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Does taxing agricultural input in uganda make economic sense?

By Vision Reporter

Added 12th September 2014 03:46 PM

Recently, there has been a debate as to whether taxing agricultural input is a good decision. For finance and revenue collection, it is a sound decision.

Recently, there has been a debate as to whether taxing agricultural input is a good decision. For finance and revenue collection, it is a sound decision.

trueBy Asa Mugenyi

Recently, there has been a debate as to whether taxing agricultural input is a good decision. For finance and revenue collection, it is a sound decision.

However to an economist and an international trade promoter, the decision to tax agricultural input is unpalatable. In Uganda, agriculture produces more than 80% of the Gross Domestic Production.

The agricultural sector contributes more than 70% of the country’s employment and exports. In the rural sector, agriculture constitutes the biggest source of livelihood. Uganda is gifted with good soil, a nice climate and a lot of land available for agriculture. Uganda should be the bread basket for the Nile basin region, with or without oil production.

From an economist and international trade aspect, applying Adam Smith’s concept of absolute advantage, a country is supposed to promote those sectors in which it has an advantage.

Likewise David Ricardo’s concept of comparative advantage requires nations to specialise in those areas it has comparative advantage. David Ricardo expounded that maximum gain is achieved when each country produces goods where it has a smaller opportunity cost for producing, while importing those in which it does not have any or less advantage.

In essence, Uganda should promote the agriculture sector. By taxing agriculture input, Uganda is not promoting the agricultural sector. A tax is an antithesis of a subsidy.

A subsidy is a financial contribution by government or a public body that is supposed to stimulate production or export. Uganda needs to modernise her agriculture sector. In short Uganda should be subsidising and not taxing the agriculture sector in order to maximise production.

Traditionally, the developed countries have a comparative advantage in the production of industrial goods while the developing countries have the advantage in agricultural goods.

The developed countries, in more particular the US, Japan, Canada and the European Union use the monies they collect from their taxation of industrial goods to subsidise their agricultural sector.

This undermines the capacity of developing countries’ agricultural exports competing with those of the developed countries. In order to avoid competing with the heavily subsidised agriculture goods in developed countries, Uganda needs to process her agriculture produce and sell it to her neighbours.

The issue of agriculture subsidies has been a bone of contention at the World Trade Organization (WTO) rounds. Some of the major controversies and deadlocks in the WTO rounds have been on the issue of agriculture subsidies by developed countries.

While the developed countries advocate for the phasing out of export subsidies for industrial goods under the Agreement on Subsidies and Countervailing Measures, they are reluctant to do so for agriculture subsidies under the Agreement of Agriculture.

Recently at the WTO rounds at Bali, Uganda was nominated to head the Committee on Subsidies. It is ironical that Uganda which should be advocating for developing countries subsidising their agricultural produce and exports is instead taxing agriculture inputs.

At the end of the day we have to ask ourselves whether the decision to tax agricultural input was supposed to raise revenue or to discourage agricultural production and exports. The two seem to be different sides of the same coin.

The writer is an International Trade Lawyer

 

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Does taxing agricultural input in uganda make economic sense?

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