During the reading of the Budget, National Treasury Cabinet Secretary Henry Rotich lowered taxes on the cigarettes from Sh2.50 per stick to Sh1.80.
The reduction in tax for plain cigarettes is a reprieve to low-incomes groups who had resorted to counterfeit brands as well as unsafe substances such as print-inks and unprocessed tobacco.
“The lower tax rate will afford low-income customers the cigarettes as well as reduce tax revenue losses,” said Mastermind Tobacco Corporate Affairs Manager Josh Kirimania.
Speaking to The Saturday Standard, Mr Kirimania said the previous tax regime that had introduced a unitary rate of Sh2,500 per 1,000 sticks had made cigarettes expensive for customers in the low-value segment.
The higher tax rate was also blamed for influx of inferior counterfeits and smuggling of cigarettes into the country leading to disappearance of value-brand products.
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Mastermind, which dominates the low-end market, also experienced a drop in sales since all cigarettes were being priced equally.
In their proposals to Treasury on December 8, 2016, Mastermind said the flat rate taxation had led to a 60 per cent dip in excise revenue from cigarettes.
“The impact of this is a reduction of excise revenue from cigarettes by over Sh1 billion per month,” the firm said in the letter.
But the latest move, argues Mr Kirimania, will ensure low motivation for counterfeits as well as introduce equity in the tax burden on the sector that has seen much restrictive legislation in the recent past.
In the Budget Statement last month, Rotich said the decision was taken to “create equity and fairness…and prevent job losses in the sector.”
Since its registration in 1989, when the local cigarette market was dominated by a single player, Mastermind has had to contend with the ever-changing law.
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In 2003, the government introduced a four-tier specific taxation structure where cigarette makers paid taxes depending on the retail price as well as brand categorisation.
While the lower category that was selling a single stick at Sh1.50 paid Sh0.45 as tax, the upper end paid Sh1.40 on each stick sold at more than Sh3.50.
This would later be amended in succeeding Finance Act up to 2015 when a single-tier tax was introduced.
“The structure was advanced on the presumption that it would facilitate ease of tax collection as it was thought that the four-tier structure was complex,” said Mr Krimania.
The tobacco industry is facing operational challenges such as restrictions on advertisement and also a requirement that manufacturers display warnings in words and pictures on packets to discourage smoking.
It is also facing a possible implementation of 2 per cent solatium tax in addition to the 30 per cent corporate tax.
The World Bank recommends a minimum tax of 80 per cent on tobacco products to discourage smoking and thus reduce health complications such as cancer.
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