Keroche tax tussle through brewer’s eye

Monday, March 23rd, 2020 00:00 |
Keroche Breweries proprietors Joseph and Tabitha Karanja in court over tax evasion claims. The Tax Appeals Tribunal has given KRA the go ahead to collect Sh9.1 billion tax from Keroche. Photo/PD/File

Tabitha Karanja

Keroche and Kenya Revenue Authority (KRA) tax dispute has become almost toxic and a subject that has severely divided public opinion in Kenya.

Two critical offices approve introduction of new products into the market. First, Kenya Bureau of Standards (Kebs) approves the quality and determine product category, then KRA determines the tax rate in what is supposed to be a simple predictable process. 

In March 1997, Kebs approved Viena Fortified Wine. On June 4, 1997, KRA gave it a classification—Tariff HS Code 22.04 or 45 per cent of ex-factory value as the excise duty. This was reconfirmed on April 27, 1998.

Viena Fortified Wine was well received in the market bringing more Kenyans to the drinking tax bracket and KRA tax collections surged.

Everyone was happy. In fact, by June 2006, Keroche was due for a tax refund of Sh84 million. 

Aiding competitors

However, in November 2006, KRA disrupted this arrangement. They wrote to Keroche stating that classifying Viena Fortified Wine under Tariff HS Code 22.04 was a mistake, and, a decision had been made to reclassify the product to a higher Tariff HS Code 22.06 or 60 per cent of ex-factory value as the excise duty.

KRA backdated the new 22.06 Tariff for five years to recover their “error” amounting to Sh1.2 billion with full knowledge Keroche had never collected the money from the public. 

The matter went to court. In a ruling delivered in Nairobi on July 6, 2007, the High Court quashed KRA’s notice.

It ruled that the classification of the products had a direct bearing on the price Keroche was selling its products and applying a different classification years later was unfair, oppressive, irrational unreasonable and constituted abuse of power and authority aimed at aiding Keroche’s competitors.

This was shortlived as the 2007/2008 Finance Bill forced the change of Viena Fortified Wine classification to a higher Tariff HS Code 22.06 or 60 per cent of ex-factory value. This finished the product.

KRA appealed the ruling. The court ruled that an appeal could be heard if and when the revenue authority produced new supporting documents with reasonable notices. 

KRA sent the same 2006 assessment - that had been quashed by the High Court - on May 10, 2017, and demanded that Keroche pays the Sh1.2 billion within 14 days. 

Keroche objected and the matter was sent to the Tax Tribunal where it remained pending till 2019 when the Tax Appeals Tribunal (TAT) was constituted.

The TAT recently ruled in favour of KRA in the much publicised Sh9.1 billion decision.

Keroche stands with the 2006 decision that termed KRA’s change of tariff and backdating as “abuse of authority”.

The year 2006 marked the beginning of the false narrative that “Keroche owes billions to KRA” and “Keroche does not pay Tax”  

Keroche Breweries in 2007 presented a new alternative for moderate drinking, a ready-to-drink vodka derived from our existing Crescent Vodka. 

This is similar to what a consumer would do – walk into a bar, buy some tots of Crescent Vodka and mix with water or soda.

Little did we know that seven years later (May 2014), the same 2006 scheme would be replayed.

Keroche received communication from KRA saying there was “confusion” of the applicable rate of the Viena Ice ready-to-drink Vodka. 

The new demand directed that water added to vodka to make Viena Ice ready-to- drink Vodka and consumed between 2007 to 2014 would now attract Sh119.90 per litre.

The assessment was backdated for three years and new demands amounting to Sh6.113 billion issued.

Punitive rate

This is the genesis of the highly publicised new Sh9.1 billion demand, billions that do not exist in reality but on paper. 

KRA on July 22, 2015 acknowledged that Viena Ice ready-to-drink Vodka met the standards of an innovation.

However, in June 2019, KRA withdrew their support for this arrangement with a new letter demanding Keroche either pays for the added water at the punitive new rate (now at Sh210/litre) or create a product below 10 per cent.  This left the product on it’s death bed.

These disruptive reclassifications explain the Sh14.4 billion case and sheds light on how torturous our 22-year-old journey has been.

 It is time to ask how does a local enterprise survive in such a hostile environment?   — The writer is the CEO, Keroche Breweries.

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