Pending Laws Prompt BAT to Cut Earnings Outlook

Source from:  Business Daily Africa 12/14/2010

Pending legislation has clouded the performance outlook for local cigarette manufacturers, prompting Kenya's biggest producer, British American Tobacco, to cut its earnings projections for next year. BAT Kenya said an amendment to the Finance Bill 2010 introduced in Parliament last week is likely to trigger a price war in the sector, eroding revenues for cigarette manufacturers. "The amendments made by Parliament will result in industry-wide pressure to reduce prices in order to benefit from lower taxes," said BAT in a statement, adding that a drop in the company's revenues could see taxes paid to the government drop by 27 per cent next year. The World Health Organisation also passed a new declaration last month calling for reduction in sugar-based additives in cigarettes, which it said have an addictive effect on the youth. Though this new law is yet to be adopted by the Kenya Bureau of Standards, BAT said if adopted locally it will make it harder for the company to sell its products as the variety of tobacco produced in Kenya "is harsh and requires additives to make it palatable." BAT is believed to control about 80 per cent of Kenya's cigarette industry. Mastermind Tobacco, the other major player in the sector, referred all questions to the company's human resource manager, Josh Kirimania, who however could not be reached for comment. In the statement issued on Friday, BAT claimed that it was not consulted during drafting of the amendment proposals by Parliament, and termed the new taxation amendments as "focused on supporting only one industry player." The proposed amendments seek to replace the current hybrid excise duty structure - which is based on physical characteristics and retail selling price - with a structure solely based on retail selling price. The move raises duty on some brands by 67 per cent. If passed into law, it would see consumers pay more for brands such as Safari, which will attract duty of Sh30 per pack. Sportsman and Sweet Menthol will see their duties go up from Sh30 to Sh50 per packet. Revenue losses BAT said that the company will either have to increase prices on these brands commensurate with the tax increase or reduce retail selling prices so that the cigarettes attract duty at a lower rate. "This could translate to revenue losses to the government estimated at Sh2 billion; a reduction of 27 per cent from the Sh7.4 billion forecast for 2010 to Sh5.4 billion in 2011," said the company. The government has adopted levying punitive "sin taxes" as a measure for discouraging cigarette smoking. The last upward review of duty on cigarette prices happened in 2008. Enditem