Monday July 7 2014

Scrap input taxes on agriculture in 2014/15 budget

By Morrison Rwakakamba

The Minister of Finance, Planning and Economic Development (MFPED), Maria Kiwanuka removed all tax exemptions for agriculture chain inputs and slapped an 18 per cent Value Added Tax (VAT). For farmers, this was the most confusing and worst news of the 2014/15 budget speech.

From hoes, pangas, acaricides, pesticides, seeds, wheel barrows, milk cans, packaging material, etc, now farmers will have to pay more and hope to recover their costs when they put their products to the market through high prices. But few farmers in Uganda make it to output market places, as many are unfortunately still subsistence with unviable surpluses.

The assumptive argument at the Ministry of Finance that many small holder farmers will not be affected since they don’t engage in inputs markets is at most wayward and diversionary. The argument is also careless and lazy, because it seems to rather celebrate perpetuation of subsistence agriculture in Uganda.

Millions of farmers, since they no longer have seed rights expressed through home grain granaries, etc, have to buy seed and other implements in open input markets. The traders will just pass the VAT incidence to farmers. And 98 per cent of these farmers have no rights under our obtaining tax code to claim VAT returns from the Uganda Revenue Authority (URA) since they don’t have a requisite turnover of Shs50 million and above to qualify for VAT tax returns.

Whereas paying taxes is a good thing- and equally expanding tax base is a legitimate pursuit of any nation, taxing instead of incentivising agriculture in Uganda’s circumstance is a big mistake. Even when taxing agriculture, it is grave to tax inputs because such undertaking increases initial cost stream and discourages investment in the sector.

Taxing agriculture outputs/products is instead logical- because then that becomes income tax, and any taxation on profits makes sense. Say if for example, a farmer puts two tonnes of coffee on the market per annum, a 5 per cent tax or so is affordable and legitimate. If a beef farmer puts on the market 30 or so animals on the market per annum, a similar foregoing tax can be levied and that is reasonable. But to put a tax on the pumps and acaricides this beef farmer needs to raise animals competitively is simply wayward.

Such state of affairs has implications for food and nutrition security but also for household incomes, investments, productivity and competitiveness of agriculture sector. We must take note that competitiveness is essentially a result of reduced cost of production- yet these taxes will serve an opposite purpose!

In a recent cost of doing business and post budget dialogue for businesses in Mityana and Mubende hosted by Agency for Transformation with support from USAID-GAPP-RTI programme, farmers and other agriculture chain actors argued that these farmer targeted taxes will inhibit production and are tangential to the spirit of the State-of-the-Nation Address that was delivered by President Museveni.

The President was categorical that agriculture was to be supported to create employment, improve exports, support income improvement and help create business farmers who are competitive. Farmers want ministry of Finance and Parliament to correct distortions in Minister Kiwanuka’s budget that taxed farmers to death in contradiction of President’s State-of-the-Nation Address.

By removing all value chain support equipment and supplies tax incentives, it will get worse for the already expensive machinery and equipment / spare-parts that farmers urgently need to produce and govern markets. Inputs like seeds, fertilisers, pesticides are very expensive so far and it will only worsen farmers’ situation and productivity will be affected.

Intermediate inputs like packaging will become even more expensive and yet essential for placement, storage of products and value addition. We must remember that our competitors in the region bring finished products already packed and yet we only charge them on finished products! As Parliament takes on scrutiny of the budget numbers, it’s my expectation that keen interest on this avalanche of agriculture taxes will be self-evident – and these input taxes will be scrapped.
Mr Rwakakamba is the chief executive officer, Agency for Transformation – Think and Do