Higher taxes will not cure fiscal shortfalls

By Zipporah Kuria

In the face of growing strong economic headwinds, the Kenya Revenue Authority (KRA) has grappled with slow growth in tax revenue, highlighting the need for innovative solutions rather than resorting to higher taxation. Despite the introduction of new higher taxation measures, the current fiscal year’s first quarter registered its slowest pace of increase since 2018, excluding the COVID-19 pandemic year. Recently, the International Monitory Fund (IMF) expressed concerns over recent shortfalls in tax revenue collection for quarter one of 2023/24 target that was missed by KES 79.0 billion, in its 6th review of Kenya’s extended arrangement program. In its latest forecast, the Treasury projects a KES 133.5 billion shortfall in projected revenue for 2023/24.

The Treasury’s budgetary outlook paper of September 2023 cites a drop in motor vehicle and fuel imports as well as lower-than-forecast sales of beer, spirits, and cosmetics, as significant factors in this slowdown as the spiraling cost of living takes its toll. Like most countries, Kenya is feeling the reverberations of a global poly-crisis. Lingering fallout from the COVID-19 pandemic, Russia/Ukraine war, Israel/Hamas conflict and the challenges caused by climate change are all having a significant impact.

Despite this, focusing on problems that are controllable locally can help to alleviate the wider malaise. The growing menace of illicit trade is one such area that deserves increased attention from our lawmakers.

The scale of illicit trade in Kenya is nothing short of alarming. According to the National Baseline Survey on Counterfeit and Other Forms of Illicit Trade in Kenya released in 2020 by the Anti-Counterfeit Authority (ACA), the total value of illicit trade was KES 826 billion in 2018, a 14% increase from KES 726 billion from 2017. In terms of their Gross Domestic Product (GDP) share, this represents an increase from 8.9% in 2017 to 9.3% in 2018. Currently, ACA estimates that the numbers may have hit more than KES 1 trillion in 2023. While manufacturing currently contributes 7.8 % to GDP, the negative extraction from GDP by illicit trade cancels out the contribution by the manufacturing sector. Research by the Kenya Association of Manufacturers (KAM) shows that members lose about 40% of their market share to counterfeits.

Illicit trade is damaging our nation’s economic development. While criminals orchestrate these activities, the impacts are borne by ordinary citizens and legitimate businesses. In Kenya, counterfeiting is the most prevalent form of illicit trade. It not only takes away the citizen’s right to quality and genuine products but also puts lives at risk by infiltrating the market with substandard and, in many cases, very dangerous goods. There have been media reports of illicit food and beverage products causing illnesses, disability, and death. Case and point, counterfeit alcoholic products whose consumption has in the past resulted in tragic outcomes. The safety of Kenyans must come first.

KAM continues to work with the Government through its agencies such as ACA to create awareness among consumers on the presence of counterfeit products in the market while advocating for interagency collaboration, coordination, and cooperation among the national enforcement institutions mandated to combat various forms of illicit trade.

In addition to counterfeiting, illicit trade includes tax evasion, which deprives KRA of billions in tax revenue annually. This substantial loss – last measured at over KES 153 billion a year and rising – limits the government’s ability to finance crucial public services such as education and infrastructure development.

To fill this fiscal black hole, there are often calls to increase the taxes which consumers pay on goods, including excise duty. However, when imposed indiscriminately, high taxes only exacerbate this issue by driving consumers toward cheaper, often illicit alternatives. Smugglers can buy cheaper untaxed or lightly taxed products such as alcohol, cigarettes, or sugar in neighbouring countries or from illegal sources and sell them in Kenya at prices below the legal market rate, but still at a hefty profit. The significant rewards for such criminality can encourage corrupt practices within law enforcement agencies, customs, and other government bodies, making it even more challenging to combat these illegal activities.

In essence, the illicit trade menace jeopardizes Kenya’s society, economy, and overall well-being, demanding urgent attention to prevent the loss of vital tax revenue exceeding KES 150 billion annually. Therefore, it is imperative that concerted efforts are made to combat the illicit trade scourge, safeguard the rights of consumers, protect the integrity of businesses, and bolster the nation’s economic prospects.

Addressing the challenges posed by high excise taxes and illicit trade requires a multi-faceted approach that combines fiscal, regulatory, enforcement and public awareness measures. Simplifying tax structures and implementing fair and transparent tax policies can help address illicit trade. Further, collaborating with neighboring countries to harmonize tax policies and regulatory measures can help tackle smuggling. Enhancing border security and customs enforcement to detect and deter illicit trade is also crucial. This includes investing in technology and training for law enforcement officers. Implementing robust track-and-trace systems for certain products, such as cigarettes and alcohol, can help authorities monitor the supply chain and combat illicit trade.

In conclusion, the battle against illicit trade requires collective efforts from all stakeholders – government bodies, law enforcement agencies, manufacturers, and vigilant consumers. It is imperative to work collaboratively, considering the unintended consequences of taxation policies, to safeguard the nation’s economic prospects and well-being.

The writer is the Chairperson of the Anti-illicit Trade Committee at Kenya Association of Manufacturers. She can be reached at info@kam.co.ke.