Unintended Consequences of Excise Tax on Tobacco and Nicotine Delivery Products in Kenya
Category: Excise TaxTobacco Regulation
By: Maureen Barasa,
In principle, Excise taxes are levied on goods and services whose consequences are considered socially undesirable. Most developing countries, including Kenya, rely on excise taxes for revenue. Furthermore, it can be used to achieve public health goals by discouraging the consumption of harmful products such as alcohol and tobacco, thereby addressing negative externalities of that consumption.
There is a growing and justifiable worldwide consensus in support of steps to reduce tobacco use in both developed and developing countries, despite the debate such policies frequently spark. Taxes can act as a tool for reducing tobacco usage and encourage attempts to successfully quit. Whether taxes are too high or not depends on how much individuals grossly underestimate the harm caused by tobacco use, which varies depending on the circumstances in each nation.
A study published by Oxford University Press, UK states that according to some estimates, taxes that increase the real price of cigarettes and nicotine delivery products by 10% can lower consumption by 4% to 6% in low-income nations, where consumers are more price sensitive, and by 1.2% to 3.36% in high-income ones. Consumers respond to price increases by reducing their consumption or finding cheaper alternatives, such as tobacco cigarettes, which may be more harmful. Raising taxes makes sense from the standpoint of public health because it encourages smokers to consume less or quit, resulting in more lives saved.
On 1st July 2022, the Kenya Revenue Authority, the Government’s agency charged with the role of assessing, collecting and accounting for all revenue on its behalf started the implementation of Excise duty on excisable goods & services introduced by the Finance Act, 2022 on the following; Nicotine delivery services at 40% tariff and liquid nicotine for electronic cigarettes at Ksh 70 per ml.
An unintended consequence of an arbitrary increase in the excise taxes applicable to nicotine delivery services and liquid nicotine could be accessing the illegal market for cigarettes by smokers due to greater price differences between nearby countries, encouraging tobacco smuggling across borders. The cigarette is an inexpensive, physically small, and highly valuable product. These qualities make it very appealing for smuggling. Kenya is plagued by the illicit traffic in tobacco products.
Worldwide, cigarettes are among the items that are exchanged on the black market the most frequently. The illegal trade in tobacco is becoming a bigger issue due to unsustainable tax policies, weak border control, and weak consequences for offenders. Tax-evaded cigarettes, or those with fraudulent tax stamps, cigarettes for export that aren’t sold in their target markets, and cigarettes smuggled into Kenya, are the main sources of the illegal tobacco trade in Kenya At the end of 2017, British American Tobacco- Kenya estimates that at least 12% of the cigarettes in the Kenyan market was illicit. This is attributed in part, to excise tax difference that is almost twice or three times that of its neighbors.
The basic justification for a higher excise tax rate is that price increases can somewhat offset the harm to society that is ignored by private markets. Supply and demand factors interact to influence tobacco and nicotine delivery products usage. Most conventional economic models assume that an individual’s consumption of tobacco and nicotine delivery products at any given price accurately reflects their personal preferences. Some of the demand for tobacco and nicotine delivery products reflects overconsumption brought on by a lack of self-control. Some people claim that the suffering that smokers inflict on themselves when they are unable to reduce consumption despite their best efforts to do so is not expressly addressed by current tax arrangements, even if they frequently atone for some of the pain that smokers cause others.
Taxing tobacco and nicotine delivery products is particularly divisive since it affects both public health and finances. Taxes are typically necessary when market prices inadequately reflect the harm that individual actions cause to society as a whole, but they shouldn’t impede individuals’ freedom to make private decisions that don’t hurt others. If constraining people’s overall spending choices causes more harm than good for society, then higher taxes are ineffective. Furthermore, higher cigarette and nicotine delivery product taxes may be regressive if they place an unfairly greater cost on poorer groups due to their reduced capacity to buy and consume other goods.
The most rational policy would be to establish a stable and predictable tax environment with moderate and controllable tax increments that take into account the effects on consumers and businesses when developing appropriate taxation rules. Furthermore, the excise duty on tobacco and nicotine delivery products should be used to directly offset externalities associated with the use of tobacco and nicotine delivery products, such as medical treatment for product consumers or education on the dangers of consumption. Finally, the government should implement policies that encourage smokers to use less harmful nicotine products, such as vape products, by using tax policy to internalize the cost of tobacco and nicotine delivery products, the effects of which on the health of both active and passive smokers are undesirable.
Key words: Tobacco Regulation, Excise Tax
Photo credit: Freepik
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Unintended Consequences of Excise Tax on Tobacco and Nicotine Delivery Products in Kenya
| Post date: Fri, Jan 13, 2023 |
| Category: Excise TaxTobacco Regulation |
| By: Maureen Barasa, |
In principle, Excise taxes are levied on goods and services whose consequences are considered socially undesirable. Most developing countries, including Kenya, rely on excise taxes for revenue. Furthermore, it can be used to achieve public health goals by discouraging the consumption of harmful products such as alcohol and tobacco, thereby addressing negative externalities of that consumption.
