By Rajan Shah,
The Kenya Revenue Authority (KRA) has proposed an increment in the rates of excise stamps which, as Kenya Association of Manufacturers (KAM), we are deeply concerned about. KRA’s proposed Excise Duty (Excise Goods Management System) (Amendment) Regulations, 2023, seek to increase the fees of excise stamps for bottled water, juices and any other non-alcoholic drinks, cosmetics, alcoholic beverages, tobacco and nicotine products and export products subject to excise with effect from 1st March 2023.
From the onset, KAM’s position is that using excise stamps as a tool for fighting illicit trade is counterproductive. From the baseline survey conducted by Anti-Counterfeit Agency in 2020, illicit trade rose from Ksh726 billion in 2017 to Ksh826 billion in 2018, despite the existence of excise duty measures.
On 19th October 2022, KAM members met with H.E. the President and a joint Kenya Manufacturing agenda 20BY30 was adopted. This is a plan to high-grade the manufacturing contribution to GDP from the current 7.2 percent (Circa Ksh1 trillion) to 20 percent (circa Ksh5 trillion) by 2030. This means increasing direct jobs from the current circa 348,000 to circa 980,000 jobs. However, with the ever-increasing and unpredictable taxation regime, uncontrolled increase in power costs, inflation, forex shortage and influx of cheaper goods from COMESA & EAC regions at zero import duty, this dream to grow manufacturing will remain a mirage as it has happened over the decades.
The proposed increment in the EGMS stamp fees shall have a detrimental effect on consumers and manufacturers due to the increased cost of production and the cost of finished products amid the rising cost of living. The ripple effects on the economy are worse as I will expound on shortly.
Lest we forget, this proposal comes barely four months after a 6.3 percent inflation adjustment on specific excise tax rates was effected on 1 October 2022, impacting cosmetics, confectionary, alcoholic and non-alcoholic beverages including bottled water, and tobacco and nicotine products, among other products. Three months before the inflation adjustment, there was an increase in excise taxes from 1 July 2022, by between 10 percent and 20 percent through the Finance Act, 2022.
To begin with, the excise stamp is a revenue assurance tool. It was initiated to deter counterfeiting, ensure the traceability of excisable goods along the supply chain, enable accounting of produced excisable goods manufactured or imported. Unfortunately, the proposed stamp, while extremely expensive, does not have the “Track & Trace” capability. Therefore, the proposed drastic increase in the cost of stamps seeks to be a revenue collection mechanism as opposed to an assurance tool. This is based on the proposal seeking to increase the cost up to levels of over 100 percent and beyond the current market costs of producing the stamps.
Despite the strive to support the economy’s push to lower the cost of living, manufacturers shall, therefore, be forced to pass this new cost to Mwananchi, exacerbating an already dire situation as Kenyans try to make ends meet.
We are also deeply concerned about the diverse effects that such a move will lead to in terms of compliance. We are afraid that such an increment to some of the most counterfeited items in Kenya will further encourage counterfeit and illicit trade. This will lead to reduced government revenue and put lives at risk as substandard and highly dangerous goods infiltrate the market. Additionally, result in low sales and in turn have a negative effect to other revenue streams from manufacturers such as VAT, PAYE, and Income Tax among others. The ripple effects will be a downside from job creation to job losses which shall affect many livelihoods.
The government adopted an export-led growth strategy as part of its plan to transform the economy. At the heart of this plan is being globally competitive. The proposed costs will further make Kenyan products uncompetitive in the global market due to the high cost of compliance and unpredictable regulatory environment as exemplified by these amendment Regulations.
Some of our members who are in the regional markets and have established manufacturing industries in other African countries are already reporting a cost of production deficit of up to 23 percent for the same finished products manufactured in Kenya vis a vis producing in other countries such as Egypt and importing to Kenya. We cannot afford to lose these kinds of investments to our regional neighbours.
The increased tax burden will also discourage foreign investment in Kenya. Investors are attracted to countries with favorable and predictable tax regimes. The hike in duty will make Kenya a less attractive destination for investment. As a result, we may miss out on the many benefits that come with foreign investment, such as the creation of jobs, the transfer of technology, and the stimulation of economic growth.
This poses a great risk of suppressing the manufacturing sector’s contribution to the Gross Domestic Product (GDP) which has been shrinking over the last five years, and our vision of doubling the contribution to GDP in the next eight years will remain a pipe dream.
Whereas taxation is a critical component of any government’s fiscal policy, an over-reliance on this source of income can lead to a decline in competitiveness. We, therefore, urge the government to retain the current charges on the excise stamps and to finalize and implement the National Tax Policy, with a focus on enhancing certainty and predictability in the tax code.
The writer is the Chairman of Kenya Association of Manufacturers. He can be reached at email@example.com.