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Why overtaxing alcohol is detrimental to economy

Saru Nkutha

For a long time, the sale and distribution of alcohol have indubitably attracted policy measures to regulate sources, sale and usage. Tipple has become so vital to the State because of the taxes it generates.

It is estimated that the industry pays in excess of Sh100 billion in taxes every year. Despite its significance, the grip of the State on the sector and numerous taxes have had a negative impact on Recommended Retail Prices (RRP).

There are also negative externalities that manufacturers have been forced to contend with, namely, counterfeits and increase of over-the-counter costs.

Obvious examples are the wide disparities in prices of alcoholic drinks in different parts of major cities. It is not uncommon to buy a 500ml bottle of beer at Sh180 in Buru Buru and find the same selling at Sh300 a stone’s throw.

Kenya Revenue Authority (KRA) missed its 2017/2018 financial year revenue target by Sh172.4 billion. The taxman collected Sh1.48 trillion or an average Sh123.93 billion a month in the year ending June 2018 against a target of Sh1.65 trillion.

High taxes is a key tax policy challenge in the country, aggravated by the presence of illicit alcohol market because consumers shift towards them when the taxed formal products are too expensive.

A clear explanation for this from the alcohol industry perspective is that the volatile tax rates imposed on alcoholic beverages cause drastic changes in the prices.

If you sum up the effect of high taxes and acquiescent over-the-counter inflation caused by businesses that sell alcohol on the far side of the RRP, you end up with a situation where the formal product is priced way beyond the reach of the ordinary Kenyan.

This is why the taxman should work for a hand in gloves with mainstream alcohol manufacturers not only to keep taxes minimal but also ensure that retailers sell at the RRP. But rubbing this kind of thinking on retailers will not be easy.

The biggest question alcohol manufacturers and distributors sometimes grapple with is, how do you know if your price is right? For alcohol, it’s been proven that Kenyan consumers buy more where retailers adhere to the RRP.

Similarly, the biggest lesson we have learnt from the unpredictable rise of the excise tax on mainstream alcohol and spirits is that every rise leads to a corresponding drop in accounted consumption, especially at the bottom of the pyramid where prices are sensitive. 

The symbiotic negative relationship that the rise in taxes and discretionary over-the-counter inflation has on KRA’s final revenue figures should incentivise the taxman to encourage retailers to sell at RRP to encourage consumption of formal alcohol.

Many factors influence a retailer’s bottom line, including properly priced products that hit the sweet spot of maximising unit sales without sacrificing the profit per unit.

KRA and manufacturers both need to work together.  – The writer, a certified accountant has also worked as marketer of alcoholic beverages. Email: [email protected]

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