Poor policies impede illicit trade war, puts consumer at risk

Two major seizures of ethanol smuggled into Kenya this year brought to the fore one of the more difficult aspects of the war on illicit trade.

The first was marked by drama: Detectives had seized a truck believed to be loaded with 20,000 litres of ethanol smuggled in through the Namanga border post.

LONG-TERM DAMAGE

Media reports said the truck had been stopped by traffic police at Kitengela and there was a six-hour stand-off as the officers insisted that it could not leave the roadblock.

Eventually, higher authorities in the police deployed officers from the Flying Squad and, after a brief confrontation, the consignment proceeded to the Directorate of Criminal Investigations (DCI) headquarters. Later, workers peeled off a layer of animal feeds from inside the container to reveal up to 80 drums of ethanol worth an estimated Sh1.6 million.

In the other incident, the authorities tracked smuggled ethanol to a manufacturing plant and would eventually discover a whole host of other alleged illegalities that had been taking place there.

Both incidents, and many more intelligence-led operations against manufacturers and importers involved in illicit trade, are proof that the multi-agency task force set up by the government is working.

As the World Anti-Counterfeiting Day was marked Thursday, more needs to be done if the fight against the dangerous trade, especially in alcohol, is to succeed. This was evident at a recent Summit on Illicit Trade organised by the Kenya Association of Manufacturers (KAM).

This is doubly important for Kenya. Illicit trade threatens not only lives — as unverified and possibly unsafe goods enter the market and can cause long-term damage to consumers — but also robs the country of much-needed revenue.

With manufacturing a top priority for the government, smuggling gives illegitimate players an undue advantage and undermines all the government’s efforts to increase the contribution of this sector to the gross domestic product (GDP).

TAX ON ALCOHOL

On ethanol, government officials who attended the summit said neighbouring countries have friendlier policies, which offers a temptation to unscrupulous manufacturers to import it. The policies result in loss of large volumes of alcohol in border areas as smugglers bring in and sell cheap alcohol, hurting legitimate players and denying the government revenue.

The policy gap is likely to grow over the next few days if MPs approve the proposal by the National Treasury Cabinet Secretary to increase excise duty on wines and spirits.

With Uganda and Tanzania not effecting any increase in tax on alcohol, Kenya will have the highest tax rates in the region. But this proposal is dangerously counterproductive: Kenya, the most economically advanced country in the region, also becomes the more lucrative destination for smuggled goods for which duty has not been paid.

In the region, Kenya has the lowest consumption of alcohol per person in a year — 3.4 litres, compared to 9.4 litres in Tanzania and 9.5 litres in Uganda, according to the World Health Organisation (WHO).

More worryingly for Kenya, nearly half, or 1.5 litres, of the alcohol consumed per person in the country in a year is unrecorded and potentially illicit, with the attendant health risk.

Past increases in tax rates have proven disastrous to price-sensitive consumers, those to whom any increase in the price of their favourite drink means they resort to illicit alcohol, with a deleterious effect on society.

INFLATION-ADJUSTED

On a second level, the proposal by the National Treasury brings back a certain measure of uncertainty regarding taxation. There has been a sense of predictability on taxation of alcoholic beverages since the enactment of the Excise Duty Act 2015.

This law introduced inflationary adjustment, where data from the Kenya National Bureau of Statistics would be used to calculate the average inflation for the past year, and that would inform the adjustment of Excise Duty annually.

With the CS’s proposal to increase tax on spirits by 15 per cent, it looked and sounded like the old days, when the price of goods was bound to increase with the reading of the Budget. All this while a premeditated, inflation-adjusted excise tax is expected to kick in for a wider range of alcoholic beverages come July 1.

There is, of course, some time before the Finance Bill 2019 is concluded in Parliament. But, as we continue in the fight against illicit trade to boost the manufacturing sector, it is important for that to be supported by the right policies and for there to be certainty and predictability from policymakers.

Mr Rowlands is the Legal Director at East African Breweries Limited. [email protected]