A trade lobby has asked the government to allow tea packers to buy the commodity from the Mombasa auction as one way of increasing value-addition in the sector and promoting domestic consumption of the beverage.
The East Africa Tea Trade Association (EATTA) said this would ease the pressure exerted on farm earnings by dependence on the volatile export market.
"If all the tea produced is sold as value-added products, it would earn the country more than three times what it is earning today," said EATTA's acting managing director Geoffrey Rimbere.
The sector earned Sh 97 billion in foreign exchange in 2010.
Packers are presently not allowed to buy the produce from the auction. They buy the commodity from tea factories where they pay a value added tax of 16 per cent.
Increasing costs of production and competition for key markets have made exports unreliable, with consumers leaning towards preferring buying value-added tea at source.
Egypt and Dubai, two of Kenya's traditional markets, have emerged as blending centres. The two markets rely on bulk tea imports from Kenya for the purpose of blending.
Pakistan, another key market, is also under threat from India which is selling tea to its neighbour following the thawing of ties between the two countries.
The Dubai Tea Trading Centre (DTTC), an initiative of the Dubai Multi Commodities Centre Authority (DMCC), transacted 10.6 million kilogrammes of multi-origin tea in 2010, up 41 per cent on the 7.5 million kilogrammes handled in 2009.
Hefty taxes on value addition
Egypt is the biggest importer of Kenyan tea absorbing 21 per cent, followed by Pakistan and United Kingdom, each buying 17 per cent of the total tea auctioned in Mombasa in 2010.
Afghanistan bought 11 per cent of the tea that was auctioned while Sudan bought 7 per cent. The rest of the countries bought 27 per cent of the tea traded on weekly auction that are held every Tuesday.
Market analysts say that prospects of exporting value added teas from Kenya are very high, considering that the eastern Africa region has slightly more than 500,000 tonnes of exportable tea in a year.
However, investors have been slow to invest in value addition due to high costs, brought about in part by the hefty taxes levied on the activity.
Teas processed in neighbouring countries such as Uganda are zero-rated and enjoy a competitive edge over tea processed in Kenya and sold in supermarkets.
Mr Rimbere said Kenya needed to set up a special economic free zone, where the government provides value addition incentives including land as is the case in Dubai.
The Tea Board of Kenya (TBK) last year announced plans to carry out a feasibility study on creation of value addition facilities.