Senator beer tax waiver returns to haunt brewer in Sh8.2 billion tax demand
A noble government-initiated idea to manufacture low-cost beer as an alternative to illicit brews that were killing and blinding dozens of Kenyans in the early 2000s has come back to haunt Kenya Breweries Ltd (KBL), which is now fighting a Sh8.2 billion tax demand, court papers indicate.
The Kenya Revenue Authority (KRA) is seeking to recover disputed Sh8.2 billion levies barely two years after the National Treasury brokered a deal to settle the protracted tax dispute.
At the heart of the tax dispute, the KRA wants KBL to pay Sh8.2 billion excise duty and VAT arising from the manufacture of the Nairobi Securities Exchange-listed firm’s popular Senator beer.
The disputed taxes, KRA holds in correspondence with the brewer, accrued from the manufacture of Senator beer between 2015 and 2017.
KBL has sued KRA and the National Treasury for going back on a deal to stop further excise duty and VAT demands for Senator beer produced between 2015 and 2017.
High Court judge Mugure Thande on April 28, 2023 gave KBL temporary reprieve by suspending the tax demands pending the hearing of the brewer’s application.
Justice Thande further ordered that all responses and necessary supporting documents be filed by all parties by June 2, 2023. She will mention the case on June 6, 2023.
KBL holds that the National Treasury has gone back on a deal that saw the brewer pay Sh3.5 billion in 2021 in full settlement of a tax dispute that started eight years ago.
In March, the National Treasury informed KBL that the 2021 deal abandoning tax claims against the brewer had been revoked.
The letter followed successive addresses by President William Ruto and his allies questioning tax waivers issued to corporates during the Jubilee government era.
Dr Ruto in January said the government would freeze all tax waivers as part of a shift from borrowing to finance the country’s budget and instead rely on the KRA’s annual collections.
Barely two weeks before KBL’s deal was terminated, KRA chairperson Anthony Mwaura and National Treasury Cabinet Secretary Njuguna Ndung’u formally announced the waiver freeze, and added that the tax agency is reviewing tax relief rules.
EABL is the second blue chip company to have a deal with the taxman revoked in the past month, following another demand by the KRA for NCBA Bank to pay nearly Sh1 billion.
The lender received a demand after the National Treasury revoked a capital gains tax exemption following the 2019 merger of NIC Bank and CBA Bank to form NCBA Bank.
NCBA has since sued and obtained orders suspending the Sh900 million demand, pending hearing of the suit.
Both NCBA and KBL hired Iseme Kamau & Maema (IKM) Advocates to file petitions challenging the tax demands.
The brewer holds that once the National Treasury accepted a settlement of Sh3.5 billion, it created a legitimate expectation that the matter was settled, hence it is unfair to reopen the matter and demand Sh8.2 billion.
“The KRA acted in violation of Articles 10, 47 and 73 (1) and (2) of the Constitution by sitting to discuss and recommend a reconsideration of the approval for abandonment without according KBL a right to be heard and considering KBL’s views. By acting on the KRA Board of Directors’ decision which was in violation of the Articles aforesaid, the National Treasury compounded the violation and premised his decision on an illegality,” KBL’s lawyers IKM Advocates say in court papers.
In 2021, KRA demanded Sh22.8 billion from KBL, amounts that the brewer disputed on account of past assurances and laws in the governments of Mwai Kibaki and Uhuru Kenyatta aimed at keeping low-cost beer in the market.
But taxation policy shifts in the governments of Mr Kibaki, Mr Kenyatta and now Dr William Ruto have placed KBL in uncertainty regarding taxation of its popular low-cost Senator beer brand.
The amounts demanded in 2021 were split into two separate claims – Sh11.1 billion covering 2015 and 2016, and Sh11.8 billion for 2016 and 2017.
The deal struck at the time saw the Sh11.1 billion claim for excise duty fully abandoned, and the second one of Sh11.8 billion cut down by nearly 70 per cent.
