Watchdog fights KRA bid to fix alcohol prices

The taxman has warned distillers selling spirits at below Sh150 of punishment. FILE PHOTO | NMG 

By EDWIN OKOTH
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Summary

• KRA has ordered minimum price of spirits at Sh150 to boost excise duty.
• The taxman has warned distillers selling spirits at below Sh150 of punishments that include withdrawing their operating licences and impounding their products.
• KRA has issued a seven-day notice for compliance with the minimum price order.

The competition watchdog has come out against Kenya Revenue Authority (KRA) plans to fix the minimum price of alcohol, saying the taxman’s order is illegal.

KRA has ordered distillers not to sell alcoholic spirits in 250 millilitre containers at below Sh150, forcing manufacturers of drinks targeted at the low-end market to increase their prices. The taxman reckons that retailers selling the 250 millilitre spirit at below Sh150 are tax cheats and that production expenses and duty cost do permit alcohol to be sold at below the KRA price.

However, the Competition Authority of Kenya (CAK) has sought clarity over the KRA order, pointing out that it could breach sections of the antitrust law that bars the setting of binding prices.

“We are aware about it (price setting order) and we have written to KRA to set up a meeting so as to appreciate where they are coming from,” CAK Director-General Wangómbe Kariuki told the Business Daily in an interview without giving details.

The KRA order looks set to hit hard price-sensitive consumers, some of whom are switching drinks following a proliferation of cheaper spirits like Moonwalker, Jambo Extra and Dallas.

The taxman has warned distillers selling spirits at below Sh150 of punishments that include withdrawing their operating licences and impounding their products.

“Based on our review, products in the market with a selling price below Sh150 per bottle of 250ml at 40 percent v/v are considered non-compliant in tax based on the minimum cost structure,” KRA says in a letter addressed to one of the distillers and seen by the Business Daily.

“We request your company to adjust the prices in the current and subsequent tax returns to reflect the correct price benchmark for the alcoholic beverage sector for tax purposes.”

KRA has issued a seven-day notice for compliance with the minimum price order.

“KRA intends to commence mop up of all products sold below the benchmark prices and sanctions imposed on the affected excise manufactures,” said the taxman’s notice to the distillers. “The mop up will start after seven days from the date of this letter,” added KRA in reference to the order sent in late October. Spirits are taxed at Sh221.24 per litre or Sh55.31 for the 250 millilitre product—which is the minimum package allowed in the Kenyan market. The tax has nearly doubled from Sh120 in 2014, cementing Kenya’s position of having one of the highest rates of tax on alcohol on the continent.

Tusker lager has a recommended retail price of Sh180 per bottle and Sh55.31 goes to the taxman directly as excise duty. Tax on beer has increased from Sh32.50 per bottle in 2014.

The rising cost of beer and spirits has pushed cash-strapped Kenyans to cheaper alcohol, including some that are considered illicit drinks. Senator Keg, a low-priced lager made from locally grown sorghum, has been one of the fastest growing brands for East African Breweries Limited (EABL) in recent years due to huge demand from price-sensitive consumers.

KRA says setting of the minimum spirits prices will “level the playing field” for dealers, arguing that cheap liquor has disadvantaged some players like EABL in a market where price is a market share driver, especially in the low income segment.

KRA Commissioner for Domestic Taxes Elizabeth Meyo said the move to set the minimum price would boost tax revenues, adding that it will help the authority clamp down on tax cheats. Excise duty collection from alcohol dropped to Sh54.6 billion in the year to June, from Sh55.4 billion in a similar period in 2016.

“As part of compliance monitoring, KRA monitors the prices in the market and any persons putting products in the market that fall below the minimum cost structure are normally targeted for compliance checks,” Ms Meyo said in an interview.

“We derive the minimum cost structure from the analysis of the cost of inputs required for the production of a unit of alcohol.”

The competition watchdog is expressing concerns over KRA setting a binding minimum price of Sh150 and the threat to impound products selling below the price. The watchdog is hinging its concerns on the restrictive trade clause, which bars the setting of binding prices.

“Restrictive trade practice which directly or indirectly fixes purchase or selling prices or any other trading conditions in Kenya, or a part of Kenya, are prohibited, unless they are exempt in accordance with the provisions of Section D of this Part,” reads Section 21(1((a) of the law. Part D allows the manufacturers to recommend non-binding retail prices.

CAK in 2016 fined British multinational SABMiller Sh2.4 million for engaging in restrictive trade practices by setting minimum prices for its products.

Crown Beverages, which is 80 percent owned by SABMiller and sells Redds, Castle, Nile Special, Peroni and Miller as well as Keringet mineral water-- had attempted to set the minimum prices for its products.