Where do we go from here? Kenyan Smallholder Farmers to Pay KES. 5 for Every KES. 100 They Make as Treasury lays Down Mechanisms to Raise Taxes FROM Farms.

Following the circumstances by the current government of Kenya, there is high tendency of introduction of taxation in sectors not previously taxed in what has been pronounced as increasing tax base to reduce burden of few taxpayers who are in the tax domain. Last year, 2023 we saw the the introduction of the withholding tax of 5% for Residents on Digital content monetization (w.e f 1st July 2023).

Agricultural produce is the current sector in the pipeline for the same tax regime. I am not surprised that the it is now befalling a sector that feeds and nourishes us. The sector is claimed to be undertaxed by the government in the medium-term strategy to raise funds for development and pay off its external debts.

In the recent press release by the CS Treasury indicates that the sector is one of the leading sector that host the labour force and livelihood opportunities. Stasta shows that it is solely the second after cumulative Services Sector that leads with 55.06% as per 2022.

“Kenyan economy is dependent on the agricultural Sector contributing 21.2% of GDP and the highest employer.” Prof. Njuguna Ndungu, CS Treasury

I am thinking these open data consistency as it may be purported to showcase the relevancy and net contribution sectors to significantly channel in more investment, on the flip side loop holes are manifested where now Farmers are targeted in what seems to be new measures to raise revenue. This might form bottlenecks for smallholders’ efforts to scale their production.

How does the withholding Tax work?

Withholding tax mechanism designs statutory tax agents ("withholders") out of entities that are not subject to tax but deal with the targeted taxpayers. These agents are required to collect tax on the government’s behalf when making certain payments to other persons ("withholdees").

In a withholding tax mechanism, a payer of income, i.e. withholder/withholding agent withholds tax from the income of the recipient at the time of payment and remit it to the revenue authority

In kenya, payment of withholding tax is done online via iTax https://itax.kra.go.ke by generating a payment slip and presenting it at any of the appointed KRA banks to pay the tax due. After successfully remitting the deducted amount to KRA, a Withholding Certificate shall be sent to the email registered on iTax by the taxpayer. 

What will happen to the withholders

Should the proposal come into existence according Prof. Njuguna Ndungu, CS Treasury, the government will introduce a final withholding agricultural produce tax at the rate not mor than 5% of the value of produce delivered to the cooperatives or other organized group.

This ascertains the withholding mechanism as I have highlighted above, where the cooperatives and farmers registered groups will be used as the agents in this assertion. Averagely Kenyan Farmers will pay Ksh 5 to every Ksh 100 they make as tax.

This will kill the spirit of aggregation as way forward to scale market pool for the smallholder farmers. With regards to the structure to Kenyan markets it has realized that when farmers aggregate their produce, they have better chances of getting better selling in the markets that always demands consistency and quantity supply.

Seemingly, joining cooperatives has been championed as one the lee ways to aggregate food products. As such, it is easy for the farmers to have records of their production journeys that form leverage to accessing financial support and credit services.

What is simmering here is the danger of the financiers demanding for withholding tax clearance as qualification access their products. There is a huge risk of losing on both parties when you assess the aftermath whilst they need each other to grow.

The agents are likely to face pushback by the members who are largely the smallholder farmers who are members of formal groups or cooperatives. They will be unwilling to participate in the new deduction as they will feel lied to by strategies highlighted in the BETA plan to revamp and jack the agriculture sector to achieve 100% food security and improve lives of primary food actors, the farmers. The BETA is looking at making agriculture a decent source of livelihood by diversifying avenues to generate income and investment in the sector both directly and indirectly.

This now starts to raise skepticism among the citizens as they do not trust the taxation that is being normalized to all go to individual pockets. They are unable to see the value for their taxes in terms of projects and programmes’ implementation. Instead, more observation has been made on increased government expenditures especially on logistics.

Who will bear the pain most?

Increased levy on fuel has already affected the agriculture sector that saw increase in food price. This was stimulated by the Ukranian war and Post Covid-19 effects that destabilized the price of commodities with the main food crops such as maize, rice and wheat supply fluctuating to cause deficits.

In reaction to the above, the primary purchasers who are mainly producers of various human and animal food products and even those who purchase to resale are likely to carry the weight of the withholding tax which can eventually increase cost of production. Remember they are in business. I anticipate that, eventually this cost will be passed on to the customers which will consequently have a multiplier effect on prices of all food products which is not the intended outcome.

Bad timing, I guess. This proposal is coming when all Kenyans are on the cry for reduction in the cost of living. They are already facing burden of tax on other commodities and sectors that has an negative impact on purchasing power including basic food stapples.

What can be done?

I agree that agriculture also benefits from that public facilities such as roads and manufacturing industry that face defined taxation, but the sector has been characterized by a lot of informality that make it difficult to impose tax.

“The sector has unique challenges making taxation of this sector difficult…the sector is highly informal, cash based and characterized by the notion that the sector should not be taxed...” Prof. Njuguna Ndungu, CS Treasury stated.

As mentioned above, cooperatives and farmer groups will be among the ways to collect tax from farmers but those farmers who are nonmembers are likely to left out of the what is claimed as probable way to intensify tax base.

First, creating awareness is necessary. I concur with CS sentiment that the government will intensify taxpayer education to ensure that the taxpayer understand their roles in nation building and need to pay taxes. KRA has some field work to do; they need to arrange workshops imparting knowledge to the affected groups to reduce rejection of the deduction due to ignorance.

Secondly, there should not be rush to effectuation of the policy. Farming community will feel like it being forced down their throats despite it being an act of patriotism. Procedures and benefits of the same should be spelt out so that the targets can willing see the business sense to comply with the changes proudly. Public participation will be relevant in this regard to determine the relenace and possible reasonable percentages to be deducted incase the bill goes through.

Thirdly, the targeting needs to be clear. KRA should come out to outline the cutoff ranges for the deductions. If it is formal groups members, all farmers or smallholder farmers. For the case of small scale farmers some questions must be answered in terms of subsistence farming or commercial farming and the value chains.

Potentially, involving the Farmer serving organization such as NGOs and private sectors in the policy formulation, will help come up with better resolutions that can be acceptable by the targets. They well understand what the farmers need attributed to the direct contact of working with them. I have to mention that, agriculture supports other sectors directly when the deductions happen especially during transportation and manufacturing. We must strike a balance so that we can be more farmers joining cooperatives and registering their groups to remit taxes.