Govt Goes After Coffee, Milk Farmers in New Taxation Plan‍

The government is aiming to raid farmers in its ambitious tax proposal which will see them, for instance, pay Ksh5 for every Ksh100 they make from their produce.

This is in the form of the introduction of a 5 percent withholding tax on agricultural produce sold through cooperatives, which has been a vital income stream for Kenyan farmers over the years.

Coffee and milk farmers will be particularly affected as they form the bulk of cooperatives involved in the agricultural sector. 

"The Government will introduce a withholding tax on agricultural produce which will be a final tax at a rate not more than 5 per cent of the value of the produce delivered to the cooperatives or other organised groups," the National Treasury stated while proposing its medium-term revenue strategy.

Treasury Cabinet Secretary (CS) Njuguna Ndung’u in his strategy had argued that the agricultural sector was undertaxed, acknowledging the unique challenges faced by the sector which makes taxation difficult.

The sector is considered highly informal, cash-based and characterized by the notion that it should not be taxed, however, the Treasury indicated that it would lay down mechanisms in a bid to raise the minimum tax from Kenyan farms.

“The Kenyan economy is dependent on the agricultural sector contributing an average of 21.2% of the GDP and the highest employer compared to other sectors,” added the Treasury.

The majority of small-scale tea farmers could also be affected even though they do not sell through cooperatives. Their produce is sold through the Kenya Tea Development Agency (KTDA) and its subsidiary factories - all of which are private limited companies 

How Tax Withholding Works

Tax withholding, also known as tax retention, pay-as-you-earn tax or tax deduction at source, is income tax paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the income due to the recipient.

Through this proposal, anytime a farmer delivers produce to the cooperative or farmer society in exchange for income, the entity withholds five percent of the amount due to them as income tax, which is paid by the cooperative or society (withholder) to the Kenya Revenue Authority (KRA). The amount withheld should be remitted online by the withholder to KRA on or before the 20th of the following month.

Upon successful remittance of the withheld amount to KRA, the system then generates and sends copies of the Withholding Certificate to the registered email addresses of both the cooperative or society (withholder) and the farmer (withholdee).

The amount deducted thereafter appears on the farmer’s payslip or statement, and the total amount deducted annually can be found on the P9 Form, which is a standard tax deduction card or form issued by the employers (in this case, the cooperative society) to the farmers with total emoluments. 

The cooperative or farmer society will then send the P9 Form to their members each year so they can file their annual income tax returns. 

The farmer will then be required to download the IT1 return form from the KRA online system and declare income earned as well as the tax withheld.

To achieve the maximum taxes, the government intends to step up taxpayer education to ensure taxpayers understand their role in paying taxes for the betterment of the country. 

The proposal could directly affect the lives of many farmers and their families and could lead to disincentives for farmers to engage with cooperatives as well as organised farmer groups.

The proposals will be subject to public participation through Parliament.