Water Tax That Has Left Keroche Breweries With a Hangovér

KEROCHE VS KRA: PART 2

The Keroche tax saga entered a chapter on Tuesday, March 16 after the brewer struck a deal with the Kenya Revenue Authority (KRA). The two parties agreed on a payment plan that will see Keroche pay Ksh957 million over 24 months beginning January 2022.  The taxman is demanding a total of Ksh22.79 billion in unpaid taxes from Keroche. The payment plan sets the stage for reopening of their Naivasha premises. In the second and last article on the Keroche vs KRA series, we look at how KRA taxed water used in making alcohòlic drinks and how it contributed to hefty tax bill.

A number of disputes between the KRA and Keroche Breweries were resolved through the ADR (alternative dispute resolution) mechanism. However, the issue of Viena Ice ready to drink vodka remained unresolved when Keroche failed to agree on a proposal by KRA.

KRA proposed to abandon all past alleged demands totaling Ksh6.1 billion (2012 /13/14)), if only Keroche agreed to apply the proposed new rate going forward. But Keroche held that water used to dilute its Crescent Vodka to make Viena Ice ready to drink vodka is punitive and incorrect in principle. In addition, this would result in a drastic price increase and automatically drive it out of the reach of the intended market. Additionally, this is not value for money to the target consumer.

Since the dispute involved different interpretations of rules of classifications it was resolved that the dispute progresses to the Tax Appeals Tribunal (TAT) for determination. With the Tax Appeals Tribunal (TAT) awaiting proper constitution, our submissions were delayed till June 2019.

Through these arbitration and negotiation processes (2014-2019), KRA continued monthly collection of taxes due for the 188ml Crescent Vodka that is in our 500ml Viena Ice ready to drink Vodka, and continued issuance of excise duty stamps on a daily basis, according to Keroche management, which now takes over the narration of this story.

However, on 14th June 2019 KRA withdrew their support for this arrangement with a new letter demanding Keroche to apply the KRA rate (which we had disputed) going forward – now at Ksh210/litre – or change our formula and create a product that is below 10% alcohol content and pay at Ksh110/litre. Neither of these proposals favoured both Keroche and ironically the KRA itself.

If the rate of Ksh210/litre of water used to dilute our Crescent Vodka to make our Viena Vodka Ice ready to drink vodka is applied, the product cost goes up by 200%. This will automatically push the product out of the market. KRA loses all the taxes they were collecting from the product.

If Keroche is forced to create a ready to drink vodka product that is below 10% alcohol content and 90% water the product loses its competitive edge in every market. Additionally, its retail price is not value for money. Keroche loses a huge customer base. KRA loses a huge amount of tax they were collecting from the product.

On 18th June 2019, Keroche objected. Keroche and KRA held a meeting and KRA team re-affirmed their decision that we pay as per their letter.

Subsequently, a Keroche management meeting was held on 19th June 2019 to deliberate the way forward and opted to go with the second KRA option to create a less than 10% Ready to Drink Vodka. As per our initial fears, we have now lost 90% of the market we had cultivated for 12 years. This product was on its death bed. To the intended market, this new formula was not value for money.

These reclassifications, back dating and change of formula are the basis of the exorbitant amounts in question (The Ksh9.1 billion explained above and the Ksh14.4 billion tax case – currently in court).

On 9th March 2020 , the Tax Appeals Tribunal (TAT) issued a decision in favour of KRA. The Ksh9.1 billion decision was contradictory. While the Còurt of Appèal has stopped KRA from reclassifying Viena Fortified wine from HS Code Tariff 22.04 to HS Code Tariff 22.06, the TAT allowed KRA to conduct an assessment based on their decision to reclassify to HS Code Tariff 22.06. Surprisingly the TAT changed our formula and determined a ‘new rate’ of Ksh94/litre whose basis CANNOT be established.

In its ruling, The TAT strangely allowed KRA to collect taxes demanded on Viena Ice ready to drink Vodka less the rebate for the excise duty paid on Crescent Vodka. This decision supports our long held position that Viena Ice ready to drink Vodka is 188ml Crescent Vodka and 312ml added water.

In other words, KRA has already collected taxes due on the 188ml Vodka. What they are demanding is tax on the 312ml water. Our position is this water cannot be charged.

 Other Pending cases:

1. The 14 billion shilling case which is currently in high court has been explained as part of our statement above which is purely based on the re-classification of our Viena ice ready to drink vodka which due to punitive taxation was forced out of the Market in 2020.

2. The last nail on our Viena ice ready to Drink vodka was in June 2020, when KRA issued a circular indicating that the ready to drink vodka should NOT be above 6% alcohol content. Mixing of 940ml of water and 60ml vodka would definitely taste like water and we were therefore forced to stop the manufacturing of our Viena ice ready to drink vodka in December 2020.

To make the matters worse, KRA deployed all its enforcement resources to ensure that we are not producing that brand and shockingly they claimed that they found some 3 bottles of our Viena Ice ready to drink vodka which was allegedly at 12% alcohol content and whose source we are yet to ascertain.

It was shocking that KRA backdated all our Viena Ice produced during that time and re-classified it to a new tariff and this is the basis of the current case of Ksh256 Million currently at the Tax Appeals Tribunal (TAT).

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We believe this case was a matter of pure witch-hunting. The sad part of it is that our Viena ice ready to drink vodka which was created through innovation and developed from 2007 had to be phased out of the market through punitive taxation in June 2020.

