July Issue 4 2012

KFC Annual general meeting a triumph

The Kenya Flower Council held its 14th Annual General Meeting on Friday July 20, 2012 at Finlays Horticulture Ltd – Kingfisher Farm, Naivasha. The event was graced by the chairman of the Board of the Board of Directors, Kenya Revenue Authority Hon. Major (RTD) Marsden Madoka.

On Arrival the members held an indoor meeting to get an update on the KFC activities, financial accounts for the year under review and also elect members of the Board. The former KFC Board of Directors under the chairmanship of Mr. Richard Fox was retained to drive the activities of the Council for the next year.  The KFC Board consists of:

Name of director Status
Mr. Richard Fox Chairman
Dr.  Isabelle H. Spindler Director
Mr. Inder Nain Director
Mr. Theodore G. Tsakiris Director
Mr. Joseph Mureithi Director
Mr. Simon van der Burg Director
Mr. Morris N. Wahome Director
Mr. Micah Cheserem Director
Mr. Peter Szapary Co-opted Director representing Lake Naivasha Growers Group
Mr. Tim Hobbs Alternate Director to Mr. Simon van der Burg
Mr. Dipak R. Shah Alternate Director to Mr. Theodore G. Tsakiris
Mr. Berjeesh D Surty Alternate Director to Mr. Inder Nain
Mr. Jos Van Der Venne Alternate Director to Mr. Micah Cheserem
Hon. Dr. Erastus. K. Mureithi Alternate Director to Mr. Joseph Mureithi
Mr. Aldric Spindler Alternate Director to Dr. Isabelle H. Spindler
Mr. Anthony Wahome Alternate Director to Mr. Morris Wahome
Ms. Karen Rono Alternate Director to Mr. Richard Fox

The colorful occasion attracted both the producer and associate members of the Kenya Flower.  It was refreshing to have the presence of partners of the floriculture industry amongst them representatives of Russian Embassy in Kenya, Netherlands Embassy, WWF, KEPSA, KEPHIS, USAID/KHCP, NEMA, KEBS, Partner Africa, AEA, KAM, Van Der Burg, React Africa, KPAWU, Dudutech, Flower Business Park and fast Target Agency.

In his speech, Mr. Fox thanked the KFC members for entrusting him as their Chairman urging them to continue supporting him steering the industry.  He added that the KFC is pursuing the resolution of the VAT refund issue relentlessly. He in addition applauded the Government’s investment in the road network and communications infrastructure.

Mr. Fox said KFC membership to the Union Fleurs has been extremely useful in the ongoing EAC- EU –EPA- Negotiations. He expressed his confidence that the outstanding issues will be resolved in time for signature by July 2014. It is also through the Union Fleurs that KFC participates in the Flower Sustainability Initiative (FSI), which seeks to harmonize standards at the international level.

He urged members to focus on an all-inclusive industry strategy; one that amplifies their strengths and transforms their weaknesses and threats into further opportunities, at the individual farm, the KFC and the country level.

In terms of Industry Self –Regulation, the Chief Executive Officer Mrs. Jane Ngige said KFC is now fully accredited to issue the KFC Silver CoP alongside the GlobaGAP, FFP, KS1758 as well as TESCOS Nurture Certificates. It’s hoped that KFC will attain benchmarking to Fairtrade and Rainforest Alliance soon. Recently, the KFC acquired the National Environment Management Authority (NEMA) Lead Auditors Registration for Environmental Impact Assessment/ Environmental Audits (EIA / EA) License. As a result, growers are enjoying multiple certifications at a fraction of the cost. It is anticipated that an ongoing national mechanism project for industry wide compliance will add impetus to self-regulation.

She acknowledged the support of KFC members in gaining the recognition the Council enjoys from stakeholders far and wide, standing tall amongst peers.

The event was crowned with a tour in the farm.

