Reconsider the proposal to remove relief of excise duty on raw materials

“A person doesn't know how much he has to be thankful for until he has to pay taxes on it”. Anonymous. This is an infamous quote that most manufacturers and bulk resellers of internet data service had not considered until the Finance Bill 2024 proposals came in proposing to remove relief of excise duty on raw materials and internet data service. This proposal, if adopted, means manufacturers will incur the cost of excise duty paid on raw materials used to manufacture finished goods subject to excise duty. Subsequently, this cost may be passed down to the final consumers who are already stretched with various levies and taxes introduced overtime. 

Currently, manufacturers offset excise duty paid on raw materials used in the manufacture of excisable goods against excise duty payable on the finished products while bulk resellers of internet data service offset the excise duty paid on the bulk purchase of internet data service against excise duty paid when reselling it. However, for manufacturers, the excise duty offset is limited to finished goods sold and subjected to excise duty. This means that where the finished goods remain unsold or are exempt from excise duty, the offset is not allowed.

Relief of excise duty under the Excise Duty Act, 2015 is aimed at cushioning manufacturers from double taxation of excise duty on raw materials used in the manufacture of excisable goods. Repealing the Section will result in double taxation of excisable raw materials and bulk internet purchased for resale. Excise duty will be paid both on the raw materials and the finished goods manufactured using such excisable raw materials. 

Kenya's manufacturing sector contributes 7.8% to the GDP, representing an estimated value of KES 3.18 trillion. The Government has implemented plans and favorable policies over the years in its goal to increase the contribution to 20% by 2030. Formulation of sound and favorable tax structures and policies are paramount in achieving this critical goal by 2030. A turn in the wrong direction such as policies introducing double taxation directly or indirectly are bound to digress the intended growth and ward off future investors into the sector. The removal of relief on raw materials is likely to discourage local manufacture of the affected goods in Kenya particularly where the cost of importing the finished products is cheaper. In this regard, it is likely that manufacturers will shift to importing finished goods impacting greatly on revenue collection and job securities.

Similarly, where the relief is removed, purchasers of bulk internet data will pay excise duty both when buying the internet data and when reselling it. Internet is the backbone of today’s economy which powers education, community, health, and economy. It’s an impactful necessity and no longer a luxury. Businesses are powered by internet and a lot of young people have enrolled in the digital workspaces which are fully powered by internet. 

In 2023, Kenya had approximately 17.86 million internet users which is 32.7% of its population. The high numbers of consumers may be a good base for revenue collection but at the detriment of any future developments and growth anticipated from this sector. It is barely 3 years since the introduction of relief of excise duty paid on internet data services by a licensed person who purchases the data in bulk for resale. Therefore, it is paramount for the Lawmakers to evaluate the impact these proposals have wholistically before adoption.

The writer is a manager at Deloitte East Africa, emuteti@deloitte.co.ke. The views expressed represent those of the author and do not necessarily represent those of Deloitte East Africa.