The government is set to hit farmers with new taxes as it looks for ways to grow tax revenues.
The National Treasury in new proposals on how to increase tax collections between now and 2027 plans to introduce a five per cent withholding tax on produce that farmers deliver to cooperatives and other large organisations that aggregate farmers’ produce.
Treasury notes that the agriculture sector is undertaxed despite the major role that it plays in contributing to the economy as well as being the largest employer in the country.
Agriculture accounted for 21.2 per cent of the country's Gross Domestic Product (GDP) last year.
It employs about 40 per cent of the labour force, and this goes up to 70 per cent in rural areas.
“Despite this, the sector contribution to tax revenue is less than three per cent, indicating that the sector is undertaxed,” says Treasury in proposals published in the Medium-Term Revenue Strategy.
“The government will… introduce a final withholding agricultural produce tax at a rate of not more than five per cent of the value of the produce delivered to cooperatives or other organised groups and intensify taxpayer education to ensure that taxpayers understand their role in nation building and need to pay taxes.”
Kenya’s agriculture sector is recovering from the three-year drought that saw it contract for the second consecutive year by -1.9 per cent in 2022 compared to -0.3 per cent in 2021.
Other than the harsh weather that farmers have had to grapple with, the sector – as with other sectors – is reeling from the high cost of doing business, including a record rise in fuel prices.
In the revenue strategy, the Treasury identifies agriculture as among the hard-to-tax sectors.
“The agriculture sector has unique challenges, including being weather dependent, perishability of the produce, the subsistence nature of the sector and inadequate tax literacy which makes the taxation of this sector difficult,” it says.
“In addition, the sector is highly informal, cash-based and characterised by the notion that the incomes generated from the sector are meagre and should not be taxed.”
Others in this category include the digital and informal sectors, which Treasury notes are characterised by informality, limited record-keeping, lack of visibility of transactions and inadequate regulation.
“Most players in these sectors believe that they are not obligated to pay taxes on self-generated incomes, leading to high levels of non-compliance,” said Treasury.
“Due to the changing dynamics in the Kenya economy, the hard-to-tax sectors continue to grow. To ensure that taxpayers in these sectors pay their fair share of taxes, the government will seek to address progressively bring them into the tax net.”
Some of the ways of addressing low levels of compliance with taxation among players in the informal sector include seeking a review of the law to allow it access to mobile money data.
With a view of mobile money and baking transactions, Treasury believes KRA can make some headway in taxing the informal economy.
“For effective revenue collection, the revenue authority requires information on economic activities of the taxpayers. However, there has been a challenge with information sharing on players in this sector due to existing laws on data protection,” says Treasury.
“To address these challenges, the government will… amend the Data Protection Act to exempt KRA from the provisions of the Act for ease of information access.”
It also proposes to use customs data to trace small businesses dealing in imported goods and get them to pay taxes as well as introduce a creditable withholding tax on all imports at a minimal rate.
Treasury makes similar observations on the digital sector, where it notes transactions “are not easily identifiable and the mobile and intangible nature of the goods and services pose a challenge in taxation.”
It will also use third-party information from banks and telecommunication companies to identify transactions in the digital sector and tax them.