Madoka says KRA working with Treasury to address the VAT refund issue

The Chairman of the Kenya Revenue Authority Hon. Maj. Marsden Madoka has said KRA is addressing the concerns of tax payers on VAT refunds which have been a thorny issue in the recent past. He said this when he was addressing the Flower industry stakeholders during the Kenya Flower Council 14th Annual General Meeting,   held on Friday July 20, 2012 at Finlays Horticulture – Kingfisher Farm, Naivasha.

He reported that the current refund bill to the private sector stands at Kshs 24 billion. He also said that KRA and is working closely with the Treasury to address the issue. To address the issue, KRA discontinued withholding VAT in July 2011 at the expense of collecting more revenue.

He went on to say that delays results from inconsistent claims forcing KRA to spend time to determine their validity. In addition KRA cites unavailability of funds as a key reason for the delays.  Out of the total annual revenue collections, KRA is entitled to a maximum of 2% but on the other hand it has been reported that KRA gets an average on 1.3% to the total collections from the Treasury. According to Hon. Major Madoka the amount is not adequate to cater for all KRA operations.

To ease the situation KRA should be allowed to keep the portion meant for refunds or even its operation instead of handing over all the collected revenues to Treasury for them to later give them their share which is not always released on time. For this to happen, it will require an amendment of the current relevant law.

The back log which has accumulated in the past few years in KRA would mean that the Authority will continue to operate beyond its means resulting to slowness in service delivery. KRA revenue total collections has recorded growth from Kshs 201 billion in 2003 to Kshs 707.3 billion in the financial year ended in June 2012.

Mheshimiwa Madoka expressed KRA’s commitment to enhance service delivery to expedite outstanding claims. More efforts to hasten validation of exports in the Simba system will be spent to clear the refund back log.

According to Mr. Richard Fox, KFC Chairman, increasing input costs, declining revenues and unfavorable tax legislation, the delay in refunding VAT to exporters among is a burden that will ultimately cripple the industry.  Currently the certified VAT refunds in the flower sector amounts to over Kshs 2 billion attracting interest charges of over Kshs 2 million daily.

Hon. Madoka encouraged growers to engage KRA on regular basis for an amicable solution on different issues affecting the sector especially through an Export Management Office which was set up in May 2011.  The office oversees export functions ensuring comprehensive control and coverage of exports liaising with Domestic Taxes Department and Large taxpayers Office on refund issues that arise out of exports.

With all said and done the question of how efficiency KRA is still remains unanswered. Kenya Flower Council will have to continue lobbying the Authority until the issue of VAT refunds is resolved once and for all.

Value Addition Tax (VAT) Bill 2012

The Value Added tax (VAT) bill 2012 was unveiled on 14th June by the Ministry for Finance, a culmination of concerted efforts to find a solution to a myriad of challenges that have bedeviled the tax system.  According to the Hon. Maj.  Marsden Madoka, Chairman of the Board Kenya Revenue Authority, the law will be simplified as spelt out in the VAT Bill 2012 applying a genera VAT rate of 16% with minimal exceptions. This means the exemptions and zero rating of items removed.

Madoka says with its implementation the taxpayers will spend less time computing taxes as opposed to the past where they were required to keep records of taxes applied at different rates.  It’s also assumed that error margins as well as abuse will be minimized and the disputes between KRA and taxpayers eradicated.

VAT on some basic agricultural inputs and basic food commodities will be charged at 16% up from 0%. From the perspective of flower industry the effects are;

16% Vat on Fertilizers, rodenticides, insecticides and disinfectants

–          Cost of these inputs will go up hence cost of production lower competitiveness of products

–          More VAT refunds to claim, worsening an already bad situation

–          Cost of food stuffs to go up (growers provide subsidized meals at the farms).

