Discussion Paper No. 52 of 2005 on Implicit Taxation of Agricultural Sector in Kenya

Abstract

Over the years, a number of policies have been designed and implemented to ensure agriculture continues to play an important role in economic development. This paper discusses the policies that have guided the agricultural sector in Kenya since independence, indicates their impact on the development of the sector and recommends policy changes that can more effectively enhance taxation of agriculture and its role in achieving economic development objectives. Among the key findings of the study is that while the agriculture sector in Kenya can be taxed directly through use of personal and income taxes, indirect taxation through trade taxes (export and import taxes), consumption taxes and land taxes have historically been favoured owing to their ease in implementation. However, with libernlizntion, the use of trade and consumption taxes has been on the decline, with most commodities being zero-rated. Agriculture is now taxed implicitly through changes in macroeconomic policies. This means that macroeconomic policy makers need to be aware of the implicit tax effect on agriculture. The study recommends that regular efforts be made by the government to ensure that macroeconomic policies do not unfairly impinge on agriculture. The government shoitld also explore a system of land taxation because land taxation is one of the most efftcien t methods of not only taxing agriculture but also for providing the motivation for modernization and utilization of idle land.