The Agriculture ministry wants the National Treasury to remove value-added tax (VAT) on tea and coffee to create more jobs along the two value chains.
It says this will attract more firms to package and add value to produce locally.
High taxes on locally-packaged tea and coffee have pushed producers to export the commodities that are then added value and packaged in other countries before re-exporting to different regions, including Kenya.
In many instances, locally-packaged products are unable to compete with the imports on price.
Agriculture Cabinet Secretary Peter Munya said the ministry had prepared a memo that will be presented to the Cabinet in the course of this month proposing removal of VAT on tea and coffee packaged and sold locally.
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“We will be proposing a review of the VAT Act to make sure that tea and coffee are zero-rated. All other food crops do not pay VAT but it is there on tea and coffee and this tends to reduce earnings for farmers,” he said.
“Imposing VAT on the two products has also made it difficult for local players to get into value addition.”
Tea traders have in the past noted that taxes are among the reasons why investors have shied away from venturing into value addition. This has led to Kenya exporting thousands of jobs in the two value chains to other countries.
These include non-producers such as the United Arab Emirates whose Dubai Multi Commodities Centre is a leading re-export hub for tea.
Tea sold in local shops attracts VAT and while exporters of locally-packaged tea are allowed to claim VAT already paid, such claims take lengthy times to process, thus eroding the firms’ working capital.
However, bulk sales through the auction do not attract any taxes, making it easier for traders to buy the tea before adding value elsewhere and re-exporting.
Mr Munya said removing VAT would give Kenyan tea packers an edge over those who currently buy in bulk for export, value add and import the finished products to Kenya.
“The set-up is such that we encourage foreigners to buy, who then go and add value in their countries and then bring back the products to the country at a cheaper price. It is among the factors that have led to low local consumption of tea and coffee,” he said.
Kenyan tea is among the most valuable and most sought after in the world market and is used in blending other inferior teas.
The country is the world’s leading exporter of black tea. Its top buyers include Pakistan, Egypt, the United Kingdom, United Arab Emirates and Afghanistan.