BACKGROUND
The year 2009 saw the Zambian economy go through great turmoil because of the global melt down leading to declining export earnings from the mining sector and unprecedented depreciation of the Kwacha. At this point, it was evident that the need for economic diversification away from the heavy dependence on the mining sector was no longer a matter for debate but accelerated action hence both the 2009 and 2010 National Budget had the same theme “Enhancing Growth Through Competiveness and Diversification”. The agriculture sector is one of the target sectors for this economic diversification. The potential for the agriculture sector in Zambia is vastly appreciated. Aside from the natural endowments, the high payoff through employment creation and income earning opportunities which the sector offers makes it a natural choice, in a country with high unemployment and poverty levels in rural areas. Growth in agriculture has the capacity to generate an immediate impact on reducing poverty and achieving food security. Furthermore, primary production has multiple effects as it feeds into many other downstream industries contributing to improving the economy through substitution of imported products by locally processed products and export earnings.
In recent years, significant strides have been made in achieving food security because national production has exceeded national consumption requirements for some commodities such as maize, soyabeans and wheat. However, lack of competitiveness has become an eminent threat to any further expansion in production because the surplus that has been produced cannot land in export markets at a competitive price. The main reason for this is that farmers in general (small, medium or large scale in size) engaged in production of maize or other crops and livestock (dairy, beef, pigs, poultry etc) all buy inputs at retail commercial prices and have to survive in the business of farming without subsidies. Apart from some small scale farmers that have access to input subsidy under the Fertilizer Input Support Programme , a majority of farmers in Zambia are actually commercial producers as they have to survive by marketing their products at some reasonable markup to make ends meet and re-invest in order to continue farming for a livelihood.
Regrettably, production costs have risen to unsustainable levels. On the local market, there is consumer price resistance and paying farmers sub-economic prices is one of the contributing factors to farm liquidations and perpetuation of poverty in the rural areas. In the export markets, products are uncompetitive compared to products sourced from other countries. Therefore, while there is desire to diversify the economy through agriculture, it is eminent that this will only come about if production costs are reduced across the board.
Reducing production costs will have a twofold positive impact. In the domestic markets agriculture products will become more affordable to a larger population hence stimulate more demand, become more competitive against imports and reduce inflation. In the export markets, there will be a greater chance to compete favourably and sell products bringing more benefits into the economy through employment creation and export earning opportunities because of access to larger markets beyond the domestic market.
The Union’s national budget submissions should be seen against this background as the sector has reached a moment of reckoning demanding that sacrifices are made in the short run in order to realize the benefits from the growth that will be unleashed when the sector becomes competitive and sustainable growth emerges in future. In the past two years, budgets have contained policy pronouncements affirming the importance of agriculture but now the time has come to put in place fiscal measures that should generate the wholistic growth in the sector.
TAXATION MEASURES
1.0 ZERO RATE AGRICULTURE PRODUCTS FOR VALUE ADDED TAX
The products to be zero rated are;
· Maize
· Soyabeans
· Livestock (Beef, Poultry, Pigs and Dairy)
· Stockfeed
· Wheat
· Sunflower
· Groundnuts
· Fruits and vegetables
JUSTIFICATION
The current value added (VAT) system where agricultural products are VAT exempt has been identified as the single most negative factor that contributes to the un competitiveness of agriculture. As producers, VAT is paid on inputs even before the process of production on farms begins which makes VAT costs to become part of the loan that a farmer borrows to finance production and when paying back the loan twelve months hence there is also interest on the loaned amount that went towards VAT on inputs. Farming or primary production by nature has a long production period for both crops and livestock unlike other value addition transformation processes that follow thereafter which puts farmers at a disadvantage when VAT is lumped on inputs before production starts.
By virtue of being VAT exempt, farmers are not able to claim the VAT on inputs which contradicts the VAT principle which is premised on the fact that VAT should be paid by the consumer. This also puts Zambian farmers at a disadvantage when compared to the practice in countries that are regional competitors where producers are able to reclaim VAT on all inputs. VAT also increases the final consumer prices by 16% for standard rated products and it increases the cost of production for exempt products by the VAT paid on inputs as the VAT cannot be recovered. Standard rating also disadvantages producers that cannot register for VAT administration because of lack of capacity to maintain the VAT accounting requirements. For wheat which is standard rated, there are some vexing developments which have emerged where VAT is possibly not levied on some wheat transactions. This happens when a grower is paid cash by a miller who in turn generates a cash sale of flour to a baker and the baker does cash sales for by products of flour to consumers. This eliminates the VAT paper trail for such transactions, creates distortions for other players in the value chain and amounts to tax evasion.
