Excise tax is a levy applied selectively on particular goods and services. The main aim of this levy is to raise substantial revenue for the government at relatively low administrative or compliance costs. Excise taxes are mainly levied at relatively high rates on a few commodities, which are produced by a few large producers. The main reason for the imposition of these selective taxes is to correct for negative externalities arising from the consumption of the taxed products.
The consumption of certain products, e.g. smoking cigarettes or excessive drinking of beer and other alcoholic beverages, is harmful not only to the consumer but also to society at large, both in the short run and in the long run. In such cases, market forces may produce distorted prices, which exclude the cost to society of consuming these commodities and hence result in higher consumption. The relatively high taxes imposed on these products are, therefore, meant to ensure that individuals internalise the cost to society of their consuming these products.
Finally, excise taxes are applied to improve the vertical equity of the tax system. Levying them on commodities that can be described as luxuries that are consumed in higher proportions by higher-income individuals normally does this. Excise taxes are also used to promote equity by spending the collected revenue on employment-generating and poverty alleviation programmes, which benefit low-income groups. Some doubts, however, have been raised about the use of excise taxes to meet the objectives stated above.
History of Excise Tax in Kenya
Historical analysis shows that excise taxes in Kenya were levied on the domestic production of only four product groups, namely cigarettes and tobacco, sugar, beer and spirits, and matches. Between 1980 and 1990, cigarettes and tobacco accounted for an average of 58 percent of total excise revenue while alcoholic beverages, sugar and matches accounted for 22 percent,19 percent and 1 percent respectively. Cigarettes and tobacco, sugar and matches were subject to excise tax only, while alcoholic beverages were subject to high rates of sales tax in addition.
In 1994, the government expanded the coverage of excise taxes to include mineral and aerated waters and petroleum products and added cosmetics in 1995. Petroleum products had been previously subject to VAT, but this was converted to an excise tax for revenue purposes.
In an effort to increase tax revenue collections, the government further expanded the tax basket in 2006 to include jewellery. The basket remained unchanged up to 2015 when the government expanded the basket further to include airtime and financial transactions. The government introduced excise duty on fees charged for money services by cellular phone service providers, banks, money transfer agencies and other financial service providers at a rate of 10 percent of their excisable value.
The continued expansion of Excise tax in 2023
Under the proposed Finance Bill 2023, new products that were not subject to tax before will now be taxed. Players in the gaming industry for instance will be required to remit excise taxes within 24 hours. The proposal is expected to increase the cost of compliance for business accounting for excise duty including the setting up of systems to enable real-time payments.
Additionally, cosmetics such as human hair, wigs, false beards, eyebrows, eyelashes and artificial nails will begin attracting excise duty at the rate of five percent. Other new excisable goods added include imported fish at Sh100,000 per ton or 20 percent, powdered juice at 20 percent and imported cement at 10 percent of the value or Sh1.50 per kilogram. Increased excise duty rates include mobile money transfer services from 12 percent to 15 percent creating a likelihood of increased mobile-money charges by telco operators, and excise duty on gaming, betting, price competitions and lotteries will move from 7.5 percent to a blanket 20 percent with the aim of raising tax nettings from the gaming industry.
With these proposed changes, it has become more evident that excise taxes have been levied specifically for meeting the growing revenue requirements of the government. However, the revenue generated may not be as productive as desired. Too often the growth in revenue has failed to catch up with government spending pressures, a situation that has occasioned huge imbalances between the demand and supply of public budgetary resources.
Thus, with the growing cost of living crisis, perhaps it’s time for the government to reassess its spending as opposed to increasing taxes.