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High taxes no cure for fiscal woes

Thursday, March 14, 2024 — updated on August 23, 2024 - 5 min read

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. PHOTO | SHUTTERSTOCK

Zipporah Kuria

By ZIPPORAH KURIA

Thank you for reading businessdailyafrica.com

In the face of growing 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 the 2023/24 target that was missed by Sh79 billion, in its sixth review of Kenya’s extended arrangement programme.

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In its latest forecast, the Treasury projects a Sh133.5 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 spiralling 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, Russia-Ukraine war, Israel-Hamas conflict and the challenges caused by climate change are all having a significant impact.

Despite this, focusing on problems we can control 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 Sh826 billion in 2018, a 14 percent increase from Sh726 billion from 2017.

In terms of their gross domestic product (GDP) share, this represents an increase from 8.9 percent in 2017 to 9.3 percent in 2018. The ACA estimates that the numbers may have hit more than Sh1 trillion in 2023. While manufacturing contributes 7.8 percent to GDP, negative extraction from GDP by illicit trade claws back the sector’s contribution.

Research by the Kenya Association of Manufacturers (KAM) shows that members lose about 40 percent of their market share to counterfeits.

Illicit trade is damaging economic development. While criminals orchestrate these activities, ordinary citizens and legitimate businesses bear the impacts.

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.

The KAM continues to work with the government through its agencies such as the ACA to create awareness among consumers on the presence of counterfeit products in the market while advocating 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 the KRA of billions in tax revenue annually. This substantial loss – last measured at more than Sh153 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 on consumer 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 illicit trade menace jeopardises society, economy, and overall well-being, demanding urgent attention to prevent the loss of vital tax revenue exceeding Sh150 billion annually.

Therefore, concerted efforts to combat the illicit trade scourge, safeguard the rights of consumers, protect the integrity of businesses, and bolster economic prospects are long overdue.

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 neighbouring countries to harmonise 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 the Kenya Association of Manufacturers.
Email: [email protected]

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