Inflation adjustment of excise tax: Here’s what you need to know
On September 1st, 2022, the office of the Kenya Revenue Authority (KRA) Commissioner General issued a public notice indicating it planned to revise upward specific excise duty rates for a number of products by 6.3 per cent effective October 1st, 2022.
Ever since there has been a hue and cry about the planned move and what it would mean for the cost of living which is already trending at a five-year high (August 2022 headline inflation closed at 8.5%).
So, what’s the inflation adjustment of excise tax all about?
What the law provides
Section 10 of the Excise Duty Act 2015 (Revised edition of 2021) empowers the Commissioner General of KRA to adjust the specific rate of excise duty once every year to take into account inflation. This has to be done via gazette notice and with the approval of the Treasury Cabinet Secretary. The formula prescribed provides that adjustment will be calculated based on the average rate of monthly inflation of the preceding financial year. In the present case, for instance, the average inflation rate for the last financial year (i.e., July 2021 to June 2022) was 6.27% and that explains the intended adjustment of 6.3%.
What’s the rationale for inflation adjustment?
There are two ways of subjecting a product to excise tax. The first is through a specific route. Specific excise tax happens where the tax is imposed per quantity of product. For example, in the present excise regime, the rate on fruit juices is Kes 13.30 per litre and that on beer is Kes 134 per litre. The second is to have excise tax based on the value of a product (ad valorem). For example, imported furniture is subjected to an excise tax of 25.0%.
The rationale for inflation adjustment of specific excise rates is that whereas rates based on the value of a product self-adjust depending on the price changes, specific rates do not. Suppose a bottle of fruit juice sold today at Kes 220 attracts Kes 13.30 per litre in excise, if the same bottle is sold at Kes 250 a year later, the excise rate would still be static at Kes 13.30 per litre unless it is deliberately adjusted to reflect the price change.
As such, it has been argued that without inflation adjustment of specific excise duty rates, the government will lose out on revenue when it comes to specific excise duty rates. This is the rationale behind inflation adjustment of excise duty for products which are subjected to specific excise duty rates.
What happens now?
Four things concern me about the proposed inflation adjustment of excise duty. First, this move will nudge further upward pressure on the cost of living at a time when inflation is already considerably high.
Second, on the list of items proposed for adjustment are petroleum products. This exposes Kenyans to the double whammy of dialling down on the subsidy and now higher excise duty rates which, if translated to the end consumer, mean higher costs.
Third, the expectation that prices will go up by 6.3% could be misguided when one considers that per Section 13 (3C) of the VAT Act, Value Added Tax is slapped on a product once excise duty has been baked in. In essence, the net effect from a price increase standpoint risks being larger than the 6.3% envisioned through the planned adjustment.
Finally, could KRA risk the perverse outcome of lower tax yield with this adjustment coming at a time when disposable incomes are already considerably depressed by the prevailing high cost of living?
Julians Amboko is the Business Editor, NTV Kenya
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According to the competition watchdog, the nine companies have been penalised for artificially inflating the prices of steel products.
The companies and their fines include Corrugated Steel Ltd (Sh86.9 million), Tononoka Rolling Mills Ltd (Sh62.7 million), Devki Steel Mills Ltd (Sh46.3 million), Doshi and Hardware Ltd (Sh41.6 million), Jumbo Steel Mills (Sh33.1 million) and Accurate Steel Mills Ltd (Sh26.8 million).
Others are Nail and Steel Products Ltd (Sh22.8 million), Brollo Kenya (Sh9.4 million) and Blue Nile Wire Products Ltd (Sh9.16 million).
CAK said investigations into the steel sector commenced in August 2020 when the Authority began collecting intelligence on pricing and output restriction.
The Authority's Acting DG Adano Wario said the penalties on the firms are proportional to the offense, specifically harming consumers who are grappling with the high cost of building materials in the country.
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Speaking in Midrand, South Africa while addressing a two-day workshop on Accelerating the African Continental Free Trade Area and the significance of the Pan-African Parliament, the President of the African Business Council Dr Amany Asfour said that already the African private sector is conducting a mapping exercise on resources existing on the continent and how to add value to them because collectively all resources in the world are available within.
She said the implementation of the African Continental Free Trade Area-AfCFTA depends on the role of the African private sector which can not achieve the dream on its own, saying legislation role is critical. “For the private sector to thrive we need an enabling environment, an investment climate and legislation for better procurement for the African private sector”
Asfour underscored the need to have incentives for African investors rather than giving to multinational companies that dot the continent, urging the Pan-African Parliament-PAP to support the private sector.
She said PAP could support the private sector by pushing for legislation in domestic Parliaments that will make it mandatory to have 40 percent of all government procurement given to the African private sector.
“It is not possible that what is on the African soil can be brought from outside Africa, that is why we need a law on 40% procurement,” she said.
Asfour added that even as Africa conducts mapping exercises of its resources, mechanisms and strategies must be quickly put in place to address the issue of value addition of African resources given that the continent has nearly all resources of the world.
She gave an example of DR Congo and Zambia as countries in a strategic place to provide a solution for batteries for electric vehicles whose demand by 2030 will have hit 200M, instead of having developed countries that get resources of lithium, and copper and then produce them outside the continent.
Asfour reminded the continental parliament that the founding vision of a competitive, borderless innovative Africa for Trade and Industrialization must be realized because AfCFTA without industrialization and investment is a dream.
For instance, she cited a lack of investment in health care which is draining the continent of both manpower and resources.
“According to WHO 80% of Africans are dying from cancer compared to 24% from Western countries because we don’t invest in the health sector forcing many to flock to India for treatment while we can invest in healthcare”
In order for Africa to produce high-quality and competitive products globally, the African business council has crafted a business strategy based on three pillars of private sector strengthening that includes SMEs, women and youth, policy advocacy that will serve as incentives to the private sector and finally product development which aims at having a solid product that can trade amongst Africans and how to ensure free movement of goods and services.
On his part, the PAP President Chief Fortune Charumbira said that by actualizing the African Continental free trade area, Africa’s Direct Foreign Investments-FDI could increase by 111% - 159% which could help African companies join regional and global value chains which are lacking at the moment.
Charumbira called AfCFTA a panacea to the continent’s economic and unemployment predicament because if realized, inflow FDIs would bring jobs and expertise, build local capacity and forge connection connections resulting in higher pay, better quality jobs with women getting the biggest wage gain.
“Wages could rise by 11.2% for women and 9.2% for men by 2035 albeit with regional variation depending on the industry that expands the most in a specific country,” he said.
He said in the event integration deepens, Africa’s exports to the rest of the world would go up by 32% by 2035 and intra-African exports would grow by 109% led by manufacturing.
Director of Trade in Goods and Competition Mohamed Ali who addressed the gathering virtually lauded the continental legislature for its support for the implementation of the AfCFTA stating that one of its success stories is the establishment of Pan-African Payment and Settlement Systems (PAPSS).
“We are losing a lot of hard currency while travelling amongst ourselves. We are setting up a PAPSS to allow traders to transact in local currencies implying cheaper access to inputs and access to products will be easier”
Africa Continental Free Trade Area entered into force on May 30 2019 after 46 member states ratified the protocol in a record two months.
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The company's PAT closed at KES 52.48 billion, a drop from KES 67.49 billion in the same period last year.
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The company recently acquired a mobile money services license in Ethiopia for $150 million, signalling its entry into the Ethiopian market.
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