The Bottom-up Economic Transformation Agenda 2022–2027 is the current government’s platform, which the Kenya Association of Manufacturers (KAM) supports. The Plan acknowledges and values the difficulties Kenyans encounter daily, particularly the high cost of living.
Related to this, KAM urges the government to Spare Kenyan pain from the inflation adjustments Plan.
The Plan shows how deeply knowledgeable and dedicated the government is to find lasting answers for everyone. KAM is still committed to collaborating closely with the government to change the economy.
- The proposed KRA inflation adjustment could not have come at a more undesirable time when Kenyans are already struggling to make ends meet, and companies are still dealing with pandemic-related shocks.
- Kenya Association of Manufacturers supports the Bottom-up Economic Transformation Agenda 2022–2027 is the current government’s platform.
- As per KAM, Regressive taxation, bureaucracy, and the expense of regulatory compliance are cited in the Plan as the main obstacles to rescuing Kenya from the “economic hole” it is now in.
Regressive taxation, bureaucracy, and the expense of regulatory compliance are cited in the Plan as the main obstacles to rescuing Kenya from the “economic hole” it is now in.
Examining and streamlining all business licences is the first step in the economic reform process, intending to cap overall licencing expenses at 1.5% of turnover fees.
As correctly stated in the Plan, passing an administrative burden law resembling the Reduction of Paperwork Act in the United States of America will guarantee that no company spends more than four person-hours per month on tax and regulatory compliance.
The ease and cost of conducting business in Kenya have remained critical barriers to the country’s economic growth.
More specifically, because the current tax regime is a “zero-sum game,” manufacturing has been moved to our neighbours in the East African Community (EAC), who are now selling to Kenya.
However, the proposed inflation changes on specific excise tax rates have put Kenyans in the midst of a new regressive taxation challenge as they carry out the government’s economic agenda.
As Kenya Revenue (KRA) moves to apply inflation adjustment on specific excise duty rates, commencing October 1st, the price of some commodities is set to rise in less than a week.
These goods include, among others, fruit juice, chocolate, bottled water, alcohol, and cigarettes.
The Excise Tax Act of 2015 included inflation adjustments on specific rates of items subject to excise duty. It allows the Commissioner General of KRA to modify special rates per the average inflation rate from the preceding year.
The suggested inflation adjustment could not have come at a more undesirable time when Kenyans are already struggling to make ends meet, and companies are still dealing with pandemic-related shocks.
Let’s use the manufacturing sector as an example, whose GDP contribution in 2020 was 7.6% compared to the 15% target set by the present government’s Big Four Agenda. This serious position will worsen due to the suggested annual inflation adjustment.
The epidemic also has long-lasting effects on economies, enterprises, and households.
Based on the Kenya National Bureau of Statistics (KNBS) Economic Survey 2021, COVID-19’s effects significantly affected the industrial sector’s slowdown last year. Real Gross Value Added (GVA) for the industry is predicted to have decreased by 0.1% in 2020 compared to an increase of 2.5% in 2019.
The epidemic severely affected the key markets for excisable products (aviation, hospitality, and tourism).
They may take some time to recover, which is another reason inflation adjustment needs to be stopped. Air transportation, lodging, and food services all had declines in 2020 of -52.7% and -47.7%, respectively, according to the Economic Survey 2021.
This is attributable to steps taken to stop the virus’s spread, which caused an abrupt drop in excise tax revenue. May 2020 had KSh 10.9 billion in revenue, down from May 2019’s 19.9 billion. As a result, only a complete recovery of the hospitality and aviation sectors will increase excise tax collection.
The annual KAM hasn’t always resulted in higher tax receipts. For instance, despite implementing the 4.94% yearly inflation adjustment, excise tax payments for cigarettes decreased by 12% in 2020. This demonstrates that raising excise taxes has reached its ceiling and cannot generate more income for the government.
Tax laws that make locally produced excisable goods significantly more costly than imports provide fertile ground for the growth of illicit trade. Customers will be driven to choose less expensive goods, which might be illegal or fake.
Even in the pre-pandemic era, unlawful commerce of smoking and alcoholic beverages was ordinary. For instance, in July 2020, an independent analysis found that over 11.4% (or 600 million sticks) of cigarettes sold in Kenya were illegal. This leads to a Ksh 2.2 billion annual revenue loss.
Another World Health Organization (WHO) study from 2018 found that an estimated 44% of alcoholic beverages consumed in Kenya are illegal, costing the country’s government Ksh. 78 billion.
The annual adjustment for inflation threatens the sustainability of current and upcoming investments.
Due to the extensive tax duties, yearly inflation adjustments will deter potential investors from entering the manufacturing of excisable items. Because Kenya has a capital-deficient economy that needs both local and foreign investments, this is an undesirable outcome.
Adjustment for inflation has inflationary effects. The inflation rate climbed from 6.44% in July 2021 to 6.57% in August 2021.
Price increases for food and non-alcoholic drinks (10.67%), transportation (7.93%), and housing, water, electricity, gas, and other fuels (5.07%) were the critical factors in this.
The affected goods’ inflation adjustment will have a negative effect on all of these. As a result, it is only reasonable to anticipate future price increases for commodities. Pump prices have risen to historically high levels, with a significant amount made up of taxes and levies, harming Kenyan manufacturing and the nation’s economy.
An actual rate of duty’s inflation adjustment will thwart efforts to help the impacted manufacturers quickly recover and become resilient. Additionally, it will hinder the planned economic recovery following COVID-19. KAM urges a halt to the inflation adjustment as a result.