Nile Breweries closes Shs 14 billion Chibuku factory over tax

For the lovers of Cibuku, a local brew, there are may be no more smiles.

As Ugandans are outraged by OTT and mobile money taxes, a leading factory too has fallen victim to a new tax.

Nile Breweries Limited, Uganda’s leading brewery, effective July 1, 2018 closed its plant for Chibuku, the opaque beer, after government imposed a high tax on it in the 2018/19 budget, a company source has revealed.

In the Excise Amendment Act 2018, government introduced an excise rate for “opaque beer”, of 30% of ex-factory price or  Shs 650 per litre,.

This pegged the excise tax for opaque beers like Chibuku at the same rate with clear beer brands such as Eagle, Senator and Engule.

Nile Breweries sources say this made Chibuku unsustainable because it was not meant to compete with clear beer, but against illicit traditional brews and sachet spirits that do not pay taxes.

“We have no choice but to close the plant,” said a company source.

In early 2017, Nile Breweries commissioned Shs 14 billion plant in Jinja to bottle Chibuku, a product similar to traditional brews such as ajon, malwa, kwete, but in a pressurized bottle.

Chibuku was priced at Shs 1,000 per 500ml bottle to make it competitive with the local brews and spirits that sold for average Shs 800.

“With 30% excise we would have to price Chibuku at 2,000 like clear beer and no consumer would touch it,” said the company source.

The source explained that even when the company attempted to increase price by just 200 to 1,200 the volumes crashed.

Illicit alcohol constitutes 63.3 % of the alcohol consumed in Uganda, with local brews similar to Chibuku constituting 1/3 of it, according to 2017 report by Euromonitor.

Government loses up to Shs 840 billion annually in potential revenue from illicit alcohol.

The Nile Breweries strategy in introducing Chibuku was to win consumers away from this informal and unhygienic alcohol.

It engaged with the Ministry of Finance, and agreed that the product needed to be developed to penetrate the untaxed alcohol category. Accordingly, from 2012 to 2016 Nile Breweries piloted Chibuku amongst consumers of informal alcohol, selling in paper cartons and jerry cans.

The product proved a success, earning government billions of shillings in VAT, but not paying excise tax, as agreed by the Ministry of Finance.

Nile Breweries, however, realised that the product was only sustainable if its shelf life was increased by packing it in a pressured bottle like clear beer.

Nile Breweries, however, was apprehensive about investing the Shs 14 billion in a specialised bottling line for Chibuku without a specific excise law on opaque beer.

The company intensely lobbied the Ministry of Finance tax office to enact a specific law for opaque beer.

The Ministry officials persistently assured the company that as custodians of tax policy they did not deem it necessary yet to make a specific law for Chibuku, until the volumes were significant.

In the meantime, the company should go ahead to invest in bottling Chibuku and prove there would be enough volume to warrant a specific excise law.

Indeed, bottled Chibuku, starting March 2017, proved an instant hit with consumers, rising from 100,000 litres per month to 1.4 million litres per month.

Nile Breweries retuned to government and demanded for an appropriate excise rate for Chibuku in the 2018/19, which would keep the price at Shs 1, 000 for it to be competitive.

However, everything was turned upside down when URA, despite knowing the gentleman’s agreement between Nile Breweries and the Ministry of Finance, turned around in May 2017 to demand for excise tax arrears on Chibuku from the company.

URA argued the excise law as it existed then, even without providing for opaque beer, covered it too as beer.

This prompted the Minister of Finance, Planning and Economic Development, Matia Kasaija, to write to the URA Commissioner General,  Doris Akol on August 3 2017, reminding her that the Ministry had authorised Nile Breweries to produce Chibuku on experimental basis without excise tax.

The minister told URA that the Chibuku experiment had worked, so an appropriate excise tax for opaque beer would eventually be formulated in the 2018/19 budget.

The Commissioner General, however, rejected the Minister’s position in a letter dated August 28, 2017.

URA continued to demand for the excise tax arrears on Chibuku, forcing Nile Breweries to petition the Tax Appeals Tribunal (TRA).

The tribunal too disregarded the understanding between Nile Breweries and the Ministry of Finance and sided with URA to define Chibuku as a beer.

To compound it all, when the specific law on opaque was enacted in the 2018 Excise Act, the rate was pegged to that of clear beer.

“We were left at a loss,” said a Nile Breweries source.

“We have had a long history of working with government to increase our indirect taxes revenue on beer from Shs 44 billion to over Shs 250 billion in 2017,” the source added.

Indeed, in 2016 URA voted Nile Breweries as the most compliant tax payer in the history of the tax body.

We spent over five years convincing government that Chibuku and other opaque beer could not carry the same excite tax as clear beer because consumers had cheaper options.

“We had repeatedly warned government not to put an unreasonable tax,” the source said.

“A top URA official instead accused us to blackmail,” he said.

“It sad that the closing to the Chibuku factory has vindicated us,” the source said.

“Government had to listen to people and investors when it comes to taxation,” the source said.

The Nile Breweries source explained that the closing of the factory is not a loss to only their company but the wider Uganda economy:

• Government will lose Shs 5 billion annually in VAT alone, which it had been getting even without excise.

• Nile Breweries had been purchasing average  3.6 million Kgs of maize annually locally to make Chibuku

• Over 1,000 farmers supplying maize for Chibuku have lost market.

• 6,000 direct and indirect jobs linked to Chibuku have been lost

• The opportunity of using Chibuku to convert consumers to taxed alcohol has been lost

With the closure of the Chibuku factory, consumers may resort to unsafe and unhygienic substitute illicit alcohol.