Customs Tariff and Sales Tax on Agriculture Inputs

Customs Tariff and Sales Tax on Agriculture Inputs

 Bhutan Trade Classification: Customs Tariff and Sales Tax Schedule (5th Edition, January 2012) imposes custom duty and/or sales tax or both on import and sales of seeds, green house, spare parts of agricultural, horticultural and forestry machinery, drip and sprinkler irrigation system and green house.  

Hybrid seeds increases production but their seeds are expensive.  Leveying 50% custom duty of hybrid seeds from third country makes the seed exceedingly expensive which actually denies the farmers from growing high quality hybrid seeds.  

Green house production increases labor productivity.  Low labor productivity is the real problem of Bhutanese farming.  Green houses are expensive but on top of high cost of it, 20% custom duty and 10% sales tax are charged.  To the polyethylene covering when imported for replacement, 40% tax is levied.

To the farm machinery custom duty and sales tax in not levied but anything listed as spare parts 10% custom duty and 5% sales tax are levied making them more expensive.
 
Fiscal Incentives 2010 (Second Edition), Section 3.1 says custom duty and sales tax are exempted only if agricultural inputs are imported for self consumption.  It means farmers have to import individually for their own consumption only.  This is completely absurd as every individual Bhutanese farmer cannot import what he needs.

The custom duty and sales tax levied on agricultural technologies and inputs imported for sale are making agricultural inputs expensive, uneconomic and unaffordable to the farmers.

Considering agriculture is the primary sector of our economy which engage 70% of our population and has the immense potential to increase production to substitute import, increase export and provide job for the youth the following points come to my mind: 

1.    Industrial tariff rates should not be applied to agriculture.

Duties and taxes of agricultural technologies and inputs will have direct negative impact on profitability.  It will not allow agriculture to be a viable livelihood alternative or create jobs or attract youth to practice agriculture.

2.   Custom duty and sales tax levied on agricultural technologies and associated inputs contradict with the policies of supporting agriculture development.

3.    Imposing customs duties and sales tax on agricultural technologies and inputs outstrips revenues that can be realized from increased production.  It will not help import substitution and export.  It hinders achieving agricultural growth targets.

4.    The current tax structure of agriculture technologies and inputs is affecting small land holding farmers more and much more in more remote areas.

5.    High taxes in agricultural technologies and inputs;
 
     (i)  lead to decline in agricultural production, productivity and       profitability.

       (ii)  increases food and agricultural commodity prices and give way to      poverty.

       (iii) poses impediment to creating employment in agriculture.

       (iv) leads to decline in production and export of agricultural products    

The impending task for supporting agriculture production growth is to review tax currently imposed of on agricultural production technologies and inputs.

The provisions of Bhutan Trade Classification: Customs Tariff and Sales Tax Schedule (5th Edition, January 2012) imposing custom duties and sales taxes needs to reviewed and revised in light of importance of agriculture sector is realizing economic growth with job for all and sustainability of the economy, food security and nutrition. 

The Fiscal Incentives 2010 (Second Edition) related Agriculture Sector should either be annulled completely or revised and align with Bhutan Trade Classification: Customs Tariff and Sales Tax Schedule.

 The department of agriculture is uniquely involved in buying and selling agricultural input as civil servants are involved in trading business which actually private sector should be doing.  

The fertilizers are needed even in organic farming though not the chemical fertilizers.  With zero input the output too is zero and in nature too there no magic.  Though organic farming is promoted Bhutanese farmers do use chemical fertilizers and farmers pay exceedingly high price.  A 50 kg bag of Urea or single super phosphate (SSP) cost only Rs. 400/- at Siliguri, India and the same bag cost Nu. 895/- at Phuentsholing, Bhutan.  

Imposing high taxes of agricultural technologies and inputs effectively leads to higher input prices and this will have two possible effects:  

First, farmers at the margin will not be able to meet the additional cost and they are compelled to practice low labor productivity and less profitable agriculture.  

Secondly, farmers who can afford to meet the increased cost of technologies and inputs will ultimately have higher cost of production and they may not like to invest in agriculture as the profitability is low.

Imposition custom duties not only increases the cost of production but also increases the food prices and reduces the competitive in export market.

The multiplicity of effects is likely to have significant negative implications on food security and income distribution.    

Indeed the tax on agricultural input will raise revenue but discourage agricultural production.  

Should we raise the revenue or discourage agriculture development?  

Economist should advise and we should listen to them.  

Economist should tell us how much revenue we collect with tax on agricultural inputs and what we gain with agriculture development spurred by removing the tax on agricultural inputs.

One thing is sure that we must incentivize investment for development of agriculture.  

Definitely tax on agricultural production technologies and inputs will discourage capital investment by private sector and farmers equally. 

High cost of production technologies and inputs influence the decision of a farmer to the extent whether to stay in the farm and continue farming.  

The economists maintain their views that "If a country wants to achieve faster agricultural growth, faster economic growth, and fewer poor people, it should stop taxing agriculture relative to other sector (Maurice Schiff & Alberto Valdes - World Bank)".   

In deciding taxation in agriculture, either inputs, export or otherwise, a fair assessment of revenue lost from no longer taxing agriculture is of great importance. 

Of late the custom duty and sales tax on Seeds and Micro Irrigation Systems  Systems (Drip and Sprinkler Irrigation Systems) are exempted but on green house and spare parts remains.