VALUE ADDED TAX - THE AGRICULTURE SECTOR
The Government has decided to reform the taxation system, replacing old inefficient tax system with a modern VAT system complemented with an Excise Tax regime on four selected goods.
Reasons for this major reform initiative are:
The present consumption tax system focuses mainly on taxation of goods. Most services are taxed only indirectly on the inputs. This has resulted in high rates of taxation on most goods. In the agriculture sector, it is mainly goods that are produced. There is clearly a need to reduce the level of taxation on goods and extend the tax base to include more services so as to spread the burden of the taxes more equitably. VAT aims to achieve this.
- It creates an incentive to comply with the tax laws
Under the VAT system, all sellers of goods and services have an incentive to register so that they will be able to reclaim their input VAT thus reducing the motivation to evade taxes since the taxes will be paid by the consumers and not the sellers.
In addition, under the VAT system, businesses have an incentive to purchase their supplies from other registered businesses so that they can benefit from the input credits. This creates a strong incentive for broad-based registration and compliance with the tax laws. Smaller farmers who have sales in excess of G$10M a year should register to benefit from the tax credit upon purchasing any input not exempted or zero rated from VAT.
- It reduces inefficiencies, distortion and cascading in the tax system.
The consumption taxes carry different names and are levied at various stages and with multiple rates, and are regulated by different pieces of legislation. This has resulted in inefficiencies and inequities within the system. There are cases where one item is taxed twice before it is sold to the final consumer. With VAT the tax will be on the final consumption at the end of the VAT chain. For agriculture sector, this will allow for more of our farmers appreciate the modernization of the tax system and the benefit which will accrue to them and the country as a whole.
- It makes exports more competitive.
The current system does not allow for refund of taxes paid on inputs that go into locally produced goods for export and, as a result, these goods become less competitive since their prices include a significant amount of domestic taxes. In addition, currently, investment in in-puts attracts consumption taxes which are generally not refundable.
VAT relieves the tax paid on capital expenditures and other business expenses by allowing businesses that are registered to claim a full credit for taxes paid on purchases. Farmers will continue to be tax neutral with respect to tax commitments on heavy duty farming equipment.
HOW DOES IT WORK
Under the VAT system, both the producers and consumers will benefit. Neither goods nor services will be taxed twice as businesses registered for VAT purposes will be able to collect the tax and take a credit (deduct what they have already paid as VAT) on their inputs/purchases.
GENERAL IMPACT OF VAT ON THE AGRICULTURE SECTOR
It would be expected that the cost of production and in-puts for the main agricultural activities will either be the same or reduced in several areas. However, there will not be any expected increase cost of food and agricultural items as a result of VAT. As such a net increase in the cost of living is not expected.
Let’s look at a few significant items in the agriculture sector and the impact of VAT:
Items |
Consumption Taxes |
VAT |
- Fruits, except imported fruits like apples, grapes, dates, prunes, peaches, plums and strawberries
|
30% |
0% |
- Vegetables except imported vegetables
like olives, carrots, black eye peas,
pigeon peas, chick peas, (garbanzos),
radishes, broccoli, cauliflower. |
30% |
0% |
|
Excise & C/Tax |
Excise Tax will be adjusted to ensure the impact is cash neutral |
- Businesses that are engaged in exporting at least 50% of its products will be granted relief from the payment of VAT on goods which are being imported for manufacturing and processing purposes, and are subsequently exported. The effect of this would be that the businesses will not pay VAT on imports
|
Not possible before VAT |
Possible for rice miller, fish plants, chicken exporter who add value once more than 50% of their products are exported |
- Large capital items, such as bulldozers, skidders, excavators, tractors, and heavy duty industrial machinery.
|
0% |
0% |
- Fertilizers, herbicide and Pesticides.
|
10%
(for resale directly for farmers) |
0% |
|
0% |
0% |
- Outboard engines (75 HP and below), fishing nets, etc.
|
0% |
0% |
Ministry of Agriculture
December 29, 2006
