Kenya’s dairy industry faces potential price hike as treasury proposes VAT changes on milk

KENYA – Kenya’s dairy industry is facing a potential financial shake-up as the National Treasury considers a new proposal to shift milk from the VAT zero-rated list to the exempt category. 

Currently, companies producing milk enjoy zero-rating, which allows them to claim tax refunds on costs associated with inputs like electricity, raw materials, and other operational expenses.

Under the proposed changes, however, these firms would no longer receive such refunds, and the additional costs would likely be passed on to consumers.

The Treasury Cabinet Secretary argued that the current policy has been misused, with companies failing to transfer the benefits of tax refunds to consumers, prompting the proposed overhaul. 

The shift follows the Treasury’s failed attempt to impose a 16% VAT on bread and milk under the 2024 Finance Bill, which sparked significant public backlash.

If the proposal is implemented, it could exacerbate economic pressures on Kenyans, who are already grappling with rising living costs. 

Companies in the dairy industry, already facing increased operational expenses due to taxes on inputs like animal feed, energy, and raw materials, will be forced to adjust their pricing strategies to offset the financial burden. 

For consumers, this could mean higher prices for essential goods like milk, further straining household budgets.

Dairy farmers have expressed concern over these looming changes, citing the already high costs of production. 

Jane Ngoiri, a farmer and industry representative, recently highlighted the financial unsustainability of dairy farming under the current tax regime. 

Speaking at the Githunguri Dairy Cooperative Sacco’s annual general meeting, Ngoiri emphasized that taxes, such as the 5% withholding agricultural produce tax and excise duties on supplements, have driven up input costs, leading to reduced profitability for farmers.

Ngoiri’s concerns were echoed by fellow farmers Anthony Maina and Patrick Nyaga, who stressed the adverse effects of the tax policies on lower-income farmers. 

They urged the government to introduce tax reliefs, subsidized farm inputs, and incentives to reduce production costs and stimulate the agricultural sector’s growth.

Despite these challenges, the Githunguri Dairy Cooperative Sacco has shown resilience. Its chairman, Joseph Mburu, reported strong growth in the Sacco’s asset base, rising from Sh4.2 billion in 2022 to Sh5 billion in 2023. 

The Sacco also increased its dividend payout to members, reflecting its commitment to delivering returns amidst a difficult economic environment.

As the dairy industry continues to grow at an estimated rate of 3% to 4% annually, the sector’s future will largely depend on how the government addresses the concerns raised by farmers and stakeholders. 

With milk production currently at 4.6 billion liters per year, policy interventions are essential to support sustainable growth in one of Kenya’s most vital agricultural sectors.

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