Tea bonus debate shows why sector needs more reforms

It is disheartening that the recently paid tea bonus didn’t excite farmers, as recently reported in the media, the reasons being they used most of it to repay monies borrowed for their pluckers' wages, purchase of farm inputs and family needs.

Little do they know that if the dollar exchange rate was at last year’s levels, or fertiliser wasn’t subsidised, they would have taken home much less.

I recall last year’s bonus was announced a few days before the end of the financial year, but we later heard it was a political gimmick, and as one of the farmers said during the Tea Reforms conference in Kericho, they are still paying for the ‘loaned’ bonus.

Interestingly, while announcing the 2022 and 2023 ‘good’ payments, the government was quick to associate it to the tea reforms, trying to take credit, but industry players including the farmers knew the truth.

Some farmers from West Rift are also aware that they have collected their final payment (aka bonus) yet some of their teas are still unsold. A sector so important should not be run through deliberate misinformation.

The tea sector supports over 10 per cent of Kenya’s population, and through its 23 per cent contribution of forex earnings, has played a critical role in stabilising the shilling. It compliments the government’s duty of maintaining roads through cess payments as well as maintaining medical and educational institutions within the plantation sector.

For these reasons, the government should do more for the sector to ensure sustainability and posterity. To start with, our Tea Research Institute urgently needs adequate funding for them to generate and cascade information and technologies necessary to farmers for them to improve production without compromising the quality. Our overseas buyers have been raising red flags on Kenyan tea's declining quality. This week, we saw some primary teas selling below a dollar! How long will such a factory remain open?

International opportunities

The Tea Board needs good funding in order to be visible in international beverage trade fairs as well as exploring opportunities for joint ventures and bilateral trade arrangements in order to ring-fence our existing markets as well as increasing our exports. Why, for instance, can’t we negotiate with India to exempt Kenya teas from the 100% import duty when most of the tea processing machines have been imported from there into Kenya at no import duty?

 At the global level, there’s a lot of funding available for initiatives that support sustainable agriculture, poverty alleviation and climate change mitigation. The government, through the Tea Board, should be guiding farmers on how to tap into these funds so that they don’t use the bonus for projects that can qualify for free funding like carbon credits from their tree planting projects.

Over 75% of Kenya’s tea is exported to only five countries namely Pakistan, Egypt, UK, Sudan and Afghanistan. Pakistan which imports almost 40% of Kenya’s total production is going through serious financial issues. The story is the same in Egypt and Sudan.

The economic growth in these countries, like in many others has been declining and disposable incomes have stagnated, making tea more expensive. 

In 2010 when tea prices went through the roof due to drought in major tea-producing countries, the Food and Agriculture Organisation urged tea-producing countries to refrain from reacting to the prices by planting more tea but instead focus on improving quality, expanding export markets and increasing their domestic consumption.

Clause 3.3.1 of the 2007 Tea Industry Task Force report noted.. Reliance on a Few Export Markets - Over 75 percent of Kenya’s tea exports are destined for only five countries namely Pakistan, Egypt, UK, Sudan and Afghanistan while the balance is shared among over 46 other countries.

This situation poses an economic threat in that if any of the five countries were to discontinue the purchase of Kenyan tea for any reason, the country may be left holding large stocks of unsold tea.

While some countries heeded the FAO call, Kenya ignored all three, there was aggressive tea planting and factories sprouted from 2010, the Tea Research and Tea Board were shrunk in 2013 to directorates. VAT on tea, introduced in 1990 was retained. 16 years since the task force report and counting, our markets have remained the same.

The Taskforce also recommended that producers diversify into high-value speciality teas away from the traditional CTC teas that are popular in markets like Russia, UAE, USA, Germany and Iran.

New requirement

But there is a hitch, local exporters must comply with a new requirement in the Finance Act 2023 for them to be exempted from payment of VAT, and I quote “All tea and Coffee locally purchased for purpose of value addition before exportation subject to approval by the commissioner general”.

This literally means that exports of those teas must be in value-added form and permission to buy them without tax must be given!

Supermarkets and online stores are the new and fastest-growing food and beverage buyers and none of them want products in commodity (bulk) form, they want products ready for the shelf. Indeed, one of the clauses in the Tea Act 2020 is to accelerate value addition and attain 40 percent value-added exports in 8 years, however, the current tax regime favours of bulk exports.

 Prior to the Finance Act 2023, imported new (virgin) paper that tea packers use for packing are under Customs HS codes numbers 48191000, 48192010, 48912090 and 48222000 (boxes, cartons and labels). These used to attract 25% import duty and 16% VAT.

But after the government had promised to address the taxes, the Finance Act 2023 increased them to 35% for import duty, added a new 25% Excise duty and 16% VAT. It’s harder to value-add tea now, even for export than it was last year!

Tea producers are going through a very stressful time now and it’s definitely the wrong time to introduce any new tariff or barrier with the potential to slow down exports. A multi-ministerial team comprising of Trade, Finance and Agriculture should be convened to urgently look at interventions necessary to cushion farmers from further losses.

At the top of their agenda should be exploring alternative trading currencies away from the unavailable dollar, facilitation to speed up exports and value addition. Finally, their recommendations should have action timelines because like Mahatma Gandhi once put it, “An ounce of practice is worth more than tons of preaching.”

 - The writer is Kericho Gold Tea Director