New tax on beer, water, fuel delayed to next year

Price increases for a wide range of goods, including fuel, bottled water, juice and beer, have been delayed by six months, offering reprieve to consumers already hurt by job cuts and unpaid leave in the wake of the Covid-19 pandemic.

This follows amendments to the Finance Act, which moved the imposition of a new tax on at least 31 goods from July 1 to January 1 next year.

The adjustment is in line with the law that demands that excise duty be revised upwards in tandem with the cost of living measure or the average rate of inflation in the 12 months through June.

The delay in increasing the tax will benefit households and traders reeling from the impact of the coronavirus, which has reduced shoppers’ purchasing power due to job cuts and low business activity.

“Annual inflation adjustment is effective from January, 2021,” says the Kenya Revenue Authority (KRA).

The taxman was from this week expected to increase excise duty chargeable on the goods by about 5.5 percent, triggering higher retail prices.

Other items that are set to attract higher taxation are cigarettes, cigars, fruit juices and motorcycles.

Now, 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.

This is a departure from the previous law that only required the KRA Commissioner-General to issue a legal notice stating the adjustment for it to become effective.

Super petrol is expected to increase by Sh1.16 at the pump as dealers’ inflation adjusted excise duty rises to Sh22.07 a litre from the current Sh20.91. Kerosene and diesel prices are 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 by many households for cooking and lighting.

Last year, the taxman adjusted excise duty by 5.17 percent on inflation, from 5.2 percent in 2018, and the Treasury expects the levy at about 5.3 percent.

The average inflation for the 12 months to June stood at 5.51 percent. This will see the excise duty on beer increase Sh6.10 a litre, with the tax currently at Sh110.62 a litre or Sh55.31 a bottle, making Kenya’s one of the highest tax rates on alcohol in Africa.

The excise on spirits is set to go up by about Sh13.40 from Sh253 a litre, while wine will attract an additional Sh10.41 tax from the current Sh189 a litre.

Firms like East African Breweries Limited (EABL) have been raising beer prices by Sh10 per bottle in response to the inflation adjusted tax.

The listed brewer has issued a profit warning for the year ended June on reduced sales following the closure of bars to limit the spread of Covid-19, and had previously warned of a tax-induced drop in beer demand.

Before 2018, the affected goods had fixed excise rates, and the new inflation adjustment is seen as a means of protecting the government’s spending power from being eroded by the rising cost of living.

Nikhil Hira, a tax consultant at Nairobi law firm Bowman’s Coulson Harney LLP, said July was not the right time to implement the inflation tax.

“The subdued consumer demand will lower its impact on KRA collection,” said Mr Hira, citing the need to limit tax increases in an effort to kick-start the economy after the pandemic.

Economic growth is projected to drop to 2.5 percent this year, from a pre-pandemic forecast of 5.4 percent.

The Treasury hopes the excise duty and the removal of a range of tax exemptions, including for oil and gas exploration, hiring of helicopters and purchase of planes as well importation of car and tractors, will help make up for revenue lost to the impact of the coronavirus crisis.

As well as a drop in tax collection caused by reduced business activities, Kenya also cut the corporate and personal income tax rates in April to boost demand and help firms keep workers on payrolls.

Manufacturers affected by the excise taxes have opposed the annual inflation adjustments, arguing that it will lead to price instability and distort the overall inflation.

They have proposed that the increment be spread over three years to give them enough time to adjust. The firms have also argued that uncertainty around the rate of annual changes would make it difficult for them to make long-term investment decisions.