Excise duty - Ep3

Transcript

Titus Mukora

Welcome to our continuing podcast around the Finance Act 2023. Really happy to have here with me Gideon Rotich. I’m going to actually let Gideon introduce himself. So, Gideon, please do introduce yourself.

Gideon Rotich

Thank you so much, Titus, and happy to be here. So my name is Gideon Rotich. I’m an associate director at PwC, currently within indirect tax. When I talk of indirect tax, I mean VAT, excise and customs. That’s my area of specialisation. I’ve been doing tax over 14 years, ten of those at PwC. I do love enjoying indirect taxes being transactional taxes. That’s me Titus, thanks.

Titus Mukora

Fourteen years; you’re still a baby. [Laughs]

Gideon Rotich

I’ve said over 14 years! [Laughs]

Titus Mukora

Excellent. So we’re here to discuss excise tax. And for me, the first question I have for you is: my original understanding of excise tax was that this was a sin tax. It was a tax that was to discourage what was considered to be harmful products such as tobacco or alcohol. But nowadays, we seem to find excise tax being applied to nearly anything and everything. Does that original idea still hold?

Gideon Rotich

Thanks for that. So the original idea doesn’t hold. Maybe we can take a walk down memory lane and really look at why was excise tax introduced in the first place. Excise tax and other sorts of taxes were mainly introduced to cater for what I call the negative externalities brought about by consumption of some of the products that are levied now in excise tax.

For example, smoking cigarettes, drinking beer, excessive consumption of alcohol is harmful and was then considered harmful both to the consumer as well as to the society at large. In order to deter the consumption of these products, excise duty was introduced. So the high prices and the high taxes introduced was ideally to catch and deter people from consuming these ones, so that even for the people who are consuming, they can take on that cost to society. Ideally, that’s the main reason excise duty was brought about. 

But now, looking at where we are at the moment, it’s no longer the case. Currently, excise duty has really been expanded and we’ve seen the government use it as a revenue mobilisation tool.

That’s one. Again, we’ve even seen the government use it as a protective measure by imposing excise duty on certain imported products. If I look at, let’s say, the service industry, currently there’s quite a number of services that are excisable, the likes of financial services, the likes of telecommunication. When you talk of the entire financial industry, it’s all excisable.

Looking at the purview of excise duty, it’s really been expanded over and above the alcoholic products. So we have imported food products now subject to excise duty. We do have betting,  gaming and lotteries now fully subject to excise duty. So the purview of excise duty has really been expanded, the reason being just to ensure that the government gets its revenue.

Titus Mukora

You spoke about financial transactions, and I just wanted to ask you a question on this one because in every Finance Act, there seem to be some changes to the financial transactions and excise duty being applicable, not being applicable, new definitions, expansion of definitions… 

Why so much focus on financial transactions? 

Gideon Rotich

Ideally the main reason why the government’s really focusing on … maybe I’ll give two reasons.

Number one is the structure of the Kenyan economy. When you look at the Kenyan economy ever since independence, we’ve mainly been a manufacturing economy. But over the past few years we’ve changed and we are now a service-oriented economy. If you look at Kenya, it’s now a financial hub. Nairobi is a financial hub. We have the Nairobi reporting city.

So it’s a financial hub. We are now hosting so many regional organisations servicing both East Africa all the way up to Central Africa. That’s number one. When you look at the service industry, it’s really expanding — and I believe that’s one of the reasons the government thought it fit that yes, we can expand the purview of excise duty through the financial services.

Again, still looking at that one, when you look at the financial services industry in Kenya and the entire telco industry, Kenya has been ahead in terms of being innovative. So year in, year out, there’s so many innovations that come through. I believe the innovativeness of the Kenyan people, the structure of the economy — now moving from manufacturing back to service oriented — I believe that’s what has given the policymakers the go-ahead to really try and pursue excise duty from that front.

Titus Mukora

And any changes in this Finance Act on excise duties for financial transactions? 

