In Busia town the difference between a cold and a warm beer is as high as Sh170.
You have the option to buy three warm beers of the same brand or drink just one bottle of a cold one, thanks to the huge taxation difference for alcoholic beverages between the two neighbouring countries.
Bar owners who have resorted to smuggling cheaper beer from Uganda cannot keep them in refrigerators, where enforcement agencies would find them during crackdowns, hence the relationship between temperature of the drinks and their prices.
The warm beer is definitely from Uganda and retails at between Sh80 and Sh100 while the cold one is Kenyan and will attract between Sh200 and Sh250 in shopping centres spread along the border from Busia to Malaba.
Why is beer so cheap in Uganda?
For one litre of beer, the Uganda Revenue Authority taxes anything between Sh18 and Sh51 (in Kenya shillings) depending on the content. That essentially means that save for the bottle, beer from Uganda could be retailing for as little as Sh9.
In Kenya, tax on beer has almost doubled in the past five years, according to data from the Kenya Revenue Authority, with the latest figure at Sh110.62 for every litre. A bottle would, therefore, comprise up to Sh55 in excise taxes only, more than seven times the Ugandan rate if you add the 16 per cent Value Added Tax.
It is KRA’s hunger for revenue that now drives hundreds of thirsty revellers across to Uganda and other border areas to partake of cheaper alcohol or smuggle it to the Kenyan side, a move that is giving local brewers and border-based law enforcement agencies sleepless nights. Bar owners have also been left with no option but to buy from Uganda to stay in business. In the little town of Adungosi on the newly built Busia-Malaba road, we find a bar located on the left side of the road and metres away from Uganda with various smuggling routes frequented by motorcycles just behind the yellow building.
Wide taxation gulf
The bar owner, only identified as James, confessed to Smart Company that about 90 per cent of his stock comes from Uganda in order to keep the customer in Kenya from straying across the border.
“We only stock a few bottles of Kenyan beer in the fridges for formality but all bars here sell beer from Uganda. If I don’t sell at the same rate as it is sold the other side of the border, I will lose all these customers. I have children to educate and I will not just close my business and watch others continue,” James said.
It is not just alcohol. The trek across to Uganda is so rampant that people cross to buy sugar, chickens and clothes or to access services including gyms.
The two East African neighbours have such a wide taxation gulf that though Uganda is landlocked and imports its goods through Kenya, where it is transported around 1,000 kilometres to reach the border, it is still cheaper to buy goods from there.
The border towns on the Uganda side rely on Kenyans economically and a walk across in the evening reveals just that. Most bars have vehicles with Kenyan registration plates parked outside and Kenyan mobile money transfer services dominate the shops, including till numbers that will enable you to buy using M-Pesa.
Sellers prefer to use Kenya shillings and life is more Kenyan than Ugandan in terms of business as money flows from the Kenyan side with people fleeing high taxation.
Cheap goods from Uganda have been finding their way into the Kenyan market through the largely unmanned porous border points lined up along the Busia-Malaba stretch.
In fact, just metres away from the designated crossing point, a narrow earth road winds through an open market and a dumpsite on to the Uganda side. Trucks are often parked and offloaded even in broad daylight near the famous Hotel Itoya.
The goods are then transferred into smaller trucks and vans to be taken further into the country to towns as far away as Meru and Voi. While some can clearly be identified, others that have been imported can easily mingle with those that have been heavily taxed in Kenya, creating unfair competition in the market and denying Kenya billions of shillings in unpaid tax.
KRA is, however, not worried that the tax difference especially on beer is working in favour of Uganda. The taxman insists its machineries are sharp enough to enforce the high taxation with the yields from excise tax, which is mainly levied on alcohol, having grown over time to Sh54.7 billion in the year to June 2019.
KRA Commissioner for Domestic Taxes Elizabeth Meyo told Smart Company that the taxman had received a boost from other government agencies to enforce order control and tame the influx of cheaper products from outside the country from being smuggled at the disadvantage of local ones.
Robust border controls?
“When Kenya sets its tax rates, it takes into consideration all factors necessary for successful implementation of the law including enforcement frameworks required to deter abuse of the law. To this end, KRA is working with a multi-agency framework and has established comprehensive border control in customs and an enforcement function within the domestic market,” Ms Meyo said.
A spot check on the border presents a completely different picture from the robust border control as the KRA boss may want to portray it. In fact, owners of bars have either been forced to close, open branches on the other side of the border or simply smuggle the beer to sell at the lower rate on the Kenyan side.
Last month, a multi-agency team from the Kenya Revenue Authority, Anti-Counterfeit Agency and Kenya Association of Manufacturers held a one-day conference in the border town where the real challenges of addressing the situation were laid bare.
The authorities were finding it hard to dissuade consumers from buying cheaper goods, with some of the enforcement officers confessing to being consumers of the same drinks across the border.
Traders who are eyeing the margin were also not easy to convince to buy from Kenya or import formally and be taxed heavily, a situation that has created a thriving smuggling economy.
So rampant is the smuggling that Busia County Commissioner Jacob Narengo has dedicated a team comprising security officers who conduct a weekly raid on pubs in the area that stock cheap alcohol from Uganda to tame the illicit trade on the Kenyan side of the border. The raids have also become too predictable and the smuggling cartels have standing armies in some areas where no one can dare approach.
“In some areas like Marachi, you cannot enforce anything and we have been met with hostility before despite going there with four vehicles full of police officers,” KRA Regional Surveillance officer Vincent Kimosop told the illicit trade conference.
The situation is even worsened by lack of harmony in quality standards between the two countries. While Kenya banned the packaging of liquor in sachets back in 2005, Uganda allowed the packaging until recently. Liquor is also sold in any regular shop across the border, unlike in Kenya where one requires several licences, including some from the county governments, to run a pub.
The liquor from Uganda now comes in plastic bottles, with some packaged in as little as 205-millilitre containers and sold for as low as Sh50. KRA is now proposing to set the Kenyan minimum prices for the spirits at Sh150, a move that will play into the hands of the smuggling cartels, unless there is watertight border monitoring.
The setting of minimum prices, which goes against Kenya’s competition laws, is expected to level the playing field for distilleries, according to KRA, which believes one cannot manufacture and sell the 250ml bottles of spirits unless they have evaded tax.
Although KRA insists that its excise tax collection has been on the rise despite the differentials in the tax rates within the East African Community, Kenya could still collect more tax had there been a significant reduction in the smuggling of beer, spirits and wine through the porous borders.
The drinks spread as far as Nairobi and are popular in slums and rural areas.
Excise tax, which also includes that on mobile cellular phone services, fees charged for money transfers as well as cosmetics and soft drinks, rose from Sh38.2 billion in 2014 to the Sh54.7 billion last year. The amount is still lower compared with the Sh55.5 billion collected in 2016, which dropped to Sh53 billion in 2017.