Taxman targets distributors in renewed illicit drinks war

Sunday February 18 2018

A police officer scrutinises alcohol seized from a home in Murang’a during a past crackdown. photo | Martin Mwaura | nmg

The taxman is seeking tighter controls over operations of distributors of alcoholic beverages in the wake of concerns about rising sale of illicit liquor, denying the country billions of shillings in potential tax revenue.

The Kenya Revenue Authority says it has finalised draft amendments to the Alcoholic Drinks Control Act which will give it some powers in the process of licensing distributors – a function currently in the hands of 47 regional governments.

“Inter-government agencies consultations have been concluded on draft miscellaneous amendment on Control of Alcohol. The law is due for presentation to the Cabinet and the National Assembly,” Commissioner of Domestic Taxes Benson Korongo told the Sunday Nation. 

Insiders say cartels have infiltrated the high-end alcohol market with counterfeit liquor that comes disguised as foreign brands.

The cabals, which largely target the spirits segment, have also penetrated some of licenced liquor manufacturing factories where they process substandard drinks and distribute them using own fake excise stamps, undercutting genuine distillers.

Production of spirits outside Electronic Goods Management System (EGMS), even at the KRA-licensed plants, has been on the rise since mid-last year, according to a section of distillers.


READ: KRA loses Sh7.3bn to fake stamps, goods

Mr Korongo said one of the licensed companies was “undergoing prosecution for offences relating to illicit spirit”, without disclosing its identity.

“In order to eliminate the use of licensed facilities in the production of illicit alcohol, KRA has put in place a stringent control and monitoring system,” he said.

KRA in September 2016 introduced new generation excise stamps for wines, spirits, tobacco, and beer whose features allows distributors to verify genuine products using smartphones through an app dubbed “Soma Label”.

The taxman has, however, been accused of concentrating on big players, while smaller firms allegedly continue to engage in undeclared production of spirits at their licensed plants, thus evading the hefty on alcohol industry.

One of the leading spirits distillers on January 16 this year provided a list of 18 firms, 14 of which have been cleared by KRA in the latest notice, alleged to be selling 205 and 250 millilitres of some of their gin, vodka and brandy products to distributors at between Sh70 and Sh75.

We could not, however, disclose the companies since we could not independently establish the distributor prices for the brands alleged to be sold at undercut prices.

The firm’s official, who did not want to go public due to sensitivity of the matter and referred us to Alcoholic Beverages Association of Kenya (ABAK), said it was impossible to sell at those prices.

He cited the Sh200 excise duty per litre, the standard 16 per cent Value Added Tax (VAT), Sh2.80 stamp duty and other overheads such as packaging, branding and labour.

“They (KRA) go to a few big companies like ourselves. They don’t check other smaller firms and that’s why these (illicit) brands are coming back,” the official said.

“The trend has been downwards since September last year. Our sales, for example, have gone down by about 45 per cent, and we only have about 200 staff right now out of about 500 employees that we usually have – that’s both permanent and casuals. We have been forced to send some away.”

ABAK – which represents Kenya Breweries Ltd, UDV Kenya Ltd, Africa Spirits Ltd, Wine of the World (WOW) Beverages, London Distillers Kenya, Kenya Wines Agencies, Moonwalk Investments and Distell Winemasters – maintained that half of alcohol consumed in the country is illicit or informally processed.

The lobby insisted the KRA may be losing about Sh30 billion annually to illicit trade in alcohol and counterfeited excise stamps.

The taxman last week Monday reported excise taxes fell by nine per cent, or Sh7.35 billion, in six months through December 2017 compared to Sh81.644 billion in the same period a year earlier, partly blamed on illicit spirits and fake stamps.

That marked the first fall in that period since 2011 when collections fell to Sh37.01 billion from Sh39.52 billion the year before, an analysis of the data kept by the Central Bank of Kenya shows.

“Industry analysts term the performance as unusual given what would otherwise have been a strong season given election-related consumption,” commissioner-general John Njiraini, whose second and final three-year term expires early next month, said.

Alcoholic drinks and cigarettes account for about 90 per cent of income from excise duty, which is also charged on soft drinks, water, cosmetics, food supplements and polythene bags (whose production is only allowed for industrial use since August 2017).

President Uhuru Kenyatta in July 2015 ordered a countrywide crackdown on illicit production of alcohol resulting in reduction of licensed manufacturers of spirits to 21 from 177.

This was after the Inter-Agency Task Force on Control of Potable Spirits and Combat of Illicit Brews, formed by the then Interior secretary, the late Interior secretary Joseph Nkaissery, found 114 licensed firms to be unfit to process spirits for human consumption.

READ: Millions lost as cartels smuggle ethanol using cereals containers

The KRA last week cleared 28 firms to make spirits this year. The revenue agency, ABAK and the taskforce on illicit alcohol, last week Wednesday rolled out a two-week multimillion-shilling sensitisation campaign on how to verify genuine alcoholic drinks using the “Soma Label” app.

Alcohol manufacturers, distributors, retailers and importers as well as the police in 35 hotspot towns are being sensitised on how to verify genuine alcoholic products using smartphones.

Most of low-value spirits from Uganda, some packaged in banned sachets, market insiders said, are widespread in western towns such as Kisumu and Bungoma, and downtown Nairobi streets.

“To ensure a quick response time to reports of illicit products in the market, KRA has devolved its Market Surveillance function to Kisumu and Mombasa,” Mr Korongo said.

“Further devolution of this function will be undertaken in the current financial year.”

Illicit production of spirits is also being helped through smuggling of ethanol – a key raw material – through the Namanga border and Coastal line largely from China and India.