3. It is good to note that the figure of 3,998,561,062 {a combination of Ksh1.1 BILLION (2006 case) and Ksh2.9BILLION water added into our Viena Ice ready to drink vodka (2012-2015)} as mentioned by KRA which was a subject of abandonment application arose from ADR settlement. The settlement was amicable and meant to provide a way forward on future taxes. The settlement figure was therefore hypothetical as Keroche had Neither charged nor collected the taxes due to ambiguity on the rates applicable

Current Taxes (Feb 2021 – Jan 2022)

Keroche Breweries appreciates the support accorded by the government through its agent the Kenya Revenue Authority (KRA), who are mandated to implement the tax policies and collect taxes on behalf of the government. However, we wish to highlight the run offs with KRA leading to closures of the company’s factory at Naivasha. The ground for closure was due to outstanding tax arrears of Ksh322 Million that accrued from February 2021.

Failure to be up to date on the payments was explained to KRA as low business leading to poor cashflows that could not fully meet all the cash obligations of the company (taxes, utilities, salaries, suppliers, etc.). We subsequently entered into a proposed payment plan with KRA but we could not manage to honor the same due to frequent interruptions by KRA:

• On 7th December 2021 KRA closed the factory and further issued agency notices to 36 banks in Kenya. This completely collapsed all our business operations since we could neither produce, sale nor access any financing from any of the banks to assist in settling the arrears.

We started negotiating for a payment plan and we requested for 24 monthly instalments based on our financial projections which KRA rejected and insisted on six monthly instalments. We proceeded with their proposal although we knew it was unrealistic since we wanted to have our plant re-opened and we were desperate to take our products in the market during the festive season.

• On 22nd December 2021 KRA re-opened, but unfortunately, the earliest our products could reach the market was on 27th December 2021. We only managed to sell for three days till the end of the year but KRA were on our case demanding for the arrears according to the payment plan. We remitted Ksh10 million which was available in our accounts then; which to them was insufficient.
• On 10th January 2022 KRA again shut down the factory and we re-negotiated the payment plan (24-installment) which they still rejected.
• On 15th January 2022, after another round of back-and-forth discussions, KRA re-opened the plant. For us to go into production we needed revenue stamps which we had to apply and it took a further one week to get approval and issuance from KRA. We, therefore, started production on 22nd January 2022 and even before these products reached our markets KRA struck again.
• On 31st January 2022, KRA closed the plant once again. In such circumstances of operating less than a week, it was impossible for us to raise the amount of money KRA were demanding. We managed to make a further payment of Ksh2.5 Million within the short period we were in operation. At this point they refused to accept further negotiations and the office of the Commissioner-Domestic Taxes Department, advised us that their hands were tied and we should seek support from the office of the Commissioner-General. Since then we have been trying to reach and even going to his office but we have been unable to reach him for his intervention.

From 1st February 2022 to date, we have remained closed and yet we have over two million litres of beer worth about Ksh512 Million in our tanks which have fixed costs to a tune of about Ksh30 Million required to maintain the same monthly. This has drained all our resources and, unfortunately, if nothing is done urgently, we will be forced to drain down all the beer and lay off over 250 direct employees and thousands within our nationwide distribution network.

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The recent closures of the factory by KRA have created a lot of uncertainty on the company’s operations and future plans which if not addressed are likely to result to:

1. Loss of 2 million Litres of beer in the tanks under fermentation worth Kshs.512 million.
2. Loss of 250 direct jobs originating from all over Kenya whose livelihoods depend on the existence of the company.
3. Loss of income to thousands of Kenyans who are indirectly involved in the distribution network.
4. Erosion of the Investors’ confidence both Local and Foreign
5. Killing of our local industries leaving the Multinationals to monopolize our economy (killing of the goose that lays the golden egg).

Conclusion

This tussle between Keroche and KRA sheds a lot of light on how torturous our 25-year-old journey has been. Even though our faith in the cause of Kenyan entrepreneurship remains unshaken, it is time to voice the question that is being asked across Kenya – how does a local enterprise survive in such a hostile environment and yet it has contributed to the Kenyan economy from the time of its inception:

1. Creation of direct and indirect jobs.
2. Breaking of the monopoly by Multinationals in the Alcohólic beverages sector and giving the Kenyan consumers a choice that is more premium.
3. Contribution of over Ksh30 Billion in taxes to the Exchequer.
4. Putting the Nakuru County and by extension Kenya on the Global map due to the latest 21st Century brewing technology.

Our humble appeal to the Commissioner-General:

• Assurance of a certain operating environment free from any harassment, unexplained tax demands, punitive taxation introduced on our products leading to their being wiped out of the market.
• To kindly but urgently request the re-opening of our plant to prevent huge losses as described above and enable us resume production, sales and distribution and most importantly protect and safeguard the livelihoods of thousands of Kenyans employed by the company both directly and indirectly.
• To kindly request the lift the agency notices with the 36 banks to enable us access financing.
• Due to the many disruptions, we have gone through since December 2021; we kindly request KRA to give the company 18 months grace period on the taxes in arrears. However, the company will continue paying the current taxes as they fall due.
• To kindly give us an audience as one of the indigenous enterprises.

To Kenyans,

We are more than grateful to the honest support, encouragement and prayers that you have shown us. A million words would not be enough to describe how grateful we are. Our future depends on the enterprise we build today for the future generations.

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