There is a growing and justifiable worldwide consensus in support of steps to reduce tobacco use in both developed and developing countries, despite the debate such policies frequently spark. Taxes can act as a tool for reducing tobacco usage and encourage attempts to successfully quit. Whether taxes are too high or not depends on how much individuals grossly underestimate the harm caused by tobacco use, which varies depending on the circumstances in each nation.
A study published by Oxford University Press, UK states that according to some estimates, taxes that increase the real price of cigarettes and nicotine delivery products by 10% can lower consumption by 4% to 6% in low-income nations, where consumers are more price sensitive, and by 1.2% to 3.36% in high-income ones. Consumers respond to price increases by reducing their consumption or finding cheaper alternatives, such as tobacco cigarettes, which may be more harmful. Raising taxes makes sense from the standpoint of public health because it encourages smokers to consume less or quit, resulting in more lives saved.
On 1st July 2022, the Kenya Revenue Authority, the Government’s agency charged with the role of assessing, collecting and accounting for all revenue on its behalf started the implementation of Excise duty on excisable goods & services introduced by the Finance Act, 2022 on the following; Nicotine delivery services at 40% tariff and liquid nicotine for electronic cigarettes at Ksh 70 per ml.
An unintended consequence of an arbitrary increase in the excise taxes applicable to nicotine delivery services and liquid nicotine could be accessing the illegal market for cigarettes by smokers due to greater price differences between nearby countries, encouraging tobacco smuggling across borders. The cigarette is an inexpensive, physically small, and highly valuable product. These qualities make it very appealing for smuggling. Kenya is plagued by the illicit traffic in tobacco products.
Worldwide, cigarettes are among the items that are exchanged on the black market the most frequently. The illegal trade in tobacco is becoming a bigger issue due to unsustainable tax policies, weak border control, and weak consequences for offenders. Tax-evaded cigarettes, or those with fraudulent tax stamps, cigarettes for export that aren’t sold in their target markets, and cigarettes smuggled into Kenya, are the main sources of the illegal tobacco trade in Kenya At the end of 2017, British American Tobacco- Kenya estimates that at least 12% of the cigarettes in the Kenyan market was illicit. This is attributed in part, to excise tax difference that is almost twice or three times that of its neighbors.
The basic justification for a higher excise tax rate is that price increases can somewhat offset the harm to society that is ignored by private markets. Supply and demand factors interact to influence tobacco and nicotine delivery products usage. Most conventional economic models assume that an individual’s consumption of tobacco and nicotine delivery products at any given price accurately reflects their personal preferences. Some of the demand for tobacco and nicotine delivery products reflects overconsumption brought on by a lack of self-control. Some people claim that the suffering that smokers inflict on themselves when they are unable to reduce consumption despite their best efforts to do so is not expressly addressed by current tax arrangements, even if they frequently atone for some of the pain that smokers cause others.
Taxing tobacco and nicotine delivery products is particularly divisive since it affects both public health and finances. Taxes are typically necessary when market prices inadequately reflect the harm that individual actions cause to society as a whole, but they shouldn’t impede individuals’ freedom to make private decisions that don’t hurt others. If constraining people’s overall spending choices causes more harm than good for society, then higher taxes are ineffective. Furthermore, higher cigarette and nicotine delivery product taxes may be regressive if they place an unfairly greater cost on poorer groups due to their reduced capacity to buy and consume other goods.
The most rational policy would be to establish a stable and predictable tax environment with moderate and controllable tax increments that take into account the effects on consumers and businesses when developing appropriate taxation rules. Furthermore, the excise duty on tobacco and nicotine delivery products should be used to directly offset externalities associated with the use of tobacco and nicotine delivery products, such as medical treatment for product consumers or education on the dangers of consumption. Finally, the government should implement policies that encourage smokers to use less harmful nicotine products, such as vape products, by using tax policy to internalize the cost of tobacco and nicotine delivery products, the effects of which on the health of both active and passive smokers are undesirable.
Key words: Tobacco Regulation, Excise Tax
Photo credit: Freepik
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The Central Bank of Kenya Act, (Cap 491) created the Central Bank as one of its autonomous agencies. The Central Bank’s mandate is to develop Kenya’s monetary policy, foster price stability, print money, and carry out other tasks assigned by a parliamentary act. The Constitution stipulates that the Central Bank of Kenya shall not be […]
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A look at the total income taxes collected by the government of Kenya in the Financial Year 2020/21 shows that collectively, working Kenyans paid a total of Ksh 694.1 billion for personal income taxes. While this is easy to compute, many Kenyan citizens are aware of how much of their income goes into taxes on […]
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