Overtaxing liquor fuels illicit drink trade

Wednesday March 18 2020
By GORDON MUTUGI

Increased circulation and consumption of illicit liquor in Kenya is a serious challenge. Government agencies and manufacturers of genuine liquor have, over the years, confiscated such drinks worth hundreds of millions of shillings, and vendors prosecuted, but it continues.

HEAVILY TAXED

Of all the attributes, none is as widely accepted as that of alcohol being a social lubricant and economic driver. The alcoholic beverages industry employs hundreds of thousands of people directly and many more over the shoulders. It provides jobs and profits and is a wealth creator. In most countries, it is a key taxpayer.

Negative connotations to do with alcohol often lie within the confines of quality and the amounts consumed. Irresponsible drinking is a recipe for social disorder and is a health risk. Checks and balances are necessary.

A key concern on alcohol is illicit brands. Like all that is ingested, alcohol whose quality cannot be measured against strict quality control is a danger to the consumer and a reputation wrecker for manufacturers. There have been reports of death as a result of consumption of illicit alcohol.

The alcoholic industry is one of the most regulated and also heavily taxed. Anything that affects the image of the industry severely affects the sales in the sector, leading to a dip in profitability. It is with this in mind that the sector has been advocating against illicit drinks.

Of the 12,500 alcohol outlets in Nairobi, only 3,900 are regulated. While industry players have met their part of the bargain, the regulators, such as county and national governments, have fallen short of executing their mandate.

BEATS PURPOSE

Alcohol tax should be used to address social justice — offset external costs associated with negative impact of alcohol. But it beats the purpose to heavily tax the sector, increasing the cost of compliance and of doing business, but not addressing the issues for which the taxation was put in place. High taxation raises the cost of entry into the formal sector, especially in the informal settlements.

Illicit liquor means health concerns for the consumers, loss of excise duty and ballooning health expenses. For industry players, it means loss of business, revenue and jobs.

The drinks are mostly smuggled in. Some are counterfeits and others parallel imports, infringing on the distributors’ rights. Others use fake stamps to get original alcohol into the market.

The trade is driven by pricing gaps between illicit and legal drinks; the former are cheaper and have a higher profit margin. Price wars in the industry, a complex regulatory and compliance environment and enforcement pitfalls contribute to the illicit liquor trade.

There is a need for a collaborative enforcement of rules and regulations on dealing with illicit liquor, address the multiplicity of conflict by the enforcers and the executors and seal tax stamp leaks.

But perhaps one of the best ways to fight illicit liquor is by giving tax incentives to dealers to make alcoholic products affordable and illicit liquor shunned. Illicit liquor hurts more than the liver.

Mr Mutugi is the chairman, Alcoholic Beverages Association of Kenya (ABAK). [email protected]