Is VAT on Agricultural Inputs Cost Effective?

This policy brief summarizes the results of preliminary analysis to quantify the potential farm-level and aggregate impacts of the proposed imposition of 18% value added tax (VAT) on key agricultural inputs in Uganda. Results reveal that the potential costs of the proposed imposition of VAT on agricultural inputs appear to far outweigh the potential benefits. The impact of VAT imposition on maize seed and fertilizer is estimated to contribute total tax revenues of $10.29 million compared to estimated total losses to maize farmers of $20.93 million. This implies a benefit-cost ratio (BCR) of 0.49. This ratio of benefits to costs is well below acceptable levels; and if other commodities, inputs, and other impact channels (e.g., the “output price effect”)were considered, the BCR could be even much lower. In conclusion, the proposed measure undermines basic agricultural and broader economic growth and development objectives; and the ratio of benefits to costs renders the proposed measure unjustifiable based on economic arguments. Therefore, the proposed measure should be reconsidered; and alternative sources of revenue sought.