Look at impact of taxes, not collected billions

Times Tower in Nairobi, the headquarters of Kenya Revenue Authority (KRA). PHOTO | DENNIS ONSONGO | NMG

Manufacturers in Kenya fully appreciate that a vital part of every country’s development is the social contract in which companies and citizens pay tax, and in turn receive public goods and services. But we have noted with concern a growing sense of frustration among taxpayers who feel this deal is skewed to their detriment.

We fear that the repercussions could cause far-reaching problems for producers, consumers, and the Treasury coffers they are meant to fill. If taxes are felt to be unnecessarily severe, taxpayers feel punished for being compliant.

Unsurprisingly, this effect is amplified in times such as these when everyone is feeling the pinch of the pandemic.

Manufacturers of excisable goods are particularly feeling the pressure from the recent decision by the Kenya Revenue Authority (KRA) to increase excise rates on at least 30 products, while citizens are already struggling to make ends meet.

The excise inflation adjustment has been imposed every year since 2018 as a way of protecting the government’s tax revenues from erosion by the rising cost of living.

The High Court initially halted this year’s 4.97 percent hike after petitioners claimed it breached their constitutional rights during such difficult times. But, after removing fuel from the list of excisable goods affected, the KRA pushed on regardless, and announced that the increases had taken effect on November 2, for all other goods.

This approach is not only discriminatory, it also suggests that our legislators have lost touch with the people they are supposed to represent.

After a tough 18 months of navigating the Covid-19 pandemic, manufacturers are struggling to get back on track. A negative growth rate of -0.1% registered by the manufacturing sector in Kenya in 2020 is clear evidence.

Inflation and record fuel prices continue to drive up costs, with a little margin left to spare. Counterfeiters and smugglers continue to undermine legitimate producers by exploiting vulnerable consumers.

With the country still reeling from the impacts of Covid-19, a price rise will reverse the little gains that have been made to turn around the economy.

The corresponding cut in legal consumption will result in falling government revenue, instead of boosting it as intended. With such an unpragmatic fiscal approach, taxpayers have no reason to think things will get better soon.

In the past few years, Kenya’s manufacturing segment for excisable goods has attracted huge investments from new and existing players.

For instance, Kenya Breweries has invested Sh15 billion in its Kisumu keg production plant, which is envisioned to create more than 100,000 jobs across the value chain.

BAT Kenya has built a world-class tobacco-free nicotine products factory as part of a Sh2.5 billion investment expected to inject skilled jobs into the economy and support more than 80,000 Kenyans in its value chain, over and above billions of shillings in estimated export revenues.

Excessive tax increases damages investors’ ability to recoup their expenditure and send an ominous signal that could deter others from committing to future spending.

Perhaps, most worrying of all, excise increases encourage even well-off consumers to seek cheaper tax-evaded goods, thereby enriching the organised criminal networks.

Before the arrival of Covid-19, a booming illegal trade in cigarettes and alcohol has leeched vital tax revenues from our economy. According to the WHO, nearly half of the alcohol consumed in Kenya is illicit, with tax being evaded on 44 percent of drinks. That results in an annual loss to the fiscus of a staggering Sh78 billion.

Meanwhile, about Sh2.2 billion is stolen from taxpayers every year by the illicit tobacco traders who sell more than one in every four cigarettes smoked in Kenya.

Some 90 percent of illegal cigarettes are smuggled into Kenya from neighbouring countries where excise rates are massively lower. Excise on alcohol is more than five times higher in Kenya than in Uganda. For cigarettes it’s double.

Tax policy uncertainty, excessive taxation and associated negative externalities such as illicit trends will continue to undermine Kenya’s industrialisation agenda.

Phyllis Wakiaga CEO, Kenya Association of Manufacturers