[By Kennedy Nakoonje Munyandi]
Income earned by a person from agricultural activities has long benefited from a preferential tax regime.
In addition to many generous tax deductions, income is taxed at a very favorable tax rate of 10 percent (previously 15 percent), compared to the prevailing standard corporate tax rate of 35 percent. The government has repeatedly stated that the fiscal policy objectives behind this preferential regime are to improve domestic food production and job creation in rural areas. In other words, the government is prepared to forgo some income from the sector if it can in turn ensure food security in the country and reduce unemployment levels in rural areas of the country.
The next obvious question would then be: What is agriculture? Who is a farmer and who is not? But before examining the tax definition of the term “agriculture”, consider the following real-life case.
A few years ago a very good friend of mine named Mr. Mulamfu (M) approached me (K) with an appealing idea. A well-trained and experienced farmer, M rents a large piece of land from a Mr. Banda (B) on whom he operates a cattle ranch. But M never actually owned the cattle that grazed on this land. What he does is approach and encourage the people who work in the city to buy cattle and keep them on his ranch, until the individual owners are ready to run a farm on their own, for example. retired. In other words, M only provided grazing and management services for a fee. Although I did not do business with M, I found the business model to be innovative and intriguing.
Based on the example above, who among the three (B, K and M) would we say is a farmer? Based on an ordinary and common sense of agriculture, it would appear that M and K would obviously qualify as farmers since they raise cattle. The situation is not so certain with B. If he makes his land available for agriculture, he is very far from the agricultural activity proper.
But perhaps an equally important question, from a government perspective, would be: who among the three contributes to the goals of achieving food sufficiency and creating rural jobs? It would appear that all three individuals contribute directly to the achievement of government policy objectives. With regard to B, in particular, the government would be happy if it made its land available for agriculture. From a political point of view, it seems logical that the government’s position is to say, “We need food security. We must reduce rural unemployment. If you have fallow land, please make it available for agricultural activities and we will treat you like farmers ”.
Indeed, the latter was the position of income tax law (and government policy) up to and including the 1999 taxation year. defined the term “agriculture” to mean “any livestock, pastoral, poultry, fish or agricultural activity and includes the rental of goods for these purposes. The law specifically included in the definition of agriculture the rental of property for these purposes. By this definition, it is clear that the three individuals (B, K and M) in our previous example would qualify to be treated as farmers.
But the Income Tax (Amendment) Law No. 4 of 2000 restricted the term “agriculture” by excluding the aspect relating to the rental of real estate. He redefines the term as follows: “excluded and that he could not therefore be qualified as a farmer from the tax year 2000.
Further changes were made to tax laws in 2019. Income Tax (Amendment) Law No. 15 of 2019 further reduced the definition of “agriculture” to mean “the cultivation of plants and crops. plants, livestock or poultry farming, beekeeping and fish farming, but excludes the rental of any property or the provision of a service incidental to agriculture. ” In our example, this new definition eliminates now also M, in addition to B. The only person who would qualify for the agricultural sector incentives would be K – the person who has a white collar job in town.
There are many possible reasons why the definition of the term “agriculture” for income tax purposes has been significantly reduced over the years. Let me address two most likely reasons.
The first possible reason is that the changes could have been motivated by income. The government tries to generate more income by excluding certain business activities from the scope of agriculture, in order to tax these activities at standard tax rates. If this assumption is true, it raises the question: Has the need for revenue suddenly exceeded the initial overall objective of fiscal policy? Or have the original goals been achieved so that the tax incentive is no longer so necessary? The answer to both of these questions is most likely no. Indeed, not only is there apparent food insecurity in the country and high levels of unemployment in rural areas (and throughout the country), but also there has been no government statement that the objectives of the policy have been fully or partially achieved.
The other reason could be that the changes could have been aimed at curbing tax evasion schemes. It is a fact that today there are many models of exploitation which differ from the actual digging and traditional plowing of the land. For example, some companies hire individuals to grow crops on their behalf by providing them with all the necessary inputs, then collect the crop and pay the grower for the work done. It is possible that these regimes were seen as abusing tax laws and therefore were withdrawn from the field of agriculture.
If the intention was to do away with abusive tax structures, I am of the opinion that the tax laws already contain adequate provisions to deal with this problem. The tax administration could have relied on the general anti-avoidance rule (GAAR) in tax laws which make it possible to disregard structures or transactions whose main purpose is to avoid tax. Changing the tax law by establishing a general exclusion rule to combat tax abuse is not only a lazy outcome, but also bad tax policy, as we will see below.
From a tax policy perspective, changing the definition of agriculture also carries two potential risks or undesirable effects. First, there is a risk that bona fide companies will be denied the agricultural tax incentives they so deserve. This not only raises equity issues, but also runs counter to the government’s policy of promoting agriculture using a holistic approach. The second problem is that change has the potential to interfere, and in fact interfere with the way farm businesses are conducted. A rule of thumb in tax policy making is that tax laws should not dictate how business is to be conducted. Businesses using new and innovative farming methods should not be restricted or adversely affected by the provisions of tax law.
Generally speaking, I also wonder if it is really necessary to provide a definition of agriculture in the income tax act. I understand why the definition of 1999 and previous years was necessary. It aimed to include in the definition certain activities which would not normally qualify as agriculture, in particular the rental of real estate. As these activities were deleted, it might not be necessary to provide a definition. The word or term “agriculture” could have taken on its ordinary meaning or been left to the discretion of the courts. In addition to the risks highlighted above in the definition, it also leaves many questions unanswered. For example, if we say that agriculture is “the cultivation of plants and plants, the breeding of livestock or poultry, beekeeping and the breeding of fish but excludes the rental of any property or the provision of of a service incidental to agriculture ”: where is it for a fish farmer? Can we say that an owner of a fish farm is “fish farm”? It is debatable! Either way, it is clear that overuse of definitions in tax laws can be counterproductive.
In conclusion, I am of the opinion that the exclusion of the provision of services from the definition of the term “agriculture” has done the sector a disservice. I hope the new government led by a proud Kachema will address this and other tax policy issues affecting the agricultural sector. But if the new government also continued on this path of narrowing the term, eventually we will end up with an irrelevant and fictitious concept that will make the preferential regime worthless. For agricultural businesses wishing to have their situation assessed in the light of the above, do not hesitate to contact us.
The author is the owner of Munyandi InterTax Advisory Xervices (MiTAX), a firm specializing in international and national tax law. He can be contacted by email ([email protected]), WhatsApp +260 76 203 1514 or Facebook (www.facebook.com/MiTAX2021).