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Kenya: Price of Soda May Surge As Coca-Cola Loses Tax Case
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Business Daily (Nairobi)
18 May 2008
Posted to the web 19 May 2008
Albert Muriuki
For millions of Kenyans who routinely grab their favourite bottle of soda on hot sunny days, their next trip to the kiosk to quench their thirst may soon cost a few shillings more.
This follows a High Court judgement in favour of the Kenya Revenue Authority that will now force the Coca-Cola Company to pay excise tax on costs incurred washing and sanitizing returned soda bottles. The judgement by Justices Joseph Nyamu and Roselyn Wendoh is expected to have a big impact in the manufacturing sector.
Coast Bottlers, one of Coca-Cola's bottlers in Kenya, had challenged a Sh142.4 million tax bill imposed by KRA, claiming that there was an ambiguity in law whether a manufacturer should pay taxes on costs incurred in cleaning up the returnable packaging bottle.
Should Coca- Cola have won this case, it would have had major tax implications for KRA throughout the manufacturing industry.
In a beverage market where consumer demand is highly sensitive to price shifts, and which is already facing cutthroat competition from among other start-up rivals and competing drinks like fruit juices and water, the decision does not bode well for Coca-Cola, which might be forced to rethink the most efficient way of packaging its products in the long run.
In a hostile economic environment where consumer incomes are being ravaged by rising food and energy prices, small price increases could force consumers to spend the little they have on buying mobile phone airtime and getting by in life than gulping expensive soda. This could force beverage manufacturers to soak in the extra taxes-and reduce their profit margins-rather than lose market share.
The judgment also deals a blow to the current wave of environmental consciousness because it will force soft drink manufacturers to focus their packaging strategies to plastics as opposed to reusable glass bottles. For now, rising crude oil prices makes plastic expensive.
Soft drinks packed in the glass bottles currently enjoy a huge price advantage over similar products sold in plastic bottles.
A typical 500ml Coca- Cola soda bottle carries a recommended retail price of Sh25 compared to Sh30 for a similar quantity in a plastic, non-returnable bottle. The 500ml soda packed in a bottle costs Sh35 against Sh45 for the one in a plastic bottle, while the two-litre one costs Sh90 against Sh125.
According to a tax consultant, the implications of the judgment to the beverage bottling industry in Kenya will be significant and could see the rise in the price of soda as excise duty is normally passed on to the consumer.
EABL, which has started targeting the mainstream soft drink market starting with it recently launched, Alvaro, is likely to be affected.
Coast Bottlers was seeking orders to stop the tax authority from charging it Sh137 million in customs and excise payments, arguing that the cost of cleaning and sanitizing was not subject to tax.
The judgment dwelt largely on interpretation of the Customs and Excise Act, which has been severally amended between 1999 and 2004. The bottling company had contended that the law was not clear on what excisable goods were.
The judges, however, found that goods subject to excise tax were defined as those manufactured in Kenya or imported into Kenya on which excise duty is imposed under the Act.
In the case of locally manufactured goods such as soft drinks, the ex-factory selling price was declared as the basis for levying customs and excise.
In the case of imports, the taxes would be derived from the sum of the value of the goods, import and other duties applicable on entry. Within these parameters, the ex-factory selling price for sodas would include value added tax, the costs of refilling the bottles and the cost of excise stamps.
The bottle is not subject to customs and excise tax because it belonged to Coca- Cola and is returned to Coca Cola once the soda is consumed.
Coca- Cola's lawyer Muriuki Mugambi of Muthaura, Mugambi, Ayugi & Njonjo (MMAN) advocates had argued that, though not specifically provided for in law, the cost of washing the bottle and sterilizing it for reuse should also be excluded from duty.
The judges held that for companies such as Coast Bottlers, only a returnable container-such as the glass bottles of soda-and excise stamps-were exempted from duty.
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"On the contrary, a plastic bottle is excisable because it is used only once. In our understanding, washing of the bottle or sterilizing would be included in any other cost that is incidental to the cost of delivery," they said.
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