A brewery’s thirst for justice

It is evident someone powerful is pulling the strings behind KRA’s unrelenting war on Keroche

BY SGI ORIARO

Charity is said to begin at home but for some of Kenya’s local industries – those not known to get along well with the state – this is a cruel fairy tale. No single story illustrates this better than the years-long tax wars between Keroche Breweries and Kenya Revenue Authority (KRA).

The brewery’s proprietors Tabitha and Joseph Karanja are entrepreneurs who have painstakingly worked their way up the ladder. The Karanjas say they started a hardware shop in Naivasha back in the 90s and it is then that they discovered a niche in Kenya’s beer market. Being determined to fill this gap, they obtained a loan from Barclay’s Bank and in 1997, established Keroche Breweries, the first alcoholic beverage producer to be wholly owned and operated by an indigenous Kenyan. Tabitha, who is the face of the company, was 32 then.

The firm has faced a lot of opposition since its inception. In its earliest years, the ministry of Trade falsely accused it of producing poisonous drinks, an allegation that was proven untrue after elaborate lab tests. The company gradually grew courtesy of its cost-friendly drink, Vienna Fortified Wine. Keroche also religiously paid its taxes. None other than the taxman has acknowledged this by previously listing Keroche as one of the major tax contributors and even awarded it for the same.

The relationship between KRA and Keroche took an ugly twist when, in 2005, KRA through the Finance ministry attempted to present what it said was a broad policy touching on tariffs which it sought to increase from 45% to 60%. That, it later emerged, was an offensive against Keroche since the said tariffs would only affect Keroche products. In fact, some products from rival firms were, at the time, being zero-rated. Parliament flatly rejected the policy in question.

When, sometime later, Keroche did a letter to KRA demanding the settlement of their Excise Tax Refund, KRA mischievously replied by alleging that, in fact, Keroche that owed the taxman. KRA claimed it had been charging Keroche’s products under the wrong tariff being Harmonised System (HS) Code 2204 instead of HS Code 2206 which provides for excise duty to be charged at 60% of factory cost. It said that it had been wrongly charging the Vienna Fortified wine product at 45% and therefore required Keroche to pay 5 years of backdated tax arrears based on their new claim.

It was a malicious claim. Section 95 of the Customs and Excise Act provides that a firm of Keroche’s stature should host KRA officials at their firm at all material times. The purpose of this is to ensure that the taxman has all the information necessary to determine the nature and class of the excisable goods manufactured and the materials used in the manufacture. The reason KRA gave for demanding higher taxation for the Fortified wine was that it was wrongly classified with wines manufactured from grapes while it was itself made from pineapples. 

It cannot be that for nine years (1997 to 2006) KRA had officials at the Naivasha firm and religiously renewed Keroche’s trading licence it did not know the raw materials used for Keroche’s products and the class of taxation they should fall under. If anything, there was ambiguity on the part of the Customs and Excise Act on whether wines made from pineapples and grapes are to be classified under the same tariff. It is a naked matter of law that in cases of such ambiguity, the relevant law should be strictly construed so as not to impose a tax burden not clearly provided for. It was not only illegal but also unfair for the taxman to backdate tax of already sold products and demand Sh1.1 billion. There is no enabling law that permits backdating of already charged tax. It was an unreasonable claim.

In 2007, relief was granted to Keroche when Justice Joseph Nyamu ruled in part that KRA cannot pluck from the air a tax liability and place on the shoulders of a company which on evidence had lawfully paid taxes that were due under the applicable tariff during the relevant period. KRA successfully appealed this decision and in 2017. The matter is yet to be fully settled.

In 2014, seven years after the High Court ruling in Miscellaneous Application No. 743 of 2006, KRA came after another of Keroche’s product, Vienna Ice ready-to-drink Vodka. By this time, the Fortified wine had already been phased out of the market due to the tax wars it generated. The disputed product was made by mixing to precision 188ml of Crescent Vodka with 312ml of water to make 500ml of Vienna Vodka. In a similar fashion to the previous case, the contested vodka had already been in the market for some years only for KRA to later claim it had been charging the wrong tax on it. It claimed that by adding water to its already existing Crescent Vodka to come up with the Vienna Vodka, Keroche was involving itself in a new process of manufacture. What KRA wants is to tax the 312ml of water. It backdated the tax for 3 years bringing a cumulative claim of Sh7.9 billion. Kenya, it would seem, is now home of the most expensive water, at least until the courts declare otherwise. 

Keroche controls only about 2 percent of Kenya’s beer market. Its competitor, Britain’s Diageo PLC, which is the majority owner of EABL, controls 71 percent. Perhaps it would surprise you that the dominant player enjoys more favours from the government than Today, how KRA demands a combined Sh9 billion from a business worth Sh10 billion is beyond me.

If these manifestly unjustified tax wars force Keroche to shut down, a lot of jobs will be lost. The only ones that will benefit are owners of the likes of EABL, for even government itself will no longer get the Sh200 or so million it collects from Keroche every month. 

We have many other promising Kenyan businesses go the same way because the government has failed to support them. Mathew Gathua, the owner of Valentines Cake House, is on record saying that the biggest challenge he faces while running his business is high taxation and lack of incentives from the government. 

Kenyans need a government that fairly supports local investors. It cannot be that Brookside Dairies, which has swallowed or killed off smaller competitors, as the only thriving indigenous businesses. Recently, the National Treasury exempted the merger between CBA and NIC banks from paying a share transfer tax running into millions of shillings. The Kenyattas held a 24.92% stake in CBA then. 

What are the government and its owner doing to our country? What are we, Kenyans, doing to ourselves?