Tax hikes call for urgent action against illicit trade

Kenya's inflation rate currently running at over 8.5 per cent. [iStockphoto]

Kenyans are hurting following the latest painful addition to the soaring cost of living.

A 6.3 per cent excise tax increase introduced on October 1 has forced up the price of a range of goods, including bottled water, juice, alcohol, SIM cards and cigarettes.

This comes only three months after the Finance Act 2022 raised excise tax rates by between 10 per cent and 20 per cent.

It amounts to a massive cumulative excise tax increase of up to 26.3 per cent in a single year. For most Kenyans, especially those struggling to make ends meet, this colossal increase is unsustainable.

That much is starkly evident from the response to a public petition set up by Stop Crime Kenya (StoCK) in a bid to bring citizens' voices to the discussion with the Kenya Revenue Authority on this latest rise.

Responses from many of the 1,300 signatories to the petition were damning. They termed the increase "unbearable, unfair and exploitative."

It would "put clean and safe water out of reach of wanjiku," warned one of the respondents. Traders predicted it would put their businesses at risk of closure. Others forecast increased tax evasion through illicit trade.

Illicit trade is already a grave problem for our nation. According to Anti-Counterfeits Authority (ACA), counterfeit or smuggled goods deprive the Fiscus of Sh153 billion in tax revenue annually.

Excessive and unsustainable excise increases threaten to fuel this criminality and widen that economic black hole still further.

Moreover, with Kenya's inflation rate currently running at over 8.5 per cent, consumers are struggling.

Businesses are still trying to recover from the impacts of the pandemic and cannot offer as many employment opportunities as they could in the absence of excessive taxation.

Any tax increase that raises the prices of goods exacerbates all these threats to Kenya's growth and prosperity.

As a result, previously law-abiding citizens are being pushed towards the shadow economy in search of supposed bargains just to survive.

This reduces legitimate sales, cutting into the bottom line of producers and suppliers, and leading to job losses.

Kenyan manufacturers have long complained that excise tax increases are far too frequent, unpredictable and steep compared to our neighbours Tanzania and Uganda.

This leads to price disparities that drive the smuggling of goods from these countries across our porous borders.

Almost four in every five Kenyans have bought illicit goods, according to the ACA. A 2020 survey by the National Crime Research Centre found that sugar is the most smuggled good in Kenya, where its retail price can be 60 per cent higher than in Uganda.

Nearly half of the alcohol consumed in Kenya is illicit, with tax evaded on 44 per cent of drinks, according to the World Health Organisation. That results in an annual loss to the Exchequer of a staggering Sh78 billion.

Excise shocks

Dramatic excise increases on tobacco products have been accompanied by a surge in sales of tax-evading cigarettes, which are counterfeit, trafficked from abroad, or both.

An estimated one in four cigarettes sold in Kenya is now illicit and paying no tax. In 2015, before a series of excise shocks, that figure stood at just one in 100. The government is now losing Sh4 billion in annual tax revenue to illicit cigarettes.

It seems manifestly unjust that government, in order to protect its revenues, pushes up prices for honest consumers, while tolerating such vast sums to be stolen from the State by criminals in illicit trade.

Criminals do not pay taxes! By driving more business towards them, tax increases backfire and result in reduced revenue for the Treasury.

Tackling illicit trade, which deprives the State of vital revenue, undermines the rule of law and subjects the consumers to unregulated, substandard and lethal products, should be top on the agenda of the new government.