EAC states review CET to protect imported goods from double taxation

East African Community member states have resolved to review the common external tariffs (CET) for goods imported into the region to strike a deal on  the taxation of “sensitive” products.

The EastAfrican has learnt that the proposed review of the  EAC three-band tariff could see excessive protection granted to sensitive goods such as maize, rice, wheat, textiles and sugar abolished and a uniform duty applied to the products.

Kenya has requested a stay of the application of a 10 per cent duty on wheat grain instead of 35 per cent while Rwanda has requested a stay of the application of $0.4 per kilogramme on secondhand clothes and other articles.

Wheat and textile are classified as sensitive goods and their imports attract higher duty because the idea is to protect local industries. But in cases where countries do not have the capacity to produce they ask for special rates to import them from outside the EAC. So Kenya had asked for a rate of 10 per cent  to import wheat instead of the standard 35 per cent.

Other key issues under discussion include a proposal to review the existing CET rates and  the basket of sensitive goods with a view to dropping some of them from the list and a proposal on whether or not an additional fourth tariff band should be introduced to the EAC’s three band CET.

The member states are also keen to strike a deal on which items should be treated as finished products and intermediate goods to eliminate cases where some products  are imported as finished goods thus attracting a higher tariff only  to end up being used as  inputs in industrial production.

Each of the partner states has appointed a team of experts to the negotiations, which start next in July.

“We want a uniform application of CET on these sensitive goods in order to get rid of these stay of applications. These negotiations usually take a long time but we want them expedited because there are issues we want it to resolve,” a source privy to the negotiations told The EastAfrican.

Comprehensive review

EAC’s current CET of 0 per cent on raw materials and capital goods, 10 per cent on intermediate goods and 25 per cent on finished goods were agreed upon by the member states on June 23, 2003.

The EAC Sectoral Council on Trade, Industry, Finance and Investment in a meeting held in Arusha in May, directed the EAC Secretariat to finalise the comprehensive review of the CET by December 2016 for implementation from July 1, 2017.

It is, however, argued that the negotiations could be complicated by countries that belong to more than one trading bloc, such as Tanzania which belongs to both SADC and the EAC.

“That is a challenge and it will remain a challenge because you are not supposed to belong to two Customs Unions,” said the source.

READ: Lack of consensus delaying common tax regime in EAC

Another challenge is that the proposed negotiations on the EAC CET review are also expected to consider the ongoing tariff liberalisation under the Tripartite Free Trade Area (TFTA), which brings together the 26 member countries of the three regional economic blocs — EAC, Comesa and SADC.

The members of the three trade blocs last year agreed to disregard sensitive products and remove protection previously granted to them in order to ensure fair competition, which opened the door for stiff competition for EAC goods from South African and Egyptian exports.

READ: East African countries could lose out on TFTA benefits from June

Under the TFTA , member countries had agreed that 80 per cent of tariff lines will be liberalised upon implementation of the agreement in June this year and the remaining 20 per cent will be negotiated over five to eight years, but the regional trade blocs are yet to agree on tariff offers.

Kenya’s Principal Secretary in charge of the EAC Affairs Betty Maina told The EastAfrican that some industries have not taken advantage of the protection granted to the sensitive products to grow and become more efficient, thus raising questions as to whether such protection should be maintained.

“We want to do a comprehensive review of the CET. These tariffs were meant to encourage industrialisation, but  10 years down the line, we are taking stock to see whether this objective has been achieved,” said Ms Maina.

Manufacturers lose competitive edge

The proposal to revise duties levied on imported goods entering any of the EAC partner state from non-EAC member countries was developed  in 2012 but the process had been  held back by financial constraints, different internal rules of origin  and lack of a common position on the range  at which different goods will be taxed.

The EAC member countries are concerned that regional manufacturers are losing their competitive edge by paying duty at a rate of 25 per cent on some imported inputs, which should have ordinarily attracted zero per cent or 10 per cent duty.

For instance under the current CET regime, palm oil is imported as a finished product and subjected to a duty of 25 per cent even though  the product  is used as a raw material  in the manufacturer of soap. This qualifies it  for a zero per cent duty.

Clinker, which is used in the manufacturer of cement, is also imported as a finished product thereby attracting 25 per cent duty.

However, the fact that the product is used as an intermediate input should allow it to attract a 10 per cent duty.

In addition to the CET, Kenya also charges an import declaration fee (IDF) of  2.25 per cent  of the cost, insurance and freight value of the goods  with a minimum value of  Ksh 5,000 ($48.53)  payable.

For instance, a new computer printer is subjected to a 2.25 per cent IDF, plus a 10 per cent duty and 16 per cent VAT.

CET refers to an agreed set of duties levied on imported goods entering any EAC partner state from outside the regional bloc.