Why firms want State to bear cost of effecting tax system

Kenya Revenue Authority headquarters Times Towers in Nairobi. PHOTO | SALATON NJAU | NATION MEDIA GROUP

What you need to know:

  • Controversial EGMS undertaken by Swiss firm comes up for review next year even as KMA say implementing the same has been a nightmare on operations
  • KAM’s position is that since its members are already paying excise tax, government should bear stamp and EGMS implementation costs.

The contract awarded to Swiss company Sicpa Security Solutions SA Limited by the Kenya Revenue Authority (KRA) is due for renewal next year.

The taxman last week did not answer queries on the future of the Swiss firm, whose system manufacturers installed to implement the Excisable Goods Management System (EGMS).
KRA officials we reached for comment promised to respond this week.

Even so, the manufacturers are demanding a review of the deal given the challenges they’ve faced since the EGMS was rolled out.

The system was adopted to facilitate production level monitoring of manufacturers and field authentication of tax stamps for goods, a move that KRA holds enables it to combat illicit production of goods and tax evasion.

FACED CHALLENGES

Although EGMS implementation began after the Public Investments Committee and the courts cleared it, it has faced challenges all along. Questions on the legality of the contract and the financial burden companies face linger.

Kenya Association of Manufacturers (KAM) says it has continued to engage with KRA to address the challenges raised in executing the system, a process KRA says has been fruitful in mitigating challenges presented and the cost attached to implementing EGMS.

The industrialists’ lobby notes, however, that implementing EGMS entails capital expenditure in regard to the server room, data cables, retrofitting lines, signal exchange and electricity backups. Tax stamps, internet and additional labour are among the running costs.

This affects industry negatively as it raises operating costs and capital expenditures, significantly increasing production costs that the consumers end up bearing, KMA told Smart Company.
Although KRA promised via email to “revert”, they had not done so by press time.

KAM’s position is that since its members are already paying excise tax, government should bear stamp and EGMS implementation costs.

When reached for comment, Sicpa, the Swiss agency, told Smart Company through its media relations team: “...we kindly advise that you contact directly the KRA.”

HEADWINDS
It is not just in Kenya where Sicpa's system has hit headwinds; it has faced similar challenges in Uganda and Botswana. Brazil put Sicpa under the radar on integrity concerns.

The new system for water and non-alcoholic drinks was to go live on September 1, 2019, but this was suspended indefinitely to allow manufacturers time to complete installation of the EGMS.
The system went live on November 13 despite protests from some manufacturers amidst a legal dispute.

The final date that all bottled water, juices, energy drinks, soda and other non-alcoholic beverage makers or importers would would be allowed in the market without stamps was January 31.

Earlier, KRA had said that it expected to collect between Sh1.6 billion and Sh2 billion from bottled water and soda taxes by the time the financial calendar ends.

However, the taxman has since said that the delayed rollout of the excise tax management system for bottled water, soda and juices will see the State forego more than Sh1.6 billion. Still, KRA was confident of the implementation. It had earlier set an annual target of Sh3.6 billion.

“We lost half the year,” KRA deputy commissioner in charge of policy and domestic taxes Caxton Masudi told Smart Company in earlier interview.

The system requires manufacturers to affix new generation excise stamps on bottled water, juices, soda, energy drinks, non-alcoholic beverages, food supplements and cosmetics.

Mr Masudi says 175 bottled water and juice producers, out of the 400 targeted, have registered in the EGMS. This means they have installed an automated stamp-fixing system and are making real-time data transmission to KRA.

SYSTEM HITCHES
He said the cosmetics industry had been spared the new tax system pending resolution of system hitches and discussions with sector players. The Treasury expects the KRA to collect Sh1.938 trillion in tax and other revenue in the current financial year, up from the Sh1.58 trillion last year when the original target was Sh1.81 trillion.

Former Auditor-General Edward Ouko on June 30, 2017 questioned the single sourcing of the Sh17.7 billion tender, which he said was without justification.

He said procurement of printing, supply and delivery of security revenue stamps complete with track and trace and integrated production accounting system from Sicpa Security Solutions was contrary to the Public Procurement and Disposal Act 2015 and KRA may not have received value for money on that contract.

In the National Assembly, MPs Rashid Kassim (Wajir East) and Joshua Kutuny (Cherangany) raised issues over the projected revenue from the stamps supplied by Sicpa following reports they would yield Sh3.6 billion a year, or Sh18 billion over the five-year contract period.

Kutuny noted that this was far below revenue that the Swiss firm would earn over the five years of the tender, which was estimated at Sh81 billion.

But PIC concluded the claims were not substantiated.

When he appeared before the PIC, then KRA Commissioner-General John Njiraini, defended the system, saying, it would help combat illicit goods and tax evasion.

“We know part of the reason why this issue has caused jitters is because when you put production line monitoring equipment, which then counts what is passing through the production line, there is a lot of concern. We know in a lot of quarters that we will be able to get rid of illicit production because that is exactly the strength we will have with this system.

We will gather that information on real-time basis. You don’t even need to tell us. You cannot cheat us,” he said.

ILLEGAL

KRA also found itself on the wrong for bypassing Parliament in implementing regulations governing the system, a move National Assembly Speaker Justin Muturi termed illegal.
At the time the regulations were sent to Parliament, MPs were on recess to take part in party primaries ahead of the General Election, which saw them come into force through a technicality after the time within which they were to be passed elapsed.

In its report, PIC, however, gave the contract a clean bill of health but urged KRA to conduct more extensive consultations, including with consumers.

Activist Okiya Omtatah also moved to the High Court and successfully challenged the new system, averring it was being implemented without public participation.

The Swiss company had initially signed the deal with KRA in December 2012 but the cost was later renegotiated upwards from Sh4.8 billion to Sh17.7 billion after the number of stamps it was to deliver per year was varied from 3.55 billion to 12.87 billion.

PETITION

The scope was also extended from making excise stamps for tobacco products, wines, and spirits to cover beer, bottled water, and soft drinks.
High Court Judge John Mativo upheld the petition, ruling that the move by KRA “restricted the scope of the principle of competitiveness.”

He revoked legal notice number 110 of June 2013 issued by then Treasury Cabinet Secretary Henry Rotich, which expanded the contract. The CS told the court that he had invited the Kenya Association of Manufacturers to air the views on the system.

KRA appealed Justice Mativo's ruling and got a temporary reprieve when the Court Appeal allowed it to continue with the implementation. However, Omtatah moved to the Supreme Court to challenge the issuance of the stay orders. The matter is pending.