The recent Tax Laws (Amendment) Bill, 2024, includes proposals drawn from the rejected Finance Bill, 2024, that specifically target the alcoholic beverages sector. The proposals, grounded in the perception of the sector as a “cash cow,” suggest taxing alcohol by volume at a rate of KES 22.50 per centilitre of pure alcohol. Manufacturers had requested that the government reduce the excise rate for spirits to KES 10 per centilitre of pure alcohol, emphasising that lower rates could improve compliance, reduce tax evasion, enhance data accuracy, and boost market transparency.

For Extra Neutral Alcohol (ENA), the manufacturers proposed maintaining the current excise rate of KES 356 per litre rather than shifting to an alcohol-by-volume (ABV) model. This decision was informed by concerns over cash flow challenges for manufacturers and uncompetitiveness compared to neighbouring countries. For instance, Tanzania does not tax ENA, and Uganda charges Ush. 2,500 per litre, while Kenya’s rate is four times higher. They noted that adopting an ABV-based system could lead to manufacturers paying KES 960 per litre upfront, creating liquidity issues and discouraging local production.

Both the parliamentary committee and the full House endorsed the original decisions, describing them as necessary revenue-raising measures.

A 2024 study conducted by the African Economic Research Consortium (AERC) in collaboration with the University of Copenhagen revealed that beer prices in Kenya are nearing the Laffer curve’s peak, whereas spirits are not. This indicates diminishing returns on additional taxation for beer. Despite this, alcohol in Kenya remains among the most expensive regionally, a trend likely to continue under the new taxation regime.

Parliament debated the committee’s report on Thursday before recess and is expected to expedite the Bill’s enactment. Given the pressing need to address the budget deficit, the president is likely to assent to it swiftly.

The committee report, tabled for discussion, highlighted concerns for small independent brewers producing less than 500,000 litres per month. The committee suggested specific considerations for these smaller players, recognising the potential strain such taxation could impose on their operations.

The proposed increases follow the publication of the Extended Producer Responsibility (EPR) regulations, which enforce the Polluter Pays Principle. Under these regulations, manufacturers are required to pay Ksh 150 per item of packaging, including materials such as glass, aluminium, corrugated cardboard, and other forms of packaging, whether imported or manufactured locally.

Alcoholic beverages manufacturers have raised objections to the Delegated Legislation Committee, arguing that the costs are unsustainable. These regulations represent an attempt to reintroduce the Eco Levy, which was rejected in the Finance Bill, 2024. However, the EPR regulations propose a costlier model by applying the levy on a “per item” basis, as opposed to the earlier “per kilogramme” approach.

This poses a significant challenge for alcoholic beverages manufacturers. On the one hand, the increased costs of production could lead to higher prices for consumers, potentially driving them toward illicit alcohol to evade punitive excise and packaging taxes. On the other hand, manufacturers must comply with mounting regulatory and fiscal demands, which threaten their financial sustainability.

This dual pressure risks undermining both public health and industry viability, highlighting the need for a balanced approach to environmental responsibility that does not inadvertently encourage harmful alternatives.