to the nation by the increasing levels of illicit trade. 

The National Treasury and Planning CS Ukur Yatani at Treasury building on his way to present the Financial Year 2021/2022 budget at Parliament Buildings, Nairobi. June 10, 2021. [Jonah Onyango, Standard]

"Our lawmakers must be forced to acknowledge that their actions have had an inadvertent consequence - fueling this criminality, through the current unpredictable and unsustainable fiscal policy that is driving increasing numbers of consumers to the shadow economy," she says.

"Retailers have two options: hike their prices for customers who already have less money in their pockets or cut their margins and put their own businesses at risk. Either way, it is a lose-lose situation for Kenyans. The latest excise inflation adjustment adds to their dilemma."

The CEO says though the Government needs stable tax revenues to help fund Kenya’s recovery from the pandemic, it must appreciate that unstable excise regimes risk achieving the exact opposite.

"Excise shocks provide a boost for criminals in illicit trade and cripple retailers in the legal sector. Kenya’s recovery requires a sustainable and predicable excise regime. It would be the best news our nation’s retailers could hear in these difficult times," she adds.

The overriding message is that a combination of Covid-19, the measures are taken to reduce its spread and an unsustainable tax burden has left them in a grim battle for survival. 

The pain is felt hardest in the poorest areas. A survey of the pandemic’s impact on the small-scale sector in Nairobi by researchers from Georgetown University* bears this out.

Respondents told of higher levels of unemployment, an increase in the prices of basic commodities, and the need to take out formal and informal loans to deal with Covid-19. 

Impact of pandemic

But they reported receiving little or no assistance from the government, NGOs or other entities.

An alarming 44 per cent said that at least one person in their household had lost a job due to the pandemic.

Almost all (86 per cent) of the retailers reported that the curfew had affected their source of income, while other measures to fight the pandemic had disrupted supply chains.

Meanwhile, the cost of living in the country has been high with month-on-month overall inflation recorded at 5.7 per cent in December. 

Fuel prices hit record levels after the energy regulator put an end to subsidies on petrol, diesel and kerosene that were introduced earlier in 2021 to ease anger over surging inflation.

A petrol station attendant at Total Petrol Station in Nakuru fuels a car on July 15, 2020. [Kipsang Joseph, Standard]

The cost of living is climbing rapidly and as you read this, the price of fuel and cooking gas is threatening to choke consumers.

The Kenya Revenue Authority (KRA) is trying to push through its annual excise adjustment.

If this overcomes the ongoing legal challenge, it will push up the cost of all excisable goods and services, including fuel products, beer, wines and spirits, food supplements, fruit juices, bottled water, cigarettes and tobacco substitutes.

The proposed excise increase will also exacerbate another threat to hard-working traders – the growing menace of illicit trade.

Kenya is a regional hub for tax evaded and counterfeit goods, which deprive the National Treasury of more than Sh150 billion a year in lost tax revenue, according to the Anti-Counterfeits Authority (ACA). 

The problem is thrown into sharp focus in border towns such as Busia and Malaba, where legal vendors are losing business to traders selling goods smuggled from Uganda, to take advantage of the significantly lower taxes there.

For example, the price of a pack of cigarettes or a bottle of beer is twice as high in Kenya as it is on the other side of the border, while the cost of sugar, rice, bread and flour in Uganda is, on average, between Sh20 and Sh50 more expensive in Kenya.

As they testify on these pages, it all adds up to an uncertain 2022 for Kenyan traders, for whom a prosperous new year is currently the stuff of dreams.

Testimonials

Moses Morandia Shop Attendant, Shell Lavington

The cost of living is high and tough compared to, say, last year.

The business environment is not looking good, sales have dropped a bit because of inflation, and the recovery is very slow.

The situation is going to be tougher because of the increase in taxes on some products.

It is going to be tough for our customers – who are already complaining about the rising cost of living, which has affected their purchasing power.

Lydia Njiru Kiosk Owner, Nairobi

My stock has declined as customers are not buying as much as they used to.

This has affected my ability to stock up and keep my business running. In fact, most of them are having to make tough choices on what to buy as most products have become expensive.

I appeal to the Government to consider lowering the cost of goods to help our customers afford them. This will in turn uplift our businesses – which are currently struggling.

Saumu Hussein Kiosk Owner, South C Centre, Nairobi

The disruptions occasioned by the COVID-19 pandemic really unsettled our businesses – with curfew hours particularly hurting us.

We are only just getting back on our feet with the lifting of the restrictions, but the recovery has not been made easier by the rising cost of goods.

Our customers are purchasing less, which in turn means that we are selling less than we are used to.

Customers are cutting down on costs, which has negatively affected the little profit that we make. If the cost of living continues to rise, there will certainly be more counterfeit goods in our market as people seek a cheaper way out.

Johnson Mbithi Trader, Westlands Market

The cost of fuel, flour, sugar, and other products has gone up. This has affected our customers' purchasing power and in turn, affected our profits.

Our business is yet to recover to pre-Covid-19 times, and the rising cost of goods, largely driven by tax hikes, is only making the recovery slower.

Eventually, there is a likelihood that some traders could find ways of shipping in cheaper products through our borders – this will affect our sales even further.