Inflation tax sets consumers for fresh July price increases tax sets consumers for fresh July price increases

Prices of cars, fuel, cigarettes, alcoholic drinks, juices and financial services are expected to rise once again in July when the Treasury factors in the average inflation rate for the past year in line with new excise tax regulations passed by Parliament.

The new Excise Duty Act, which came into force last December, provides for adjustment of the prices of goods based on the average inflation rate for the preceding 12 months – a move that would mostly affect goods consumed by the lower middle to upper classes.

Kenya’s average inflation rate stood at six per cent, meaning that the Sh200,000 exercise duty currently charged on imported cars aged more than three years will rise by six per cent, making the new figure Sh212,000 the base for next year’s adjustment.

Prices of motorcycles, mineral water, food supplements, jet fuel, diesel oil, fuel oil and plastic shopping bags, which are listed as excisable goods, will be subject to similar adjustments.

Poor segments of the society will not be spared the price inflation as some of the services they consume such as mobile phone airtime, money transfers and financial services are subject to the new law and could be adjusted in line with the inflation rate.

Producers of excisable goods last week called for the postponement of the inflation adjustment, citing its enactment late last year which left the market little time to absorb the impact.

“Given the magnitude and timing of the excise increase in 2015, we urge the government to defer the inflationary excise adjustment for the next financial year to allow for industry to absorb and fully appreciate the impact of this change on market performance and government revenue,” said BAT managing director Keith Gretton.

Mr Gretton was addressing the concerns of shareholders during an annual general meeting held in Nairobi.

The shareholders had expressed concern that a renewed increase in prices of the company’s products arising from inflation adjustment would depress demand and ultimately the company’s profits.

Tax experts expect prices of goods to go up should Treasury secretary Henry Rotich implement the law as it stands.

“Most probably prices of these goods will go up should the minister decide to adjust the duty for inflation in line with the law says,” said James Mulili, senior tax manager at PKF East Africa, a tax consultancy.

Mr Mulili supported postponement of the inflation adjustment, noting that demand for the affected goods and services is likely to dip with an overall negative effect on the economy.

The Treasury introduced the new excise tax regime aiming to make it easier for taxpayers to determine the applicable rates as opposed to the more complex system that has been in use.

A notice for the application of the changes in the excise duty is likely to be published in June.

The application of the law is expected to cause a chain reaction that will begin with manufacturers factoring in the cost of raw materials and the implications of excise duty on their products before passing on the same to the consumer in the form of higher prices.

Mr Malili, however, noted that the Treasury secretary – acting through the commissioner-general of the Kenya Revenue Authority (KRA) – still has the final say as to whether the new rates will apply.

The law requires the KRA commissioner-general to publish a gazette notice adjusting the specific rate of excise duty annually taking into account inflation.

The KRA, which is lagging behind its tax targets, is under pressure to generate more revenue to finance the government’s ongoing public projects that must be completed ahead of the General Election in August next year.

The prices of cars rose significantly last December with the application of the new excise tax law, reducing the number of small cars sold for the first time in four years.

Data from the Kenya National Bureau of Statistics shows that Kenyans bought 68,489 family cars — saloons and station wagons — last year compared to 69,444 the previous year, a drop of 955 units.

Charles Munyori, the secretary general of Kenya Auto Bazaar Association, which represents used car dealers, said demand started falling even before Parliament passed the excise tax law towards the end of last year.

“When the issue of excise duty started being discussed by Parliament people got concerned and held back — in fact even now our suppliers in Japan are calling concerned over low figures,” said Mr Munyori in an interview with the Business Daily in February.

The First Schedule of the Excise Duty Act 2015 says the Treasury will adjust the tax using the average monthly rate of the preceding financial year – which in this case is for the period between July 2015 and June 2016.

“The specific rates of excise duty on excisable goods specified in this Schedule shall be adjusted for inflation at the beginning of every financial year… Each rate of excise duty … shall be replaced by the rate of excise duty computed by reference to … the rate of excise duty on the day immediately before the adjustment day; and … the average rate of monthly inflation of the preceding financial year,” says the First Schedule of the Act.

With 10 months of this financial year having passed, the average inflation rate is just below seven per cent.

It would mean that if prices were to be adjusted by six per cent across the board on this preliminary basis, the Sh200,000 excise for cars, for example, would be about Sh214,000. The car charged an excise duty of Sh150,000 would now have it at about Sh160,000.

Business Daily

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Harrison Karemeri

Harry is an accountant, freelance writer and a biz-tech enthusiast. He is currently head of finance and managing editor at Nairobi Digest. Harry has watched John Q 13 times! Follow on twitter; @karemeryl