Friday August 22 2014

Taxes on agricultural inputs, tools and machinery are a disastrous setback

By Augustine Ruzindana

For a very long time, agriculture has rarely received more than 4 per cent of the national Budget contrary to the African Union target of 10 per cent set in Maputo, expected to achieve a sector growth rate of 6 per cent.

However, the growth rate in Uganda instead fell from 7.9 per cent in 2000 to 0.7 per cent in 2009 and has since been just above or below 2 per cent when the population growth rate has been consistently above 3 per cent. The contribution of agriculture to GDP has been falling and it is now around 20 per cent whereas the population depending on agriculture hovers between 70-80 per cent. This is why the issue of poverty is so pressing as around 80 per cent of the population shares less than 20 per cent of GDP.

Thus the Ministry of Agriculture calculates that the absolute poor will rise to 10.15 million in 2015 (Agriculture Sector Development Strategy and Investment Plan: 2010-2015). The ministry, in this plan, identifies numerous “challenges” facing agriculture, such as, low productivity; declining soil fertility with low productivity enhancing inputs; high losses due to pests, vectors and diseases; inadequate infrastructure for value addition, storage, marketing and distribution; inadequate feeder road network; negative consequences of climate change; uncoordinated efforts among public agencies, etc.

The plan identifies some measures that can provide remedies e.g enhancing production and productivity; improving access to markets and value addition; creating an enabling environment for farmers, entrepreneurs and investors to make informed decisions and public investment in rural roads, railways, electricity and telecommunications.

The Minister of Finance in the Budget speech in June also reiterated the same objectives, namely to “Enhance production and productivity in agriculture, agribusiness….” Specifically in paragraph 86 of the budget speech the minister said: “The agricultural sector is key for employment, for productivity and for exports.

It employs 70 per cent of Uganda’s labour force and contributes 21 per cent to the GDP and less than 1 per cent in taxes.” It seems this 1 per cent contribution in taxes is the sole source of the disastrous taxes imposed on agricultural inputs but this is not correct because the 70 per cent consume many products on which indirect taxes are levied.
The 70 per cent of the population that shares only 21 per cent of GDP was hit real hard.

The “exemption on interest income on agricultural loans”, which perhaps benefits the big farmers, who borrow from banks, was terminated. The presumptive tax threshold was increased from 1 per cent to 3 per cent and this will definitely affect farmers as well. The minister’s explanation that VAT “is borne by the final consumer” does not hold true in agriculture. She nevertheless terminated VAT exemption on “Supply of feeds for poultry and livestock”, “Supply of agriculture and dairy machinery” and “supply of packaging materials to the dairy and milling industries”.

In addition, VAT was imposed on the following hitherto zero-rated supplies: “I. Supply of seeds, fertilizers, pesticides and hoes; II. Supply of machinery and tools for agriculture; iii. Supply of milk and milk products; iv. Supply of cereals, grown, milled or produced in Uganda; and v. Supply of printing services for educational materials.

Is it not cynical for a government intent on increasing agricultural productivity to impose VAT on seeds, fertilizers and pesticides, tractors, poultry and livestock feeds, milk coolers and tankers and even hoes on which VAT cannot be borne by the final consumer? To make matters worse, the minister increased tax on diesel and petrol by Shs 50 and a whopping Shs200 on kerosene, which also affects the 70 per cent who only share 21 per cent of GDP. Thus at all stages of the agricultural cycle, VAT will be levied but the main effect is that the farm gate price will fall and total production will go down. In the public interest, these taxes must be removed expeditiously.

Mr Ruzindana is a former IGG and former MP.