'VAT on inputs will chase farmers out of business'

By Francis Kagolo & John Odyek                                                         

KAMPALA - The ministry of agriculture has warned that re-instating the 18% Value Added Tax (VAT) on agricultural inputs and cereals will reduce farmers’ profits and chase many out of production.          

Prof. Zerubabel Nyiira, the state minister for agriculture, said this will hamper efforts to mechanise and commercialise farming to boost food security.

The 2014/2015 budget reinstated VAT on the supply of poultry and livestock feeds, agricultural and machinery like tractors, as well as specialised vehicles and plants.

Other inputs on which VAT was imposed include seeds, fertilisers, pesticides and hand hoes.  The supply of cereals grown, milled or produced in the country, which has always been VAT-free, will also start attracting the tax.

Consequently, the price for a brand new tractor is to increase by more than sh10m, from sh55m and sh80m currently, to sh65m-sh94m. A hand hoe which has been costing a farmer sh7000 will now go for about sh8500.

Yet, Nyiira explained that Uganda’s agricultural sector is made up of mainly smallholder farmers who cannot set prices for their products and as such cannot wash out VAT like other businesses.

"They will collapse'

Being an indirect tax on consumption, the Uganda Revenue Authority (URA) reimburses a company the VAT they paid on inputs when they are selling their final products, technically called “washing out VAT”.          

“Although agro-inputs dealers will increase the prices for their stock, smallholder farmers are price takers. They have no capacity to increase their commodity prices on account of increased cost of production due to VAT,” Prof. Nyiira explained.            

“Farmers who are smart will realise they are making loses and will exit. If they don’t, they will collapse.”          

The minister’s message was contained in a speech delivered by the ministry’s commissioner for planning, Samuel Ssemanda, during a workshop organised by the Economic Policy Reaserach Centre (EPRC) on Thursday at Serena Hotel, Kampala.  
    

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Ssemanda said Uganda is likely to lose over sh80b in reduced cotton exports alone because of VAT

EPRC director Dr. Sarah Ssewanyana explained that Government went for the soft targets because it is easier to tax agricultural inputs than either the farmers’ produce or land.

An analysis done by Swaibu Mbowa, a senior research fellow at EPRC, shows that a maize farmer’s net profit will reduce by 15%, from sh328,000 to sh278,000 per hectare as a result of VAT on inputs.          

“The impact of VAT will be immense and wide reaching. Even domestic products will become uncompetitive on the market yet already some people have been buying fertilizers from Rwanda,” Mbowa reasoned.     

Stuck at the airport

Government expects to raise sh30.4b through VAT on agricultural inputs. But Ssemanda cited an example where the country is likely to lose over sh80b in reduced cotton exports alone because of VAT.

He said cotton pesticides donated by the World Bank are now stuck at the airport because URA is demanding for VAT which had not been planned for earlier. “As the pesticides are being warehoused, the cotton leaf borer is destroying plantations,” he said.          

Ssemanda denounced claims that the ministry was against taxing the agricultural sector, saying “these views on VAT are from the public”.          

However, Dr. Kisamba supported the tax, arguing it would promote organised farming and encourage farmers to work harder. “None of my village-mates in Bamunanika can afford even a bar of soap apart from me who is the richest there. They buy small pieces of soap. But all the same they afford to pay that VAT on soap,” Kisamba reasoned.          

Most participants advised Government to instead utilise the services of district commercials officers to tax middlemen, wholesale and other traders in the agricultural value chains to raise more revenue other than VAT on inputs.          

Uganda’s agricultural productivity fell from 5% in the early 1990s to 2.5% in the early 2000s. Productivity continued to slump to 1.4% last financial year, much below the 2015 target of 5.6% growth envisaged in the sector Development Strategy and Investment Plan (DSIP) 2011-2015.