Augustine Ruzindana

Taxes on agricultural inputs are a disastrous setback (part 2)

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By Augustine Ruzindana

Posted  Friday, September 5  2014 at  01:00

In Summary

Basically, this tax imposition contradicts the declarations about fighting poverty and modernisation of agriculture and in fact in the whole paper of the minister of Finance, there is no reference to how these measures will contribute to attainment of these goals.

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Last week, I could not send in my article in time because my house had no power. Something messed up a fuse at the transformer for my area. Apparently, Umeme has no fault detection mechanism when interruptions occur in their power distribution system and, therefore, it only reacts when a report/complaint is made.

In this case, they reacted quickly when I reported but the first technician who went only identified the problem, which could only be fixed by another (faults) department.

This latter department eventually fixed the problem but if a “fuse” took two days to fix in a rapid response mode, you can imagine the sum total of the days lost in a year in the whole country because of non-existent systemic fault detection mechanisms.

The privatisation of Uganda Electricity Board was supposed to improve power supply to the consumer by investments in technical and managerial capacity that eliminates unnecessary inefficiencies.

Access to electricity is still around a miserable 12/14 per cent and even these privileged 12 per cent get power intermittently.

So far, there are no visible gains from privatisation of the power sector, whether in access or improvements in technical or managerial efficiency. It is just foreign owned UEB with another name. Therefore, this situation calls for urgent sector policy reviews to find the best option for the country.

My last article addressed the adverse effects of the imposition of VAT and the removal of exemption and zero rates on agricultural inputs, supplies, machinery and equipment. Many other commentators, especially stakeholders in agriculture, have made a case for withdrawal of these taxes but government remains adamant that the taxes will not be removed.

I have accessed a justification paper for these taxes presented to Parliament and I am more convinced that the imposition of these taxes is an error which must be corrected before these taxes are passed by Parliament in the Finance Act.

Basically, this tax imposition contradicts the declarations about fighting poverty and modernisation of agriculture and in fact in the whole paper of the minister of Finance, there is no reference to how these measures will contribute to attainment of these goals. The minister in her paper informs the MPs that “VAT is designed to tax domestic consumption”.

But who is the consumer of a hoe, chicken feed or maize seed who “can claim all the VAT he has paid on his inputs and, therefore, bear no tax burden” as the minister asserts? The minister only looked at the importer but not the farmer. Get the importer with income tax.

Lest I am considered politically biased, let me quote the findings of an analysis by Dr Swaibu Mbowa and others of the EPRC on the effect of VAT on just maize and fertilizers.

The summary of findings is as follows: “That the potential costs of the proposed imposition of VAT on agricultural inputs appear to far outweigh the potential benefits.

The impact of VAT imposition on maize and fertilizer is estimated to contribute tax revenues of $10.29 million compared to estimated total losses to maize farmers of $20.93 million.

This implies a benefit-cost ratio of 0.49. This ratio of benefits to costs is well below accepted levels; and if other commodities, inputs and other impact channels … were considered the benefit-cost ratio could be even much lower.

In conclusion, the proposed measure undermines basic agricultural and broader economic growth and development objectives; and the ratio of benefits to costs renders the proposed measure unjustifiable based on economic arguments.

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