22 Jun 2012
Last week, the Kenyan Minister of Finance tabled in parliament a budget of Kshs 1.458 trillion (USD 17.2 billion), the largest in the history of this country. Tobacco control advocates had lobbied strongly to have current tax levels raised so as to complement other strategies to reduce tobacco consumption.
The World Health Organization (WHO) recognises tax and price policies as one of the most effective strategies for combating the tobacco epidemic, by reducing demand for tobacco products. Good tobacco tax policies have enormous potential to encourage quitting amongst tobacco users, prevent young people from starting, and simultaneously generate considerable tax revenue.
The International Institute for Legislative Affairs (ILA) in 2011 commissioned a study on the economics of tobacco taxation in Kenya. Amongst other things it sought to determine the responsiveness of tobacco consumption to changes in prices and taxation. The study found that the excise tax system in Kenya has been in a constant state of reform over the years, switching from specific rates to ad valorem rates, back to specific and sometimes a hybrid of both specific and ad valorem.
This constant state of flux has not produced predictable impacts on consumption and revenue. In fact, in many instances it has led to huge revenue losses, suggesting that the design and administration of the excise duties is problematic.
ILA has been lobbying for changes to the taxation system that include: an initial, substantial increase on tobacco taxes for 2011-12 and subsequent regular increases thereafter, and also to have the Ministry of Finance set aside a proportion of taxes earned from tobacco products for tobacco control programmes.
In last week’s budget:
- The minister retained the tax structure that was adopted in the Finance Act 2012. It meets the simplicity principle, and also ensures that all tobacco products are taxed equally, to prevent tobacco users from switching tobacco brands and types due to price differences. The rate of excise duty for cigarettes is Ksh. 1200 per mille or 35 percent of retail selling price
- The minister has authority to adjust taxes for Inflation. This indexing will endure that inflation does not erode the real value of the excise tax.
In order for indexing to succeed, the Ministry of Finance should have a clear principle in place upon which the excise tax (and other taxes) is regularly adjusted for changes in inflation.
The changes introduced in the budget mean that tax policy will be easier to administer. They will also limit opportunities for the tobacco industry to reduce its prices in order to avoid/ evade paying excise taxes. However, cigarette taxation must continue moving towards internationally accepted norms, including tax rates of at least 70 per cent of retail prices.