Alcohol, cigarettes spared tax hikes for first time in 5 years

Alcohol and cigarettes were exempted from tax increases for the first time in five years after a finance bill excluded producers from the excise tax adjustments, giving manufacturers and consumers a significant exemption.

These two products, along with betting and luxury items, became an easy target for excise tax increases by the regime of President Uhuru Kenyatta, which unleashed successive tax increases on the ‘sin industry’ as it sought to raise extra revenue.

Alcohol and cigarettes have for decades been seen as price inelastic, meaning their consumption would not be harmed by price movements in either direction, making the products easy targets for tax raids.

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The tax freeze on the sector comes against the backdrop of intense pressure from manufacturers who warn that higher taxes will lead to lower revenues while leading to a rise in illegal trade.

Jane Karoko, managing director of East African Breweries (EABL), noted during discussions on last year’s finance bill that the brewery could no longer absorb costs from higher taxes, and that such costs would be passed on to consumers, driving up the cost of beer, wine and wine. . spirits.

“I think the tax changes would be a disaster. Ten percent is too much. It would make beer and spirits very expensive affecting the entire ecosystem from growers to bar owners and distributors. It wouldn’t be good for anyone,” she noted.

In another win for the sector, the government plans to reverse the annual tax rate adjustments that are currently being made each October.

The new finance bill proposes stopping rituals that lead to an increase in the prices of exchangeable goods such as petroleum products, alcoholic beverages, cigarettes, bottled water, fruit juices, motorcycles and sweets.

Instead, the Treasury rolls its tax net outside of traditional alcoholic beverages and cigarettes to include levies on imported fish, powdered juice, human hair, wigs, false beards, eyebrows, eyelashes, and artificial nails.

In September last year, Kenya Breweries Limited (KBL) expected Ksh588 million to the income of sorghum and barley farmers in raising tax rates by 6.2%.

An estimated 15,000 farmers were contracted by the brewing company to supply them with raw materials to manufacture alcoholic beverages.

KBL expected to incur additional losses of Sh20 billion due to distributors and recruitment income.

Through the Finance Act 2022, the excise duty on beer not exceeding an alcohol strength of six per cent rose to 134 shillings per liter from Sh121.85 while the rate of excise duty on wine rose to 229 shillings per liter from Sh20,820.

The excise duty on spirits exceeding six percent alcohol strength was Sh335.30 per liter from Sh287.70 while the excise duty on cigars rose to Sh15,296.60 from Sh13,906.04.

Tobacco alternatives including e-cigarettes and nicotine pouches were also targeted in the excise tax hike last year along with regular and filter cigarettes.

In their analysis of the law, KPMG tax analysts stated: “The consumption tax increase is part of the broadening of the tax base although the increase may negatively affect the consumption of these products largely due to the expected increase in their costs.”

The increase also aims to reduce consumption of commodities deemed harmful to health. However, most of these items have inelastic demand, and therefore the increase in the price of the products involved may not achieve the desired goals.”

Excise revenues from beer, wine, spirits and cigarettes are beginning to level off, indicating a possible rise in collection from higher duty rates.

Data from the 2023 Economic Survey shows excise revenue from beer fell to Sh27.34 billion from Sh28.61 billion even as duties from wines and spirits rose to Sh18.97 billion from Sh16.99 billion in 2021.

Meanwhile, excise revenue from cigarettes remained unchanged for the period at Sh11.76 billion.

In 2021, nicotine substitutes were pulled into the tax net for the first time when they were charged at Sh1,200 per kilogram.

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A year earlier, an excise tax was imposed on low-strength alcoholic beverages for the first time at £105.20 per liter in a move that pushed up the prices of alcoholic beverages, aimed at lower-cost markets.

The move was widely seen by tax analysts as encouraging the consumption of illegal drinks.

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