PAPER INSTRUCTIONS FROM CUSTOMER
Assignment Topic : EXCISE LAW AND PRACTICE
Number of Pages :6 Page/ 1650 Words
ESSAY WRITTEN SOLUTION
The excise tax imposed on the economy is done so to achieve several goals. To do this, the act itself is defined as An act of parliament to provide for the charge, assessment and collection of excise duty to make administrative provisions relating to it and for connected purposes. Among the many reasons for the imposition of this tax is to correct for negative externalities arising from the consumption of the taxed products, now commonly referred to as \’sin tax\’. The consumption of certain products, e.g. smoking cigarettes or excessive drinking of beer and other alcoholic beverages.
Excise duty is meant to reduce the consumption of such products by making the goods less affordable. The sin tax is now a tax levied on goods and products considered harmful or costly to society. The additional government revenues from sin taxes are generally used to cover the societal costs created by the consumption of harmful goods, e.g. increased spending on healthcare to treat diseases caused by smoking. Additionally, revenues from sin taxes allow governments to implement different social programs(e.g. raise awareness on the consequences of smoking). Consumption of these products is harmful not only to the individual but also affects society at large both in the short-run and long run. In such cases, market forces produce distorted prices, which exclude the cost of society consuming these products and hence result in higher consumption. The outcome produced by the market forces needs to be corrected for their negative externalities.
Therefore, the relatively high taxes imposed on these products are meant to ensure that individuals internalise the cost to society of consuming this product. Excise taxes are efficient, relatively high and can be levied with minimal welfare loss. Differences in sin taxes application and outcomes are present between low and middle income vs high-income evidence has shown that the application of these taxes can significantly affect consuming patterns and well-being of the population while being financially sustainable.
From an economic standpoint, excise duties are a form of indirect taxation in that they are levied on goods or services rather than on firm or personal income. This gives them a greater capacity to shape consumer behaviour. Sin taxes can be applied in two different ways:
- Per unit-defined as a fixed amount for each unit of a good or service sold such as Ksh per kilogram
- Ad valorem- levied on spending and set as a percentage of the value added by a firm as in the case of VAT
In the case of (a), the tax is represented by a fixed amount per unit, while in the latter, the tax is made up of a fixed percentage per unit. A uniform tax would result in a larger reduction in the number of smokers and a large reduction in the consumption of cigarettes. Under a uniform excise tax rate of Ksh 2500, consumption of cigarettes would reduce by 3 million relatives to 761 thousand.
Objectives of the study
This study aims to examine cigarette taxation in Kenya and how it affects cigarette consumption. The study analyses the probable effects of recent excise tax policy changes on tax revenue and cigarette consumption.
- To review tobacco taxation and consumption.
- To analyse the effect of excise tax on consumption
This discussion will focus on cigarettes rather than other tobacco products and beer. In sin tax, I am of the opinion that cigarettes are the main tobacco product consumed in Kenya, and cigarettes generate the highest excise revenue and have the biggest public health impact among tobacco products.
Tobacco Consumption in Kenya
According to the Global Audit Tobacco Survey 2014, the current smoking prevalence in Kenya is 15.1% among men and 0.8% among women, with the national average being 7.8%. Daily cigarettes smokers include 11.6 % of women and 0.6% of women. With a 7.8% smoking prevalence of 42.927 million people and 58.1% of the total population aged over 15 years, there are 1.95 million smokers in Kenya. The total market value of cigarette sales in Kenya was Ksh 34 billion for 7403 million sticks in 2013. It means the number of cigarettes smoked per day per every adult smoker was nine sticks. The annual expenditure on cigarettes per adult smoker is 17477 or Ksh 48 per day. This was per a Capita GDP of Ksh 124468 as of 2014. This cigarettes expenditure accounts for 13% of per capita GDB for a smoker. This percentage reflects how the opportunity cost of tobacco use is high.
Tobacco Taxation and Consumption
Excise duty imposed on cigarettes is known as the most effective tobacco control strategy available. Even so, a key challenge is how to choose which type of excise to levy and at what rate. Finding the appropriate balance between specific and ad valorem taxation is also a challenge. Additionally, it is also a problem to decipher whether to apply a uniform tax or a differential rate system.
The appropriate type of excise on tobacco products
The choice of specific and ad Valorem excise is a long-standing issue in tax policy and affects price variety, variety of tobacco products and tax administration. These three broad tax policy effects do impact tobacco consumption in one way or another.
Price effects on excise
Specific excise is known to increase consumer prices relatively more than ad valorem excises, leading to a relatively higher reduction in consumption. This is because under specific taxation, an increase in the producer price will go to the producer as revenue, and this would increase the producers\’ incentive to raise their products. For ad valorem taxes, on the other hand, part of the increase in prices accrues to governments as tax revenue, and hence a tax increase may not have a similar impact as that of a specific tax. When the income level of countries is accounted for, the average retail price is much higher for countries that rely solely on specific taxes relatively to those that solely rely on ad valorem.
Effect of excises on a variety of tobacco products
The product variety is important in the tobacco control perspective since it enhances the appeal of its products and, in this case, the cigarettes. This is especially the case when referring to the younger age groups and more affluent tobacco users who prefer higher-priced, more heavily marked cigarettes. A narrower range of products would reduce consumption by depressing among other the market power product appeal. Evidence indicates that ad valorem excise may perform better than a specific price in affecting product variety. Conceptually, an increase in ad valorem tax makes markets relatively more competitive, which may induce the exit of some brands hence reducing product variety in the market. On the other hand, specific excises provide incentives for more appeal and higher-priced products as well as greater product variety.
Effects of excises tax administration
Specific taxes are easier to administer as government revenue can be collected at a designated stage. Ad Valorem taxes are prone to undervaluation since the tax authority relies on the declaration of price to determine the tax due. For this reason, ad valorem taxes require string tax administration with high technical capacity. Thus relative terms specific taxes are more likely to enhance tax effectiveness and thus have a greater impact on the consumption of cigarettes.
Consumers of tobacco products may reduce consumption of their preferred brand or may switch consumption to lower brands when facing tax and price increases. Specific excises are less likely to induce substitution from high to low priced brands or switching down. This is because a uniform specific tax would reduce the relative price of higher to lower-priced brands with an ad valorem. The relative prices shall remain unchanged hence providing room for switching down. Ad Valorem taxes have a couple of advantages too. A particularly important one is that an ad valorem tax maintains revenue value under the high inflation, given that the number of taxes increases as price increases. On the other hand, specific taxes need to be adjusted with the consumer price index (CPI) to keep pace with inflation. Many tax systems that rely on specific taxes overcome this challenge by introducing an automatic inflation adjustment.