KENYA – Maize millers have announced that they plan to increase prices for maize and wheat flours as a result of the 16% Value Added Tax (VAT) on petroleum products, which came into effect on September 1, reports Business Daily.

According to Cereal Millers Association, such price hikes reflect increased operating costs associated with the implementation of the new taxes on fuel.

The tax changes are part of the treasury’s move to collect US$705.2 million in International Monetary Fund’s (IMF) new petrol taxes, raising petrol taxes above those of the neighbouring Tanzania.

To save households from further squeezing, members of parliament voted to suspend the VAT for a further 2 years but Treasury secretary Henry Rotich went on to direct the Kenya Revenue Authority (KRA) to implement the tax before the President assented on Parliament’s amendments.

From zero-rated to exempt status

The millers stated that the recent VAT rise changes the status for processed wheat and maize flour from zero-rated to exempt status.

“The recent changes in the Value Added Tax (VAT) status for processed wheat and maize flour and more recently the addition of VAT to petroleum products, have left our members with little room to absorb these additional costs without jeopardizing quality and the sustainability of operations,” said Cereal Millers Association chairman Mohamed Islam in the statement.

“Furthermore, the recent introduction of VAT on petroleum products has exacerbated the situation as millers and all players along the supply chain are now factoring in these additional costs in their production.”

The Tax Laws Act, 2018 changed the status of maize, cassava, wheat and maize flour from taxable status (zero rate) to exempt.

The amendment was made following a petition by the Cereal Millers Association (CMA) who argued that the changes in taxable status from zero rate to exempt had prevented millers from passing on the full impact of cheap maize in the form of affordable flour.

The association said the change in law could slow down the grain milling business and ultimately hurt farmers who feed the millers with wheat and maize.

Zero rate allows manufacturers to claim VAT from raw materials used in making their products while exempt does allow tax refund, which normally leads to rise in commodity prices.

Following a deficiency in maize supply in the country early last year, the Treasury proposed to allow duty free importation of white maize for four months.

Also to address food security which was worsening at the time, the government decided to waive all taxes on the inputs used to manufacture wheat and maize flour, bringing a reprieve to about 3.2 million Kenyans facing starvation.

Additional costs

The millers lobby high petrol prices may lead to additional costs for grain handling, flour processing, packaging and distribution costs.

To absorb pressure from inflation, Kenya turned to Uganda for maize imports and together with local supplies from Western Kenya helped to control high maize flour prices.

“The CMA is cognizant of inflationary pressures faced by our consumers but regrettably in light of all the above-mentioned costs, members would find it very hard to maintain current wheat and maize flour prices,” said Mr Islam.

He added that millers’ transportation costs will now increase two-fold following the introduction of VAT on fuel, forcing millers to absorb the costs.

“The newly-introduced VAT on fuel will have an additional ripple effect on the cost of electricity, packaging and other costs of production that are fuel-related,” he said.