Working Paper 121
The issue of agricultural taxation has almost completely disappeared from the scholarly and policy agendas in recent decades. And yet, agriculture is taxed very lightly despite contributing substantially to GDP across many Global South countries today. In some cases, light-touch taxation may be necessary to encourage investment in the sector and to protect small and subsistence farmers. However, anecdotal evidence from countries like Uganda suggests that there are a substantial number of high-income earners engaged in agricultural activities that are sheltered almost completely from any form of taxation. More effectively taxing these high-income earners could provide much-needed resources to finance public service provision in lower-income countries. The time is ripe, this paper argues, to revitalise discussions about how best to tax the agriculture sector.
In Uganda, taxation of the agriculture sector has historically been the subject of intense political contestation. In 2018, Parliament adopted a revised 1 per cent withholding tax (WHT) on the supply of agricultural products. Although the revised WHT raised significant revenue in its first year it faced a strong political backlash, and was abandoned in 2019. Currently, the agriculture sector accounts for roughly 22 per cent of GDP in Uganda, but contributes less than 1 per cent of tax revenue. While many participants in the agriculture sector are smallholder or subsistence farmers, internal URA investigations show that there are also highly profitable suppliers of agricultural products that pay little or no taxes.
There are four potential strategies that Uganda could pursue to collect taxes more fairly from the agriculture sector in the short and medium term. First, Parliament could reinstate some level of WHT on the sector. While politically controversial, WHTs are one of the only ways to successfully collect income taxes from the sector. Second, URA could upgrade the existing WHT system to require the clear identification of agricultural suppliers. Suppliers could then be tracked more effectively to ensure they are complying with existing income tax obligations. Third, the URA could put its internal data to better use by specifically targeting the largest agricultural suppliers – who are also likely to be the most profitable – to make sure that they are registered with the URA and complying with their existing tax obligations. And fourth, URA could increase enforcement on non-compliant agricultural suppliers, beginning with the largest firms.
This paper summarises early debates on taxation of the agriculture sector, before turning to the contemporary context of Uganda. The paper includes a discussion of some URA investigations that have begun the process of identifying high income-earners in the sector. The paper next outlines some potential strategies Uganda could pursue to tax the agriculture sector more fairly. The paper concludes with a discussion about overcoming the strongest political resistance to agricultural taxation, and a series of recommendations for the way forward.