Alcohol makers beat retreat on taxman’s excise stamps

Tuesday October 11 2016

Residents of Nyahururu in Laikipia County destroy alcohol: The East African Breweries Limited (EABL) and the Kenya Wines Agencies Limited (Kwal) have now embraced the taxman’s move. FILE PHOTO | STEVE NJUGUNA | NATION MEDIA GROUP

Residents of Nyahururu in Laikipia County destroy alcohol: The East African Breweries Limited (EABL) and the Kenya Wines Agencies Limited (Kwal) have now embraced the taxman’s move. FILE PHOTO | STEVE NJUGUNA | NATION MEDIA GROUP 

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Alcoholic beverage makers have now endorsed the new generation excise stamps for wines, spirits, tobacco and beer despite a procurement row surrounding its acquirement and initial opposition by bottlers.

Use of the stamps is one way that the Treasury is counting on to seal tax leakages.

The East African Breweries Limited (EABL) and the Kenya Wines Agencies Limited (Kwal) have now embraced the taxman’s move.

On Friday, the Kenya Wines Agencies Limited (Kwal) said the new  system would help deal a blow to counterfeiters.

“The mobile app platform, which is part of the EGMS enables the industry to ascertain authenticity of alcoholic beverages, which helps weed out parallel importers and counterfeiters,” said Kwal communications manager Gordon Mutugi, who is also the chairman of the Alcoholic Beverage Association of Kenya (Abak).

The group draws its membership from Africa Spirits Ltd, Kenya Breweries, United Distillers and Vintners (UDV) Kenya, Kenya Wines Agency, Wines of the World and Keroche Industries.

“Our priority is to protect our consumers for whom our business exists and this mobile app is one such initiative, which enables them to verify genuine products,” Mr Mutugi said.

“We support legislation and government initiatives that are aimed at standardising the industry.”

EABL said: “We have submitted our views on the various options available and we trust that the government will adopt measures which do not impose an incremental financial burden to manufacturers and consumers, and in turn undermine the stated objective of securing tax revenue and combating illicit trade.”

KRA records indicate that excise revenue grew by 28 per cent in 2015/16 compared to the previous period, while domestic excise revenue from products controlled under EGMS system jumped 43 per cent.

The Kenya Revenue Authority (KRA) introduced the new generation excise stamps for wines, spirits, tobacco, and beer. The stamps allow consumers to verify a product using smartphones.

“The use of the new excise stamps using a smartphone app will further enable consumers to verify that the products are genuine hence guaranteeing their safety,” KRA commissioner for domestic taxes Benson Korongo said last month.

“Following the strong revenue performance of the products managed under EGMS, the authority is in advanced consultations with relevant stakeholders for the rollout of the system on the remaining excisable goods” he said.

EABL, which had been reported to be in opposition to the Excisable Goods Management System (EGMS), arguing that it has imposed unnecessary cost burden on its business has now turned round to endorse it.

“We support the various initiatives by the KRA and the government to combat illicit trade in alcoholic beverages,” says EABL in a statement on Friday.

The excise stamps have a quick response code (QR code) that will enable distributors, retailers and consumers use an app on their smartphones to verify the authenticity of the products being bought.

The taxman, however, said the old generation paper stamps on wines, cigarettes, beers and spirits will continue to be in use in the meantime until all products on which they have been affixed on are consumed.

The new stamps are part of KRA’s wider scheme to ride on electronic goods management system to combat illicit trade, seal revenue leakages and boost collection.

A section of companies including soft drinks maker Coca-Cola had opposed the system and even threatened to close shop and relocate its manufacturing plants to neighbouring countries if the taxman insisted on implementing the Sh17.7 billion platform.

Coca-Cola said its opposition is hinged on the fact that the system would force it to part with between Sh8 billion and Sh11 billion annually based on the Sh1.50 stamp duty it is meant to impose on every bottle of water, juice and soda.

Coca-Cola estimates that it would require up to Sh1.4 billion to modify its production lines in Kenya besides the huge annual costs involved.

“We have not piloted the EGMS, but our analysis shows Sh1.4 billion will be needed to install the system across the 13 production lines,” said Ms Selena Achieng Olende, Coca-Cola public affairs and communications manager at Nairobi Bottlers Ltd.

EABL had earlier said it started using the EGMS on February 2 when the law requiring all beers to bear e-tax stamps came into effect.

The beer maker had told Parliament it spent more than Sh400 million to install the EGMS system but has been experiencing “a lot of down time arising from frequent machine failures.”

The KRA missed its 2015/2016 financial year target by Sh6.5 billion, booking a total tax collection of Sh1.210 trillion against a target of Sh1.217 trillion.

The taxman reckons that smartphone use would enable manufacturers, distributors, retailers and consumers verify and trace all excisable goods throughout the distribution chain. This would in turn help boost revenue collection.

The new generation stamps system is, however, at the centre of controversy with legislators raising a number of issues.

KRA is currently facing the Public Investments Committee, which is accusing the authority of engaging in direct procurement of the EGMS from SICPA Security Solutions SA, an international security systems provider.

The National Assembly’s Public Investments Committee has heard that SICPA Solutions SA Ltd, the firm in the eye of the storm, was awarded the contract three years before it was cleared to do business in Kenya.

The validity of a tax management systems contract that the Kenya Revenue Authority awarded the Swiss firm was thrown into a spin last month after a procurement oversight agency told Parliament that it was based on fraudulent documents.

The Public Procurement Oversight Authority (PPOA) told MPs that KRA awarded SICPA Solutions the Excisable Goods Management Systems (EGMS) contract in May 9, 2010, long before the company was registered on May 9, 2013.

Mr Maurice Juma, the PPOA director-general said then that in an ideal situation where such vital information surfaces after the award of a contract, the tender should be subjected to debarment proceedings.

“Under the procurement law, the contract was processed through fraudulent means and it cannot be sustained,” Mr Juma told Parliament. PPOA is the government agency responsible for regulation of procurement systems.

KRA is also on the spot for single sourcing the Sh17.7 billion e-tax job to SICPA, which has been accused of corrupting tax agencies in Brazil, Albania, Morocco and the Philippines.

The committee is investigating a clause in the tender documents that requires companies manufacturing excisable goods to pay SICPA Sh1.50 for every stamp attached to each item – earning the Swiss firm billions of shillings every year.

Previously, the taxman targeted large consumers such as supermarkets and hotel chains for enforcement of EGMS. But the law has since changed and transferred the burden to manufacturers and importers of the products.

KRA and SICPA Solutions SA originally signed the e-tax contract in December 2012 at a cost that was later renegotiated and increased after a June 2013 legal notice that expanded the scope of goods that would be required to use it.

The five-year contract that started on April 18, 2013 was worth Euros 20,341,464 (approximately Sh4.8 billion) and was originally to provide 3.55 billion stamps a year.

It was initially intended to produce excise stamps for tobacco products, wines and spirits but the Treasury, through a legal notice number 110 of June 2013 increased the scope to cover beer, bottled water and soft drinks.

This saw an upward adjustment of the contract to Euros 158,213,898 (Sh17.7 billion at current exchange rates) for 12.87 billion stamps.

Mr Juma said he was not privy to information on how the money collected under the EGMS is shared between KRA and SIPCA.