Lawmakers have rejected the proposal to increase taxation on alcohol and bottled water, dealing a blow to the Treasury’s plan to generate an additional Sh50.4 billion revenue in the year starting July.
The Finance and Planning Committee of the National Assembly has also recommended that the proposed excise duty on fruit juice be reduced to Sh13 per litre from Sh13.30 in the Finance Bill 2022.
The proposed duty on juices is, however, still higher than the current Sh12.17 per litre.
And in what is seen as a move aimed at pleasing voters ahead of the August polls, the committee has voted to adjust the duty on excisable goods — which also include fuel and motorcycle taxis (boda bodas) — in line with inflation after every two years as opposed to annual changes currently.
The recommended changes to the Finance Bill will likely keep the cost of these goods largely unchanged if adopted by the House before it takes a break on June 9 for campaigns ahead of the August 9 general elections.
They will, nonetheless, hurt tax collections by the Kenya Revenue Authority (KRA).
“Increase in excise duty on beer may increase uptake of illicit brew. Additionally, the excise rate…had been revised in the Finance Act 2021, and should therefore be given some time before review,” the committee chaired by Homa Bay Woman Rep Gladys Wanga wrote in its report. “Increasing excise duty on bottled water will increase prices of the commodity.”
If adopted by the lawmakers in the House, the excise duty on beer will remain at Sh121.85 per litre as opposed to Sh134 proposed by the Treasury in the Finance Bill 2022, while that for wine and spirits will be retained at Sh208.20 and Sh278.70 per litre, respectively.
This presents a round-one win for brewers such as East African Breweries Ltd (EABL) and Keroche which had warned the taxes, which are also adjusted annually for inflation, will push the cost of the beverages to unaffordable levels for some consumers.
“The tax changes will be a disaster. Ten percent (rise in excise duty) is too much. It will make beer and spirits very expensive. It will affect the whole ecosystem from farmers, bar owners and distributors. It will not be good for anybody,” EABL managing director Jane Karuku said on April 26.
“There are so many things that are going wrong from an inflation perspective: Oil prices are going to affect us, the Ukraine-Russia crisis, and now we are hit with excise just when we are trying to survive Covid. What do we do?”
The lawmakers voted to have the KRA adjust excise duty in line with inflation after every two years as opposed to current annual changes, making a U-turn from their position less than a year after the same parliamentary committee shot down the same proposal by the giant brewer, EABL.
The annual inflation adjustment, which came into force in 2018, was meant to protect the government’s spending power from being eroded by the rising cost of goods and services.
The committee argues a window of two years before the duty is adjusted for inflation “will give businesses time to recover from the effects of Covid-19 pandemic”.
Since last year, there have been rallying calls from consumers and manufacturers for a change in the legal regime for inflation adjustment to consider unique economic circumstances before raising the duties, which eventually reflects in final prices.
Treasury Cabinet Secretary Ukur Yatani had responded by asking lawmakers to change the law through the Finance Bill 2022 to allow KRA Commissioner-General Githii Mburu to spare some of the essential goods annual tax raise in October.
The Kenya Association of Manufacturers, however, protested the proposed transfer of powers to waive taxes from Mr Yatani under the Public Finance Act to Mr Mburu, arguing there was no legal provision for such a move.
The Finance committee has backed the manufacturing sector lobby on grounds that such powers are only vested in the Cabinet Secretary for National Treasury.
Sin taxes on cigarettes and alcohol have traditionally been the target of finance ministers for additional revenue, but in recent years the pool has been widened to include widely used items such as bottled water, cosmetics, confectionery, motorcycles and petroleum products.
The committee has, however, endorsed the Treasury’s proposal to raise excise duty on cosmetics and beauty products to 15 percent from current 10 percent.
“The committee adopts the proposal in the Bill that the excise duty be at 15 percent to discourage fake and counterfeit beauty products in the market,” the committee wrote in the report.