The 42 taxes spoiling taste for tea farmers

Tea trucks arrive from the field fighting the thick fog that has engulfed the Meru skyline. They come into Imenti Tea Factory to be welcomed by a cloud of smoke billowing from the tea factory.

They are immediately weighed and drivers waved on to go to collection centres where tea sacks are offloaded and hanged onto moving trolleys that ferry them inside the factory. The leaves are then separated and spread on big pans to start the withering process.

For Imenti, the tea will then be split into two. One batch will go to the driers that make its newest specialty tea, the orthodox tea from where the green leaf will be rolled by machines into different twists and styles.

The other type will go through the usual process that generates ordinary teas, which after being weighed, is withered, crushed, torn and curled into the final product.

Like 54 other tea factory bosses under Kenya Tea Development Agency (KTDA) umbrella across the country, Mr Charles Murigu, the boss of Imenti Tea Factory, has several things to worry about every morning.

Murigu, who is the factory unit manager, a role that is equivalent to the chief executive officer has to worry about the state of the road as his trucks head out to the various tea-buying centres in the region.

Besides ensuring that farmers keep to the high quality standard of tea, he has to fret about his over 5,000 growers under his zone, who are becoming restless and continue to demand more from their leaf every year.

Every month, Murigu has to look for at least Sh16 to pay his farmers for each kilogramme of deliveries to the plant, whether he has sold the tea or not. He then has to start figuring out how to deal with the rising costs in the sector to ensure that when October comes, he has some good news for his farmers.

October is the most watched month in the tea calendar since it is the time when the bonus or what is also called the lump sum is declared.

But by the time this windfall hits bank accounts of over half a million farmers in the country, this bonus will have been subjected to at least 42 tea taxes from multiple agencies.

The taxes are paid from the moment the tea leaves farms to the factory, then to the warehouses, Mombasa auction all the way until they are shipped out to the to their final destination.

Besides the Kenya Revenue Authority (KRA), tax accountants in the sector have to deal with over 10 other agencies among them county governments’ revenue officials, the Agriculture and Food Authority (AFA) and the Kenya Plant health inspectorate Service (KEPHIS) who charge various levies and taxes.

On the line is also the Kenya Bureau of Standards (KEBS), the National Environment Management Authority (NEMA), the Kenya Ports Authority (KPA), the Department of Occupational Health and Safety (DOHS) as well as Weights and Measures among others.

Smart Business has learnt that ultimately, the farmer in Imenti or any of the other 54 tea factories in the country, unknowingly, ends up shouldering this heavy burden of multiple and duplicating taxes that are structured to punish the grower in an industry that is already hurting from the effects of the Covid-19 and mismanagement.

This is because most of the time, tea companies find a way of passing this taxes downwards, which end up taking away money that would have been used to pay dividends.

These taxes keep accountants in the tea sector busy the whole year, and a slip up is costly since KRA is always watching and waiting for mistakes to pounce.

Registration fees:

The tea sector is one of the most restricted industries in Kenya where players have to be licensed and this comes with various registration fees.

To be a buyer at the tea auction, one has to pay a Sh10,000 annual fee to the Agriculture and Food Authority (AFA). To be a processor, you also have to deal with a Sh7,500 yearly fee.

Then there is the Sh10,000 fee for tea auction organisers, Sh2,000 for tea packers and Sh25,000 for every management agent. These are annual fees and are eventually part of the costs of doing business in the sector every year.

County fees:

County governments have their set of taxes that tea factory companies in their zones must deal with to be allowed to operate.

You would expect that having paid all the other taxes, farmers would be spared any additional fees. First is the green leaf cess that is levied at one percent on the gross value of the produce. This may look a small fee but combined, county governments end up collecting hundreds of millions of shillings from the sector.

There are also a host of other levies depending on the county. In Mombasa, there is Sh5,000 levy as port health charges. This is annual. It was inherited from the Mombasa municipal port health levy.

Then there is also the annual Sh10,000 license fees charged by the county. On top of this, tea companies deal with land rates that range from about 0.3 to 0.75 percent of undeveloped value annually.

There is a weekly inspection and grading fee from the Kenya Plant health inspectorate Service (Kephis). This is charged at Sh5,000 per consignment and this doubles to Sh10,000 per multiple consignment to one consignee that it inspects. This is not all that Kephis takes. The plant health inspectorate also asks for Sh1,000 for the Kephis SPS certificate, which is charged weekly.

After they are done with Kephis, they now have the Kenya Bureau of Standards (Kebs) to deal with. For Kebs, the tea industry has to pay a levy charged at 0.2 percent of the value of made tea or Sh400,000, depending on whichever is lower, for the product conformity.

This is an annual fee. A similar amount is also paid for the Kebs quality standard, this time quarterly. Then there is the National Environment Management Authority (Nema) do deal with.

Every tea factory company has to part with at least Sh55,000 annually for the air emission license from environment watchdog. This is in line with the emission license as per Air Quality Regulations, 2014.

To get a water license, they have to pay Sh100,000 annually as part of the Waste Water Regulations to Nema. The environmental watchdog also charges a 0.1 percent levy of investment costs on the Nema environmental audit done every year.

