Bungoma Governor Ken Lusaka….Photo/courtesy
IP Analysis
NAIROBI, Kenya
New tax proposals aimed at raising government revenue could sharply cut the incomes of small-scale farmers and weaken Kenya’s agriculture sector.
This analysis is based on Governor Kenneth Lusaka’s warning as chair of the Council of Governors’ Agriculture Committee.
The measures — which include raising value-added tax on farm inputs, increasing import duties and levies and introducing a 5 percent withholding tax on produce sold through cooperatives — could lift farm production costs by up to 15 percent in the first year if passed without changes.
Agriculture contributes roughly a fifth of Kenya’s gross domestic product and supports millions of smallholder farmers.
Analysts warn that any major cost shock to the sector could disrupt food supply chains, raise consumer prices and slow rural economic growth.
Lusaka has urged the government to avoid what he called “choking the agriculture sector” and instead consider growth-friendly reforms, including tax relief on essential inputs, duty waivers on cold-chain and processing equipment, harmonized county levies and a national fund to support value-chain development.
Below are three modeled scenarios showing potential effects on farmer incomes and government revenue over the first year.
SCENARIO A — FULL TAX PACKAGE IMPLEMENTED (“Do Nothing”)
Under this scenario, all proposed taxes take effect: higher VAT on fertilizer, seeds and pesticides; increased fuel and import duties; unchanged county cesses; and a 5 percent withholding tax on produce handled by cooperatives.
Assumptions:
Production costs rise about 15 percent.
Smallholder incomes drop about 12 percent as higher costs erode margins.
Withholding tax applies across all major cooperatives.
Estimated impact (Year 1):
Smallholder incomes fall by roughly $2.25 billion nationwide.
Government collects an estimated $700 million from the withholding tax and gains additional VAT from taxed inputs.
Farmers reduce use of quality inputs, lowering yields and raising the risk of food inflation.
Likely outcome:
Sharp income losses, reduced production and increased informal trading as farmers avoid taxed cooperative channels.
Long-term, the tax base may contract.
SCENARIO B — PARTIAL RELIEF (“Moderate Reform”)
Here, the government offers targeted relief. Essential farm inputs remain zero-rated, county levies begin to be harmonized, and duty waivers are provided for cold-chain and processing equipment. The withholding tax is applied only to large cooperatives.
Assumptions:
Production costs rise 5 percent.
Smallholder incomes fall by about 4 percent.
Withholding tax base is cut roughly in half.
Estimated impact (Year 1):
Smallholder income losses total around $750 million.
Withholding tax brings in about $350 million.
Value-chain investment becomes more feasible as cold-chain and processing equipment become cheaper.
Likely outcome:
Limited damage to farmers, lower production risk and more political stability.
Government still raises revenue but avoids major sector disruption.
SCENARIO C — FULL AGRICULTURE PROTECTION PACKAGE (“Growth-Friendly Reform”)
This scenario implements Lusaka’s full proposal: zero-rating core inputs, waiving duties on processing equipment, standardizing county levies and establishing a National Value-Chain Development Fund.
Assumptions:
Production costs decline by about 2 percent.
Smallholder incomes rise by 3 percent due to better margins, improved storage and strengthened value chains.
Withholding tax is scrapped or redesigned to exempt small cooperatives.
Estimated impact (Year 1):
Smallholder incomes rise by about $560 million nationwide.
Government foregoes the bulk of withholding tax revenue but gains through expanded production, value addition and improved compliance in formal markets.
Likely outcome:
Higher productivity, stronger food security and long-term revenue growth from a more competitive agriculture sector.
Conclusion
The three scenarios show a stark trade-off: aggressive taxation delivers short-term revenue but risks deep losses for farmers, weaker production and potential food inflation.
Moderate reforms offer a compromise. Growth-focused reforms require short-term fiscal sacrifice but strengthen long-term output, rural incomes and Kenya’s competitiveness.
Governor Lusaka argues that without urgent adjustments, new taxes may “hit the very people who feed the nation,” and that Kenya should avoid policies that undermine smallholder farmers while trying to expand its revenue base.
