Kenya: Sobering Effect of New Taxes and Laws On Brewers

22 December 2020

Should Members of Parliament have their way, alcohol dealers will have to make a major shift in packaging of beer, wines and spirits whose minimum volumes will be adjusted to 750 mililtres from the current 250ml.

The legislation will sound like the last nail on the coffin of an industry that has over the years faced various uncertainties around tax and regulations and whose year has been full of staggering disruptions by the Covid-19 pandemic.

Brewers contend it may be the end of the formal alcohol market because the 250ml, commonly known as 'ka-quarter' moves close to 90 percent of sales volumes for spirits according to the Alcoholic Beverage Association of Kenya (ABAK).

ABAK Chairperson Gordon Mutugi told Smart Business that while the increase in minimum volume will only make alcohol more expensive, the shift to informal alcohol drinks and reduced sales volumes will also hit the government hard in reduced tax collections.

Read: Yearly tax will increase illicit drinks, warn beer makers

"This is one among the many ways in which regulations have been slowly pushing out the formal alcohol market. We are yet to fully absorb the periodic inflation adjustment and the increase in minimum volume will only ensure that one will have to spend Sh400 to taste alcohol from the formal market," Mr Mutugi said.

"Many cannot afford that and they will not stop drinking. They will go for the unregulated products with dire health and revenue consequences."

The proposed law is only among the many sobering realities the industry has faced this year.

Just before coronavirus began disrupting the economy, a Business Law Amendment Act passed in April, adding a 25 percent excise tax on imported bottles.

Absorb extra cost

The move is said to have targeted to promote local bottle manufacturers but it resulted into an unintended consequence with beverage manufactures being forced to absorb the extra cost given the economic situation as the pandemic period was kicking in.

A united push by the glass users comprising the Kenya Breweries Limited (KBL), Coca-Cola beverages Africa, UDV Kenya Limited, Kenya Wines Agency Limited (Kwal) and Trufoods Limited, to have the excise duty removed for being counterproductive was unsuccessful.

"The local manufacturers lack modern glass technology which prevents them from switching from one type of glass to the next efficiently and the protection of glass manufacturing companies in Kenya violates the principle of equity and fairness in taxation of excisable goods," the manufacturers argued.

Read: Beer distributors without excise stamp get 2 month amnesty

"It will increase the cost of alcoholic products and soft drinks beverages in a season when household disposable income is facing the greatest negative impact due to the Covid-19 pandemic."

A recent ruling by the East African Court of Justice to freeze the tax after a Tanzanian bottler challenged it, bring a ray of hope but it remains uncertain whether Kenya will comply.

The same uncertainty surrounds another attempted introduction of a duty remission scheme for low-end beer brewed from sorghum, millet and cassava. The plan in June shocked the industry since the move had been tried before but failed in 2013 as keg beer demand plummeted when the government reduced the excise duty remission from 100 percent to 50 percent.

The lower the duty remission, the higher the excise tax brewers pay on keg and the more expensive the drink becomes. The result is low sales volumes and wider ripple effects to the entire value chain including farmers.

Treasury had proposed to reduce the remission scheme from 80 to 60 percent but a quiet withdrawal of the plan left the sector in limbo.

"The move did not sail through but we also did not get a conclusive response from government. We are not sure whether they will wake up one of these days and surprise us with a similar proposal," a senior manager in a top brewer said in confidence.

The relief on frozen remission plan was wiped away by the closure of bars after Kenya reported the first coronavirus case, occasioning an economic meltdown in the industry marked by thousands of job losses and permanent closure of some establishments.

The low season peaking between April and June damaged the bottom lines for major brewers including the East African Breweries Limited whose net profit dropped by close to 40 percent, ending into a six-year low of Sh7 billion for the year ended June 2020.

A few months later, the tax man was back knocking again at the alcohol firms doors. The Finance Act had been amended and the imposition of a new tax on at least 31 goods including beer had been moved from July 1 to January 1 next year but KRA would hear none of it.

KRA in August announced it would increase the taxes in October, escaping the need to seek Treasury and Parliament approval in January for the increment.

The prices jumped in October by at least 5.43 percent, adding a new blow to consumers already hurt by job cuts and unpaid leave in the wake of the Covid-19 pandemic.

The KRA said it would seek the approvals in the next round of review in 2021 making the adjustments introduced in 2018 an added pain in a pandemic year when disposable income had hit an all-time-low.

"These haphazard regulations have been our biggest undoing since no investor can even plan for three years in this sector. It is like the longest one can plan is a year and the next year could mean a total stop in operations or deep plunge in profitability. This is despite the constant pressure to pay taxes and the suspicion that we are evading taxes," Mr Mutugi said.

In October alone KRA, said it was investigating 14 players in the alcohol sector for tax evasion, seven of which had been completed.

KRA raised Sh67 billion

"KRA has raised Sh67 billion through compliance checks, audits, and investigations of various manufacturers of alcoholic beverages. KRA continues to enhance its tax recovery measures including regular tax audits, 24-hour monitoring of excise factories, tracking of transit goods and prosecution of identified tax offenders," KRA wrote in a statement to Smart Business.

The hunger for more tax has opened more loopholes for tax evasion with bars in border towns like Busia selling two sets of beer, one cold and expensive, the other warm and cheaper by close to Sh150 . The warm beer is smuggled from Uganda and is not kept in the refrigerators where inspectors may find them.

For one litre of beer, the Uganda Revenue Authority taxes anything between Sh18 to 51 (in Kenya Shillings) depending on the content. That essentially means that a bottle of beer from Uganda could be paying as little as Sh9 in taxes.

In Kenya, tax on beer has almost doubled in the last five years according to data from the Kenya Revenue Authority with the latest figure at Sh110.62 for every litre. A bottle would therefore comprise of up to Sh55 in excise taxes only, more than seven times the Ugandan rate if you add the 16 percent Value Added Tax.

The plan to increase the minimum volume of alcohol in Kenya will only increase the gulf in prices between Kenyan and Ugandan alcohol and increase the motivation for smuggling which has seen some Ugandan alcohol ferried to towns further from the border like Mombasa and Kilifi.

"Kenya keeps adding unrealistic legislation and then they spend more on enforcing the same. Now, there is a multi-agency team in every sub-county enforcing a regulation on alcohol.

These uncertainties persist in 2021 and alcohol is becoming one of the most difficult businesses to run in Kenya" the ABAK boss said.

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