A recent study commissioned by British American Tobacco (BAT) Kenya and conducted by research firm Kantar has revealed that Kenya is losing an estimated Sh10.2 billion annually in excise duty and Value Added Tax (VAT) revenue to illicit cigarette trading. The study found that nearly one in every two cigarettes consumed in the country escapes taxation. This has significant implications for the government's revenue collection and the formal tobacco industry.
The study indicates that illicit cigarettes accounted for 45 percent of the Kenyan market in 2025, leaving legally taxed products with a 55 percent share. This represents a significant shift in market composition, with the share of legally taxed cigarettes declining by 11 percentage points between 2021 and 2025, from 66 percent to 55 percent. BAT Kenya Managing Director Sidney Wafula attributed this decline to the growing illicit market.
The illicit market is raising concerns over lost government revenue, weakening of the formal tobacco industry, and the effectiveness of tax and border enforcement measures. Cheaper untaxed products are gaining ground among increasingly price-sensitive consumers. The study identifies Uganda as the leading source of illicit cigarette supplies entering Kenya, followed by Tanzania and South Sudan.
Differences in excise duty rates across East African Community markets are creating incentives for cross-border smuggling. Kenya charges Sh4,100 in excise duty per 1,000 cigarettes, equivalent to Sh82 per pack of 20, compared to Sh1,974 in Uganda, Sh1,874 in Tanzania, and Sh1,200 in South Sudan. This tax differential, coupled with porous borders and enforcement gaps, has created opportunities for illicit traders.
Consumer affordability pressures have also contributed to the shift towards illicit cigarettes. Higher excise taxes have increased retail prices, potentially pushing price-sensitive smokers towards cheaper untaxed alternatives. Successive increases in excise duty between 2018 and 2022, which raised the tax burden by 55 percent, coincided with declining legal cigarette volumes and government collections.
The study also found that employment supported across the formal tobacco value chain declined from approximately 80,000 people in 2022 to 75,000 in 2025. BAT Kenya's Sidney Wafula called for more predictable excise tax policies, sustained enforcement, stronger border controls, and measures to prevent the diversion of transit consignments.
The cumulative tax loss over the last five years amounts to Sh37 billion. The study's findings highlight the need for a multi-faceted approach to address the issue of illicit cigarette trade in Kenya. The government, industry stakeholders, and law enforcement agencies must work together to prevent further losses and ensure that the tobacco industry contributes to the country's economy.
Key points
- Illicit cigarettes account for 45 percent of the Kenyan market.
- Kenya loses Sh10.2 billion annually in excise duty and VAT revenue.
- The share of legally taxed cigarettes declined by 11 percentage points between 2021 and 2025.
