FERTILIZER IMPORT CHALLENGES : TARIFF CLASSIFICATION DISPUTES AND VAT EXEMPTIONS

Introduction

Fertilizers have been a common subject of classification challenges during importation.

All products entering the country are categorized and classified under various Chapter Notes of the EAC/CET (East Africa Community Common External Tariff). This classification determines whether a product attracts VAT or is VAT exempt. This distinction has led to frequent disputes between the Kenya Revenue Authority (KRA) and importers.

In particular, companies importing fertilizers have repeatedly encountered challenges with classification and reclassification by KRA, often resulting in the payment of VAT under protest.

Under the First Schedule of the VAT Act, fertilizers are generally VAT exempt and classified under HS Code 3101.00.00. However, upon importation, these products are frequently reclassified as “Miscellaneous chemical products” under Chapter 38 of the EAC/CET with HS Code 3824.99.00, which attracts VAT. This reclassification has been a persistent issue for fertilizer importers.

Reasons for Reclassification

The Commissioner of Customs and Border Control has consistently argued that the classification of goods under HS Codes is determined by the characteristics, composition, and components of the product, rather than the product’s name or intended purpose. This rationale has been the basis for reclassification by the Commissioner.

In applying this reasoning, the Commissioner closely examines the chemical composition of imported fertilizers. If the chemical composition is found to exceed a certain threshold in relation to the product’s overall makeup, the product is reclassified as a “Miscellaneous chemical product,” thereby attracting VAT.

However, in many cases, the chemical components of fertilizers constitute only a minimal part of the overall product, which is predominantly composed of non-chemical elements.

Navigating Classification Challenges

When importing any product, it is crucial to identify the key ingredients or components that define its nature and use these as the basis for classification, provided the criteria align with the nature of the goods.

For fertilizers, when the Commissioner asserts that the imported product constitutes a higher chemical composition than expected, hence the basis for reclassification, it is advisable to request a laboratory report or certificate of analysis detailing the product’s composition. This can serve as critical evidence to ensure the product is classified correctly.

Technical Review Process

For a proper technical review of a product, such as fertilizer, upon reclassification, the Commissioner should demonstrate the following:

1. Sample Tested: Provide details of the sample of the product that was tested.
2. Tests Conducted: Outline the specific tests conducted on the sample to determine its composition.
3. Tariff Classification: Clearly indicate the tariff classification assigned as a result of the tests.
4. Technical Report: Present a comprehensive technical report from a relevant authority that supports the reclassification decision.

This process ensures that the reclassification is based on a thorough and transparent evaluation of the product’s characteristics.

Conclusion

Tariff rulings by the Commissioner of Customs and Border Control remain a complex and often contentious process for importers.

Misclassification of goods can lead to the imposition of additional taxes. Therefore, it is essential for importers to correctly identify and classify their products using the appropriate HS Code.

In cases where the Commissioner has wrongly reclassified a product and issued an erroneous tariff ruling, Section 229 of the East Africa Customs Management Act (EACCMA) provides the right to seek a review before proceeding to the Tax Appeals Tribunal.