After finishing with Nema, the tea industry now has to deal with the Kenya Ports Authority (KPA). The authority charges a Sh9,000 levy for every 40 feet container at the time of loading. KPA also has the terminal handling charges of Sh200 for every 20 feet container, also charged at the time of loading.

The Directorate of Industry Training Levy (DIT) charges tea factories a Sh50 levy per employee. This fee is paid monthly and increases labour costs, which reduce how much money tea farmers take home at the end of the year.

The Kenya Maritime Authority is not left out. The industry now has to deal with Merchant Shipping Superintendent (MSS) levy which is charged at Sh10 per tonne every year. To get the Chamber of Commerce Certificate of Origin, the tea industry has to pay another levy, which is charged at 0.025 percent of the gross value of tea sold.

Cess taxes

Cess an antiquated colonial tax that continues to impoverish small-scale farmers in Kenya hits tea growers from various fronts. First there is the APC licenses, then the fuel wood movement which is charged at about Sh300 per vehicle per trip.

Tea factories consume mountains of firewood to power their boilers that generate heat needed to wither tea. It is impossible to escape this tax, which cumulatively on a daily basis ends up in hundreds of millions of shillings at the end of the year.

The Department of Occupational Health and Safety (DOHS) charges Sh2,060 for their annual license while the Weights and Measures demand Sh2,010 annually for scales.

The tea sector relies on weight to make purchases and this means that they have numerous scales to support them.

At the national level, the Water Resources Board charges Sh4,600 for the water permit, which is another levy on usage of water. Then the ministry of health also asks for Sh1,000 to be given the Underground Water Tank license.

Mombasa County, which hosts the tea auction and is also the destination of all tea before it is shipped out of the country makes a killing on parking fees.

Every truck pays Sh1,700 per day as the Mombasa municipal parking ticket. Then farmers have to pay management fees to their managing agents, which is another form of tax. Currently this fee is about 2.5 percent of their revenues.

The tea factory companies also pay various subscription fees to various organisations such as the East African Tea Trade Association (EATTA), a voluntary organisation that brings together tea producers, buyers (exporters), brokers, tea packers and warehouses. membership to the Kenya Tea Growers Association (KTGA) also attracts some annual subscription fees.

Government taxes

After this, they will now start dealing with eight official government taxes that are paid to the taxman at the national level by all other companies.

At the point of export, tea companies must pay the import declaration fee. This is 2.75 percent at the point of export. Then tea factories have to pay a furnace oil import tax charged at six cents for every litre. This tax should be paid daily.

Since most of the transport in the sector is by big trucks, tea farmers cannot escape the vehicle advance taxes through their tea factories. It is an annual tax charged at Sh1,500 per tonne of commercial vehicle.

The motor vehicles also deal with another tax when they book the annual inspection. This is not all. There is also another duty that is paid at a rate of Sh10,305 per cubic metre for fuel for agriculture operations. This is a daily tax.

But on top of the government taxes list is the usual corporate taxes, which are paid by all companies. Before the Covid-19, this tax was being charged at 30 percent. Now, this is charged at 25 percent.

Since most tea factory companies under the KTDA are owned by farmers, producers end up taking this tax bill as well. This tax is paid in installments, using the performance of the previous financial year as a guide.

Then there is the 16 percent Value Added Tax (VAT) that is paid by all tea companies when they sell their produce through brokers at the auction. Due to Covid-19, the government reduced the rate to 14 percent, giving taxpayers some marginal relief. VAT is paid monthly and defaults can be extremely painful.

After companies make some money and declare some dividends to their shareholders, most of who are the smallholder tea farmers, their earnings will also have to be reduced by five percent, which is the withholding tax on dividends.

This is an annual tax and is paid by tea factory companies upfront before forwarding the rest of the dividends to their shareholders.

Tea brokers, which are at the tail end of the tea industry food chain pay 0.75 percent levies as producers and 0.5 percent as buyers.

In its latest update on the sector, AFA is preparing farmers to expect a bad year given the drop in average prices at the global level.

In June 2020, 42.9 million kilogrammes of Kenyan tea was sold through the Mombasa auction, which is higher than the 34.7 million kilogrammes in May and 21.9 million kilogrammes in the same period of last year.

“The average auction price for Kenyan tea during the month of June was much lower at $1.86 per kilogramme compared to $1.97 in May and 2.11 recorded in April 2020. Compared to June 2019, when the average price was $2.16 per kilogramme, the average price for the month of June 2020 price was also lower,” AFA says in the report.

The authority adds that this has also been the trend for the first half of the year, with auction prices remaining low at an average of $2.07 per kilogramme compared to $2.24 per kilogramme during the same period last year owing to higher supply during the first quarter coupled with the effects of the Covid-19 pandemic on access to global markets.

“Apart from supply disruptions, the pandemic has also created global economic shocks thereby reducing consumer purchasing power. However, declining price trend is expected to change in the third quarter of the year following the gradual decline in production due to changes in weather patterns and anticipated increase in demand occasioned by ease of lockdown and movement restrictions by most countries,” AFA said.

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