High taxes are choking the alcoholic beverages trade as smuggling across East African borders rob Kenya Revenue Authority (KRA) of millions of Shillings.
Spectre International, a spirits mixer, said the uneven tax structures among the East African Community (EAC) partners has spawned a thriving black market.
“Research has shown that high tax rates are a significant motivator for tax evasion and is the major cause of the proliferation of the black market in Kenya,” said Spectre Internationalsales and marketing director Ruth Adhiambo.
Spirits in Kenya attracts Sh280 per litre in excise duty compared to Sh80 per litre in Tanzania and Sh49 per litre in Uganda.
Declining tax compliance, she said, had seen revenue from excise duty fall to below Sh10 million per month because of cross-border smuggling induced by the disparities.
“Policy makers have refused to tackle this challenge and have instead resorted to raising taxes and costly administrative measures,” said Ms Adhiambo.
Smuggling of spirits through KRA manned ports and porous borders has denied alcoholic drinks manufacturers revenue with Ms Adhiambo saying the biggest losers have been distillers, Spectre International Ltd and Agro Chemical and Food Company (ACFC), which have recorded reduced sales.
The distillers say the reduced sales have been worsened by KRA’s requirement for registration of Kenyan firms which import spirits from Uganda, Tanzania, Rwanda and Burundi, a demand not made by competing exporters in Southern Africa and Asia.
“Uganda and Tanzania are recording significant rise in per capita consumption of spirits,” said Ms Adhiambo.
Producers of alcohol-based products had relocated to other East African countries forcing a shift towards imports of finished products and shrinking the market for local distillers from 100 firms in 2005 to less than 10 presently.
Ms Adhiambo said the introduction of Electronic Cargo Monitoring System (ECMS), flow metres, delayed deliveries and administrative fiat had made Kenyan spirits the most expensive in the region.
She said taxation on denatured spirits— meant for industrial use and essential purposes — should be lifted because it had reduced its consumption from an average of 60, 000 litres per month to less than 5, 000 litres a month.
Mr Caleb Oguya, marketing manager Agro Chemical and Food Company (ACFC) said that the taxation on denatured spirits has eroded sales margins to less than 25 per cent.
“Some of our customers have stopped purchasing from us and are instead importing finished products,” said Mr Oguya.