Livelihoods at stake in Keroche’s tough call to raise Sh500m

Few days remain to the lapse of the one month notice given to Keroche Breweries by a court to pay Sh500 million to Kenya Revenue Authority.

But as the clock ticks to the Thursday April 16 deadline, the company will be fighting for its life and the livelihood of its 350 employees amid a tough economic environment caused by coronavirus pandemic.

Due to the virus, the government has closed all bars, dealing a major blow to alcohol manufacturers whose businesses have been hit by the closure.

It will be interesting to watch if the company, which had earlier indicated it does not have cash to pay the original Sh9.1 billion claim, will be able to raise the cash by Thursday under the prevailing tough economic conditions.

“Because of the coronavirus pandemic, we are suffering. You can see bars have been closed. So, looking at things from the business perspective, we cannot meet that deadline,” Keroche’s CEO, Tabitha Karanja, said last week.

“We need to go to court to prove that we do not owe KRA this amount of money but courts have scaled down operations,” she added.

In papers filed in court, Keroche is raising the alarm and warning that the threats and demands might signal the end of the company, which “has been the champion of local entrepreneurship and resilience.”

The Naivasha-based brewery believes the sustained battle is intended to drive the beverage maker from the market and render more than 300 employees jobless.

The company has accused the taxman of reclassification of its products, backdating of uncollected taxes and change of formula, all in a bid to squeeze more from them.

Ms Karanja, said the company which has been in existence for 23 years has gained and solidified a reputation as a champion of local entrepreneurship.

From a start-up investment of Sh500,000 made in 1997, Keroche now stands as a state-of-the-art brewing facility valued at Sh8.5 billion with a capacity to produce 1.1 million hectolitres of beer and Sh1 billion facility to produce wines and spirits.

KRA issued agency notices to Keroche’s bankers but they were lifted, pending the hearing of the case by the High Court.

Keroche is no stranger to KRA battles. Some 14 years ago, the company won a ten-year battle with KRA after the court quashed a demand for assessments on income tax, excise duty and withholding tax amounting to Sh1.1 billion.

But KRA appealed against the decision accusing the court of failing to take into account the existence of an appeal mechanism where the merits of the case could be canvassed.

Immediately after the Court of Appeal ruling, KRA sent new assessments to Keroche of Sh1.1 billion payable within 14 days and with the option of appealing the assessment as provided for and in accordance with section 52 of the Tax Procedures Act, 2015 within thirty (30) days as provided under section 13 of the Tax Appeals Tribunal Act, 2013.

But Keroche claims the Appeals Court on February 3, 2017 barred KRA from reclassifying Keroche’s Viena fortified wines from HS code tariff 22.04 to HS code 22.06. In addition, the Court of Appeal ordered KRA to issue reasonable notice(s) accompanied by supporting documents.

In Keroche’s opinion, 11 years down the line could not be considered reasonable notice.

Unsatisfied with the KRA’s assessment of Sh1.1 billion despite the court’s decision, Keroche took the matter to the tax appeals tribunal (TAT).

The taxes in dispute in the six appeals at the TAT were Sh1.19 billion relating to the HS code for fortified wines, and Sh7.9 billion regarding to Viena Ice Ready to Drink Vodka.

The TAT, held that Keroche pays excise on the Viena fortified wine based on HS code 22.06.

The TAT also ruled that Keroche was involved in the compounding of spirit, which amounts to manufacture within the meaning of the Excise Duty Act, 2015 and Customs and Excise Act.

TAT ruled that as such Viena Ice Ready to Drink Vodka was a distinct product for which excise duty and VAT were payable less the taxes already paid on the Crescent Vodka.

Mrs Karanja has maintained that the extra duty levied on added water to Crescent vodka to make the Viena Ice Ready to Drink Vodka is punitive, unfair and not good for business.

She said being a pioneer in the Kenyan low-end alcoholic beverage market, the company in 2007, came up with an alternative for moderate drinking, a ready-to-drink vodka derived from the existing Crescent Vodka. That is, 188ml crescent vodka plus 312ml naturally distilled water to make 500ml viena ice ready to drink vodka.

The only difference was that Keroche used naturally distilled water and mixes to precision for moderate drinking.

But seven years later, on August 20, 2014, KRA disputed the formula of the Viena Ice, ready-to-drink vodka. The taxman said that the vodka would attract Sh101.2 tax per litre.

The company questioned and disputed the logic used saying the drink would now attract higher taxes than even the most expensive vodkas and whiskies known worldwide.

KRA later sent Keroche backdated assessments demanding Sh6.1 billion (on the water used to dilute the Crescent Vodka to make Viena Ice Ready to Drink Vodka), an amount that has since ballooned.

Documents filed in court showed that the company has been embroiled in several disputes with KRA, most of which have been resolved through alternative dispute resolution.

But the Viena ice Ready to Drink Vodka dispute has remained unresolved because the parties failed to agree on interpretations on the rules of classification.

And as the dispute was pending, the brewer said KRA between June 2007 — June 2019 supported the Viena Ice ready-to-drink innovation through issuance of stamps, monitoring production on a daily basis through the EGMS system, and collecting tax on a monthly basis.

Keroche wondered why the KRA would backtrack after 12 years of legitimate expectations by rejecting the formula in use, forcing adoption of a new formula, make demands on the new formula/new rate, and, backdate the demands.

In June last year, KRA withdrew from the arrangement and demanded that Keroche applies the new rate.

Mr Francis Muiruri, a KRA official, said in a sworn statement that the demand for Keroche to pay the amount was not a fresh assessment. He said the company was all aware of the tax liability, since the case was pending before the tax appeal tribunal.

And after the TAT delivered its judgment on March 9, KRA was free to recover the taxes.

Fortified wines are alcoholic drinks that have a distilled spirit added to them. The taxman argues that the fortified wine products list is reserved for grape-based drinks, while Viena Ice is made from fermented pineapples.

Ms Karanja said KRA has made several demands for a cumulative payment of Sh23 billion from the company. He argued that there is a baffling logic in KRA’s decisions that have terminated two successful products by Keroche Breweries.