Keroche: How KRA's thirst for taxes brought brewers down

A plant operator at Keroche Breweries supervises the production of Vienna Ice Strong Lager. May 2021. [Antony Gitonga, Standard]

The decision by the Kenya Revenue Authority (KRA) to shut Naivasha-based Keroche Breweries over tax arrears of Sh323 million has brought to the fore the bruising brawl between the taxman and local brewers.

KRA, whose perceived high-handedness has seen it moot plans to drop the word “Authority” for “Service,” is once again in the eye of the storm for allegedly frustrating the country’s only indigenous brewer.

“This has drained all our resources. It is a bad position to be in,” said an emotional Tabitha Karanja, the CEO of Keroche, who together with her husband Joseph Karanja, humbly started the brewery at their home with a seed capital of Sh500,000.  

At its inception in 1997, the firm focused on the middle and low-income earners with its low-priced brand of spirits, before venturing into beer, an area dominated by the East African Breweries Ltd (EABL). Their first beer, Summit Lager, was launched in October 2008.   

“If nothing is done in the next seven days, we will be forced to drain down all the beer and lay off over 250 direct employees and thousands within our nationwide distribution network,” said Karanja.

KRA, which has been at loggerhead with the Keroche since 2003 over tax arrears, insists it is only doing its work.

KRA had not responded to our request for comment by the time of going to press. However, in the past, the taxman has maintained that its role includes trade facilitation and that it is not its intention to shut down businesses.

In March 2020, as the country grappled with the Covid-19 pandemic, the tax appeals tribunal made a ruling on the long-running tax dispute between Keroche and the taxman, ordering the brewer to pay up Sh9.1 billion in tax arrears.

The Naivasha-based brewer had opposed the charging of excise duty on one of its products, Vienna Ice, which it argued had been produced by diluting Crescent Vodka, a process that did not amount to manufacturing in any way.

While making its decision, the tribunal directed Keroche to pay Sh500 million as a condition for the taxman to lift the agency notice that had seen the brewer’s bank accounts frozen.

The High Court would, later on, reduce this figure to Sh323 million. Keroche would go back to the same court requesting a review.

Besides arguing that it is in the public interest that the plant remains open as it is the only indigenous player in the alcoholic beverage market and that its collapse would lead to a monopoly, thereby undermining consumer interests, it also pleaded that the negative effects of the Covid-19 pandemic had also left it without any cash flow.

Keroche also argued that banks had refused to give it a loan repayment moratorium, citing uncertainty in the business environment.

Meanwhile, the brewer remained closed as pubs and nightclubs were also shut as part of the government’s measure to curb the spread of Covid-19. 

However, KRA pointed out that Keroche was insincere. The tax dispute, it said, had been ongoing since 2006.

“And the matters before the Tax Appeal Tribunal date back to 2015 and 2017 respectively, hence the appellant knew that it had a contingent liability before the Covid-19 pandemic for which it ought to have made provision under the applicable accounting standards,” said the taxman.

Nikhil Hira, a tax expert, reckons that KRA’s aggressiveness has not been directed unilaterally on alcoholic drinks as much alcohol is slapped with nearly all the tax heads.

“But the alcoholic industry happened to be highly profiled,” said Mr Hira.

Keroche CEO Tabitha Karanja. [File, Standard]

And it is not just high-profile, it is also politically charged. Indeed, some critics insist that Keroche’s case has been politically instigated, a claim KRA denies.

Keroche’s allegations that its woes have been instigated by its competitors, especially after it ventured into beer-making with its Summit Lager, though unsubstantiated, are not without precedence.

Attempts by South African Breweries’ subsidiary Castle to break EABL’s monopoly between 1997 and 1998 set off a vicious beer war that occasionally turned violent, with Castle ultimately being “hampered by [Kenya Breweries Ltd’s] KBL’s tight links with political and business leaders and barley farmers,” according to historian Charles Hornsby.

“There was also strong brand loyalty to Tusker and its sister brands as ‘Kenyan,’” wrote Mr Hornsby.  

In 2002, Castle conceded defeat having failed to beak-even, shut down its Thika plant and retreated to Tanzania where it remains to date.

Hornsby noted that the beer wars of 1997-2002 that were triggered by Castle’s aggressive marketing and even violence, spawned massive changes in the industry.

Politically, Castle was prepared to face off with KBL.

The late MP for Kiambaa, Njenga Karume, was poached from KBL as a distributor and owned one-third of the Thika plant.

