Kenya: Alcohol, tobacco exempt from tax hikes in recent budget announcement

While there has been a consistent rise in excise duty on alcohol, cigarettes and nicotine products to discourage use and increase government coffers, Kenya’s most recent budget announcement instead focussed on increasing tax on sugar, fuel, betting, and small businesses to raise essential revenue.

Excise duty on a litre of beer is Ksh142.4. For wine it is Ksh243.43 per litre, spirits, with alcoholic content above 6%, has a rate of Ksh356.4 per litre and tax on filtered cigarettes is Ksh4067.03 per kilogram – unchanged since September.

Alcohol will, however, face indirect tax-related costs after an excise duty of Ksh5 per kg on imported dry sugar when Kenya is in a deficit of the product. The reason behind it is to discourage consumption and hopefully stem rising rates of diabetes in the country, says Ndung’u.

The measure will exclude sugar imported for use in the manufacture of pharmaceutical products.

Telephone and internet data service providers will benefit from a reduction in excise duty from 20% to 15%. Licensed payment service providers will also benefit with the tax on mobile money transfers cut from 12% to 10%.

In addition, all excisable goods will be exempt from inflationary adjustment triggered every year, meaning that some of Kenya’s largest taxpayers – including EABL and British American Tobacco (BAT) – will be given some breathing space to absorb previous tax hikes.

But the surprise reprieve to the excisable goods explains why other products like fuel, the informal sector and employees have been hit with either fresh taxes or rate hikes in what seems to be an attempt to bridge the revenue gap.

Value-Added Tax (VAT), for instance, has doubled to 16% and betting tax rose to 12.5% from 7.5%. Turnover tax (ToT), which mainly affects small and medium businesses with between KSh500,000m and KSh15m annual revenue, was increased to 3% from 1%.

Advertisement fees on alcohol, betting and gaming will also be subject to an excise duty rate of 15% – double that of the previous budget – while duties on imported cement and furniture will rise by 10% and 30%, respectively.

A 3% digital asset tax was also introduced with a new higher income tax rate of 35% on workers earning Ksh800,000 a month or over.

Collection deficit

Kenya’s next budget, starting July, has been set at KSh3.68tn and will be financed by Ksh2.96tn in revenues from taxes and grants. The Ksh718bn deficit will be borrowed from domestic and foreign markets.

Although the exact margin of the annual revenue shortfall is unknown, the Kenya Revenue Authority (KRA) said last month that there was already a KSh128bn collection deficit in the 10 months to April 2023.

Tax collection stood at KSh1.780tn in April against the KSh1.908tn target.

“KRA is implementing revenue mobilisation measures jointly agreed on with the National Treasury. However, we are aware that we will still close the year with a significant shortfall,” Treasury Cabinet Secretary Njuguna Ndung’u told the Budget and Appropriation Committee days before the official budget.

With the tax changes, which will hit the middle class the hardest, pressure from the International Monetary Fund (IMF) to raise revenue is hoped to finally come to fruition under President William Ruto’s administration as it aims to collect KSh4tn in taxes in the medium-term ending 2025.

Multilateral pressure

While delivering his debut speech before the House, Ndung’u said that the World Bank and IMF were satisfied with the budget plan, confirming the country’s commitment to meet some of the stringent conditions to continue enjoying financing programmes.

This, according to Aly-Khan Satchu, an economist and the CEO of investment adviser Rich Management, may force Kenya to continue with policy reform touching on fiscal consolidation, revenue collection, boosting agriculture exports and restructuring of state-owned enterprises that has haemorrhaged billions from the exchequer.

“A lot of the economic reforms have been aligned with what they think the multilaterals want,” says Satchu. “Multilaterals have put their money on the table and therefore I expect alignment towards [their requirements] to gain further traction. But I am yet to be convinced that the government of Kenya will meet its now very ambitious revenue targets, however, the signalling effect is key here – Kenya is in a tight spot.”

The KRA will spearhead various aggressive tax reforms and implement the new and hiked rates despite experts warning that the taxes could dampen economic growth.

“Excise duty in certain sectors, such as manufacturing, is hitting it’s limit,” says James Mulili, a tax policy director at PKF Consulting. “We’ve seen that if the duty is over hiked, collection by the KRA starts to drop as consumption falls and hits profit,” he says.

The previous excise duty hike, for example, left East Africa Beverages Limited’s (EABL) profit flat by the end of 2022 as sales in Kenya dipped by 1% compared to markets in Uganda and Tanzania, which witnessed growth.

EAC agreement

Ruto is banking on key sectors like small businesses and agriculture, which have received massive financial support and subsidisation to improve the economy and generate more money to tax.

In the agriculture sector, for instance, there is a KSh49.9bn budget for various programmes, with Ksh5bn going into fertiliser subsidies and another KSh8.6bn for the National Agricultural Value Chain Development Project.

It is anticipated that this support will translate into a positive impact on other interlinked sectors like industries, manufacturing and agro-processing in terms of jobs and money circulation. This is through the targeted value addition of products such as cotton, leather and edible oils, among others. Agriculture contributes more than 60% of Kenya’s total export.

But given the existing shortage in some of the staple foods, Kenya will import rice at a lower import duty rate of 35%, instead of the 75% rate agreed upon under the East Africa Community (EAC) Common External Tariff. The same applies to wheat, attracting a 10% rate instead of EAC’s 35%.

It follows an agreement with other EAC members that granted Kenya a chance to extend special duty measures in its 2023/24 fiscal year meant to support the country’s distressed manufacturing sector.

“The immediate impact of a reduced rate for an additional year will stable inflation rate”

The move, together with the harvest and previous duty-free maize importation window, might lower the cost of Kenya’s major staple food. Maize, rice and wheat are the top three most consumed food in Kenya.

The EAC importation window is also allowed on inputs for manufacturing baby diapers, footwear products, roofing tiles and animal feed.

On the other hand, the window will encourage higher importation which, according to some analysts, might have little impact on the foreign exchange outflow, but will definitely dent KRA’s hiked Ksh2.57tn collection targets in the upcoming financial year.

“The immediate impact of a reduced rate for an additional year will stable inflation rate. But for the KRA, it is forgoing 40% what would have otherwise been collected from the duty. As such, there will be quite a bit of pressure from a customs duty perspective,” says Robert Waweru, tax policy expert at the Ichiban Tax and Advisory firm.

Kenya imports almost 90% of wheat and 70% of its rice mainly from Pakistan – the biggest consumer of Kenya’s tea. Pakistan previously threatened reactionary higher taxes on Kenya’s tea, explaining why the government shelved the higher 75% duty on rice.

However, improving the level of national tax contribution by the informal sector, which is earmarked for huge support, remains an uphill task for an administration that faces opposition from the devolved units which still do not want their tax systems linked to that of the KRA.

“If the KRA and devolved units can harmonise their systems, they can seal loopholes and bring on-board more taxpayers from the informal side where cash or bank transfers is the preferred mode of salary payment,” says Mulili.

“No business can operate without the licenses issued by county government.”

Giving the KRA access to business license systems held by the devolved unit will ease tracing the tax compliance of small and medium-sized businesses, the biggest players in the informal sector.