Title Goes Here
Special Correspondent
The Nation Kenya
May 14, 2007

Giant multinational Coca-Cola is lobbying the Kenya government to reduce excise duty from 10 per cent to 5 per cent in this year's budget.

In a pre-budget proposal to Finance Minister Amos Kimunya, the company's East and Central Africa subsidiary says the current tax system is both punitive, and inhibiting the sector's growth.

According to the firm's head of public policy, government and corporate relations, Dr Nelson Githinji, Kenya must address issues such as reduction of duties on raw materials if the manufacturing sector is to continue sustaining the carbonated soft drinks market and exploit the region's potential.

He says the existence of tariff anomalies, the need for tariff splits and introduction of specific duty rates for items prone to under-invoicing should also be scrutinised.

Coca-Cola is a major regional player in the carbonated soft drinks industry.

In 2004, after intensive lobbying by the manufacturers of carbonated soft drinks, the minister reduced excise duty from 15 per cent to the current 10 per cent. The reduction says Dr Githinji, was a win-win situation for the parties involved. The government, he argues benefitted from increased tax revenues as a result of increased sales. Coca-Cola benefitted from a reduction of the tax burden while consumers also benefitted from the product's availability.

These gains are now being eroded by the increasing costs of production, such as electricity charges attributed to global increases in fuel costs, inflation, increased distribution cost due to poor infrastructure and increased sugar prices globally as it is a major component in the manufacture of carbonated soft drinks.

The proposal asks the government to focus on an economic stimulus that will result in increased local and foreign direct investment in the sector. This it says "will ultimately result in growth of the sector which will in turn result in additional tax revenue mainly in the form of corporate income taxes and consumption taxes."

Coca-Cola and its franchises continue to experience a steady decline in profitability as a result of increased production costs brought about by inflation and the high taxes.

The carbonated soft drinks sector operates with both an upstream supplier chain, as well as a downstream industries and services which include distribution, sales and marketing of its products. The affordability and availability of the product in the market important for the sector. One of the factors that determine affordability of the product is taxation.

"Lowering the rate of tax particularly in relation to exercise duties and broadening the base is widely accepted as best practice in tax policy," states the company's proposal to the minister. "It is for this reason that we propose a reduction in the rate of excise duty of carbonated soft drinks from the current rate of 10 per cent to a lower rate of 5 per cent."

Also on the company's wish-list to Mr Kimunya is the lowering of the sugar development levy. "The sugar development levy should be reduced progressively on imported sugar for manufacture of goods for home use from 7 per cent to 3 per cent this year 2007, 2 per cent in 2008, 1 per cent in the year 2009 and finally to 0 per cent in 2010. The tax should not be levied on imported sugar for use to manufacture goods for export."

Dr Githinji says, a sugar development levy of 7 per cent increases the cost of production both for export and local markets. No other country levies this charge, thus making Kenya's goods uncompetitive.

The levy is a fee charged by the government for the development of the country's sugar industry which does not produce white refined sugar, an essential raw material in the production of carbonated soft drinks. Besides, any imported finished products containing sugar does not attract the said levy.

The company says its day-to-day operations and strategic expansion efforts are being hampered by by tax and cost related constraints. Though the company strives to be more efficient by cutting down operational costs, says Dr Githinji, inflationary adjustment coupled with the current high cost of doing business inhibit the potential growth of the industry in Kenya.

For this reason, he adds, a conducive and enabling tax policy is vital to create a favourable environment to encourage more investment in the sector.

In his budget speech last June, Mr Kimunya said that for a long time the sugar development levy had been passed on as a sugar tax on consumers. He clarified that as a user charge, it should be levied on those who use or directly benefit from the fund such as sugar industry players.

He proposed that amendment shifted the base from final consumers to cane growers. This measure was to reduce the price of sugar for consumers, while making sugar farmers vigilant on the utilisation of funds. However, the proposal was not passed by parliament.

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