The investment generated tension between South Africa and Kenya as many Kenyans viewed Castle as foreign.

Today, it is EABL, which is celebrating its 100 anniversary, that is being described as “foreign.”

Throughout Keroche’s tax battle, the firm’s CEO Karanja has never missed an opportunity to remind Kenyans that EABL is foreign-owned. In retracing Keroche’s footsteps, these are the words you will be confronted with when you open its website: “Their (Tabitha and Joseph) story is a classic in Kenya, where the brewing industry for over half a century was dominated by multinationals, the largest being the Diageo-controlled East African Breweries who control both the beer and spirit markets.”

The Nairobi Securities Exchange-listed EABL is majority-owned by the British alcoholic maker Diageo.

EABL has also gone through the same fights with KRA, although, unlike Keroche, it won its case.

In June 2021, EABL’s subsidiary, KBL, was spared a heavy import duty on its Tusker Cider brand by the Tax Appeals Tribunal.

The tribunal ruled that the apple fruit concentrate, which is the main ingredient used to manufacture the alcoholic drink, does not attract 25 per cent import duty as had been demanded by KRA.

Instead, importation of the concentrate, the tribunal ruled, is classified as edible preparation attracting a duty of 10 per cent.

KRA, which had turned down KBL’s request for the case to be escalated to the Customs Cooperation Council, had argued that the concentrate, with 14 per cent alcohol content, was classifiable under the tariff of “beverages, spirits and vinegar,” which attracts a duty rate of 25 per cent. This would have seen the retail price of the alcoholic beverage go up, denying the listed company much-needed revenue.

“The appellant (KBL) in its short reply submitted that what was in dispute in this appeal was apple concentrate and not alcoholic fermented apple plus. The tribunal concurred with the position taken by the appellant and declines the respondent’s (KRA’s) invitation as doing so will amount to engaging in speculation,” read the ruling in part.

KRA offices along Mombasa Road, Nairobi. November 2021. [Edward Kiplimo, Standard]

EABL also lost out when the State decided to reverse the tax relief that offered on its low-end beer, Senator Keg, leading to a dip in the consumption of this drink after a spike in its price. There are other alcoholic companies that have been on the receiving end of the State’s fight against illicit brews, tax evasion, with some of them reading harassment instigated by their competitors.

In April last year, KRA ordered the closure of Mount Kenya Breweries Ltd over allegations that it had affixed 16,600 bottles of beer with fake excise duty stamps.

But seven months later, Justice Weldon Korir ordered the taxman to reopen the Nanyuki-based brewer, advising it to stop killing local companies in the guise of collecting taxes. The judge regretted that KRA had become a monster by killing local businesses over alleged failure to pay taxes. This, said Justice Korir, in turn, affects thousands of families whose breadwinners are rendered jobless once the companies are shut down.

He ruled that when KRA proceeds to kill businesses in the guise of collecting taxes, it becomes an undertaker and will itself eventually die since its survival depends on the existence of income-generating businesses from which it can collect taxes.

The taxman has since appealed the decision, arguing that Justice Korir ruled that although KRA is justified to collect taxes and that the companies have an obligation to declare and remit their taxes, closing their premises and stopping production is not the right way to deal with tax evasion.

KRA, in its appeal, argued that the judge failed to consider the consequences of allowing the company to operate when they had admitted to having the counterfeit excise duty stamps.

Billionaire Humphrey Kariuki and his two companies, Africa Spirits Ltd and Wow Beverages Ltd, had also been battling with KRA over tax evasion allegations amounting to Sh41 billion. Even after the court in December 2020 acquitted the businessman, the government still went ahead and auctioned his factory.

Alcohol is generally a heavily taxed commodity. More than half the price of a bottle of beer, for example, goes to taxes, including stamp fees, the 16 per cent value-added tax (VAT) and excise duty, popularly known as the sin tax.

Increased taxation of taxes on beer, especially the sin tax, which is adjusted annually for inflation, has resulted in a jump in beer prices. For example, the average price of a half litre of Tusker beer has increased by 67 per cent in the last 10 years to 2020.

Sin tax from alcohol, especially beer seems to have stagnated, with industry players attributing this to a drop in per capita consumption of booze.  

Due to increased taxation, per capita consumption of beer had been on a decline from 5,300 litres in 2011 to 4,500 litres in 2017, with Nikhil noting that this coincides with the period when there was an increase in excise duty.