The National Treasury has handed farmers a new price increase shocker in the 2023 Finance Bill, that has proposed to raise the cost of fertilisers and pest control products at a time Kenya was on course to cut production costs.
Under the proposals, Treasury wants to move all inputs and raw materials supplied to manufacturers of agricultural pest control products, agricultural pest products and fertilisers of Chapter 31 (fertilisers containing either two of nitrogen, phosphorus or potassium) from zero-rated to exempt VAT supplies.
The re-categorisation means suppliers will not be able to claim input VAT unlike the case currently when both fertilisers and pest products fall in the zero-rated category.
While VAT will not be levied on farming inputs, manufacturers will be forced to absorb or pass on the cost of unrecovered input taxes to farmers, which will worsen Kenya’s position as the most expensive nation for farmers in the region.
Transportation of sugarcane from farms to milling factories has also not been spared after it was moved from zero-rated status to the VAT-exempt category.
This means sugarcane farmers will be handed more deductions by millers after crop deliveries.
“The reclassification is expected to increase the cost of production for suppliers hence passing the cost to the farmers, which will ultimately lead to an increase in the cost of food,” said tax experts from KPMG East Africa in a note.
“The proposed reclassification will also have an impact on the subsidised fertiliser programme as any input VAT incurred in supplying the fertiliser will become a cost to entities supplying fertiliser to the government. This will in turn impact the government’s efforts to ensure that all Kenyans have access to affordable and nutritious food.”
Higher farm input costs would be a setback for a government fighting a myriad of challenges around food security including a spike in inflation and the effects of a raging drought, which had gripped the country for most of the past two years.
Transforming agriculture sits at the heart of the government's 2023-24 budget, which has been dubbed the Bottom-Up Economic Transformation Agenda that is underpinned by increasing investments in at least five sectors with the largest impact and linkages to the economy.
“This intervention aims at ensuring food security in the country through climate change mitigation and adaptation, thereby reducing the cost of living. As part of the country’s long-term food security plan, the government working with the private sector will continue to subsidise fertiliser in order to make it available and improve productivity in counties,” the National Treasury stated in its summary of the budget.
Despite holding the largest share of GDP, the performance of agriculture has been lacklustre, posting back-to-back years of negative growth in 2021 and 2022.
According to the latest economic print from the Kenya National Bureau of Statistics, the sector posted a negative growth of 1.6 percent, extending its contraction of 0.4 percent in 2021.
“This was attributed to drought conditions that characterised the period under review,” said KNBS.
Drought in most parts of the country severely affected agricultural production with maize output for instance declining to 34.3 million bags from 36.7 million bags in 2021.
Tea production, horticultural exports and volumes of marketed milk similarly dropped in the year.
Sugarcane deliveries and coffee production nevertheless increased on account of conducive weather conditions in the respective growing areas.
Agriculture, forestry and fishing was the third largest contributor to wage employment in the year having sustained 341,600 jobs in 2022 to rank behind only education and manufacturing roles that employed 629,100 and 352,600 persons respectively.