Tax policies killing Kenya’s agro-industry

Kenya Revenue Authority. (Photo: Courtesy)

Preparations for the August General Election have gripped the nation. However, there is an urgent matter that policy makers need to pay attention to, as it stands right in the way of our envisioned future state – that of an industrialised economy by 2030.

As a nation, we have to decide whether we want to develop a vibrant pesticide industry to effectively support farming or kill it altogether. As it is, we are slowly but surely killing the industry by saddling it with punitive taxes and levies.

Prior to 2014, the Value Added Tax Act and previous Finance Acts had zero-rated pest control products. However, the VAT Act 2013 introduced a 16 per cent tax on all imported ingredients of pest control products for local processing but maintained zero-rated status for already packaged products.

This has made locally manufactured pesticides more expensive than imports and threatens the survival of the 17 companies that manufacture pesticides in Kenya and collectively employ 19,890 people. In addition to VAT, the active ingredients, carrier materials, solvents and emulsifiers attract a 10 per cent import duty and 25 per cent excise duty for imports.

Local formulators incur VAT on these substances, as well as on packaging materials, labour and transport. The importation of finished products is becoming more attractive, forcing local manufacturers to scale down their operations and investments by 88 per cent.

Investments in the supply chain have also declined as demand for packaging materials and labels subsequently wane.

This has led to loss of revenue to Government due to ‘disinvestment’ and loss of jobs in the agrochemical manufacturing value chain. With dreams of industrialising in the next decade and a half, we should get our basic agricultural policies right.

Correctly so, the Government is currently popularising a “Buy Kenya, Build Kenya" policy, which if successful, should boost local production and competitiveness. This is a noble policy.

But it seems the Government is yet to consciously transfer this from paper to practice. Agriculture, alongside five other sectors, comprise the backbone of Vision 2030’s economic pillar.

The sector already plays a significant role in the nation’s social and economic development, since it contributes approximately 25 per cent of the Gross Domestic Product (GDP). It also accounts for 80 per cent of national employment. The people who live in rural Kenya are predominantly employed within the agriculture value chain.

Agriculture directly influences the country’s overall economic performance in any year. But we know how tough it is for farmers to ‘coax’ their shambas and their livestock to produce enough for consumption and some extra for sale or export in the case of cash crops.

Why is it a backbreaking job to engage in farming in a tropical country such as Kenya? It is because, among other factors, pests are a major headache in this part of the world.

It behoves farmers – and the nation – to control pests that destroy crops. The United Nation’s Food and Agriculture Organisation (FAO) estimates that pests are responsible for 40 to 60 per cent of food losses in the country.

We must acknowledge that the high taxation of locally formulated/repacked pesticides is essentially 'killing' the local industry by encouraging imports and loss of jobs locally.

It is further resulting in reduced usage of farm inputs or pesticides, compromising yields. This in turn has a major effect on food security, leading to a litany of socio-economic and political implications.

It is for these reasons that the agrochemical industry proposes that all repackaging materials, ingredients, technical material, imported finished pesticides and labour in the industry be zero rated. The Government should also reduce import taxes on imported ingredients and inputs for manufacturers of pesticides.