16% Vat on locally assembled water pumps

–          Will make it expensive for smallholders to acquire them discouraging them from participating in irrigation supported farming. Smallholders provide affordable summer flowers to diversify/value add production by established growers

16% VAT on basic food commodities –Maize & Wheat flour, milk & cream

–          Cost of food to go up. Coupled with an additional cost of inputs to food production, demand for higher wages is likely-industrial actions, higher cost of production.

–          Cost of food stuffs to go up (growers provide subsidized meals at the farms).

–          Eroded purchasing power will slow overall economic growth

Elsewhere, local supply of flowers will be charged vat at 16%

–          Allows exporters to claim VAT on locally sourced flowers

–          Allows smallholders to offset the input VAT

–          Makes local sales of flowers expensive, stifling growth of a local market for flowers

According to reports, over 30 MPs and financial experts have warned of a food riot in the country if the controversial Value Added Tax (VAT) bill is enacted by parliament calling on the government to withdraw it ( http://www.standardmedia.co.ke/?articleID=2000062763&story_title=MPs-warn-of-food-riots-over-tax).

Notably, the Government reduced the tax on second hand clothes in the budget estimates for 2012/2013 financial estimate owing to the massive loss of businesses in the sector.

If the bill is passed the way it is, investors will be discouraged and will favour the competitors of the Kenyan investors not forgetting the cutbacks or exemptions were some of the ways Government used to attract investors local and international.

The bill should be drafted focusing on how plentiful foreign and local investment can be generated. It needs to clearly specify exactly how the investors will benefit without any doubts.  Some of the sectors to benefit from the VAT remissions facility include geothermal enterprises focusing on Naivasha area, wind power projects, Konza among others within the LAPSSET corridor.

Update on EAC –EU Economic Partnership Agreement

The negotiations on the EAC – EU Economic Partnership agreement (EPA) are still going on with the last meeting by the technical experts meeting in the beginning of July 2012 in Brussels.  So far about 90% of the issues in the agreement have been agreed upon with just a few outstanding.  The next joint round meeting is scheduled to take place from 17th to 21st September 2012 in Brussels while the EAC will meet on 7th August 2012.

  • Rules of Origin: Most areas are resolved.  Flowers and Ornamentals have been included in the list for products for accumulation for value addition.
  • Agriculture: 90% is complete only few issues remaining on domestic support and export subsidies.
  • Most Favoured Nation: Nothing much has changed since our last report.  Some clauses were not agreed on since they were limiting the flexibility of Kenya having another partnership agreement with other countries.
  • Export taxes: The final decision is now at the Ministerial level having failed to reach a consensus at the technical level. The EAC reiterates that this is A WTO issue and needs not be included in the EPA.
  • Dispute settlement and institutional arrangement: this will be finalized after all the other clauses have been agreed upon.
  • Trade, environment and Sustainable development: As reported last time EAC state this is should be negotiated at a later date since it’s a trade related issue though EU wanted it included in the current negotiations.

The process may take about four months to be completed barring any other delays.

The Euro Crisis effect on the flower industry

Europe remains Kenya’s biggest trading partner and a source of financing. The current financial volatility in the Eurozone could pose significant challenges for Kenya’s exports and investments.

For the flower industry the impact has been felt from to the weakening of the euro against Kenya shilling and other major currencies. This is due to the fact that flower sales are mainly in the euro. Surprisingly, demand for flowers seems not to be affected by the raging euro crisis.

The weakening of the Euro against the US$ and KES has resulted in a reduced value of turnover valued in KES. More importantly, wages which is a significant portion of cost is paid in KES. Falling value of the Euro to the Kshs therefore devalues returns substantially.

To address the situation, growers are closely watching their costs, for example by not hiring new employees and not replacing those who have resigned voluntarily. Currently there is less expansions happening in the farms.  Others are trying to keep a market balance by increasing their sales to direct market with fixed quantity   and price year round and less to the auctions.  On the other hand, others have increased their export per square metre and also hedged on the exchange rates.

If this continues, they may be forced to lay off workers.

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