Importance of Excisable Duty in Kenya and Its Implications
Excise duty is a tax charged on specific goods and services manufactured locally or imported, on varying rates specified in the Excise Duty Act 2015. In Kenya, it is charged in both specific rate where a specific amount of tax is charged per unit of measure on an excisable product, and ad valorem rate where a percentage rate of duty is charged on the value of an excisable product. Every package of excisable goods, except motor vehicles, manufactured in or imported into Kenya are required to be affixed with an excise stamp. The affixed stamp aims at deterring counterfeits and enabling accounting for the production of excisable goods manufactured in or imported into Kenya.
Excise taxes in Kenya are based on the Excise Duty Act which came into effect on 1 December 2015. The excisable goods and services are mostly those considered to be luxurious, addictive, goods having negative effects and those that have low price elasticity, among others. The list and types of excisable goods and services and their respective rates are listed in the First Schedule of Excise Duty Act 2015. The excisable goods include bottled water, soft drinks, cigarettes, alcohol, fuels, and motor vehicles while excisable services include mobile cellular phone services, fees charged for money transfer services, and other fees charged by financial institutions.
Most of the excise taxes are levied on a specific rate base. These include, but not limited to, spirits, other alcoholic beverages (beer and wine), tobacco, soft drinks (water, juices, and non-alcoholic beverages), motor cycles, fuel oils, kerosene and plastic bags. All excisable services, food supplements, cosmetics and beauty products, and motor vehicles are charged on ad valorem rate. Excise taxes have been characterized by shifts between specific and ad valorem tax regimes. In the late 1980s, there was a switch from specific to ad valorem tax regime mainly to maximize revenue collection and eliminate discretion. However, the switch did not yield much in terms of eliminating discretion, a move that saw the government revert to specific rate regime. Generally, ad valorem rate is used where the objective is to raise revenue whereas specific rate is used to correct externalities.
The excisable products and rates are subject to review as provided by the Finance Act, for various reasons including widening of the tax base, raising more revenue, reducing consumption of products considered to be harmful, reallocating resources from the rich to the poor, among other reasons. For example, the Finance Act 2018 amended section 10 of the Excise Duty Act 2015 to enable adjustment of the specific rate of excise duty once every year instead of every two years to take into account inflation. The adjustment is done using the inflation adjustment rate calculated by multiplying the preceding excise duty rate of an excisable good or service with the average rate of monthly inflation of the preceding financial year.
Further, the enactment of the Finance Act 2018 saw an increase of duty for telephone and internet services from 10% to 15% and the fees charged for money transfer services by banks, money transfer agencies and other financial service providers from 10% to 20%. Similarly, rates for the fees charged by cellular phone service providers were increased to 12% from 10%.
Excise duty in Kenya is one of the core sources of tax revenue to the government. Over the last five years, excise tax has remained the third largest source of tax revenue after income tax and value added tax (VAT). Excise duty has traditionally been used as a revenue raising mechanism on high volume and price inelastic goods. The excise tax revenue as a percentage of total revenue has risen from 11.2% in 2013/14 to 13.5% in 2017/18. The growth is key in raising government revenue to finance the growing public expenditure. Excise tax revenue aids in raising more revenue and plays a critical role in reducing fiscal deficit. Effective and efficient collection of excise tax has a potential of boosting the economic growth of the country through revenue generation which is restored back to the economy in form of public expenditure.
In 2017/18, total excise tax revenue collected amounted to Ksh 197.4 billion, contributing 2.24% of GDP (13.5% of the total tax revenue) compared to Ksh 85.7 billion (1.9% of GDP and 11.2% of the total tax revenue) collected in 2012/13. It is projected that the government will raise approximately Ksh 219 billion in 2018/19 financial year. The growth in excise tax revenue over the years is attributable to continued increase in revenue from the leading excisable products such as beer, cigarettes, wines and spirit as shown in the table 1 below. In addition, growth in excise revenue was supported by the enactment of the Excise Tax Act 2015 which expanded the tax bracket to include products that were previously not covered, such as airtime and financial transactions.
