Impact of taxes on cost of production and input use efficiency on maize, potato, and big onion cultivation in Sri Lanka.

Abstract

Maize, potato, and big onion are strategically important and politically sensitive field crops due to their high demand and income-generating potential. However, the increasing cost of production (COP) of these crops, particularly amid rising input prices and taxes embedded in agricultural inputs such as fertilizers, seeds, agrochemicals, machinery, and fuel, is a commonly expressed concern among farmers and agricultural stakeholders. This study aims to assess the exact tax burden embedded in the production systems of these three crops and evaluate its impact on cultivation costs and input-use efficiency. Utilizing secondary data for the 2024 Yala season obtained from the Department of Agriculture and Sri Lanka Customs tariff schedules, a quantitative analytical framework was established. The methodology utilizes an enterprise budgeting approach coupled with Harmonized System (HS) code-based tax extraction to algebraically estimate the total tax burden (TT), tax incidence percentages (TI), and input cost structures (ICS). Empirical results show that taxes constitute a notable component of COP, accounting for approximately 9% for maize, 11% for potato, and 8% for big onion, including imputed costs. Excluding imputed costs, cash-tax incidence rises to 12%, 16%, and 10%, respectively, concentrating heavily at 16% to 17% within purchased inputs. This fiscal burden correlates with a low expenditure share on critical inputs, contributing to sub-optimal yields (1,761 kg/acre for maize, 4,929 kg/acre for potato, and 9,976 kg/acre for big onion) compared to regional economies. The study concludes that high embedded taxes distort input structures and limit production efficiency. To lower production costs and strengthen sector competitiveness, policymakers should rationalize agricultural tariffs and help farmers use resources more efficiently.