Tax on inputs to hit farm productivity

THE imposition of 17 per cent sales tax and 1–2.5 per cent special excise duty last week on almost all farm inputs including machinery, fertiliser, pesticides and seeds may prove to be a drag on agricultural productivity.

The decision may bring some temporary financial gains to the government, but would negatively impact balanced use of fertiliser, discourage investment in other inputs and stifle agricultural production. Ultimately it has the potential to affect food security, exports and may end up increasing imports.

The three ordinances issued by President Asif Ali Zardari last Tuesday are focused on revenue generation, necessary for continued engagement with the foreign lenders at the cost of agricultural development which needs to be at the centre of the country’s economic growth strategy.

Its indirect and long-term losses may not only neutralise the current financial gains but impact adversely on the overall national economic growth.

To begin with, the imposition of sales tax and special excise duty on all agriculture inputs would hit worst the subsistence farmers, who form over 93 per cent of the community and have been exempted from income tax for social reasons. he government has once again resorted to retrogressive taxation.

There are over six million such farming families in the country which would sink further down the poverty line. The additional revenues would come at very high social cost.

Second, the new taxation would have a multiplier impact on the prices of agri-input. The industry calculates that these taxes would increase cost of inventory keeping, necessitating additional bank loans and interest payments. Every actor in the entire supply chain would need more money, and pay its cost – ultimately passing the cumulative impact on to farmers.

“The final impact may be close to 25 per cent,” assesses Jawed Qureshi, a pesticides and fertiliser manufacturer and owner of an agri-marketing company. He also agrees that receding government writ may add some additional cost, as the increased taxation would be justified for price increase.

Third and the most dangerous risk would be a drop in crop size. With pesticides and fertiliser prices going up by 25 per cent, they would simply spin out of reach of majority of farmers. It will result in corresponding reduction in final yield and national crop size.

In market terms, the price of DAP, which is hovering around Rs3,200 per bag, might go beyond Rs4,000. In Pakistan rupee denomination, a bag in India costs around Rs1,100. The equation is thus 4-to-1, when compared with Indian farmer on affordability index.

The urea bag, which at present costs around Rs1,100, would jump to Rs1,350. Can the farmers, especially the subsistence ones, absorb that kind of increase? Certainly not! Couple it with increasing international prices of DAP and emerging agriculture picture becomes even scary.

Pakistan ended up subsidising DAP bag, when its international prices went beyond $500 per ton. Currently, they are hovering around $680 per ton. Once peak usage period hits the country in May, DAP price may soar beyond Rs4,500 per bag, making its usage impossible for farmers.

All efforts at diversifying to other high-priced crops and increasing intensification revolve around efficient and balanced application of inputs and farm mechanisation.

If these inputs and farm machinery, which has also been placed in the new tax net, keep slipping beyond the farmers’ reach, the government would find it increasingly difficult to sustain these initiatives in order to boost agriculture development.

The government may face a double jeopardy. On the one hand, drop in sale of inputs may hit its revenue targets. On the other, the decreasing crop size may hamper all its efforts to increase exports. Three crops are crucial for food security and national economy. Wheat provides food security and cotton and rice contribute over 70 per cent foreign exchange earnings. If these crops receive any shocks, the economy country would be in for huge trouble.

There is no denying the fact that the government is hard pressed for cash. However, had it done its homework properly, it could have located avenues for revenue generation even within the agriculture sector.

For example, it could have increased tax on trading. It recently imposed 3.5 per cent tax on middleman, which could have been reasonably increased. Cotton trade has many steps that could come under taxation. Best of all is to tax the farm income, where bigger farmers pay more.

The basic philosophy for any taxation should be that it should not suppress production. It should be designed to help increase output. Production improves chances of more revenue generation. Suppressing production is tantamount to blocking the sources of revenue generation. The new sales tax and excise duty are likely to become a drag on production.