KBL’s legal director Nadida Rowlands says in her affidavit that in 2004 the government requested the brewer to invest in low-cost beer to provide Kenyans with an alternative to illicit brews.
KBL answered the call and put up a Sh1 billion manufacturing plant in Ruaraka, Nairobi intended for production of Senator keg. The beer was to be manufactured using barley sourced from local farmers.
To ensure that KBL sold Senator at the lowest possible price, the government implemented excise duty waivers that fluctuated between 50 per cent and 100 per cent over the years.
In 2015 the Alcoholic Drinks Control Act was amended, and it granted a 90 per cent waiver of excise duty for companies that manufactured their products with locally sourced raw materials.
The Excise Duty Act was also amended, giving the Treasury CS powers to grant waivers to companies producing alcohol using locally grown agricultural products, excluding barley – the key ingredient in Senator beer.
In 2016, the Finance Act scrapped sections of the Excise Duty Act that provided for tax waivers arising from locally sourced agricultural products.
KBL, standing on uncertain ground over the potential of tax claims for Senator beer, asked the National Treasury to make clarifications. There was no response from the National Treasury.
The brewer then applied for a waiver on excise duty for Senator beer under the Excise Duty Act, but the National Treasury did not respond.
In meetings with the National Treasury, KBL got verbal assurances that the 90 percent waiver on excise duty for Senator beer would stand.
But between 2015 and 2017, the KRA made several tax demands to KBL totaling Sh22.8 billion. KBL filed objections at the Tax Appeals Tribunal in 2017 challenging the demands.
In 2017 and 2018 KBL held at least eight meetings with officials from the National Treasury and KRA, including then CS Henry Rotich and PS Kamau Thugge. Other senior officials KBL met were KRA boss John Njiraini and Treasury’s investment secretary Esther Koimett.
The National Treasury advised KBL to liaise with the KRA over the tax demands.
In 2020, KBL wrote to the National Treasury citing alleged unfairness of the tax demands. In the same year, KBL and the KRA engaged the latter’s alternative dispute resolution platform.
During the alternative dispute resolution process, KBL said it had proceeded with building a Sh15 billion plant in Kisumu with the knowledge that the tax demands would be dropped following assurances from senior National Treasury officials.
On January 22, 2021 a deal was struck.
KBL was to withdraw its objections to the taxes assessed by KRA. The KRA on its part was to entirely abandon its claim for Sh11.1 billion in tax assessed for the years 2015 and 2016.
For the levies assessed by KRA between 2016 and 2017, the taxman was to abandon its claim for Sh8.2 billion. KBL was to pay the Sh3.5 billion difference and the matter would be settled.
On January 27, 2021 the KRA confirmed in writing that payment of the Sh3.5 billion would bring an end to the tax dispute.
“On February 15, 2021 the KRA acknowledged receipt of the Sh3.5 billion and advised the KBL to withdraw its appeals at the Tax Appeals Tribunal to enable the KRA to close its files. KBL acted on the said assurance and withdrew its appeals at the Tribunal by filing notices of withdrawal filed on February 15, 2021,” Ms Rowlands said in court papers.
But on March 24, 2023 the National Treasury wrote to KBL stating that the deal struck on January 22, 2021 had been revoked. The National Treasury further told KBL to liaise with the KRA to ensure that the Sh8.2 billion balance for the years 2016 and 2017 is paid.
The National Treasury invited KBL for talks on payment of the taxes on April 13, 2023.
The meeting was held six days later. At the meeting, KBL representatives requested time to consider a way forward, and National Treasury officials accepted.
On April 25, 2023 the KRA sent KBL a demand for payment of Sh8.2 billion within seven days, failure of which would see the taxman attach bank accounts owned by the brewer.
KBL wrote to the National Treasury requesting an urgent meeting. By the time KBL filed its suit on April 27, 2023 the National Treasury had not responded to the letter requesting for an urgent meeting. BY DAILY NATION
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