Excise Duty Relief Applicable To Packaging Materials If They Are Essential To The Final Product’s Integrity

Case Study: Buyline Industries Limited v Commissioner of Domestic Taxes (Tax Appeal E945 of 2023) [2024] KETAT 1610 (KLR)

The Kenya Revenue Authority (KRA) issued an excise duty assessment of Kes. 8,300,174.00 against BIL for the period January 2021 to June 2023. BIL objected, arguing that the excise duty was wrongly imposed on imported glass bottles, labels, and plastic caps used in manufacturing excisable goods.

Key Legal Issue

Whether KRA erred in disallowing BIL’s claim for excise tax relief on imported glass bottles, labels, and plastic caps under Section 14 of the Excise Duty Act, 2015.

BIL Arguments

· Packaging materials are raw materials: The glass bottles, labels, and plastic caps are integral to the final products (e.g., nail polish, perfumes, deodorants). Without them, the product is incomplete.

· Excise tax credit system: The Excise Duty Act allows for excise duty relief on raw materials used to manufacture excisable goods, and packaging materials should qualify.

· Ambiguity in tax law: The Excise Duty Act does not define ‘raw materials’, and under the principle of contra fiscum (ambiguity in tax laws favors the taxpayer), the claim should be allowed.

· Regulatory compliance: Labels are legally required under the Standards Act (KEBS, KS 1707:2002) for consumer protection and should be considered part of the final product.

KRA Arguments

· Packaging materials are not raw materials: The excise duty relief under Section 14 applies only to raw materials, not packaging materials, as packaging is not part of the manufacturing process but rather an end-stage necessity.

· Definition of raw materials: Packaging materials do not fit the ordinary meaning of raw materials, which are inputs necessary for manufacturing, not final product containers.

· Tax law interpretation: Tax laws must be strictly interpreted, and there is no provision allowing tax relief for packaging materials.

Tribunal’s Analysis & Findings (22/11/2024)

· Ambiguity in law: The Excise Duty Act does not define “raw materials,” and Black’s Law Dictionary gives a broad definition that includes semi-processed materials used in production.

· Broad definition of manufacturing: Section 2 of the Excise Duty Act includes intermediate or uncompleted processes as manufacturing, supporting BIL’s position.

· Precedent support: The Tribunal reaffirmed its ruling in London Distillers Ltd v Commissioner of Domestic Taxes (TAT No. 1026 of 2022), where similar claims were upheld.

· Taxpayer favorability: The Tribunal applied the principle of contra fiscum, ruling that ambiguities in tax law should favor the taxpayer.

As such BIL won!

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