Mosquito net manufacturers now warn that in the next two months, they may be forced to go against the government policy requiring them to zero VAT their finished mosquito nets. Or alternatively they are going to up the prices of the nets if they have to stay afloat in their businesses.

Already, some of them are charging higher prices to recover some of their money, which might be affecting the government's Roll Back Malaria strategy.

Their twin-fold complaints are on the refund of value added tax by the Kenya Revenue Authority (KRA) and the charging of the same duty on raw materials used in the manufacture of mosquito nets.

The three major companies - Mossnet Industries Ltd, Nets Ltd and Polo Industries Ltd - blame KRA, which they accuse of having not refunded their tax since early last year when they were told not to charge VAT on finished mosquito nets.

They were to get a refund of the equivalent amount from KRA. This is in line with government's policy on the Roll Back Malaria (RBM) strategy agreed upon by African countries and international community in Abuja Nigeria in the year 2000.

The objective of the strategy is to enable about 60 per cent of the population of any country where malaria is endemic have access to mosquito treated nets at reduced prices.

Through such programmes, African countries including Kenya have agreed to halve malaria burden by the year 2010.

However, the goal might not be achieved if current dissatisfaction among partners continues.

Local manufacturers say although zero VAT on mosquito nets can help poor people access them, the problem comes when they want to recover their input VAT.

"We spend dearly to have external auditors verify our claims, and no money is forthcoming. Some of us have taken overdrafts from banks which are attracting huge interests," says Michael Oddenyo, a director at Mossnet Industries Limited.

"How can we invest in more nets production, when you cannot recover your costs. It was even better when we were allowed to charge VAT and recover costs on sales," concludes Prakesh Shah, a director at Nets Limited.

Companies like Net limited claim their production has reduced by 65 per cent since they cannot recoup the money they invest in the manufacture of nets.

They also complain that with VAT and other duties charged on the raw materials, they are finding it difficult to compete with cheaper Nets from Tanzania and Asia.

“ We cannot operate because of the duties on raw material and the huge sums of our capital being held up by the KRA. There is serious cash-flow constraints on our part,” explains Polo Industries managing director, Sunil Wanzah.

When they import yarn, the raw material for making mosquito nets, local manufacturers pay 2.75 per cent for an import declaration form and 20 per cent duty. A fee of three per cent is also charged on insecticides.
Malaria experts say removal of such taxes will bring prices much lower to benefit poor people, who cannot even afford the current heavily subsided price of Ksh 300 per net.

They claim that mosquito nets will be required to put malaria at bay, a disease that account for 30 per cent of outpatient cases and 26,000 deaths of children under five years of age in Kenya.

But if things remain the way they are many may not afford. It is understood that VAT refund problem and duties on raw materials has made the price of locally manufactured nets 15 per cent higher than that of imported ones. A huge amount of which come from Tanzania.

For Tanzania, the only other Africa country besides Kenya dealing in mosquito nets production, three factors make their product cheaper. No duty is charged to the local manufacturers, besides being given export compensation of about 12 per cent. Tax on yarn is only five percent.

In addition, when the nets come to Kenya, they do not attract any duty in line with government’s policy of zero VAT on finished mosquito nets. Export compensation of 20 per cent to Kenyan exporters was suspended in the early 90s when the Goldenburg scandal came to the fore.

In this case, billions of shillings were paid up by the government as export compensation to local company for goods that were not exported. The case is still in court.

With her incentive policies still in place, Tanzania products are cheaper. And she always gets the largest share when tenders are offered by organisation such as Population Service International and Unicef.

Another dimension to the problem is that when PSI sells its nets, popularly known as supernets, the price is heavily subsidised that consumers prefer them to local manufactured ones.

This is making local manufacturers who traditionally used to sell their nets on credit to wholesalers, to either do so on cash or on demand basis. But the strategy is not earning dividends either.

This has evolved to an extent that the local manufacturer of nets is damned if he or she does not sell the nets to PSI. Or alternatively enter into a certain arrangement with the same organisation.

Nevertheless, the same manufacturers credit PSI for creating increased awareness on treated mosquito nets use, which also works to their advantage.

PSI, an NGO that operates in many countries, is pushing a five year aggressive social marketing strategy promoting use of treated mosquito nets. The organisation is able to heavily subsidize the nets using funds from donors.

However, local mosquito net manufacturers argue that if VAT on raw material is scrapped, their nets would be between 10 and 15 per cent cheaper than the imported ones.

According to the Director of Medical Services, Dr Richard Muga, the ministry of health has been tackling the issue of VAT on raw material for mosquito nets.

“ We have applied for the scrapping of VAT on the raw materials, but it has not come through yet. We are indeed committed to fighting malaria in these country, but our performance is unfairly judged by some people.”

However, other sources indicate that the government is nervous to have raw material- the mosquito netting fabric- attract a zero VAT because the material can be diverted to other uses. In fact, the sources say this is one of the obstacles in the debate.

The government argues that some of net manufacturers are also using the fabric to make other commodities such as vests.

Nets manufacturers do not agree with this. They say less than five per cent of the netting fabric can be diverted for other uses. Even if such a move will benefit a few people, they add, it would be advantageous as it will stimulate the dying textile industry.

For now, unable to operate profitably in the mosquito net busisness, some of the manufacturers are diverting and investing in other businesses like car tyre sells.