Parliament should scrutinize the tax proposals of the current finance bill with a fine-tooth comb with the sole objective of rejecting all ill-considered measures likely to harm the post-Covid 19 recovery of the productive and wealth-creating sectors of our economy. .
I fully support the views of Kenya Association of Manufacturers (KAM) Chairman Mucai Kunyiha who has sounded the alarm over aggressive increases in excise duty on the alcohol and beverage sector.
If the finance bill proposals are passed, the government will have increased excise duty on beer by 45% and on spirits by 55% in just one year.
On top of that, the bill proposes to increase excise duty on bottles by 25%. A new excise duty of 15% on alcohol advertising has also been proposed. Certainly, excise duties are sin taxes that not only generate revenue, but also help control excessive alcohol consumption.
But it all has to be weighed against the damage done to businesses and the disruption to supply chains. Indeed, the alcohol and beverage sector is a major employer in this economy.
It has a supply chain covering a wide range of players, including beer makers, glass makers, bars, restaurants, transporters and, in the case of Kenya Breweries, an ecosystem of agribusinesses that supports hundreds of thousands of barley, wheat and sorghum producers. .
Clearly, the proposals in the finance bill are not based on a healthy economy. How can you justify a 55% increase in the excise tax on a product whose demand is income-elastic in such a short time? Has the minister taken into account the likely impact on the broader macro-economy: jobs, price levels and growth?
Excise duties inevitably raise the consumer prices of the taxed products, thereby reducing consumer demand for the products. Shouldn’t tax policy currently focus on supporting bar and restaurant businesses and other supply chain players to recover from the suffering they have suffered during Covid-19?
What we need right now is a finance bill designed to help revive key supply chains and sectors.
Indeed, no sector of this country’s economy has suffered more from coronavirus shutdowns and restrictions on movement than pub owners, liquor makers and the hospitality industry in general.
During the pandemic, it was open season on the hospitality industry where pub owners were forced to endure overzealous regulations. What is needed now are fiscal policies to guide the sector back to pre-pandemic levels of production and productivity.
If the proposals are adopted, the implications on regional competitiveness will be dire for Kenya. I say this because, as things stand, Kenya imposes the highest excise taxes on alcohol and beverages in the East African region.
We will have to prepare for the negative economic consequences in terms of regional competitiveness and the impact of illegal cross-border trade in alcoholic beverages. Bottle and glass manufacturers from Comesa countries such as Egypt will have a competitive advantage over our local factories
In the region, we are seen as the frontrunners in tax reform. However, in reality, the opposite is happening. I see four major weaknesses in the way excise tax policy is designed in this country.
First, the tendency to apply excise taxes ad hoc, almost arbitrarily, whenever we face critical revenue shortfalls.
A clear distinction should be made between temporary and permanent measures. Second, an overreliance on taxes that target a few profitable companies. Third, an excise duty regime riddled with taxes tailored to specific business models.
Fourth, capricious and fanciful changes that only serve to create unstable and unpredictable tax regimes. Parliament should reject excise tax increases that do not make good economic sense.