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.  

Frosty's Logs in Developing Horticulturre

Low labour productivity and missing link between farmers and market are the two primary reasons for Bhutanese farming not being profitable.  

The farmers are using no longer economically viable technologies due to which Bhutanese farming has low labour productivity.  This issue is long been known.  It is also known that the problem can be resolved by enabling farmers to use modern technologies and engaging private sector for connecting Bhutanese farms to market.  

While the labour productivity is low, high Custom Duties (CD) and Sales Taxes (ST) are levied on green house, drip irrigation and hybrid seeds which are necessary to promote horticultural enterprise, increase labour productivity and profitability.  This has been a long standing dilemma of horticulture development.  

High costs of production technologies and absence of market a farm gate have been deterrent to creating job for youths in horticulture.  

Inarguably private sector can provide market at farm gate and execute trading beyond Phuentsholing auction yards.  Also the private sector can deliver agricultural technologies and associated inputs much more effectively and efficiently.  

The present system of civil service agencies buying and selling agricultural inputs to which CD and ST are exempted, needs to be reviewed in the light of the cost to the Government and engaging private sector to which CD and ST are levied.  

It is high time that supply of agricultural inputs to farmers be deregulated and let the private sector to do it. 

The Bhutan Trade Classification (BTC) - Customs Tariff and Sales Tax Schedule, 5th Edition, January 2012, has the following provision for Custom Duty and Sales Tax.  

Head	BTC Code	Commodity Description	CD %	ST %
1209	1209.91.00	Vegetable Seeds	50	0

The 50% CD is levied on hybrid vegetables seed imported from third countries, the countries other than India.  

The 50% CD is levied even when the seed is brought from Indian market imported by Indian Companies.  It means tariff restriction is imposed on Bhutanese farmers from using hybrid vegetables seeds from countries like Japan.  

Under the BTC Head 39.17, 30% CD and 10% ST are levied for drip irrigation system. 

Similarly under the BTC Code 73.02, 20% CD and 10% ST are levied for green house.

Fiscal Incentive Policy 2010, General Rule 4.2 says:

If CD and ST are not levied to the private sector just as to the civil service agencies, the private sector, competing in the market, can effectively deliver agricultural inputs at competitive market price to the farmers.  There will be huge cost saving to the Government in terms of civil servants being engaged in buying and selling, subsidy grants, revolving fund, and capital and recurrent annual budget.  

Waving off CD and ST on production technologies and associated agricultural inputs will bring down the cost and improves affordability of the farmers to modern production technologies.

Farmers not been able to use technologies mean Bhutanese farming remaining in-competitive and unprofitable.  Therefore, the policy of levying CD and/or ST on horticultural technologies needs to be looked at in the light that whether it is contributing more to the national economy or there can be more benefit in not levying the CD and/or ST.  

Truly farmers need support in a packaged form.  Waving off CD and ST will bring down the cost of production technologies and associated inputs by 30 to 50%.  Providing capital investment support will shorten the long gestation /turnover period.  Providing credit at lower interest rate enables farmer to pay back the credit and earn profit in shorter period than otherwise possible with high interest rate.  Having insurance scheme for commercial horticulture encourages farmers to burrow and invest.  All these need to be balanced and packaged.

Inherently the green house, drip irrigation and hybrid seeds are expensive and adding high CD and ST makes them even more expensive and unaffordable to the farmers.  If the cost of agricultural production technologies and associated inputs are lowered by waving off CD and ST, its combination with low interest credit being provided by the Government will have synergistic impact on adoption of horticultural enterprise. 

The best practices in promoting horticultural enterprises have been the provision of initial capital investment support and low interest credit in back-ended mode.  These two support mechanisms together with market support needs to be considered together.

The promotional programs purchase hybrid seeds, green house and drip irrigation system and demonstrate to the farmers.  But until appropriate support in packaged form is provided to farmers and private sector, the promotional program may not achieve the objective.

For enabling Bhutanese farmers to use production technologies and connect them to local, regional and global markets we need to do macro-economic research to guide the process of making right policy.  

The horticulture development has not been able to attract private sector investment.  The development programs have been conventionally focusing on welfare rather than agri-business.  The horticulture development projects are less subjected to commercial discipline which blurbs the role of private sector.  

Every 9 out of 10 jobs are said to be provided by private sector.  It is in this sector most jobs will have to be created in the future.  For this reason good framework and support for private sector is inevitable for horticulture development.

The Government has immensely invested on formation of cooperatives.  But the sizes of cooperatives are small and therefore not been able to execute their own sales and marketing.  Given the small size of individual farm, nature of terrain and pattern of settlement, the individual cooperative will always be small.  

The cooperatives so far developed need private sector to provide market at farm gate.  Only then the small scattered cooperatives will succeed.

The high initial investment costs and risks are the primary underlying reasons as why there is low private sector investment in horticulture.  By nature the horticultural enterprise involves high initial investment costs and risks in the early years.  The private sector investors will not bear the high initial investment cost and risk particularly when profitability is not assured.  

To kick start of horticulture development, every aspect including duties and tax regimes, capital investment support, credit interest rate should be looked together.  

The private sector can play a crucial role in creating jobs in horticulture if right policy and regulatory paradigm are in place. 

The right policy and regulatory paradigm can only be assured with continuous public-private dialogue as partners.  Clearly there is a need of a formal structural platform for public-private dialogue. 

The Horticulture Development Policy and Strategy of the Ministry of Agriculture and Forests for 8^th FYP (1995) had proposed for Horticulture Development Board.  A platform such as Horticulture Development Board is necessary to engage private sector as responsible partner for developing horticulture industry transforming every Bhutanese farm to an agri-business enterprise.  

It is only with continuous public-private dialogue at a formal platform there will be integrated policy and packaged support for addressing the challenges of promoting agri-business in horticulture.