The row arose when the cigarette manufacturer misinterpreted Finance Act, 2003 (Act No. 2003) which amended the Fifth Schedule to the Customs & Excise Act, by categorising payment of excise duty on cigarettes according to the retail selling price of cigarettes.
According to the taxman, prior to July 2003, excise duty on cigarettes was determined by the production cost incurred by the manufacturer, plus the mark up imposed by the manufacturer on the cigarettes.
As a result a standard rate of tax was then imposed on the total amount; however, because the production costs were not standardised for all manufacturers, a new excise tax regime was put in place.
In September 2003, four categories of retail prices were created that included A, B, C and D; so the higher the retail selling price, the higher the amount of excise duty payable.
Mastermind’s Supermatch Brand was placed in category B since its retail selling price at Sh1,900 was between Sh1,500 and Sh2,500 which was the price range for category B.
In June 2007, the Finance Act, No. 9 of 2007 amended Part II of the Fifth Schedule to the Customs & Excise Act Cap 472, which increased the rates of excise duty on cigarettes but maintained the four categorizations of A, B, C and D.
Following the amendment, Mastermind then increased the retail selling price of its Supermatch Brand from Sh1,900 per mille (every 1,000 sticks) to Sh2,560 per mille effectively moving it from category B to C.
The cigarette maker, however refused to pay the higher amount of excise duty insisting that the KRA was bound by Gazette Notice No. 6776, which had placed it in category B, adding that the Finance Act 2007 was ambiguous and unclear.
The Court finally agreed that the Customs & Excise Act was the basis for the calculation of excise duty and not the gazette notice, which was only valid for the period when the rate stated within was valid.
It added that once the rates were altered by succeeding Finance Acts, the Gazette Notice ceased to apply.
KRA has been looking at several ways to widen the tax net to increase its revenue collection, which hit Sh707.4 billion for 2011/12 financial year, just Sh10 billion shy of its target for the year.
The revenue collector has an ambitious target to collect Sh1 trillion in the coming financial year.