Finance Bill 2024 Landscape: Kenya’s Alcoholic Industry
Category: Finance Bill
By: Fiona Okadia,
Introduction
Conditional on the passage of the Finance Bill 2024, a 750 ml bottle of 37% alcohol by volume of a popular beverage gin in Kenya will now have an excise tax of Ksh 444, up from Ksh 267. On the other hand, a 500ml Tusker Cider that used to have a tax burden of 72 shillings will now have one of 51 shillings. In a nutshell, this is the impact of the excise changes in the Finance Bill 2024; making higher-alcohol beverages more expensive. These changes herald a significant shift in Kenya’s alcohol taxation policy. These adjustments are not merely incremental; they are a comprehensive overhaul that seeks to realign the sector with the government’s revenue and economic development objectives. However, these changes must be scrutinized through the lens of market dynamics, consumer behavior, and the broader economic implications. While well-intentioned, this author ultimately believes that the negative effects of these changes outweigh the positive intentions.
Notably from Table One above, there is a shift from the tax being based on the product volume to the percentage of pure alcohol in the alcoholic drink which solves the differentiation problem. In this instance, the differentiation problem refers to the challenge of fairly taxing alcoholic beverages with varying alcohol contents and volumes. Previously, taxes based on product volume led to inequities, impacting lower alcohol content beverages more heavily. The Finance Bill 2024 addresses this by taxing based on pure alcohol content, promoting fairness, and reducing market distortions. However, this approach raises critical questions about its impact on consumer behavior and market dynamics.
Looking at the figures, it’s evident that beverages with higher alcohol content, such as 60%, incur a relatively lower excise tax for the alcohol itself, approximately Ksh 5.9 per litre. The majority of the excise tax seems to be allocated towards other ingredients, such as water. Conversely, beverages with lower alcohol content, like 20%, pay a significantly higher amount, around Ksh 17.8 per litre, for the alcohol component. However, with the new rates as explained above, this distribution appears to be more balanced and equitable.
Revenue Generation and Market Dynamics
Kenya’s alcoholic beverages industry has long been a cornerstone of government revenue, consistently contributing a substantial portion of excise taxes. From 2018 to 2023, alcohol accounted for 42% to 31% of total excise duty. The data reveals a discernible pattern: nominal excise tax revenue from alcohol has exhibited an upward trajectory from 2018 onwards, except for the 2020 -Covid period. In 2023, excise tax revenues from alcoholic beverages amounted to Ksh 51.01 billion, underscoring its significant fiscal impact.
The two primary categories of alcoholic beverages for excise are beer on the one side, and wines and spirits, on the other. Beer accounts for the majority of alcohol excise revenue because it has high consumption volumes. Its share is declining from highs of 70% in 2018 to 59% in 2022. In 2023, it then readjusted to where it was in 2021. This reality likely informs the direction chosen by the National Treasury in the Finance Bill 2024/2025.
The proposed excise duty increases, particularly the steep hike for wines and spirits, are intended to bolster government revenue. The implicit behavioral objective is to increase the consumption of low-alcohol drinks while curbing the consumption of higher-alcohol alternatives such as spirits. By making high-alcohol beverages more expensive, this move aims to create a substitution effect, where consumers opt for lower-alcohol alternatives. This is based on the economic principle that consumers will alter their consumption patterns in response to changes in relative prices. The effectiveness of this policy also depends on the price elasticity of demand for high-alcohol versus low-alcohol beverages. If the demand for high-alcohol beverages is elastic, consumers will significantly reduce their consumption in response to the price increase, achieving the desired behavioural change.
Consumer Behaviour and Sector Shifts
Kenya’s alcohol taxation paradigm rests on a flawed assumption: that demand for legally compliant alcohol is inelastic. Yet, when prices rise, consumers turn to illicit alternatives, categorized as counterfeit, contraband, and traditional brews. Licit alcohol demand is elastic, especially among those prone to alcohol-related harm. Some heavy drinkers may maintain their consumption regardless of tax rates.
