Manufacturers have petitioned the Kenya Revenue Authority (KRA) to freeze the tax increase on at least 31 products, including fuel, bottled water, juice and beer in October, arguing it will cut demand and hit tax collection.
The taxman announced last month he would adjust the tax for such products by about cost 5.43 percent — being the average inflation for the year period ending June 2020— costs which will be passed onto consumers.
The Kenya Association of Manufacturers (KAM), the sector lobby, argues the increment in excise duty at a time homes and businesses are already struggling with coronavirus-induced depressed earnings will further hurt consumption.
Under the current law, the KRA Commissioner-General only needs to issue a legal notice stating the adjustment for the new tax to become effective.
The tax increase will hit consumers hard as households and traders reel from the impact of the coronavirus disease, which has reduced purchasing power due to job cuts and movement restrictions, forcing businesses to cut down their activities.
“KRA should not implement the proposed inflationary adjustment rate from 1st October 2020 until after Kenya is declared pandemic free and full recovery of excisable goods manufacturers achieved,” KAM chief executive Phyllis Wakiaga wrote in a letter to KRA Commissioner-General Githii Mburu on Friday.
Tax consultants and consumers expected the KRA to review the prices in January in line with a new law, which takes effect at the start of next year and requires the taxman to seek the approval of Treasury Cabinet Secretary and Parliament for the new inflation tax.
But Mr Mburu has chosen to apply the current law which only requires him to issue a legal notice stating the adjustment for the new tax to become effective.
The chief taxman did not publish the rate at which the duty will adjusted, only stating he will use “the average inflation rate for the financial year 2019/2020”.
Ms Wakiaga argues in the letter, which also seeks a meeting between KAM and KRA this Thursday, the omission of the adjustment rate in the notice “denied the public full information required for public participation”.
Inflation adjustment tax was introduced in 2018 and is seen as a way of protecting the government’s spending power from erosion by rising cost of living.
KAM says inflation adjustment amid Coronavirus economic fallout will exacerbate the decline in excise duty collections which fell 6.4 percent in the financial year ended June.
Excise duty receipts in the period dropped to about Sh188.83 billion from Sh201.74 billion a year earlier with the taxman blaming it on decline of production of excisable products like cigarettes, spirits, keg beer and non-keg beer” after the coronavirus struck.
“In the past few years, manufacturing segment for excisable goods has attracted huge investments from new and existing manufacturers,” Ms Wakiaga said.
“The proposed inflationary adjustment and given the Covid-19 pandemic ravaging the economy, it will be impossible for manufacturers to break-even and recoup back their investments. This will also send wrong signals to potential investors.”
The impact will directly and indirectly be felt by all households as it also affects pricing of fuel such as diesel which is used in farming, transportation and manufacturing whose products are consumed by both wealthy and poor homes.
This, KAM warns, will put pressure on inflation which has stayed within the Central Bank of Kenya’s target range of 2.5-7.5 percent since August 2017 when the country help tense presidential poll which was later nullified by the Supreme Court.
The Treasury is betting that the inflation tax and removal of a range of tax exemptions including for oil and gas exploration, hiring of helicopters and purchase of planes as well as importation of cars and tractors, will help to make up for revenue lost to the impact of the pandemic crisis.
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