[Finance] VAT and Agriculture in Kenya: Recent law changes

Introduction of value added tax (VAT) on petroleum products and its implications for cost of living is an issue that has featured prominently in discussions on tax policy and law-making in Kenya. However the recent changes to the value added tax law, introduced through the Tax laws (Amendment) Act, 2018 and Finance Act 2018, contain measures that are of interest to different sectors not least agribusinesses. This article written by Mr. Bosire Nyamori, Advocate at the High Court of Kenya, explains the changes and assesses them against the priorities and interests of international business.

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Agriculture remains high on Kenya’s agenda, and rightfully so, given that it is, among others, a source of employment, an earner of foreign exchange, a constant supplier of food security and a market for industrial goods such as pesticides, fertilizers and machinery and equipment

There are very few, if any, major policy documents that do not mention agriculture. The latest is the Government’s Big 4 Agenda, the blueprint driving Kenya’s development agenda in the period 2018-2022, which places achieving food and nutritional security as one of its core elements.

Taxing agriculture more effectively therefore becomes central to the development issue. Often, the government uses tax policy and law to attract investments, facilitate productivity and sustainable outcomes for farmers, and create a stronger business environment. While doing so, the government has to ensure that its tax measures do not impede or create disincentives for the sector.

VAT and agriculture, a brief history

Kenya first  introduced value added tax (VAT) on 1st of January 1990. Many of the products which were used or consumed in the course of conducting a farming enterprise such as fertilizers and seeds were either zero-rated or exempt from VAT. Also, some farming enterprises-for instance, those selling eggs and milk- would not qualify for registration as they were producing and supplying exempt products. When the using “zero-rate,” the law does not impose VAT on outputs/sales of products, but allows business credits for the VAT paid on inputs/purchases. In contrast, “exempt” products do not attract VAT, on the one hand, business engaged in the same business are not allowed credits for the VAT they pay on inputs/purchases

The VAT treatment for agriculture stemmed from political considerations, assisting farmers with cash flow, distributional concerns and difficulties in administering the tax system.

In 2013, the 1990 VAT law was repealed and replaced with the 2013 one. Part of the reasons for law changes included removing distortions caused by exemptions, addressing administrative difficulties associated with the payment of refunds, and broadening the tax base so as to collect more revenue needed for government programs.

The 2018 law changes relating to the VAT are a continuation of efforts to reduce the spread of exemptions and zero-rating. In addition, the changes are geared at increasing government revenue as well as contributing to the government’s agenda on nutrition and security, a key item of the Big 4 development agenda.

Recent VAT changes

Tax laws (Amendment) Act, 2018

Agricultural pest control products: The Government policy on VAT treatment of agricultural pest control products has been inconstant. When VAT Act 2013 was passed, agricultural pest control products were exempt from VAT. In 2017, the law was amended so that the products became zero-rated. After the Tax laws (Amendment) Act, 2018 came into force, the products started being taxed at 16%.

Changes around pest control products have been controversial, attracting a lot of criticisms and complaints from the major players in the industry. These changes will increase the cost of pesticides and generally increase cost of agricultural production for farmers. Invariably, farm yields will be affected undermining the government’s Big 4 agenda.

Finance Act 2018

Although this law became effective on 21 September 2018, changes relating to VAT start applying on 1 July 2018 because of the way Kenya’s law-making process works. Essentially, once the finance bill is tabled in Parliament, some of the proposals become law before Parliament debates and subjects them to constitutional requirements. The High Court has recently declared this process unconstitutional.

Exemptions

Equipment for Construction of Grain Storage: The law exempts from VAT equipment for construction of grain storage. This changes is aimed to spurring investment in grain storage facilities so as to reduce post-harvest wastage and storage costs, which are high, contributing to food security.

The exemption is not automatic though. A recommendation from the Cabinet Secretary responsible for Agriculture is required before an enterprise can obtain the exemption.

Raw Materials for Manufacture of Animal Feeds: In 2014 and 2016, law changes exempted from VAT raw materials for the manufacture of animal feeds. The number of items qualifying for exemption under this head have increased. This move is aimed at making animal feeds affordable to farmers and attracting more investors to the sector.

Standard Rating

Maize (corn) Seed: The Maize (corn) was exempt from VAT. After the changes, the seeds are to be taxed at the standard rate of 16%. This change increases the prices of seeds making it less affordable to farmers. However, wheat, meslin and barley seeds for sowing are exempt.

Zero-rating

Previously, maize (corn) flour, cassava flour, and wheat or meslin flour and maize flour containing cassava flour by more than ten percent in weight were exempt from VAT. The Finance Act 2018 has now zero-rated. These products constitute staple food and the changes will reduce their prices.

Comments and Conclusion

Agriculture comprises of several sub-sectors including cash crops farming, animal breeding, irrigation, horticulture, fishing and poultry. Some of these sub-sectors may not be affected by these changes.

The reason for introducing a new VAT law in 2013 included reducing products that are either zero-rated or exempt so as to deal with administrative difficulties and refunds. On the one hand, there is continuation of this policy, for instance, through taxing pesticides at 16%. On the other hand, the government is detracting from this by, for instance, excluding raw materials for animal feeds from VAT. This lack of consistency creates uncertainties for business making it difficult to plan for future investments in the affected sectors.

For any questions to Mr. Bosire Nyamori, Advocate at the High Court of Kenya. Email: bosire.nyamori@gmail.com or follow him on twitter: @b_nyamori. For any other questions feel free to send an email to us via nai-lnv@minbuza.nl