Taxman row with processors sets up consumers for costly products

An announcement by the Kenya Revenue Authority extending the use of excise stamps on bottled water, processed juices and cosmetics, has opened the lid on operational intrigues of the system controversially awarded to a Swiss multinational in 2013.

The Excisable Goods Management System (EGMS), which is being implemented by SICPA Securities Solutions, is said to have been overpriced with the burden pushed to manufacturers who pass the costs to consumers in the long run, according to the processors.

The Sunday Nation has seen an analysis by the Kenya Association of Manufactures detailing the skewed implementation costs in favour of SICPA, whose expatriates are paid by manufactures to oversee the system installations in production lines.

“It is far too expensive to justify the cost of the ink and stamps and this will render all the manufacturers that fall under this Act uncompetitive. KRA cannot justify the Sh0.50 to Sh2.80 as the cost of stamp as manufacturers tend to print batch numbers and the cost of ink for coding or for stamps is nowhere near the above-mentioned costs,” reads the KAM analysis, also shared with KRA.

The additional costs, which KAM says will reduce sales volumes by making products “prohibitively expensive for the common man” are said to be higher compared to other jurisdictions where similar systems have been installed, such as Morocco.

MPs had raised similar concerns over skewed contract clauses in the Sh17 billion excise stamps deal between SICPA and KRA, with the Swiss firm said to be the main beneficiary, including protection not to be penalised for underperformance.

“The contract states that in the event of partial or full termination, and if KRA is in default, the authority shall reimburse SICPA within 30 days all reasonable investments and expenditure made by SICPA,” solicitor-general Kennedy Ogeto told the National Assembly’s Public Investment Committee (PIC), which was investigating the award of Sh17 billion EGMS contract to SICPA through single-sourcing.

The team, which was also probing a clause in the tender documents that requires manufacturers of excisable goods to pay SICPA Sh1.50 for every stamp attached to each item — earning the Swiss firm billions of shillings annually, did not share the deal and SICPA is now set to implement the same scheme on bottled water starting September 1, according to KRA.

Manufactures who remain opposed to the expanded roll-out of the system also blame SICPA for failing to keep its SICPATRACE system running optimally, slowing down production and compounding their losses.

The system, according to the manufactures, frequently breaks down and rejects some products not properly coded, accounting for up to 1.5 per cent of downtime in the production lines and loss of sales.

Other costs related to retrofitting the production line to accommodate the new system have been added to the manufacturer’s capital outlays.

They are required to install blowers that dry the bottle caps before they are coded, build server rooms, fibre optic cabling as well as software and hardware synchronisation.

“When installing and making adjustments to accommodate the EGMS system, manufacturers will need to bring in experts from the manufacturers of the equipment (OEMs) from outside the country to be present during the installation on the lines so as not to void the warranty. Average industry estimates for the cost of getting the OEMs to be present will cost about 150,000 Euros (Sh17.3 million) per line,” KAM wrote.

The Swiss firm had not responded to our queries by the time of going to press.

Critics of the tax monitoring scheme, such as the Institute of Economic Affairs chief executive Kwame Owino, also questioned the new move to expand the scope of EGMS even as it remains unclear whether SICPA was cleared over past allegations when it was first awarded the deal.

Mr Owino, who also dismissed the justification by KRA that the system has been instrumental in adding tax revenue, said the September roll-out is akin to extending SICPA’s stay through the backdoor.

“We all know how that contract was controversially awarded and now that SICPA’s contract is supposed to end in about two years, KRA could just be adding its stay behind the back,” Mr Owino said.

Apart from lack of consultation before the decisions to roll and extend the scope of the system was made, manufactures are also concerned that the rate is not pegged on the value of products and can also change from time to time, making it unpredictable.

The excise stamp costs on a packet of cigarettes, which retails for an average of Sh100, is Sh2.80.