The Kenya Revenue Authority (KRA) will increase the taxes of at least 31 products, including fuel, bottled water, juice and beer in October, escaping the need to seek Treasury and Parliament approval in January for the increment.
The taxman will increase the costs of the products by at least 5.43 percent, which will be a blow to consumers already hurt by job cuts and unpaid leave in the wake of the Covid-19 pandemic.
Analysts 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.
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.
“The Commissioner General will adjust the rates of excise duty using the average inflation rate for the financial year 2019/2020, as determined by the Kenya National Bureau of Statistics. The adjusted rates will be effective from 1st October 2020,” KRA Commissioner General Githii Mburu said in the notice.
The October review means that the KRA will unilaterally impose the new inflation tax, avoiding MPs who have been hesitant to approve new taxes on basic products like petrol.
The KRA will be required to seek the approval of the Treasury Cabinet Secretary before making the specific excise rate adjustment, and thereafter the legal notice will be taken to Parliament within seven days of publication for consideration.
Parliament will, within 28 sitting days of receiving the notice, decide whether to approve or reject the inflation adjustment under changes to the law made in June and which will apply from January 1.
The KRA reckons it will seek the approvals in the next round of review next year.
Inflation adjustment tax was introduced in 2018 and is seen as a means of protecting the government’s spending power from erosion by rising cost of living and avoid seeking MPs’ nod for higher retail prices.
Super petrol was expected to increase by Sh1.12 at the pump as dealers’ inflation adjusted excise duty rises to Sh22.05 a litre from the current Sh20.92. Kerosene and diesel prices were set to increase by Sh0.60 a litre.
Fuel prices have a big effect on inflation because Kenya’s economy depends heavily on diesel and petrol for transport, power generation and agriculture, while kerosene is used in many households for cooking and lighting.
Excise duty on beer will increase Sh6 a litre with the tax currently at Sh110.62 a litre or Sh55.31 a bottle, giving Kenya one of the highest rates of taxation on alcohol on the continent.
The excise on spirits is set to go up by about Sh13.40 per litre from Sh253 per litre, while wine will attract an additional Sh10.41 tax from the current Sh189 per litre.
Firms like East African Breweries Limited have been increasing beer prices by Sh10 per bottle in response to the inflation-adjusted tax.
The listed brewer reported a 39 per cent drop in profit to Sh7 billion for the year ended June on reduced sales following the closure of bars and hotels to limit spread of Covid-19 and has warned of tax-induced drop in beer demand.
Tax experts, however, reckon that the KRA may not raise the targeted amounts from the increase in excise duty on beer and spirits.
“But even if you charge the rates in October, are you going to collect as much because most of the bars are still closed?” Nikhil Hira, a tax consultant at Nairobi law firm Bowmans Coulson Harney LLP posed.
Other items that are set to attract higher taxation include cigarettes, fruit juices and motorcycles.
Lovers of cigars will pay Sh685 more for a kilogramme of the smoke.
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.
As well as a drop in tax collection caused by reduced business activities in the wake of Covid-19, Kenya also cut the corporate and personal income tax rates in April to boost demand and help firms keep workers on their payrolls.
For the Treasury and KRA, the new system simplifies the tax system since the increments are automatic and do not require any additional approval from Parliament because it is already in law.
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