Gideon Rotich

Yeah, there are quite a number of changes. I will just say one that is really refreshing is a reduction of excise duty. We’ve seen a reduction of excise duty from 20% to 15% on fees charged for money transfer services by banks and financial institutions.

This is really a very, very good move. Ideally, when you reduce from 20% to 15%, I believe that every other citizen will notice in terms of the reduction of the fees that they’re being charged. And again, I believe this one is just from financial inclusiveness. The government is really trying to ensure that most of the citizens, or all the citizens, are part of the economy. As part of the financial inclusiveness, there was that need to reduce the excise duty on mobile money transfer. 

Then the other one that is really welcome was on internet and data services. Again, there was a reduction from 20% to 15%. So mobile data should now be reduced. Ideally what that means is it gives most Kenyans accessibility to the internet. When you can access the internet, you open up, you can do so many other things. As part of the government’s digitization agenda, I think that was a very good move in terms of reducing the excise duty.

Titus Mukora

Do you think these reductions in rates will hold? In the sense that we’re not going to see in the next Finance Act, the rates going back up.

Gideon Rotich

We’ve seen quite a number of changes, as you mentioned. These rates started at 10%, 12%, 15%, 20%. So even in the same Act there was a slight increase from 12% to 15% on fees charged by mobile companies. So that one from 12% to 15%.

And ideally, the main reason as to why the government moved it to 15% was to rationalise all the rates within the financial industry. I do believe that within the foreseeable period the rates should remain at 15%. And hopefully, when they do enact the National Tax Policy, giving us perhaps a lifeline as to when taxes can be amended.

So I do believe maybe within the next few years it should remain at 15%. 

Titus Mukora

I’m definitely looking forward to the National Tax Policy. Now, there were some other changes in the excise tax. I know there was a change on the annual inflation, which I think a lot of people are quite happy — manufacturers quite happy — about. Maybe take us through a rundown of some of these other important changes that were there in the Excise Act.

Gideon Rotich

On the annual inflation, it was really a welcome move. If you notice, most manufacturers are really happy because of that one. Ideally the previous law — because it’s now previous — empowered the Commissioner to adjust rates of excise duty on various products annually. The Commissioner had the discretion to adjust rates, over and above that one, through the Finance Act. Rates were always being changed.

So you will find maybe the rates of certain excisable products were increased via the Finance Act. Over and above that one, the Commissioner also adjusted the rate — so you’ll find that rates were adjusted twice, which was really unfair and very punitive. By deleting this provision, it really gives reprieve and certainty in terms of: manufacturers are fully aware that they can only adjust their rates via the Finance Act.

There’s really that certainty that any rate adjustment by the Commissioner is only done through either the Finance Act or, if there’s any other statute, miscellaneous fees, but not through the Commissioner’s discretion. The other advantage is that when it goes through the entire Finance Act, it goes through the entire public participation, goes through the entire parliamentary process, unlike currently when the Commissioner will just publish the rates in the Legal and Gazette Notice. 

Titus Mukora

Excellent. And we will continue to see, I’m guessing, excise tax being an important catch-all tax. Is that your expectation, that excise tax will continue being that, sort of, catch-all tax that is then being applied to any and every sort of business?

Is that our expectation if you were to look forward to the Finance Act 2024?

Gideon Rotich

Yes, there’s that expectation that government will continue using excise tax, like the financial industry that I talked about. When you look at VAT, most of the financial services are exempt from VAT. But now, coming to excise, they’re now chargeable to excise. I believe the government is trying to balance: if you’re not getting revenue through VAT, get it through excise.

So I believe if there’s any product that is not really ‘VATable’, you might see it being brought into the purview of excise duty. 

Titus Mukora

There’s nowhere to hide. [Laughs]

Gideon Rotich

There’s nowhere to hide. And everybody has to pay. [Laughs]

Titus Mukora

Excellent. Gideon, this has been a really interesting discussion, just clarifying to me a couple of things. Looking forward to seeing you again. I hope you’ll come back and talk to us more on indirect taxes. 

Gideon Rotich

Happy to be back to the city. 

Titus Mukora

Thank you. 

Gideon Rotich

Thank you.