Inflation is considered a hidden tax in that the same paycheck covers fewer goods, services, and bills leaving taxpayers less well-off due to higher costs while increasing the government’s spending power.
Inflation increases the amount of money a government collects as taxes, for instance, 16 percent Value Added Tax (VAT) on a bottle of beer that ordinarily costs Kes100 is higher than if the same drink would cost Kes80.
But, if inflation is a tax, then, raising the taxes to take into account market price increases turns out to be a double tax.
Interestingly, the government now says it is not satisfied with collecting more money and it has to adjust specific taxes such as excise to a higher rate.
Such a move will automatically make the beer more expensive as it will see the government further adjust the tax payable to the new, higher retail price and the cycle rolls on until consumers cannot afford a beer and have little option but to turn to the unhealthy and risky local brews.
The Kenyan taxman is under a lot of pressure to increase tax collections that they are willing to even kill the goose that lays the golden eggs.
For years, the taxman has fought to adjust taxes to reflect inflation that it has defied court orders and ignored data that clearly shows levying higher taxes on some products reduces consumption and in the end, the total tax collected.
The High Court issued orders stopping the implementation of excise tax rate inflation increase last year but the Commissioner General has declined to honour those orders.
The contempt of court order hearing has been held with a ruling expected on 22nd September 2022.
Data, for instance, shows that excise tax payments for cigarettes declined by 12 percent in 2020 despite the implementation of the 4.94 percent annual inflation adjustment.
Airtime and call data tax collections fell by 19.8 percent or Kes7.4 billion in 2021 on reduced use following the increment of excise duty from 15 percent to 20 percent.
The manufacturers’ lobby says this proves that increasing excise tax has reached its limit and further hikes will only drive consumers to dangerous alternatives and increase tax evasion since neighbouring countries such as Uganda and Tanzania have retained their rates of excise in the last four years.
This has made their excisable goods more attractive and competitive for Kenyans living along the border areas of Malaba, Busia, Namanga, Taveta, and Oloitoktok.
High costs usually erode the purchasing power of the citizens in turn leading consumers to buy counterfeits and illicit, which risks lives and also denies the government the taxes they project to collect.
The latest 6.3 percent excise increase starting October 1st will negatively affect the hustlers, who are sensitive to prices when they are making daily purchases of 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, rawhide and skins, among others.
The excise rates of some of the above products already increased by between 10 percent to 20 percent through the Finance Act 2022.
Kenyans are already suffering unprecedented price increases which are at a five-year high and climbing against stagnant wages and job losses from the Covid-19 pandemic and adding the tax burden is simply cruel.
Another increase would distort the market given the high rates of inflation in the economy, spiraling fuel prices (with the threat that fuel subsidy will lapse this month), and increased level of illicit and contraband petroleum, tobacco and alcohol products (mainly driven by a steep increase in July 2022), declining yield by farmers who supply raw materials such as barley and sorghum for making alcoholic products due to poor weather among other unintended consequences of the perpetual increases.
It will also mean in turn that Kenyan industries will continue being uncompetitive in East Africa, with the negative impact being experienced across the value chains supporting manufacturing, which mostly comprise the micro and small enterprises.
Section 10 amendments to the Excise Duty Act 2015 that came through the Finance Act of 2020 gave the Commissioner General the discretion to decide whether or not to increase excise taxes by inflation.
However, even when the economic conditions are not right to implement such increases, he has consistently continued to push up the rates.
At a time when the cost of living is so high, inflation adjustment ought to lower and not increase tax rates.
“Inflation adjustment” has a dual meaning and should be exercised to create a win-win scenario for both government and private sector. Currently, it’s created a win-lose situation to the disadvantage of the industry and millions of consumers.