CS Mbadi gives breakdown of how tea industry is taxed

Treasury Cabinet Secretary John Mbadi has come to the defence of the government's taxation policy on the tea industry amid concerns by some leaders from the tea growing zones.

Mbadi clarified that the sub-sector is not overtaxed as has been claimed and instead continues to enjoy a range of incentives aimed at boosting growth and competitiveness.

Appearing before the Senate plenary on Wednesday, Mbadi gave a detailed breakdown of taxes and levies applied across the entire tea value chain.

He was responding to a question by Kirinyaga Senator James Murango, who had sought clarity on whether the tea sector is overburdened.

Murango had demanded to know all the taxes and levies across the value chain, specific measures to reduce double taxation and challenges faced in the bid to eliminate it.

“The tea sub-sector benefits from numerous tax incentives that support its growth and sustainability...it is not taxed more than any other sector,” said Mbadi.

“It enjoys favourable policies that encourage its development. Any taxes imposed are standard and apply equally across other sub-sectors, ensuring a fair and consistent taxation framework across the economy.”

At the farming level, Mbadi clarified that no VAT is charged on essential agricultural inputs as fertilisers, which are classified under Chapter 31 of the East African Community Common External Tariff.

Additionally, agricultural services and farming tractors are VAT-exempt.

Imported machinery used in land preparation, he said, is duty-free, although it does attract VAT at 16 per cent, a 2 per cent Railway Development Levy, and a 2.5 per cent Import Declaration Fee.

In terms of processing, the CS said tea factories located outside the cities of Nairobi, Mombasa, and Kisumu benefit from a 100 per cent investment deduction for capital projects valued at Sh250 million or more.

“Machinery used for tea processing is duty-free under the EAC Common External Tariff, though income from processing is subject to a corporate tax rate of 30 per cent,” he said.

He, however, explained that processed tea sold locally is subject to 16 per cent VAT, but key cost areas remain exempt, including the transportation of unprocessed tea from farm to factory and the green leaf itself.

“Locally purchased tea intended for value addition before export is zero-rated, helping to ease cash flow constraints for businesses engaged in export preparation.”

On marketing and distribution, Mbadi noted that tea brokerage services are VAT-exempt, and tea supplied to export auction centres is zero-rated.

Similarly, locally purchased tea meant for export-oriented value addition also qualifies for zero-rating, he said.

He added that manufacturers of packaging materials for use in tea and other export-bound products can import raw materials duty-free under the EAC Duty Remission Scheme.

“Imported packaging materials themselves attract a 25 per cent excise duty and a 35 per cent import duty, designed to protect domestic manufacturers,” he stated.

Mbadi, at the same time, disclosed that the Treasury is currently reviewing public submissions ahead of the Finance Bill, 2025, which may propose further adjustments to enhance efficiency and reduce operational burdens in the tea industry.

In addressing past efforts to ease the tax burden on farmers, Mbadi highlighted several key reforms.

He said the enactment of the Tea Act, 2020, reduced the KTDA management fee from 2.5 per cent to 1.5 per cent, resulting in annual savings of over Sh1 billion for farmers.

He cited that the scrapping of the Ad Valorem Levy in 2016 saved farmers an additional Sh900 million annually.

This, while the elimination of the Agricultural Produce Cess cut another Sh486 million in yearly costs.

To compensate for the removal of these levies, the government said it now provides direct funding to the Tea Research Institute (TRI) and the Tea Board of Kenya (TBK) to support research, trade promotion, and industry development.

He also pointed to the development of the "7 Crop (Tea Industry) Regulations" in 2020, which guide registration, value addition, and product diversification in the tea sector.

“These regulations are aimed at improving the competitiveness of Kenyan tea globally while ensuring that all players in the value chain operate within a clear and supportive regulatory framework,” said the CS.