Kenya’s rigid tax policy helps export tea jobs, say traders

Workers at Iria-ini Tea Factory go about their daily duties. Tea traders at the Mombasa auction told the Standard that Value Added Tax (VAT) was the main reason investors are not keen to venture into packaging or processing of the popular beverage. (PHOTO: JOHN GATHUA/ STANDARD)

Kenya could be exporting thousands of jobs in the tea value chain due to stringent taxation measures at home.

Tea traders at the Mombasa auction told the Standard that Value Added Tax (VAT) was the main reason investors are not keen to venture into packaging or processing of the popular beverage.

Exporters are allowed to claim VAT already paid but such claims can take years to process, effectively compounding their working capital needs.

However, bulk sales in bags through the auction does not attract any taxes, making it easier for traders to acquire it before adding value elsewhere, including the United Arab Emirates for re-export.

“We are exporting jobs and losing our identity by exporting the unpackaged tea,” explained Edward Mudibo, the 11-member East Africa Tea Trade Association's managing director.

Jobs in the tea value chain within Kenya are concentrated on the farm level, where an estimated 650,000 small-scale farming households are employed, but earn a small fraction of what is realised from the finished product.

A much smaller population is employed through the bulking at the tea buying centres and across tens of factories, before the produce is transported to the bonded warehouses in Mombasa for export.

Superiority of the Kenyan produce in the World market raises the urge by traders to take it offshore and use it to blend other teas. UAE, for instance, is listed among the major tea exporters selling nearly 40,000 tonnes in 2014 even though it does not produce any of it.

Mr Mudibo says Dubai is among the biggest beneficiaries of the Kenyan tax regime, specifically profiting from the thousands of jobs in processing and packaging of imported tea. More than 95 per cent of the tea produced in Kenya is exported to more than 10 countries including the UAE – the World’s largest re-exporter, and Pakistan.

Peter Kimanga, a major tea exporter and Mudibo’s predecessor, said in an interview that other countries were claiming Kenya’s tea as their own produce after undertaking basic repackaging.

“Our tea is used in blending poorer varieties produced elsewhere ensuring that we are losing our identity,” he said adding that there is hardly any value addition at home due to the unfavourable local taxation procedures.

Dealers like himself would rather sell the tea in bulk to avoid the rigorous VAT claiming procedure, which inadvertently locks in ‘billions’ worth of working capital. Besides, paying the tax puts the local at disadvantage position compared to producers in the region including Uganda, Tanzania and Rwanda are enjoy concession from their respective government, Kimanga adds.

Kenyan tea, on average, is the most valuable and most-sought after at the market – where 70 buyers from around the World are members. UK’s Unilever, Finlay’s and L.A.B International are three of the biggest traders at the Mombasa Auction in terms of value and volumes.