Author(s): Raphael Gitau, John Olwande,Mary Mathenge, Lilian Kirimi and Mercy Kamau
Introduction

Increased agricultural productivity is key to food security and poverty reduction. A major impediment, though, has been the low use of productivity enhancing inputs in the form of fertilizers and improved seed, due to limited capital to finance such expenditures, and in some cases, low returns to inputs used. Tegemeo data show that most farmers who do not use fertilizer are constrained by the high cost of the inputs relative to price of the output. To ensure increased food supply and low food prices for consumers, governments must be frugal in their interventions by making agricultural inputs and food affordable, particularly for smallholder farmers and consumers in the low income categories respectively. One of the ways that the Kenya Government has been supporting farmers and consumers is through the zero-rating of value added tax (VAT) on inputs, and processed food, eliminating the additional cost that would result from such charges. This situation, however, is likely to change if the proposed review of the VAT Act is approved.

The proposal to review the VAT Act is a bid to harmonize the way different items are treated with respect to VAT. The proposal aims to make the administration of VAT easier and more effective. The VAT Bill, which is still under discussion, proposes reducing the number of zero rated items to address the problem of huge tax refunds. This implies that some basic items that were initially zero rated will now attract the 16% charge in VAT. The items to be affected include agricultural inputs such as fertilizers and seed and processed food items such as sifted maize meal, processed milk, among others. These proposed amendments have been made despite the high and rising food prices that continue to be a challenge in Kenya, as evidenced by the rising food insecurity within households and the quest for increased wages by workers.

Imposing VAT on fertilizer and seeds would effectively lead to higher input prices. Higher input prices will have two possible effects. First, farmers at the margin will not be able to meet the additional cost, and will either reduce the acreage under cultivation or use less inputs per given crop area. Either possibility will result in lower farm output and hence reduced national supply. Secondly, households that can afford to meet the increased cost of input, will ultimately face a higher cost per unit of output, a cost they will likely pass on to consumers in form of high output prices. Thus the real implications of imposing VAT on inputs will go beyond the increase in input prices and reduced affordability to affect consumers through its effects on prices food. This multiplicity of effects is likely to have significant implications on food insecurity and poverty, particularly among poor and vulnerable consumers.

This brief highlights the potential effects of the proposed VAT Bill on food prices, particularly the key staple food commodity, maize. We quantify the potential effects of 16% VAT on agricultural inputs,specifically fertilizers and maize seed, on the cost of maize production and on prices of maize grain and sifted maize meal. The purpose of this analysis is to inform the debate on the proposed VAT Bill and to ensure that the Bill does not have a negative impact on food security, and the overall performance of the agriculture sector.

Potential effects of the imposition of value added tax on agricultural inputs and sifted maize meal