Findings on the Implication of Excise Duty on Sorghum Value-Chain

Kenya’s agriculture sector continues to face challenges in production in marginal areas. This is mainly due to frequent and prolonged drought hence the need for drought resistant crops like sorghum to address the issue of food security, household income, poverty alleviation, and climate change adaptation. Kenya’s Vision 2030 also identifies agriculture as one of the key sectors to deliver sustainable economic growth and improved livelihoods for the poor in the rural areas. Productivity increases in agriculture can reduce poverty by increasing farmers’ income, reducing and stabilizing food prices and thereby enhancing increments in consumption.

Sorghum is a staple food crop for many low-income households in Kenya and a raw material in the food, feed and brewing sectors of this country. When sorghum is viewed in terms of its suitability for production in drought-prone, semi-arid areas of Kenya, its importance increases. The growth of these regions will best be served by promoting the production and use of crops suited to these agro-ecological conditions - this has been the driving force behind promoting sorghum production by various stakeholders in these regions. In 2012, Eastern, Nyanza and Western regions accounted for 45, 39 and 6 percent of the Kenya’s sorghum production respectively. Collectively, these three regions produce about 91 percent of the country’s sorghum (MoA-ERA, 2011, 2012 & 2013).

In 2004 the government granted a remission of 30 % on excise duty on beer made from sorghum, and increased it to 100 % in 2006. This allowed beer made from locally produced sorghum to be sold at Ksh 16. per 300 ml per glass (equivalent of $0.20), approximately the same price as most illicit brews. This was meant to promote the use of locally produced raw materials (sorghum) while encouraging consumers of illicit brew to switch to hygienically prepared beer. This tax break boosted sales of legal beer made from sorghum, and allowed government to collect some of the tax lost from sale of illicit brews. In September 2013, a new tax regime came into force through the Customs and Excise Act that introduced excise duty on beer made from sorghum, millet or cassava at 50% of the rate charged on other beverages on top of the 16% VAT that the beer attracts. This brand of beer from sorghum was initially introduced to woo drinkers of illicit brew to a more hygienically prepared brew.

In our recent analysis of the implication of the excise duty on the sorghum value chain, we use the case study of smallholder sorghum producers to demonstrate the anticipated welfare losses to farmers as a result of its implementation and the implication on the fight against poverty, food security and job creation. The Government’s key argument in introducing this tax was difficulty to administratively differentiate between various beer products and those made from sorghum hence posing a threat to revenue collection. However, this argument did not take into account how the small scale sorghum producers will be affected if the demand for sorghum, a raw material in beer production is curtailed by the new tax regime on the sorghum beer.
The introduction of the tax and subsequent withdrawal of a major buyer in the sorghum value chain has led to income losses estimated at Ksh 3.4 billion to various actors. The country risks adverse long run effects on poverty, food insecurity, nutrition and unemployment as well as increase in number of children dropping from school due to this tax.

The incentive to produce sorghum by farmers in marginal areas where food insecurity and poverty is rampant was enhanced by market access offered by East African Breweries Limited and the hope for better returns. However, the excise tax increased cost of producing a litre of sorghum beer by Ksh 35. This additional cost was passed on to consumers of the beer subsequently leading to low demand. Sales for sorghum beer fell by 75% in 2013/2014 as reported by EABL. The brewer subsequently reduced demand for sorghum. Our analysis estimates the farmers’ forgone income from sale of sorghum to EABL in 2013/2014 at about Ksh. 180 million. We anticipate decline in production of white sorghum due to the shrinking of the market. Sorghum production declined by 17 percent in 2013 (FAO estimates) and the question we pose is: Could this be attributed to market uncertainty faced by farmers due to the excise tax on sorghum beer? The intermediaries’ forgone revenue from bulking and sale of sorghum to EABL is estimated at Ksh 78 million. Jobs have been lost by several other actors in the value chain. EABL has reported losses in revenue stream due to low demand of sorghum. Who could be gaining from this tax regime? Perhaps feed manufacturers if they take advantage and buy sorghum cheaply from farmers- but again this needs to be investigated.

Implications for Policy
Efforts by the government and other stakeholders to promote sorghum production were based not only on the desire for equity or concern about the welfare of those producing insufficient food, but also its contribution to national economic growth. Therefore, government policies and investment strategies should be designed to exploit the competitive advantages of poor people living in marginal areas in the production of sorghum. They should also ensure agricultural growth with favorable marketing incentives in the agro-processing sector. In response to the Custom and Excise Act 2013 that introduced a 50% excise tax on sorghum beer, the government should consider the following actions:

Firstly, reviewing downward the rate at which the excise duty has been set before total collapse of the sorghum value chain so as to:
a. Keep farmers in business as they continue to meet their food security needs and be able to keep their children in school.
b. Help in reducing the number of people consuming illicit brews hence avoiding unnecessary deaths.
c. Stimulate demand for sorghum beers hence help the government realize the projected Excise tax of Ksh 6.2 billion or more.

Secondly, explore options for up-scaling use of sorghum in feed and food manufacturing to cushion farmers from market uncertainty and over reliance on EABL as a major buyer since agricultural marketing and agro-processing is critical to agricultural growth.

Finally, review the rationale for imposing excise duty on value added products manufactured using locally produced agricultural raw materials.

Author: Joseph Opiyo, Senior Research Assistant at Tegemeo Institute of Agricultural Policy and Development – Egerton University