BAT eyes tax holiday for nicotine pouches

British American Tobacco #ticker:BAT (BAT) Kenya is pushing for a three-year tax holiday on local production of nicotine pouches and similar products at its $25 million (Sh2.7 billion) plant which is close to completion.

The firm says it has opened talks with the Treasury and the Kenya Revenue Authority (KRA) to have the non-combustible pouches to be initially exempted from excise duty for two to three years, and subsequently lower taxation than prevailing rates on cigarettes.

Managing Director Beverley Spencer-Obatoyinbo said the tax holiday will help it start manufacturing and set up distribution networks for local sales and exports in six-nation East African Community and 21-member Comesa markets.

She argued that the oral nicotine pouches – consumed by being placed between upper lip and gum and seen as alternative to smoking – are “new-to-world” products which should not be slapped with punitive taxes as those on cigarettes.

“My expectation is that there would be no excise on this category due to the size of foreign direct investment. We are looking at holiday of two-three years in order to start the manufacturing, distribution and sales of this category, and also give us chance to establish exports,” Ms Spencer-Obatoyinbo told the Business Daily on Thursday.

“We believe that based on its reduced harm profile, excise tax paid should be significantly lower than cigarettes.”

BAT started importing the new tobacco-free category into Kenya in third quarter of last year, and plans to begin local production of the oral nicotine pouches when it opens its new factory in Nairobi targeting the African market.

The gradual switch from tobacco to nicotine pouches will likely hit Kenyan leaf farmers – who have for decades depended on the cigarette industry for livelihood – hardest in the medium- to long-term.

“We have a very long and stable relationship with farmers. Our objective over the short-term is to continue that relationship,” Ms Spencer-Obatoyinbo.

“Looking forward, there will definitely need to be discussions with leaf farmers in terms of how all these categories all come together. The nicotine that is currently utilised in pouches is produced in Switzerland … and is obviously drawn from tobacco leaves, and the Kenyan leaf fits in the global leaf that BAT purchases.”