Excise Duty is a duty charged on specific goods and services manufactured locally or imported on varying rates. Excise taxes can be either specific or ad valorem. Specific excise taxes are charged per quantity, such as per cigarette, pack, or kilogram for example Ksh 12 per pack regardless of price.  Ad valorem excise taxes are charged as a percentage of the value of the product for example  5% of the price .Some of the items charged under specific rates in Kenya include Wine, spirits, beer, mineral water,  fruit juices, cigarettes, tobacco and  petroleum products.

Items charged under ad-valorem rates include imported motor vehicles and cosmetic products. Kenya utilized the ad valorem system until the Excise Duty Act, 2015 (the Excise Act), introduced specific excise duty system for most products except cosmetics, food supplements and motor vehicles.

Most countries do not adjust their tax systems for inflation, or do so only partially. However, when inflation reaches significant levels its effects on the tax revenues cannot be ignored. The best remedy is to bring inflation under control. If this not possible, adjusting the tax system to inflation becomes necessary.

The effect of inflation is an important consideration in choosing between ad valorem and specific modes of taxation. As mentioned ad valorem taxation is payable on a unit of the product and as such increases in proportion to its price. Therefore, it rises automatically in line with general inflation. However inflation erodes the real value of a specific tax fixed in nominal terms. Every time a tax law contains an amount expressed in national currency as is the case with specific taxation, the value of this amount is eroded by inflation.

The static nature of specific taxation necessitates inflationary adjustments on the specific rates since the value of amounts in legislation are eroded by inflation. For example, consumers in Kenya could pay as much as Kshs.5.77 more per litre of beer in line with the new excise duty rates which has been fixed as Kshs. 121.85 from the previous Kshs.116.08. In Kenya several amounts are expressed in our national currency of Kenya Shilling. Examples include the Income Tax act which expresses the levels at which the various tax rate brackets for the income tax begin and end in the Income Tax in Kenya shilling as well as the amount of the personal deduction for the income tax .In the VAT act   the amount of turnover according to which the requirement to register for the value-added tax (VAT) is measured, and further the specific amounts for penalties.

Conclusion

This erosion of amounts expressed in national currency can be dealt with in a number of ways, One way would be to to provide in the statute for automatic adjustment, on a periodic basis, of any amounts expressed in terms of national currency. The current system provides that the Commissioner General is required under the Excise Duty Act, 2015 to adjust, the Excise Duty rates of products with specific rates of Excise Duty, annually, to take into account the rate of inflation, subject to the approval of  the Cabinet Secretary National Treasury and Planning as well as Parliament. The new rates of excise duty are then published through a legal notice. This is a more tedious route as opposed to an ad valorem mode of taxation.

In summary, there is indeed a real difference that ought to be appreciated between the seamless adjustment of an ad valorem tax to inflation and the discontinuous adjustment of a static specific tax.