Why alcohol manufacturers fight to cheat excise taxes
Thursday July 21 2022
In Nairobi’s densely populated Pipeline Estate, one can buy a 250ml bottle of a wide range of vodka and brandy brands at Sh120 from one of the wines and spirits shops.
The situation is similar in other low-income estates such as Dandora and Mwiki — also in the capital city— where these cheap spirits dominate the market.
The alcohol sector has some of the most fierce price competition in the economy, partly due to a large, thirsty market and low entry barriers for small manufacturers. Anything that can confer an advantage in the market is therefore quickly pounced upon.
In the case of the spirits market, the biggest advantage for a manufacturer comes from avoiding the steep sin taxes the government levies on alcoholic products—evasion that leaves the exchequer with an average of Sh12 billion per year in lost revenue.
For a manufacturer who faithfully collects and remits excise duty on a 250ml bottle of vodka or brandy, the Sh120 retail price would barely cover production costs, even before their product leaves the factory floor.
A leading liquor manufacturer told the Business Daily that the average production costs of a single 250ml product include a bottle at Sh15, caps and labels at Sh4.20, boxes and taping at Sh3.50, the spirit itself at Sh8, flavours at Sh2 and an excise stamp at Sh2.80.
Excise duty on spirits is charged at Sh335.30 per litre, which works out to Sh83.83 per quarter-litre bottle, and the entire cost is then subjected to 16 percent VAT, setting the base price of the bottle of liquor to Sh138.42.
The manufacturer then incurs an additional cost of Sh31.20 on labour, transport, electricity, water and wastage, meaning they have to sell the product at a minimum of Sh169.60 to break even. When seller margins are factored in, the legal spirits end up retailing between Sh200 and Sh255.
“This means that when our product leaves the factory, it can’t compete on price with those who evade excise, and we have yet to factor in distributor and retailer margins,” said a manager at the liquor maker, who refused to be named due to ongoing deliberations with the Kenya Revenue Authority (KRA) on the excise question.
The tax agency has come under fire from those manufacturers that comply with excise rules, who say it is not doing enough to curb the vice.
KRA Commissioner General Githii Mburu admitted that alcohol excise collection is a challenge because these taxes are significant, and therefore the motivation to evade paying is also high.
He pointed out several measures the agency has rolled out to curb illicit alcohol trade, key among them introduction of new generation excise stamps that have enhanced security features, and increasing the number of officers doing inspections to nab fake stamps and raw materials.
“We have enhanced supervision, and are also now requiring manufacturers to mount CCTV cameras and then link them to our centre so that we can see the factories in real time and things moving,” said Mr Mburu.
“We are also putting our staff on the ground and also changing them frequently because the motivation to corrupt them is very high because of the sums of money involved.”
The wide network of distributors and retailers stocking these untaxed spirits, which are often affixed with fake excise stamps, makes it difficult for the KRA to nab the culprits.
The tax-evading manufacturers mainly sell their products on the outskirts of the city, preferring lower-income areas where price is a big factor for consumers, and in urban and peri-urban centres in Machakos, Western Kenya, Nakuru and Mount Kenya.
These twin factors of easy reach and low prices have been key in driving consumption of these spirits, and therefore providing motivation for more manufacturers to venture into the business.
Alcohol products and ethanol thus account for the bulk of illegal goods seized by the KRA in the country.
In the three months to March this year, the KRA nabbed Sh280 billion worth of illegal alcohol and ethanol, equivalent to half of the total seizures which totalled Sh570.8 billion in the period.
In the preceding quarter ending December 2021, the alcohol products seized—largely for use of fake excise stamps—amounted to Sh564.4 billion, representing 82 percent of the total of Sh687.8 billion worth of goods nabbed by the taxman.