How Finance Bill will deal a huge blow to farmers

The Finance Bill 2024, proposes a suite of changes to the nation’s tax policies with significant implications for the farming sector.

While these changes aim to increase government revenue, they have sparked concern among farmers and industry stakeholders due to their potential impact on farming operations, input costs, and overall agricultural productivity.

This comprehensive overhaul has drawn considerable attention, especially from Githunguri Member of Parliament Gathoni Wamuchomba, who has voiced strong opposition, citing the bill’s adverse effects on smallholder farmers.

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One major change is the proposed increase in excise duty on fuel, raising it from Sh21.95 per litre to Sh24.95 per litre. This hike is poised to elevate overall farming costs, affecting everything from planting to transporting produce. Higher input costs can diminish profitability, potentially leading to reduced agricultural production.

The bill also proposes removing Value Added Tax (VAT) exemptions on essential agricultural inputs such as fertilizers, pesticides, and seeds, subjecting them to the standard VAT rate of 16 percent. This removal will likely reduce farmers’ margins by raising the cost of essential inputs, thus negatively impacting farm productivity and food security.

Wamuchomba has been vocal in her criticism of the bill, arguing that it unfairly targets smallholder farmers while benefiting larger operations. In a recent interview, she detailed the challenges farmers face and the potential repercussions of the new tax policies.

“I represent farmers. I have seen this proposal as discriminatory. You cannot remove some taxes on a certain sector and not touch the other sectors. Milk transportation takes all the money that the farmer is supposed to end up with. The cost of transportation of milk is very expensive in Githunguri. Most of my farmers lose their money during that process because milk is perishable. By the time they deliver the milk to the processing point, much is already spoiled and therefore they have to lose,” said Wamuchomba.

The bill also introduces higher taxes on packaging materials used for value-added products like tea. Wamuchomba explains that these taxes discourage local value addition, forcing businesses to relocate or shut down. 

“Excise duty of 35 per cent on papers used for packing tea leaves, import duty, VAT, and eco-tax make it unsustainable for any industry in value addition of tea. Most packers closed down or relocated to Dubai, Egypt, and Sri Lanka,” the MP said. 

She noted that this exodus has led to significant jams in Mombasa warehouses, where over 8 million kilos of tea are stranded. The taxes have made it unprofitable for packers to operate, affecting farmers who depend on these businesses to buy their produce.

Agricultural Economist Dr Kirimi Sindi says the introduction of a 10 pe rcent per annum investment allowance on specific agricultural equipment and infrastructure encourages investment in modern farming equipment and infrastructure, potentially increasing productivity and efficiency.

“However, Kenya is made up largely of smallholder farmers who do not use large farm equipment. Hence, this measure will benefit large-scale farmers while other measures are hurting the smallholder farmers,” said Dr Sindi.

According to Sindi, 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 fertilisers and pesticides directly impacts farmers’ operational costs. The cost of fertilizers and chemicals is very high in Kenya. It is difficult for smallholder farmers to buy farm inputs even before taxes were introduced,” he says. 

The bill also proposes an increase in freight tax on non-resident shipowners or operators from 2.5 per cent to 3 per cent. Dr Sindi says higher freight costs can increase the cost of imported agricultural inputs and exported produce. Kenya imports most of the farm inputs by sea. Hence, their costs will likely go up and affect their affordability.

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

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