Chances that your favourite alcohol is a counterfeit could be as high as 50 percent. There is even a higher possibility that the spirit brand you find at your local joint has not paid a single coin in taxation.
In the alcohol trading cartel there are two types, the genuine ones are referred to as number one and the counterfeits are known as number two.
The term is only used by insiders including retailers who know it by its sources and pricing with claims that even law enforcement agencies including the Kenya Revenue Authority (KRA) officials use the term frequently, according to those who have first-hand knowledge of the industry operations.
The number two brand makes a multibillion shilling tax evasion empire that runs a parallel alcohol supply chain. They include small distilleries like the one police found being run by Chinese nationals in Athi River as well as manufacturers in Nairobi and in other areas including Meru and Nakuru.
The number two alcohol is largely manufactured from contraband ethanol, which may present a risk to its consumers since the raw material is not subjected to compliance checks while entering the country.
Kenya levies heavy tax on ethanol, making it a lucrative product to smuggle across other East African countries with the taxation on the product remaining unharmonised. Once the manufacturers of number two are able to save on the 100 percent tax levied on ethanol, the net stage of gaming the system is in the excise tax, which KRA demands for Sh56 for the smallest allowed package of a 250 millitre bottle.
Kenya Breweries Communications Relations Director Eric Kiniti told the Sunday Nation that the raw material taxation added to the in-factory compliance where beer manufacturers pay Sh1.50 for every stamp while each bottle of spirit is affixed with a Sh2.980 stamp has encouraged the tax evasion.
“The cost of compliance is so high that they find it easier to operate outside the radar, this is the elephant in the room. The other alternative is to ensure the KRA can enforce full compliance to level the playing field and avoid having many more players to opt for the illicit route,” said Mr Kiniti.
The KRA recently recruited 80 more market surveillance officers to bring the number to 160. The upcoming roll-out of excise tax stamps on water, juice and cosmetics will expand its scope and the alcohol cartel is likely to continue with the huge savings from tax evasion. It is these savings that make the multibillion war chest that used to buy its presence in the market and rundown legal manufacturers in what is now causing concerns from the players.
Gordon Mutugi, who chairs the Alcoholic Beverages Association of Kenya (ABAK), told the Sunday Nation the war on illicit brew, which peaked after 2016, is slowly being lost with the weakening compliance and taxation regime that encourages the illegal trade.
“It has even become much worse because the integrity of the tax stamp in now in question and the taxation is such that getting away with evasion makes such a wide margin that some manufacturers have chosen to risk and still make enough money to buy their survival in the trade. This is only possible to be done in collaboration with KRA officials and the police,” said Mr Mutugi.
There are chances that the tax on spirits may be adjusted in December to about Sh70 for every 250ml bottle before others like the value-added tax.
Attention will now focus on the Market Surveillance Office at the KRA that is accused of having been complicit in the multibillion shilling tax evasion including the current Sh41 billion businessman Humprey Kariuki is facing from his Africa Spirits Limited.
Some manufacturers have also preferred to operate from Uganda and Tanzania and import finished products where they are only taxed the import duty instead of incurring the heavy levies on ethanol, which is the main raw material.