Raising prices to mitigate alcohol-related harm is often ineffective, as consumers switch to informal markets, fueling a flourishing illicit industry. Higher excise duties on stronger wines and spirits risk driving consumers further into the informal sector, worsening revenue collection and public health standards. Conversely, the informal market doesn’t adhere to regulations such as the operating time which has been restricted to the time slot from 5 pm to 11 pm. They are, therefore, more accessible at any time.
Promoting Local Agriculture?
One of the notable changes in the Finance Bill is the inclusion of spirit liquor in the list of goods eligible for excise duty remission if locally sourced agricultural products are used in the manufacturing process. Spirits such as vodka are made from products such as potatoes and grains. On the other hand, most of the spirits that are manufactured in Kenya are made from sugar.
This policy aims to boost local agricultural production, aligning with broader economic development goals. Encouraging local sourcing can strengthen the agricultural sector, create jobs, and promote sustainable practices. This is an area of emphasis in the Kenya Kwanza Manifesto on page 13, which states:
“Agriculture has the highest employment multiplier effect i.e., agricultural growth creates more jobs in other sectors than any other sector, owing to its strong forward and backward linkages to other sectors of the economy.”
However, the success of this initiative depends on the industry’s capacity to adapt, collaborate with local farmers, and ensure the availability of high-quality local raw materials. A notable example of this approach is the East African Breweries (EABL), which, through its subsidiary East African Maltings Limited (EAML) has engaged farmers to grow barley for brewing. Barley, which matures between 120 to 150 days depending on factors such as altitude and weather conditions, has seen a boost in production, reaching a value of Ksh 1.63 billion, according to the Statistical Abstract (2023). However, small brewers who cannot implement similar partnerships may face prohibitively high costs, making them uncompetitive.
Challenges for Manufacturers of Alcoholic Beverages
At the same time, Section 39 of the Finance Bill 2024 proposes to repeal the provision allowing manufacturers to offset excise duty on raw materials used in production. The change increases the cost burden on producers, particularly those dependent on imported excisable raw materials such as sugar, ethanol, and bottles. Consequently, manufacturers may face higher production costs, which could impact their competitiveness both domestically and internationally. Other markets have significantly lower production costs than Kenya. This concern is especially notable given that the Observatory of Economic Complexity (OEC) places Kenya’s alcoholic exports at USD 23.5 million in 2022 to various destinations around the world.
Export and Investment Levy to Promote Local Industries
Introducing export and investment levies on specific alcoholic products, such as vodka, rum, and other spirits obtained by distilling fermented sugar, at a rate of 3% of customs value, underscores the government’s focus on promoting local industries. However, this approach appears contradictory to the previously mentioned issues and seems primarily aimed at raising revenue. Considering the integration of these factors—including the increase in excise duty and the inability to reclaim excise duty on raw materials—the result will inevitably be higher production costs for these products, which is not favorable for the manufacturers.
Conclusion
The Finance Bill 2024, presents both opportunities and challenges to the alcoholic beverages manufacturing industry and the consumers. On the upside, it aims to boost local agriculture, albeit requiring time to identify farmers and ensure quality production. However, this transition period could disadvantage consumers with higher prices, especially considering the six-month growth cycle for sugarcane which is the agricultural product used in most of Kenya’s spirits.
Conversely, the higher excise rates might drive some consumers to the informal sector, potentially fueling illicit trade. While the government’s intentions are clear, achieving revenue increase and curbing alcohol-related harm seems uncertain with this bill. In a market like Kenya’s, rife with illicit trade, excise adjustments may not breed the results that the government thinks it will. Thus, close monitoring of consumption patterns is imperative for meeting revenue and behavioral goals. Heightened enforcement efforts to combat illicit trade will likely be necessary, though they will come with significant costs.
