The Keroche-KRA tussle: What it is and what it isn’t

So what has made the Keroche Breweries-Kenya Revenue Authority tax dispute become almost toxic and a subject that has severely divided public opinion?

Reclassification of existing products to higher tax brackets and backdating the taxes that were never collected.

Two critical offices give approval when one introduces a new product -Kenya Bureau of Standards (Kebs) approves quality and determines product category, while Kenya Revenue Authority (KRA) decides the tax rate.

PREDICTABLE PROCESS

This is supposed to be a simple predictable process.

In March 1997, Kebs approved Viena Fortified Wine. On June 4, 1997, KRA gave it a classification – Tariff HS Code 22.04 or 45 per cent of ex-factory value as the excise duty. This was reconfirmed on April 27, 1998.

Kenyans embraced the quality, cost friendly Viena Fortified Wine. It brought more Kenyans to the drinking tax bracket and KRA tax collections surged. Everyone was happy. In fact, by June 2006, Keroche was due for a tax refund of Sh84 million.

However, in November 2006, KRA disrupted this arrangement. The taxman wrote to Keroche stating they had made a mistake by classifying Viena Fortified Wine under Tariff HS Code 22.04, and, a decision had been made to re classify the product to a higher Tariff HS Code 22.06 or 60 per cent of ex-factory value as excise duty.

KRA backdated the new 22.06 Tariff for five years to recover their “error” amounting to Sh1.2 billion (the difference between the initial tariff and new tariff) with full knowledge that Keroche had never collected this money from the public.

HIGH COURT

The High Court quashed the KRA’s notice ruling: “The classification of the products had a direct bearing on the price Keroche was selling its products and applying a different classification years later is unfair, oppressive, irrational unreasonable and constitutes abuse of power and authority aimed at aiding Keroche’s competitors”.

However, Keroche’s victory was short lived. The 2007/2008 Finance Bill forced the change of Viena Fortified Wine classification to a higher Tariff HS Code 22.06 or 60 per cent of ex-factory value. This high taxation killed the product.

KRA appealed the ruling. The court ruled that an appeal could be heard if and when KRA produced new supporting documents with reasonable notices.

On May 10, 2017, KRA sent the same assessment of 2006 that had been quashed by the High Court - and demanded that Keroche pay the Sh1.2 billion within 14 days. Keroche objected and the matter was sent to the Tax Appeals Tribunal. 

SH9.1 BILLION

The matter remained pending till 2019 when Tax Appeals Tribunal (TAT) was constituted. TAT recently ruled in favour of KRA in the much publicised Sh9.1billion decision.

Keroche honoured the 2006 decision that termed KRA’s change of tariff and backdating as “abuse of authority”.

The year 2006 marked the beginning of the false narrative that Keroche owes billions to KRA and “Keroche does not pay Tax. 

In 2007, Keroche Breweries presented a new alternative for moderate drinking, a ready-to-drink vodka derived from our existing Crescent Vodka.

This is similar to what a consumer would do – walk into a bar, buy some tots of Crescent Vodka and mix with water or soda. For illustration, 188ml of Crescent Vodka (40 per cent) is mixed with 312ml of naturally distilled high quality water, which makes 500ml of Viena Ice ready-to-drink Vodka (15 per cent).

Little did we know that seven years later in May 2014, the same 2006 scheme would be replayed.

Keroche Breweries received communication from KRA saying there was “confusion” of the applicable rate of the Viena Ice ready-to-drink Vodka.

VODKA

The new demand directed that water added to our vodka to make Viena Ice ready to drink Vodka and consumed between 2007 to 2014 would now attract Sh119.90 per litre. The assessment was backdated for three years and new demands amounting to Sh6.113 billion issued! 

This is the genesis of the highly publicised new Sh9.1 billion demand. Billions of shillings that only exist on paper.

While we protested the new tax on the water as irrational and punitive, KRA on July 22, 2015 acknowledged that Viena Ice ready-to-drink Vodka met the standards of an innovation.

Their letter was matched by KRA’s consistent support through issuance of stamps and collection of the tax as per the mutually agreed applicable rate.

PUNITIVE RATE

However, in June 2019, KRA withdrew their support for this arrangement with a new letter demanding we either pay for the added water at the punitive new rate (now at Sh210 per litre) or create a product below 10 per cent.

With the current product now priced beyond the target market, we opted to create another Ready to Drink Vodka of less than 10 per cent alcohol. As per our initial fear, this change has left the product on its death bed.

These disruptive reclassifications also explain the 14.4 billion case which we cannot discuss because the matter is currently in court.

This tussle between Keroche and KRA sheds a lot of light on how torturous our 22-year-old journey has been. Even though our faith in the cause of Kenyan entrepreneurship remains unshaken, it is time to voice the question that is being asked across Kenya – how does a local enterprise survive in such a hostile environment?  

The writer is the CEO of Keroche Breweries.