Impact of the Kenyan 2024 Finance Bill on the Farming Sector

Introduction

The Finance Bill 2024 introduces significant changes to Kenya's tax policies, which have profound implications for the farming sector. These changes aim to increase government revenue while potentially impacting farming operations, input costs, and overall agricultural productivity. This article examines the bill's impact on farming, focusing on adjustments in excise duties, VAT policies, investment incentives, and compliance measures. Additionally, we will explore the economic theories underpinning these changes and provide real-world examples of their impacts.

Economic Theory

Taxation in the agricultural sector can influence production decisions, investment, and overall economic growth. According to supply-side economics, reducing taxes and providing incentives can stimulate production and investment by increasing after-tax returns. Conversely, higher taxes can increase costs, reduce profitability, and potentially lead to lower production levels. The elasticity of supply in agriculture is often lower due to the time it takes to grow crops or rear animals, making farmers more sensitive to tax changes.

Impacts on Farming

Excise Duties and VAT

1. Increased Excise Duties

Details: The bill proposes an increase in excise duty on fuel, raising it from KES 21.95 per litre to KES 24.95 per litre.

Impact: Increased fuel costs will raise the overall cost of farming operations, including planting, harvesting, and transporting produce.

Economic Theory: Higher input costs can reduce profitability and output, leading to lower overall agricultural production.

2. VAT Changes

Details: Removal of VAT exemptions on certain agricultural inputs such as fertilizers, pesticides, and seeds, subjecting them to the standard VAT rate of 16%.

Impact: The removal of VAT exemptions will increase the cost of essential farming inputs by 16%, reducing farmers' margins. Increasing agricultural productivity requires a bundle of inputs. Increasing their cost discusses their use and hence will reduce farm productivity and hence reduce food security.

Economic Theory: Increased costs of inputs can lead to reduced investment in farming, lower yields, and higher food prices.

Investment Incentives

Capital Allowances

Details: Introduction of a 10% per annum investment allowance on specific agricultural equipment and infrastructure.

Impact: Encourages investment in modern farming equipment and infrastructure, potentially increasing productivity and efficiency. However, Kenya is made up of largely small holder farmers who do use large farm equipments. Hence, this measure will benefit large scale farmers while other measures are hurting the smallholder farmers.

Economic Theory: Investment incentives can lead to technological advancements and higher productivity, promoting long-term growth in the agricultural sector.

Freight Tax Increase

Details: Increase in freight tax on non-resident shipowners or operators from 2.5% to 3%.

Impact: Higher freight costs can increase the cost of imported agricultural inputs and exported produce. Kenya imports most of the farm inputs through the sea. Hence, their costs will likely go up and affect their affordability.

Economic Theory: Higher transportation costs can reduce the competitiveness of agricultural exports and increase the cost of imported inputs.

Impacts on the Country

Positive Impacts

Revenue Generation: Increased tax revenue can fund agricultural research, extension services, and rural infrastructure development. This can enhance the overall productivity and sustainability of the agricultural sector.

Technological Advancement: Investment allowances can encourage the adoption of modern farming techniques and equipment, leading to higher productivity and efficiency.

Food Security: Improved infrastructure and investment in agriculture can enhance food security by increasing production efficiency and reducing post-harvest losses. However, this is unlikely to happen because majority of the farmers are small scale farmers.

Negative Impacts

Increased Production Costs: Higher excise duties and the removal of VAT exemptions increase the cost of farming, potentially reducing profitability and production levels. For instance, the increased VAT on fertilizers and pesticides directly impacts farmers' operational costs. The cost of fertilizers and chemicals are very high in Kenya. It is difficult for small holder farmers to buy farm inputs even before taxes were introduced.

Reduced Competitiveness: Higher transportation and input costs can make Kenyan agricultural products less competitive in international markets, leading to lower export volumes.

Food Prices: Increased costs of production may lead to higher food prices, impacting affordability and access to food for the general population. Industrialization occurs associated in low food costs. Hence, this is negative to the spirit of low cost of labor in the country.

Real-World Examples

Negative Impact

India: The introduction of the Goods and Services Tax (GST) on agricultural inputs initially led to increased costs for farmers and reduced profitability. Farmers faced higher prices for seeds, fertilizers, and equipment, affecting their production capacity. This led to farmers unrest and a very high suicide rates.

Brazil: High taxes on agricultural exports have sometimes led to reduced competitiveness in global markets and lower export volumes, impacting the country's agricultural sector.

Beneficial Impact

Netherlands: Investment incentives in agriculture have led to significant technological advancements, making it one of the most productive agricultural sectors in the world. Government policies supporting innovation and efficiency have enhanced productivity and sustainability.

Israel: Government support and tax incentives for water-saving technologies have transformed the agricultural sector, increasing productivity and sustainability. These policies have helped Israel maximize agricultural output despite limited water resources.

When is it Beneficial and When is it Harmful?

Beneficial

Investment Incentives: Tax policies that incentivize investment in modern farming techniques and equipment can lead to higher productivity and long-term growth. Investment in technology can improve efficiency and yield, making farming more sustainable.

Revenue Utilization: Effective utilization of increased tax revenue for agricultural research, infrastructure, and support services can enhance the overall productivity and sustainability of the sector. Funding for extension services and rural infrastructure can significantly benefit farmers.

Harmful

High Input Costs: Excessive taxation on essential farming inputs can reduce profitability, discourage investment, and lower production levels. This can lead to decreased agricultural output and higher food prices.

Competitiveness: High taxes on exports and transportation can reduce the competitiveness of agricultural products in international markets, leading to lower export volumes and revenue. This can negatively impact the agricultural sector and the broader economy.

Conclusion

The Finance Bill 2024 introduces substantial changes to Kenya's tax policies, impacting the farming sector through higher excise duties, VAT changes, and investment incentives. While the bill aims to increase government revenue and promote investment in agriculture, it also raises concerns about increased production costs and reduced competitiveness. Balancing these factors is crucial to ensure the long-term growth and sustainability of Kenya's agricultural sector. Effective policy implementation and adjustments will be essential to support farmers and promote overall economic stability.

References

1. Finance Bill 2024: Analysis by Deloitte, May 2024.

2. Economic Theory: Supply-Side Economics and Agricultural Taxation, N. Gregory Mankiw, Principles of Economics.

3. Real-World Examples: India's GST Implementation, Brazil's Agricultural Export Taxes, Netherlands' Agricultural Investment Incentives, Israel's Water-Saving Technologies.

By carefully balancing revenue generation with the need to support agricultural productivity, Kenya can ensure that its farming sector remains robust and competitive.