Trend in excise tax revenue and the revenue as a percentage of GDP
Source: National Treasury (2018), Quarterly Economic and Budgetary Review, August 2018 Edition. * Preliminary actual and ** original budget
Excise revenue from wines and spirits registered a significant growth from Ksh 3,036.86 million in 2013 to Ksh 8,772.87 million in 2017 while revenue from beer increased from Ksh 16,886.17 million to Ksh 24,842.54 million during the same period. The significant growth was attributed to the review of excise tax rates particularly in 2015. The specific tax rate on wines was increased from Ksh 80 per litre to Ksh 150 per litre while beer was increased from Ksh 70 per litre to Ksh 100 per litre. In addition, the rate for spirits was increased to Ksh 175 per litre from Ksh 120 per litre. Notable was the introduction of excise duty on electronic cigarettes at Ksh 3,000 per unit and cartridge for use in electronic cigarettes at Ksh 2,000 per unit.
The review of the excise tax rates and introduction of new excisable goods and services in 2015 resulted to an increase in the excise tax revenue. For instance, the total revenue from selected commodities shown in the table 1 registered a significant growth of 70.0% from Ksh 36.9 billion in 2014 to Ksh 62.7 billion in 2015. The growth was largely attributed to the introduction of cellular and telephone airtime, and financial transactions excise duty which contributed 31.1% of the total revenue. The introduction of excise duty on electronic cigarettes and cartridge also led to the growth of excise revenue on cigarettes by 28% during the period under review. The share of beer, wine and spirits registered significant growth following the review. In 2016, excise revenue from the category of beer, wine and spirits grew by 36.8% from Ksh 25.7 billion realized in 2015 to Ksh 35.1 billion in 2016.
The introduction of new goods and services in the excise tax bracket is based on various objectives the government aims to attain. For instance, introduction of excise duty on mobile airtime and financial transactions was meant to expand the excise tax revenue base. In addition, the growth of new items in the excisable basket is attributed to the attempts by the government to regulate consumption of commodities considered to be harmful to health. For example, the introduction of excise duty on electronic cigarettes was meant to curb its excessive consumption.
Source: Economic Survey, 2018 ** includes revenue from jewelry, cosmetics and locally assembled vehicles * provisional estimates
The direct effect of the increase in excise duty is the increase in prices of the affected commodities. For example, the review of duty on illuminating kerosene from Ksh 7,205 per 1000 litres to Ksh 10,305 per 1000 litres resulted in increase in the commodity price to Ksh 109.41 per litre as at November 2018 from an average of 67 per litre in 2017. This has had adverse effects on households who use kerosene for lighting and powering the cooking stoves. The expenditure on kerosene by the poor in Nairobi is minimal compared to rural areas where there is increased use. Statistics from the Kenya National Bureau of Statistic (KNBS) show that in 2017, 409.08 metric tonnes of kerosene were consumed, a 13.4 per cent increase from 360.85 metric tonnes consumed in 2016. However, following the review of the excise duty, there is a potential decline in consumption in 2018. For instance, the consumption in September 2018 declined to 16.8 metric tonnes compared to 30.34 metric tonnes consumed in September 2017. This could be attributed to households seeking alternative means of lighting, and energy for cooking due to increased kerosene cost. In addition, the increased price will discourage those that use kerosene for fuel adulteration, and therefore the demand for the commodity will go down. The increased duty may hurt the low-income households but may also be beneficial to operators of vehicles and machinery who have previously incurred higher maintenance costs due to fuel adulteration.
The increase in excise duty charged for money transfer services by banks, money transfer agencies and other financial service providers from 10% to 20% saw various financial institutions review their bank transaction charges upwards. This increased the cost of banking services given that the tax is applicable on bank transfers (both local and international), over-the-counter withdrawals, and ATM and account fees. The duty may highly affect financial institutions that rely on commissions and fees to boost their profits especially by lowering the number of bank transactions. Further, the high cost of transaction could affect the efforts towards enhancing financial inclusion especially if households prefer other means of savings and storing money that are relatively cheaper. In particular, it may encourage “mattress banking” where households prefer to keep their money at home as opposed to taking it to the bank, and the informal channels of remittances. This would impact the money market negatively as it may make it difficult for the Central Bank of Kenya to effectively use its monetary tools to control the money in circulation.
Author: Hellen Chemnyongoi, Policy Analyst, Macroeconomics Department