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Finance Bill 2024 Landscape: Kenya’s Alcoholic Industry
| Post date: Wed, May 29, 2024 |
| Category: Finance Bill |
| By: Fiona Okadia, |
Introduction
Conditional on the passage of the Finance Bill 2024, a 750 ml bottle of 37% alcohol by volume of a popular beverage gin in Kenya will now have an excise tax of Ksh 444, up from Ksh 267. On the other hand, a 500ml Tusker Cider that used to have a tax burden of 72 shillings will now have one of 51 shillings. In a nutshell, this is the impact of the excise changes in the Finance Bill 2024; making higher-alcohol beverages more expensive. These changes herald a significant shift in Kenya’s alcohol taxation policy. These adjustments are not merely incremental; they are a comprehensive overhaul that seeks to realign the sector with the government’s revenue and economic development objectives. However, these changes must be scrutinized through the lens of market dynamics, consumer behavior, and the broader economic implications. While well-intentioned, this author ultimately believes that the negative effects of these changes outweigh the positive intentions.
Notably from Table One above, there is a shift from the tax being based on the product volume to the percentage of pure alcohol in the alcoholic drink which solves the differentiation problem. In this instance, the differentiation problem refers to the challenge of fairly taxing alcoholic beverages with varying alcohol contents and volumes. Previously, taxes based on product volume led to inequities, impacting lower alcohol content beverages more heavily. The Finance Bill 2024 addresses this by taxing based on pure alcohol content, promoting fairness, and reducing market distortions. However, this approach raises critical questions about its impact on consumer behavior and market dynamics.
Looking at the figures, it’s evident that beverages with higher alcohol content, such as 60%, incur a relatively lower excise tax for the alcohol itself, approximately Ksh 5.9 per litre. The majority of the excise tax seems to be allocated towards other ingredients, such as water. Conversely, beverages with lower alcohol content, like 20%, pay a significantly higher amount, around Ksh 17.8 per litre, for the alcohol component. However, with the new rates as explained above, this distribution appears to be more balanced and equitable.
Revenue Generation and Market Dynamics
Kenya’s alcoholic beverages industry has long been a cornerstone of government revenue, consistently contributing a substantial portion of excise taxes. From 2018 to 2023, alcohol accounted for 42% to 31% of total excise duty. The data reveals a discernible pattern: nominal excise tax revenue from alcohol has exhibited an upward trajectory from 2018 onwards, except for the 2020 -Covid period. In 2023, excise tax revenues from alcoholic beverages amounted to Ksh 51.01 billion, underscoring its significant fiscal impact.
The two primary categories of alcoholic beverages for excise are beer on the one side, and wines and spirits, on the other. Beer accounts for the majority of alcohol excise revenue because it has high consumption volumes. Its share is declining from highs of 70% in 2018 to 59% in 2022. In 2023, it then readjusted to where it was in 2021. This reality likely informs the direction chosen by the National Treasury in the Finance Bill 2024/2025.
The proposed excise duty increases, particularly the steep hike for wines and spirits, are intended to bolster government revenue. The implicit behavioral objective is to increase the consumption of low-alcohol drinks while curbing the consumption of higher-alcohol alternatives such as spirits. By making high-alcohol beverages more expensive, this move aims to create a substitution effect, where consumers opt for lower-alcohol alternatives. This is based on the economic principle that consumers will alter their consumption patterns in response to changes in relative prices. The effectiveness of this policy also depends on the price elasticity of demand for high-alcohol versus low-alcohol beverages. If the demand for high-alcohol beverages is elastic, consumers will significantly reduce their consumption in response to the price increase, achieving the desired behavioural change.
Consumer Behaviour and Sector Shifts
Kenya’s alcohol taxation paradigm rests on a flawed assumption: that demand for legally compliant alcohol is inelastic. Yet, when prices rise, consumers turn to illicit alternatives, categorized as counterfeit, contraband, and traditional brews. Licit alcohol demand is elastic, especially among those prone to alcohol-related harm. Some heavy drinkers may maintain their consumption regardless of tax rates.
