The World Bank is seeking higher taxes on alcohol and cigarettes to boost State revenues in an advisory that pushes for annual increases on the sin taxes to cover inflation.
The bilateral lender reckons that that share of alcohol and cigarette taxes have fallen as a share of gross domestic product (GDP)—suggesting that Kenya’s excise duty has not matched economic growth and inflation.
It argues that additional taxes on the two commodities will not only boost State coffers but they will also help cut consumption of cigarettes and alcohol that are considered health hazards.
The Treasury in December increased taxes for wines and spirits but cut taxes for beers in a setting where excise duty from alcohol was little changed.
But the World Bank reckons that the increments are inadequate.
“Both taxes need to be adjusted to account for inflation and economic growth to reduce consumption and reduce losses in the revenue base,” the World Bank said in a new report.
“Increases of 117 percent on alcohol and 50 percent on tobacco will return tax rates to 2016 levels. Further, taxes should continue to be adjusted annually for inflation-or the tax rates should be increased- to ensure that tax increases account for both inflation and economic growth.”
The World Bank’s proposal, if adopted, will put pressure on alcohol and tobacco prices amid a soft economy where salaries have not kept pace with inflation. This has seen consumers drop non-essential items like beer from their budgets, hurting firms like EABL and BAT.
The government has found alcohol and tobacco products as an easy target for new tax measures amid opposition over aggressive revenue-raising measures on basic household commodities.
It netted Sh29 billion from excise duty on beer last year, a drop from Sh32 billion in 2023 while duty on wines and spirits rose slightly to Sh19.5 billion from Sh18.9 billion previously.
Excise duty collected from cigarettes was largely flat at Sh11.5 billion in 2024 from Sh11.6 billion previously.
Tax rates on alcohol were adjusted in December through the Tax Laws (Amendment) Bill where excise duty rates were rebased to alcohol content by volume (ABV) from a flat rate based on each litre of product.
Excise duty on beer and wine, for instance, shifted from the rate of Sh142.44 per litre to Sh22.50 for every 10 millilitres of alcohol content.
This pushed higher taxes for wines, which have a relatively higher alcohol content by volume. Excise duty on spirits was meanwhile lifted to an equivalent Sh400 per litre from Sh356.42 previously.
Filtered cigarettes had their rate of duty raised from Sh4,067.03 for every 1000 sticks of products to Sh4,100 while duty on plain cigarettes also jumped to Sh4,100 for every 1000 sticks from Sh2,926.41.
Revenue raised from alcohol and tobacco taxes has weakened over recent years despite the Treasury persistently raiding the products to raise its receipts from time to time.
According to an analysis of trends in alcohol and tobacco tax revenues, the collections declined by 6.0 percent and 39 percent respectively in real terms between 2013 and 2016.
Beer revenues have declined by 15 percent while revenue from spirits and wines increased by 15 percent.
Alcohol generates the bulk of tax collections in contrast to tobacco.
The World Bank also wants higher taxes on soft drinks, effectively bringing a sugar tax to discourage the consumption of sweetened beverages which when combined with alcohol and tobacco are seen as contributors to death and morbidity.
“Collectively, consumption of these products accounted for 9.7 percent of all deaths in Kenya in 2019. This is a significant increase on the 7.5 percent of deaths in Kenya in 1990 attributable to the consumption of these products,” the World Bank said. “It is also significantly higher than the regional average for 2019 of 7.4 percent.
Alcohol is viewed as the largest contributor to mortality, with its consumption accounting for 5.4 percent of all deaths in Kenya in 2019.
Sugar-sweetened beverages have a significantly smaller contribution to mortality but deaths due to consumption have been rising rapidly.
The excise duty slapped on fruit juices is set at Sh14.14 per litre, with the tax having been left unchanged at the end of last year when levies on alcohol and tobacco were raised.
The World Bank recommends that Kenya drop taxes on healthier alternative beverages such as water, which is currently hit with an excise duty of Sh6.41 per litre, as it raises the levy on sweetened drinks.
“There is scope to reform the tax on soft drinks since it applies to both sugar-sweetened beverages and healthier alternatives like water,” the World Bank report said.
“Removing the tax on healthier alternatives such as water will increase their affordability and incentivise substitution from drinks with a high sugar content. The loss of tax revenues can be offset by increasing taxes on sugar-sweetened beverages.”
Receipts from excise duty on mineral water, soft drinks and juices stood at Sh7.9 billion last year from Sh7.5 billion previously.
