The share of illicit trade in cigarettes has more than doubled in three years, a leading manufacturer says, citing lower taxes in neighbouring countries and lax enforcement at border points.
British American Tobacco (BAT) Kenya claims that the illegal sale of cigarettes ate up about 25.5 percent of the market last year compared with 11.3 percent earlier, resulting in a loss of billions of shillings in revenue.
The NSE-listed firm cites findings of an annual survey conducted by a “third party” which largely lays blame on increased taxation of the product linked to the risk of contracting life-threatening diseases such as cancer as well as lung and heart diseases.
It estimates the illegitimate market – where traders evade taxes – denied the Kenya Revenue Authority Sh6.5 billion in 2022, a 62.5 percent jump from Sh4 billion the year before.
“This [shrinkage of legitimate market] has been further exacerbated by the resultant differentials in excise rates between Kenya and its neighbouring EAC partner States, with the excise payable in Kenya being double that of Uganda and almost triple that of Tanzania,” BAT Kenya wrote in its annual report for the year ended December.
“To address this dire situation, we continue to call upon the government to enhance local deployment of resources and enforcement, as well as collaboration with neighbouring governments against the illicit trade in tobacco products.”
The Ruto administration spared cigarettes from tax increases in its first finance law, marking the first time in five years that the sale of the health-risk product was not included in the plan to raise additional revenue.
Cigarettes, alongside alcoholic drinks like beer, spirits and wine, have for decades been seen as price inelastic, meaning their consumption would not be hit by cost movements, making them the easy targets for tax raids.
The freeze on the taxes for the products came on the back of intense lobbying by manufacturers who had warned that the higher taxes would result in lower revenues while leading to a further spike in illicit trade.
It was a double-joy for BAT and other firms in the traditional ‘sin taxes’ bracket after authorities also scrapped the annual adjustment of excise duty for inflation that had been in force since 2018.
“Effectively, in 2022 alone, excise duty has increased by 21.3 percent, and cumulatively by over 50 percent since July 2019. Such an increase which is ahead of the average inflation rate for the year presents an unstable and unpredictable business environment,” BAT writes in the report.
“This has forced consumers to seek cheaper products in the illegal market.”
