Reduce duty, BAT urges State

British American Tobacco, wants the government to reduce excise duty on cigarettes to lock out illicit traders from the local market. The pitch for lower taxes by the largest cigarette manufacturer comes several weeks ahead of the budget that is traditionally read in June.

Related Downloads

• Stocks Download

The government mostly targets the sin taxes that include cigarettes and alcohol during the budget to raise revenue. However, speaking during the company’s annual general meeting at the Intercontinental hotel on Thursday, the CEO Gary Fagan said the excise duty had increased to unsustainable levels, making the product unaffordable to the low-end market while opening ground for illicit cigarettes to find their way into the local market.

“The government needs to understand that excessive excise tax increases will lead to a decline of the legal market and provide incentive for illicit trade (tax evasion and smuggling) to grow,” said Mr Fagan. He said an estimated 12 per cent of cigarettes in the market was illicit, which denied the government revenue and undermined legal businesses.

Not sustainable

Mr Fagan said the company had experienced a compounded excise increase of more than 60 per cent in the last 12 months which, he said, was not sustainable. The company is the fourth largest taxpayer in the country having paid Sh7.9 billion as taxes last year. The experience in other parts of the world, he said, indicated that when excise tax rates are continuously increased, illicit trade grows as consumers turn to cheaper, smuggled and counterfeit products.

He called for simple tax structure based on popular price, which would reduce the tiers from four to two - providing excise categories for soft cups and hinge-lid products. The company’s profit before tax increased by 18 per cent to Sh2.4 billion, which the CEO attributed to the sales mix and improvement in production systems.

Mr Fagan said the 31 per cent average increase in their products had impacted on the company’s profitability while driving up the cost of cigarettes. He said the Nairobi plant, that is one of the company’s manufacturing hubs for Africa and Middle East, will be improved to produce 20 billion sticks by 2012.

The export market expanded by 2 per cent to 65 per cent in 2008, with the plant undertaking contract manufacturing for 16 countries.