Why inflation adjustment should not be implemented

By Anthony Mwangi 

Kenya Association of Manufacturers (KAM) identifies with the current government’s manifesto: The Plan – The Bottom-up Economic Transformation Agenda 2022 – 2027. The Plan recognizes and appreciates the challenges Kenyans face daily, particularly the high cost of living.  

The Plan demonstrates the government’s deep understanding and commitment to developing sustainable solutions for all. KAM remains committed to working closely with Government to transform the economy.  

The Plan has singled out regressive taxation, bureaucracy , and regulatory compliance costs as the biggest impediment to getting Kenya out of the “economic hole” we are currently in. The starting point for the economic transformation journey is the commitment to reviewing and rationalising all business licenses to cap total licensing costs at 1.5 per cent of turnover fees.  

As rightly articulated in the Plan, enacting an administrative burden law analogous to the United States of America’s Reduction of Paperwork Act will ensure that no business spends more than four person-hours a month on tax and regulatory compliance.  

Over the years, the Ease and Cost of doing business in Kenya continue to be significant roadblocks to economic prosperity. More specifically, the hash tax regime is a “zero-sum game” that has shifted manufacturing to our East African Community (EAC) neighbours who are now exporting to Kenya. Unfortunately, as they  implement the Government’s economic plan, Kenyans are now facing a new regressive taxation challenge – the proposed inflation adjustments on specific excise tax rates.  

The Kenya Revenue Authority (KRA) informed manufacturers, importers of excisable goods and members of the public that they shall adjust excise duty rates of the following products: petroleum products; motorcycles; alcoholic and non-alcoholic beverages, including bottled water; cosmetics; SIM cards (which were just listed as excisable less than three months ago); confectionary; tobacco and nicotine products; and raw hide and skins. The taxes on these products will go up by 6.3%, the average inflation rate for the financial year 2021/2022, as determined by the Kenya National Bureau of Statistics (KNBS). The new rates shall be effective from 1st October 2022. 

The Finance Act 2022 increased excise tax rates by 10% and 20%, effective 1st July 2022. A further increase of 6.3% within three months will result in a massive 16.3% to 26.3% cumulative tax increase in one year. Such an increase will significantly impact on mwananchi, who is already overburdened by the ever-increasing cost of living. The cost of raw materials and intermediary inputs has increased by 15% – 20% due to global commodity price hikes.  

Furthermore, import costs have increased due to the weakening Kenyan shilling. Fuel prices have also reached a historic high, with a large portion constituting taxes and levies, resulting in a high distribution cost and further increasing the price at which a consumer buys the locally manufactured product.  

The inflation adjustment shall also stifle small and medium enterprises (SMEs), who are the backbone of job creation and our economy at large – SMEs are one of the government’s key focus areas. The proposed adjustment shall stifle their growth due to reduced cash flow as they will be forced to absorb inflation adjustment to remain in business.  

Implementing the tax increase goes against the Government’s intention to reduce the cost of living, support agriculture through agro-industry value chains, support the growth of SMEs and create jobs for Kenyans, especially the youth. The inflation adjustment is being considered despite several court cases in court challenging KRA’s enforcement of the previous inflation adjustment made under Legal Notice 217 of 2021. The notice sought to adjust the inflation rate of excise duty on excisable goods by 4.97%. 

We appeal to the government to halt the implementation of the inflation adjustment as it is not sustainable. Since 2018, the cumulative increase in annual inflation has risen to 26.56%. Therefore, SMEs, among other manufacturers, may not be able to survive if the yearly inflation adjustment rate continues to increase every year. 

The government must develop policies with long-term economic goals as opposed to short-term goals aimed at raising revenue without considering the impact of such policies on citizens and the economy.   

The writer is the Chief Executive of the Kenya Association of Manufacturers and can be reached at ceo@kam.co.ke.