Raising prices to mitigate alcohol-related harm is often ineffective, as consumers switch to informal markets, fueling a flourishing illicit industry. Higher excise duties on stronger wines and spirits risk driving consumers further into the informal sector, worsening revenue collection and public health standards. Conversely, the informal market doesn’t adhere to regulations such as the operating time which has been restricted to the time slot from 5 pm to 11 pm. They are, therefore, more accessible at any time.
Promoting Local Agriculture?
One of the notable changes in the Finance Bill is the inclusion of spirit liquor in the list of goods eligible for excise duty remission if locally sourced agricultural products are used in the manufacturing process. Spirits such as vodka are made from products such as potatoes and grains. On the other hand, most of the spirits that are manufactured in Kenya are made from sugar.
This policy aims to boost local agricultural production, aligning with broader economic development goals. Encouraging local sourcing can strengthen the agricultural sector, create jobs, and promote sustainable practices. This is an area of emphasis in the Kenya Kwanza Manifesto on page 13, which states:
“Agriculture has the highest employment multiplier effect i.e., agricultural growth creates more jobs in other sectors than any other sector, owing to its strong forward and backward linkages to other sectors of the economy.”
However, the success of this initiative depends on the industry’s capacity to adapt, collaborate with local farmers, and ensure the availability of high-quality local raw materials. A notable example of this approach is the East African Breweries (EABL), which, through its subsidiary East African Maltings Limited (EAML) has engaged farmers to grow barley for brewing. Barley, which matures between 120 to 150 days depending on factors such as altitude and weather conditions, has seen a boost in production, reaching a value of Ksh 1.63 billion, according to the Statistical Abstract (2023). However, small brewers who cannot implement similar partnerships may face prohibitively high costs, making them uncompetitive.
Challenges for Manufacturers of Alcoholic Beverages
At the same time, Section 39 of the Finance Bill 2024 proposes to repeal the provision allowing manufacturers to offset excise duty on raw materials used in production. The change increases the cost burden on producers, particularly those dependent on imported excisable raw materials such as sugar, ethanol, and bottles. Consequently, manufacturers may face higher production costs, which could impact their competitiveness both domestically and internationally. Other markets have significantly lower production costs than Kenya. This concern is especially notable given that the Observatory of Economic Complexity (OEC) places Kenya’s alcoholic exports at USD 23.5 million in 2022 to various destinations around the world.
Export and Investment Levy to Promote Local Industries
Introducing export and investment levies on specific alcoholic products, such as vodka, rum, and other spirits obtained by distilling fermented sugar, at a rate of 3% of customs value, underscores the government’s focus on promoting local industries. However, this approach appears contradictory to the previously mentioned issues and seems primarily aimed at raising revenue. Considering the integration of these factors—including the increase in excise duty and the inability to reclaim excise duty on raw materials—the result will inevitably be higher production costs for these products, which is not favorable for the manufacturers.
Conclusion
The Finance Bill 2024, presents both opportunities and challenges to the alcoholic beverages manufacturing industry and the consumers. On the upside, it aims to boost local agriculture, albeit requiring time to identify farmers and ensure quality production. However, this transition period could disadvantage consumers with higher prices, especially considering the six-month growth cycle for sugarcane which is the agricultural product used in most of Kenya’s spirits.
Conversely, the higher excise rates might drive some consumers to the informal sector, potentially fueling illicit trade. While the government’s intentions are clear, achieving revenue increase and curbing alcohol-related harm seems uncertain with this bill. In a market like Kenya’s, rife with illicit trade, excise adjustments may not breed the results that the government thinks it will. Thus, close monitoring of consumption patterns is imperative for meeting revenue and behavioral goals. Heightened enforcement efforts to combat illicit trade will likely be necessary, though they will come with significant costs.
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