The Kenya Revenue Authority (KRA) has suffered another setback in its plans to tax plastic bottles used to package non-alcoholic drinks after the Tax Appeal Tribunal (TAT) ruled that duty paid on the tubes used to make the bottles should be refunded.
Ruling on a dispute between KRA and Kenafric Industries, the tribunal said the packaging bottles imported by the consumer goods company were raw materials and the Sh10,284,385.59 excise duty paid on them should be credited against the total tax payable on the final product.
“It is therefore the Tribunal’s finding that the Respondent (Commissioner of Domestic Taxes) erred in disallowing the Appellant’s (Kenafric’s) claim of excise duty in respect of imported preforms for making plastic bottles for packaging its bottled products under Section 14 of the Excise Duty Act,” the TAT said on August 1.
This is a big win for many non-beverage manufacturers who use plastic bottles to package their products, and who had also opposed the removal of Section 14 of the Excise Duty Act by Finance Bill 2024, saying it would increase their production costs.
In the shelved Finance Bill 2024, the government had proposed to delete Section 14 of the Excise Duty Act, which provides for claims for excise duty paid on raw materials used in the manufacture of excisable products.
The KRA had argued that preforms are finished products, noting that apart from modification, a raw material must be part of the finished product, in this case the liquid content, and not just a packaging material, to qualify as a raw material.
However, the tribunal, chaired by Justice Robert Mutuma, agreed with Kenafric's submission that the drink could not be sold without the packaging.
“This position is supported by the provisions of Section 12 of the Excise Duty Act, which specifies bottled or similarly packaged waters and other non-alcoholic beverages, not including fruit or vegetable juice, as a class of excisable goods that cannot be sold in their state other than accompanied by a type of packaging, in the appellant’s case being bottles,” added the Tribunal.
The KRA argued that in order for packaging to be considered as a raw material in the manufacturing process, Kenafric, which produces Fresh chewing gum, had to demonstrate how it is used in the value chain, other than for storage purposes before reaching the final product. The packaging material had to be a component of the final product.
In the Finance Bill 2024, the government had proposed to repeal Section 14 of the Excise Act to prevent beverage manufacturers from claiming refunds on inputs, which in the case of alcoholic beverages included sugar and concentrates in addition to bottles.
Beverage manufacturers, including soft drinks company Coca-Cola and alcohol producer East African Breweries Limited, argued that paying excise duty on inputs and the final product amounted to double taxation.
In the financial year ending June 2022, the government paid excise refunds of Sh1,142,278,736 compared to Sh1,029,885,870 in the previous year, National Treasury data shows.
Kenafric said it had paid excise duty of Sh10 on each preform between September 2021 and June 2022, which it wanted to offset against the final excise duty it should pay on bottled water and beverages.
The manufacturer was to pay excise duty of Sh6.41 on each litre of bottled water and soft drinks, the finished products, against which Kenafric would offset the duty it had paid on the preform bottles.
