[By Kennedy Nakoonje Munyandi]
Income derived by a person from farming activities has for a long time enjoyed preferential tax treatment.
In addition to many generous tax deductions, the income is taxed at a very concessional tax rate of 10 per cent (previously 15 per cent), compared to the prevailing standard corporate income tax rate of 35 per cent. The government has on several occasions stated that the tax policy objectives behind this preferential regime are to enhance national food production and employment creation in rural areas. In other words, the government is ready to forgo some revenue from the sector if it can in turn achieve food security in the country and reduce unemployment levels in the rural parts of the country.
The obvious next question then would be: What is farming? Who is a farmer and who isn’t? But before we look at the income tax definition of the term ‘farming’, let us consider the following real case scenario.
A few years ago, a very good friend of mine by the name of Mr Mulamfu (M) approached me (K) with an attractive idea. As a well-trained and experienced agriculturist, M rents a large piece of land from a Mr Banda (B) on which land he operates a cattle ranch. But M never actually owned the cattle that were grazing on this land. What he does is to approach and encourage people working in town to buy cattle and keep them at his ranch, until the individual owners are ready to run a farm themselves, for example upon retirement. In other words, M was only providing grazing land and management services for a fee. Although I did not do business with M, I found the business model to be innovative and intriguing.
From the above example, who among the three (B, K and M) would we say is a farmer? Based on an ordinary and common meaning of farming, it would seem that both M and K would obviously qualify to be farmers since they are raising livestock. The situation isn’t so certain with B. Although he makes his land available for farming, he is very remote from the actual farming activity.
But perhaps an equally important question, from a government perspective would be: who among the three is contributing to the objectives of attaining food sufficiency and creating rural employment? It would seem that all the three individuals are directly contributing towards the achievement of the government policy objectives. With respect to B, in particular, the government would be happy that he has made his land available for farming. From a political stand point, it seems logical that the government’s position would be to say: ‘’We need food security. We need to reduce rural unemployment. If you have idle land, please make it available for farming activities and we will treat you as a farmer”.
Indeed, the latter was the position of the income tax law (and the government) policy up to and including the 1999 tax year. The Income Tax Act defined the term ‘farming’ to mean “any husbandry, pastoral, poultry, fish rearing or agricultural activity and includes the letting of property for any such purposes.’’ The law specifically included in the definition of farming the letting of property for such purposes. Under this definition, clearly all the three individuals (B, K & M) in our earlier example would qualify to be treated as farmers.
But the Income Tax (Amendment) Act No. 4 of 2000 narrowed the term ‘farming’ by excluding the aspect relating to the letting of property. It redefined the term as follows: “’farming’ means any husbandry, pastoral, poultry, fish rearing or agricultural activity BUT EXCLUDES the letting of property for any such purposes.’’ Thus, in our example, the business activity of B is specifically excluded and he would therefore not qualify to be classified as a farmer as from the tax year 2000.
Additional changes were made to the tax laws in 2019. The Income Tax (Amendment) Act No. 15 of 2019 further narrowed the definition of ‘farming’ to mean “the cultivation of crops and plants, raising of livestock or poultry, beekeeping and rearing fish but excludes the letting of any property or provision of a service ancillary to farming.’’ In our example, this new definition now eliminates M too, in addition to B. The only person that would qualify for the farming sector incentives would be K – the person with a white-collar job in town.
There are many possible reasons why the definition of the term ‘farming’, for income tax purposes, has been significantly narrowed down over the years. Let me address two most likely reasons.
The first possible reason is that the changes might have been revenue driven. The government is trying to raise more revenue by carving out some business activities from the scope of farming, so as to tax such activities at standard tax rates. If this postulation is true, it begs the following question: Has the need for revenue suddenly outweighed the initial overall tax policy objective? Or have the initial objectives been met, such that the tax incentive is no longer that necessary? The answer to both of these questions is most likely negative. This is so because not only is there apparent food insecurity in the country and high unemployment levels in rural areas (and countrywide), but also there has been no government pronouncement to the effect that the policy objectives have been fully or partially attained.
The other reason could be that the changes might have been aimed at curbing tax avoidance schemes. It is a fact that there are now numerous farming models that are distinct from the traditional actual digging and tilling of the land. For example, some companies engage individuals to cultivate crops on their behalf by supplying them with all the required inputs and later collect the crop and pay the grower for the work done. It is possible that these schemes have been deemed to be abusing the tax laws and therefore that they be removed from the scope of farming.
If the intention was to remove the tax abusive structures, I am of the view that the tax laws already do have adequate provisions to deal with this. The tax authority could have relied on the general anti-avoidance rule (GAAR) in the tax laws that allow for disregard of structures or transactions whose main purpose is to avoid tax. Changing the tax law by making a general exclusion rule to fight tax abuse is not only a lazy way out, but also is bad tax policy as discussed below.
From a tax policy perspective, the change in the definition of farming also has two potential risks or undesired effects. First, there is a risk that bona fide businesses will be denied farming tax incentives that they so deserve. This does not only raise issues of fairness, but also defeats government policy of promoting agriculture using a holistic approach. The second problem is that the change has a potential to, and in-fact does, interfere in the way farming business is carried out. One basic rule in tax policy-making is that tax laws should not dictate how business should be done. Businesses with new and innovative methods of farming should not be limited nor negatively affected by the tax law provisions.
In general, I also wonder whether providing a definition of farming in the income tax law is necessary at all. I understand why the 1999 and prior years definition was necessary though. It was aimed at including in the definition some activities that would not ordinarily qualify as farming, in particular the letting of property. With such activities removed, it may not have been necessary to provide a definition. The word or term ‘farming’ could have assumed its ordinary meaning or be left for the courts of law to interpret. In addition to the earlier highlighted risks that the definition poses, it also leaves a lot of unanswered questions. For example, if we say farming is “the cultivation of crops and plants, raising of livestock or poultry, beekeeping and rearing fish but excludes the letting of any property or provision of a service ancillary to farming”: where does this leave a fish breeder? Can an owner of a fish hatchery facility be said to be in the business of “rearing fish”? It is debatable! Whatever the case, it is clear that excessive use of definitions in tax laws can be counter-productive.
In conclusion, I am of the view that the exclusion of service provision from the definition of the term ‘farming’ was a disservice to the sector. I am hopeful that the new government led by a proud Kachema would look into this and other tax policy matters affecting the farming sector. But if the new government also continued on this path of narrowing the term, we will eventually end up with an irrelevant and fictional concept that will render the preferential regime worthless. For the farming business that would want to have their situation evaluated in light of the above, please feel free to contact us.
The Author is the proprietor of Munyandi InterTax Advisory Xervices (MiTAX), an international and domestic tax law specialist firm. He can be contacted via e-mail (email@example.com), WhatsApp +260 76 203 1514 or Facebook (www.facebook.com/MiTAX2021).