Policy Analysis: Excise Duty in Kenya

 

1. Introduction

Excise duty in Kenya represents a critical component of the country’s fiscal and regulatory framework. It is imposed on specific goods and services — primarily those considered non-essential, harmful, or luxurious — and serves both revenue-generation and behavioral-regulation purposes. The Excise Duty Act, 2015, as amended through subsequent Finance Acts, provides the legal foundation for its administration by the Kenya Revenue Authority (KRA).

This policy analysis examines the objectives, structure, effectiveness, and challenges of Kenya’s excise tax regime, with a view to assessing its alignment with national economic and social policy goals.

2. Policy Objectives

Kenya’s excise duty policy pursues a dual mandate:

a. Fiscal Objective

To mobilize domestic revenue in a predictable and sustainable manner. Excise taxes contribute significantly to national revenue, providing fiscal space for public investment and reducing reliance on external borrowing. In FY 2024/25, excise duty accounted for a substantial share of ordinary revenue, particularly from petroleum, alcoholic beverages, and telecommunications.

b. Regulatory and Social Objectives

Excise duty also functions as a behavioral and policy tool designed to:

• Discourage the consumption of harmful goods (alcohol, tobacco, sugary beverages).
• Promote environmental sustainability through taxes on fuel and motor vehicles.
• Regulate socially sensitive sectors like gambling and betting.
• Encourage equitable taxation, ensuring luxury consumption bears higher fiscal responsibility.

Thus, the policy aligns taxation with Kenya’s Vision 2030 and the Bottom-Up Economic Transformation Agenda (BETA) by integrating health, environmental, and equity considerations into fiscal design.

3. Structure and Mechanisms

Excise duty in Kenya is structured through two main approaches:

• Specific Duty: Fixed charge per unit or quantity of goods (e.g., KSh 134 per litre of spirits, KSh 3.59 per cigarette stick). This provides revenue predictability and administrative simplicity.
• Ad Valorem Duty: Percentage of product value (e.g., 20% on motor vehicles, 15% on betting stakes). This ensures progressivity and captures value-based differences across product categories.

Revisions to excise rates are typically introduced annually via the Finance Act, which allows the Treasury to adjust for inflation and policy shifts. KRA administers compliance through the iTax system and enforces registration, licensing, and reporting obligations for manufacturers and service providers.

4. Policy Effectiveness

a. Revenue Mobilization

Excise taxes have proven effective in stabilizing Kenya’s revenue base. However, heavy reliance on a narrow set of products — such as fuel and alcohol — poses risks of volatility, especially in times of economic downturn or shifts in consumption patterns.

b. Public Health and Social Outcomes

Excise duty has supported public health objectives by discouraging excessive consumption of tobacco and alcohol. For example, following sustained tax increases, Kenya has seen gradual declines in smoking rates. However, affordability and availability of illicit brews remain persistent challenges, undermining regulatory intent.

c. Economic and Market Impacts

Excise taxes influence market behavior by shaping pricing strategies, production costs, and consumer demand. High excise rates on petroleum products, for instance, have contributed to higher transport and commodity prices, sparking debates over their inflationary effects and burden on low-income households.

d. Environmental Regulation

Excise duty on fuel and motor vehicles supports Kenya’s environmental and climate goals by encouraging energy efficiency and reducing carbon emissions. However, enforcement gaps and lack of targeted incentives for green technologies limit the policy’s transformative potential.

5. Key Policy Challenges

1. Illicit Trade and Tax Evasion:
   High excise rates on alcohol and tobacco have led to the growth of unregulated markets, depriving the government of revenue and exposing consumers to unsafe products.
2. Inflationary and Regressive Impacts:
   Excise duty, particularly on fuel and mobile services, disproportionately affects lower-income groups, raising concerns over tax equity and cost-of-living pressures.
3. Policy Predictability and Investor Confidence:
   Frequent rate adjustments through annual Finance Acts create uncertainty for businesses, discouraging long-term investment and planning.
4. Administrative Complexity:
   Compliance costs remain high for small and medium enterprises (SMEs), especially those in manufacturing and telecommunications sectors, due to complex filing and audit requirements.
5. Limited Linkage to Expenditure Outcomes:
   While excise duty is justified partly on social and environmental grounds, revenue earmarking for related programs (e.g., health promotion, environmental conservation) is weak, reducing transparency and public trust.

6. Policy Recommendations

1. Enhance Predictability and Transparency:
   Introduce a medium-term excise duty framework that limits ad hoc adjustments and aligns revisions with clear inflation and policy benchmarks.
2. Broaden the Tax Base:
   Diversify excise coverage to include emerging products such as e-cigarettes, carbon-intensive goods, and digital luxury services, while reducing overdependence on traditional categories.
3. Strengthen Enforcement and Anti-Illicit Measures:
   Expand the Excise Goods Management System (EGMS) and integrate digital tracking to curb smuggling and counterfeiting.
4. Mitigate Regressive Impacts:
   Introduce targeted subsidies or social safety nets to offset excise-related cost increases for low-income groups, particularly in energy and transport.
5. Earmark a Portion of Revenue for Social Goals:
   Allocate defined shares of excise revenue to health promotion, addiction treatment, and environmental programs to enhance policy coherence and accountability.

7. Conclusion

Excise duty in Kenya plays a multifaceted policy role—as a fiscal instrument, a behavioral regulator, and a social policy tool. While it has contributed significantly to revenue mobilization and public health goals, its full potential remains constrained by administrative, equity, and enforcement challenges.

A more strategic, transparent, and evidence-driven excise policy—anchored in Kenya’s long-term economic and social objectives—would enhance both revenue efficiency and policy legitimacy, ensuring that excise taxation continues to support sustainable development within a fair and inclusive framework.

Key Data Points

• Total collection by Kenya Revenue Authority (KRA) in FY 2024/25: KSh 2.571 trillion (growth of ~6.8 %). (Kenyans)
• Domestic excise duty (excise on locally‐manufactured goods and services) in FY 2024/25: KSh 69.385 billion (performance ~97.2 %). (Kenyans)
• Decline in domestic excise duty: Collections fell ~5.75% to KSh 69.39 billion in the year to June 2025 (down from ~KSh 73.62 billion the prior year) — the sharpest drop since Covid-19. (The Eastleigh Voice News)
• Excise duty on betting services in FY 2024/25: KSh 13.233 billion, up from KSh 10.598 billion the previous year, with a performance ~117.2% of target. (theinformer.co.ke)
• Excise duty (imports + domestic) growth via customs/excise head in FY 2024/25: excise duty collections rose ~11.6% to KSh 125.3 billion under the customs division. (Citizen Digital)
• From the budget outlook: Excise duty is projected to contribute ~10.1% of total revenue in FY 2025/26 (estimated excise duty revenue ~KSh 335.5 billion). (Cytonn)
• New goods/services added under excise duty via the Tax Laws (Amendment) Act, 2024 effective 27 Dec 2024: e.g., 25% on imported fully‐assembled electric transformers; 15% on imported printing ink; 5% or KSh 50/kg on certain sanitary fixtures. (Kenya Revenue Authority)
• Example of policy rate retention: The duty on mobile money transfer services retained at 15 % in the 2024/25 Budget. (African Watch)