Third Eye

TABITHA KARANJA: The Keroche – KRA tussle: What It is and what it isn’t

Thursday, March 26th, 2020 15:40 |
Keroche Breweries chief executive Tabitha Karanja. PHOTO | FILE

So what has made the Keroche vs Kenya Revenue Authority(KRA) tax dispute become almost toxic and a subject that has severely divided public opinion in Kenya?

Reclassification of Existing Products to Higher Tax Brackets and Backdating the Taxes that were never collected.

Two critical offices give approval when one introduces a new product.

  • Kenya Bureau of Standards (Kebs) to approve the quality and determine product category.
  • Kenya Revenue Authority (KRA) to determine the tax rate.

This 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% of ex-factory value as the excise duty. This was reconfirmed on April 27, 1998.

The quality, cost-friendly Viena Fortified Wine was embraced by Kenyans. It brought more Kenyans to the drinking tax bracket. KRA tax collections surged. Everyone was happy. In fact, by June 2006, Keroche was due for a tax refund of Kshs 84 million.

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

KRA issued a notice to backdate the new 22.06 Tariff for 5 years to recover their “error” amounting to Kshs 1.2billion (the difference between the initial tariff and new tariff) with full knowledge Keroche had NEVER collected this 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 ruling:

“The classification of the products had a direct bearing on the price Keroche was selling its products and applying a different classification years later is unfair, oppressive, irrational unreasonable and constitutes abuse of power and authority aimed at aiding Keroche’s competitors”.

However, Keroche’s victory was short-lived.

Soon afterwards, the 2007/2008 Finance Bill forced the change of Viena Fortified Wine classification to a higher Tariff HS Code 22.06 or 60% of ex-factory value. This high taxation killed the product.

KRA appealed the ruling. The Court ruled that an appeal could be heard if and when KRA produced new supporting documents with reasonable notices. KRA in defiance on May 10, 2017, sent the same 2006 assessment - that had been quashed by the High Court - and demanded that Keroche pays the Kshs 1.2billion within 14 days.

We 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-publicized Kshs 9.1b decision. Keroche stands with the 2006 decision that termed KRA’s change of tariff and backdating as “abuse of authority”.

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

We never gave up. 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. For illustration, 188ml of Crescent Vodka (40%) is mixed with 312ml of naturally distilled high-quality water, which makes 500ml of Viena Ice ready-to-drink Vodka (15%).

Little did we know that seven years later (May 2014), the same 2006 scheme would be replayed. Keroche Breweries 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 our vodka to make Viena Ice ready to drink Vodka and consumed between 2007 to 2014 would now attract Kshs. 119.90 per litre. The assessment was backdated for 3 years and new demands amounting to Kshs 6.113 billion issued!  

This is the genesis of the highly publicized new Kshs 9.1 billion demand. Billions that do not exist in reality but on paper.

While we protested the new tax on the water as irrational and punitive, KRA on July 22, 2015 clearly acknowledged that  Viena Ice ready-to-drink Vodka met the standards of innovation. Their letter was matched by KRA’s consistent support through issuance of stamps and collection of the tax as per the mutually agreed applicable rate.

However, in June 2019 KRA withdrew their support for this arrangement with a new letter demanding we either pay for the added water at the punitive new rate (now at Kshs 210/litre) or create a product below 10%.

With the current product now priced beyond the target market, we opted to create another Ready to Drink Vodka of less than 10%. As per our initial fear, this change has left the product on its death bed.

These disruptive reclassifications also explain the 14.4 billion case which we cannot discuss because the matter is currently in court.

This tussle between Keroche and KRA sheds a lot of light on how torturous our 22-year-old journey has been. Even though our faith in the cause of Kenyan entrepreneurship remains unshaken, it is time to voice the question that is being asked across Kenya – how does a local enterprise survive in such a hostile environment? 

The writer is the CEO, Keroche Breweries.

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