Therefore, VAT zero rating all agricultural products would have an immediate impact of removing the VAT component on inputs for products that are VAT exempt. In addition, the 16% VAT on the final consumer price of all agricultural products that are standard rated would be removed. This would have several positive effects such as the consumer price of agriculture products would reduce, stimulate demand, improve the competitiveness and eliminate any cash sale malpractices.
IMPORT TAXES
1.1 Remove import duty on Knapsack sprayers
Justification
Currently there is a 15% import duty on Knapsack Sprayers which are classified as “Other Sprayers”. This results in farmers paying more for these sprayers which are widely used in the course of producing cotton, tobacco, livestock, etc. ZRA should create a special tariff code for Knapsack sprayers which should allow duty free importation of these sprayers for agriculture use to lower the cost of these sprayers for farmers.
1.2 Remove import duty on Electric delivery vehicles
Justification
Electrical delivery vehicles should be allowed to be imported tax free like solar panels for the following reasons:
a. Electricity is produced in Zambia unlike diesel
b. Hydro Electricity is "clean power" It would not contribute to global warming
c. They could be charged at night during off peak hours.
d. It would cost 10% of the equivalent diesel price to run.
2.0 Remove Livestock Levies
Justification
There is a new trend which has emerged in Local Councils where livestock is the main economic activity of increasing livestock levies indiscriminately. The list of livestock products is wide and some of the commodities being target are beef animals, goats, poultry (chicken birds, chicks, eggs, etc), kapenta, fish, etc. Farmers have no argument with the payment of livestock movement permit fees which are paid to the Veterinary Department of the Livestock Ministry. Abolition of livestock levies will level the playing field for livestock farmers with crop farmers as the crop levies were abolished.
REVENUE ENHANCING MEASURES
1.0 Value Added Tax
To recoup the revenue lost by zero rating agricultural products, additional VAT revenue could be realized as follows;
1.1 Increasing the VAT rate by 0.5% from the current 16% to 16.5%. With increased economic activity in the mines and other sectors such as communication and construction, the revenue gap would be mitigated against.
1.2 In 2009, the government collected approximately K91 billion in form of VAT from the agricultural sector as a whole which is the projected loss of revenue. This translates into approximately 30% of the total VAT revenue collected in 2009 which amounted to K307.1 billion. However, the total VAT revenue collected in 2009 fell short of the total budgeted revenue of K2,549.9 billion on account of poor performance of the mines that year. In a normal year, the actual VAT revenue from agriculture as a share of the total VAT revenue should be much lower than 30%. Indeed, in relation to the budgeted VAT revenue for 2009, the VAT revenue realized from agriculture amounts to only 3% of the budgeted VAT total revenue. The loss in revenue should therefore be recoverable from the proposed revenue enhancing measures and the re-bound in VAT revenue from the mines and other booming sectors. In the long run, the benefits that will accrue to the economy will far outweigh this loss as the sector will be set onto a sustainable growth path.
2.0 Increase import taxes on imported finished edible oil products
Justification
This measure is proposed in a bid to encourage local processing of edible oils. However, import duty on crude edible oil should not be increased because this allows value addition for edible oil processing locally until such a time when production of oilseeds such as sunflower, palm, etc increase to a point of meeting domestic requirements.
3.0 Increase Excise Duty on Talk Time
Justification
The Cell phone network which is almost countrywide provides an opportunity for the informal sector to contribute towards government revenue. Government should consider an excise duty on cell phone talk time as a way of raising revenue.
EXPENDITURE MEASURES
Government expenditure priorities should be targeted at supporting the private sector to grow in line with the free market principles. To support agriculture, government expenditure should go towards;
· maintaining rural infrastructure such as roads
· improving farmers’ access to latest information on farming methods through research and extension
· improving funding for training of Ministry of Agriculture and Cooperatives staff in organic farming practices through training institutions located in areas close to farmers that are already engaged in organic farming.
INCENTIVES FOR LONG TERM AGRICULTURE VENTURES
As the government sets its annual priorities in the budget, agriculture ventures that are of a long term nature such as forestry, fisheries, coffee, etc should be considered by being provided with incentives to promote investment in such ventures. It is regrettable that colossal sums of money are being spent on importing poles from neighboring countries for Zesco when they could be grown locally because of a shortage locally and absence of re-planting of forests.
CONCLUSION
The 2011 national budget provides the government with an opportunity to address the despondency that has beset the agriculture sector. As a farmer organization, we present the issues highlighted above as the consensus emerging from the agriculture sector as a whole. The Union is convinced that this is an opportune time for Government to take far reaching decisions that will forever change the Zambian agricultural sector for the better and achieve the shared view of economic growth through competitiveness and diversification. Additionally the Union has no doubt that granted these measures, the sector should be set onto a more sustainable and diversified growth path.
