Why cosmetics sector can’t afford new taxes

Most businesses start out as small and medium enterprises (SMEs), and the cosmetics sector is no exception. What stands out is that the majority of cosmetic manufacturers are women who started their careers in the beauty industry. 

This is because the capital requirement is low, the raw materials are locally available and there is relative ease of manufacturing. 

As a result, the sector is currently dominated by women-led SMEs, but this has not limited them from expanding their operations.  

This is best demonstrated by the growth of Suzie Beauty from an SME to a thriving make-up company that was sold to Flame Tree Group. There is also Inter Beauty Products that started as an SME and later sold to L’Oréal Paris. We are also seeing many social media influencers who have ventured into building their own cosmetic brands. 

However, realising this potential dwindles as the government introduces new taxes and regulations that make it difficult for more investments into the sector. Cases in point include new tax obligations in the manufacturing of cosmetics, starting with implementation of 10 per cent excise tax in 2017, which was increased to 15 per cent in July 2022. 

This was followed with changes from the ETR system to the TIMS one, which saw the sector players incur compliance costs. And earlier this year, the government proposed amendments to introduce Excisable Goods Management System (EGMS) stamps to cosmetic products at a rate of Sh2.5 per stamp, effective March 1, 2023.  

Introduction of EGMS stamps will increase the tax burden to untenable levels and, subsequently, make these basic products unaffordable to wananchi.  Beside the cost of the stamps, manufacturers, the majority of whom are SMEs, will be required to procure EGMS machines which may not be compatible with the factory systems, or be forced to hire people to place the stamps on products, incurring logistics costs of getting the stamps. 

At the onset, the government introduced EGMS stamps to combat counterfeiting and illicit trade. However, as demonstrated by the alcohol and beverage sectors, this has not been effective in addressing the surging counterfeits. The Anti-Counterfeit Authority  says  the total value of illicit trade has hit more than Sh1 trillion, from Sh826 billion in 2018.

Speaking at the Annual Taxpayers’ Month event held in October 2022, the President noted that consumption of excise stamps in Kenya is significantly lower that in neighbouring East African countries. This is attributed to rogue officials and counterfeiting of stamps. 

An addition of EGMS will add to the cost of doing business, with no tangible benefit to manufacturers. No other EAC country subjects cosmetics to the same processes. 

On a national development level, an excessive tax burden stifles innovation by diminishing the financial incentive people need to create new products. Innovation reduces dependence on imports and builds trust for investors. Foreign investors would shy away as the net of tax rate increases.  

Over the past 10 years, local cosmetic SMEs brought to the market what was previously only possible to import. 

This has seen the sector support communities through job creation and improved health as users shift to healthier lifestyles, including cosmetics, as seen since Covid-19, and building overall intellectual property. 

EGMS stamps are prohibitive for business growth, as they eat into margins that could be used to innovate. They also reduce overall growth of the sector and, thereby, the Gross Domestic Product (GDP). 

Although we welcome the government’s intention to curb counterfeit and illicit trade, this is not the solution as it has not worked for alcohol and beverage sectors. 

The government should revisit the proposed amendments and exclude cosmetics from EGMS requirements. 

The writer is the chairperson of KAM Cosmetics and Hygiene Sub-Sector and can be reached at info@kam.co.ke.