MPs oppose proposed tax on fertiliser in Finance Bill

However, at a session with the House Committee on Budget and Appropriations (BAC), Molo MP Kuria Kimani, who chairs the finance committee, assured attendees that he is doing all he can to ensure that fertiliser remains in the zero-rated goods schedule.

“This proposal is something we want to go slow on because shifting fertiliser to tax-exempt from its current zero-rate status, will increase its prices and ultimately, the cost of production,” said Mr Kimani.

The fertiliser used in the country is largely manufactured locally, meaning that exposing it to an indirect taxation regime will hurt the local manufacturing industries that employ hundreds of Kenyans.

Although the Bill is not proposing any additional taxes on the fertiliser, moving it from zero-rated product to tax exempt, has negative implications on the consumer pricing.

This is because under the zero-rated system, value-added tax (VAT) is charged at zero percent rate on the sale of certain goods and services.

This allows businesses to claim back their tax refunds from the Kenya Revenue Authority (KRA) paid on inputs used to manufacture the product if they are eventually selling the product at zero tax rate.

However, when a product is VAT-exempt, it means that suppliers cannot claim input tax, which are costs incurred in the production.

This means that farmers will ultimately bear the cost of this change through higher fertiliser prices due to the costs of input tax transferred to them by the manufacturers.

The reclassification, according to agricultural technology company Farmonaut and audit firm Deloitte therefore, “is expected to lead to higher fertiliser prices.”

“This is because the cost of inputs, which are not recoverable under the VAT-exempt system, are passed on to the farmer,” says Farmonaut in documents before Parliament.

According to Deloitte, the reclassification means “shifting the VAT burden from the government to farmers through a change in the VAT status of fertilisers.”

This comes as Embakasi East MP Babu Owino warned that unless the proposed reclassification is reversed, the cost of food in the country “runs the risk of hitting the roof,” posing the danger of hitting the poverty-stricken families hard.

Read: Here is why you will spend more to put food on the table

“If the government raises the cost of fertiliser as this Bill proposes, the cost of food will go up and therefore, ultimately killing the agricultural sector that largely contributes to the economy,” warned Mr Owino.

“We need to encourage domestic manufacturing to enable the government to create jobs. But this cannot happen if we hit farmers hard. Things must change for the interests of Kenyans, specifically the majority of poor Kenyans,” the Embakasi East MP added, with the Molo MP giving an assurance that “all is well.”

“We have always disagreed with the National Treasury and as a committee, we have always returned fertiliser to zero-rated status when they want to reclassify it to tax exempt,” Mr Kimani told the committee.

The Molo MP also noted that his committee has planned a meeting with the local fertiliser manufacturers to discuss the matter.

Kenya first introduced VAT on January 1, 1990, and many of the products used in farming enterprises, such as fertilisers and seeds, were either zero-rated or exempt from VAT.

However, some businesses — for instance, those selling eggs and milk — would not qualify for registration because they were producing and supplying exempt products.

→ [email protected]