Proposed EGMS Tax hike threatens Kenya’s economic growth

By Rajan Shah,

The Kenya Revenue Authority (KRA) has proposed an increment of excise duty which as Kenya Association of Manufacturers (KAM) are deeply concerned about.  KRA’s proposed Excise Duty (Excise Goods Management System) (Amendment) Regulations, 2023, seek to increase the rates of excise stamp fees for bottled water, juices and any other non-alcoholic drinks, cosmetics, alcoholic beverages, tobacco and nicotine products and export products subject to excise with effect from 1st March 2023.  From the onset, KAM’s position is that using excise duty stamps as a tool for fighting illicit trade is counterproductive. From the baseline survey conducted by Anti-Counterfeit Agency in 2020, illicit trade rose from Kes 726 billion in 2017 to Kes 826 billion in 2018, despite the existence of excise duty measures.

On 19^th October 2022, KAM members met with H.E. the President and a joint Kenya Manufacturing agenda 20BY30 was adopted. This is a plan to high-grade the manufacturing contribution to GDP from the current 7.2% (Circa Kes 1 trillion) to 20% (circa Kes 5 trillion) by 2030. This means increasing direct jobs from the current circa 348,000 to circa 980,000 jobs. However, with the ever-increasing and unpredictable taxation regime, uncontrolled increase in power costs, inflation, forex shortage and influx of cheaper goods from COMESA & EAC regions at zero import duty; this dream to grow manufacturing will remain a mirage as it has happened over the decades.

The proposed increment in the EGMS excise stamp fees shall have a detrimental effect on consumers and manufacturers due to the increased cost of production and the cost of finished products amid the rising cost of living. The ripple effects on the economy are worse as I will expound on shortly.

Lest we forget, this proposal comes barely four months after a 6.3% inflation adjustment on specific excise tax rates was affected on 1 October 2022, impacting cosmetics, confectionary, alcoholic and non-alcoholic beverages including bottled water, and tobacco and nicotine products, among other products. More alarming is that three months before the inflation adjustment, there was an increase in excise taxes from 1 July 2022, by between 10% and 20% through the Finance Act, 2022. Tax predictability is essential in encouraging investors to invest.

To begin with, the EGMS excise stamp is a revenue assurance tool. It was initiated to deter counterfeiting, ensure the traceability of excisable goods along the supply chain, enable accounting of produced excisable goods manufactured or imported. Further, it allows any persons in the supply chain to track and trace the origin of the goods. Unfortunately, the proposed stamp while extremely expensive does not have the “Track & Trace” capability. Therefore, the proposed drastic increase in the cost of stamps seeks to be a revenue collection mechanism as opposed to an assurance tool. This is based on the proposal seeking to increase the cost up to levels of over 100% and beyond the current market costs of producing the stamps.

It is imperative that Kenya rethinks its approach of ensuring that tax administration measures and tools do not impact or increase the cost of doing business.

We are also alarmed by the cost of the EGMS stamps and their impact on the cost of production to manufacturers. More alarming is the cost of the EGMS stamps compared to other economies. From our analysis, Kenya’s cost is amongst the highest in Africa. In some cases, the cost of the stamp is higher that the revenue it purports to protect.

Despite the strive to support the economy’s push to lower the cost of living, the Manufacturers shall, therefore, be forced to pass this new cost to Mwananchi, exacerbating an already dire situation as Kenyans try to make ends meet. This is against a backdrop of global supply chain disruptions among other challenges that have resulted in an increase in the cost of production. To some of our members, the effects of this proposal will see an increase of up to 10% in the cost of products to the consumer.

We are also deeply concerned about the diverse effects of such a move will lead in terms of compliance. We are afraid that such an increment to one of the most counterfeited items in Kenya will further encourage the counterfeit and illicit trade. Subsequently, this will lead to reduced government revenue and put lives at risk as substandard and highly dangerous goods infiltrate the market This will lead to low sales and in turn have a negative effect to other revenue streams from manufacturers such as VAT, PAYE and Income Tax among others. The ripple effects will be a downside from job creation to job losses and affect many livelihoods.

The government adopted an export-led growth strategy as part of its plan to transform the economy.  At the heart of this plan is being globally competitive. The proposed costs will further make Kenyan products uncompetitive in the global market due to the high cost of compliance and unpredictable regulatory environment as exemplified by these amendment Regulations.

Some of our members who are in the regional markets and have established manufacturing industries in other African countries are already reporting a cost of production deficit of up to 23% for the same finished products manufactured in Kenya vis a vis producing in other countries such as Egypt and importing to Kenya. We cannot afford to lose these kinds of investments to our regional neighbors.

The increased tax burden will also discourage foreign investment in Kenya. Investors are attracted to countries with favorable and predictable tax regimes. The hike in duty will make Kenya a less attractive destination for investment. As a result, the country may miss out on the many benefits that come with foreign investment, such as the creation of jobs, the transfer of technology, and the stimulation of economic growth.

This poses a great risk of suppressing the manufacturing sector’s contribution to the Gross Domestic Product (GDP) which has been shrinking over the last five years and our vision of doubling the contribution to (GDP) in the next eight years will remain a pipe dream.

The proposed fees shall stifle small and medium enterprises (SMEs), which are the backbone of job creation and our economy at large. The costs shall stifle their growth due to reduced cash flow as consumers seek alternative, cheaper products.

Predictability earns investor confidence in the country, leading to increased local and foreign investments. Sudden changes in fiscal policy and regulations divert the industry’s resource allocation from productivity to meeting the costs associated with changes towards fast compliance.

Whereas taxation is a critical component of any government’s fiscal policy, an over-reliance on this source of income can lead to a decline in competitiveness. The proposed tax hike will increase the cost of doing business in Kenya, which will make it more difficult for manufacturers to compete with other countries in the region.

We, therefore, urge the government to retain the current charges on the excise stamps and to finalize and implement the National Tax Policy, with a focus on enhancing certainty and predictability in the tax code.

The writer is the Chairman of Kenya Association of Manufacturers and can be reached through info@kam.co.ke.