Massive price cuts worry KRA

February 15, 2011

, NAIROBI, Kenya Feb 15  – The Kenya Revenue Authority (KRA) is concerned about current huge price cuts by players in key sectors of the economy arguing it could affect revenue collection.

Heated competition in the cigarette and mobile sectors has seen players slash prices as they respond to market pressure.

KRA Domestic Tax Commissioner John Njiriani says the fluctuation in pricing has created a challenge for the revenue authority as tax collection is pegged on the price, thus the constant change affects revenue targets.

"There has been a change and that change affects the tax on the price and this is certainly going to have an impact both for cigarettes and airtime," Mr Njiriani said.

Mr Njiriani however said KRA was working on a new tax base where it will be seeking to mitigate the risk of price cuts.

"Like cigarettes, the taxation is pegged on the price of the packet. But if tax for example was pegged to one cigarette it doesn\’t matter whether it was priced at Sh100 or Sh70 the price will be the same," he said.

Both mobile operators and cigarette manufacturers have been engaged in cut throat competition with players resulting to slashing prices as they look to grow or retain their market share.

Parliament amended and passed a new taxing regime for cigarettes, which was gazetted in January to replace the previous hybrid excise duty structure.

The system is based on physical characteristics with a structure solely based on retail selling price.

This saw market leader British American Tobacco cut the prices of its cigarettes by nearly a third to avoid paying higher taxes and compete favourably with its main rival Mastermind Tobacco Limited.

BAT has said that a drop in the company\’s revenues could see taxes paid to the government drop by 27 percent next year reminiscent to the telecoms market where a price war has halved the cost of calls.

It is estimated that the current price cuts could cost the government Sh26 billion in revenue collected from mobile operators.

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