Region to adopt new tax rules to protect it from cheap imports

New measures to protect local industries and farmers from cheap imports will be known in June once the East African Community partner states agree on taxation rates.

The region’s finance ministers will meet next month meet to agree on a new Common External Tariff (CET) on products like sugar, maize, wheat and rice, as well as customs-related taxation measures designed to protect local industries from cheap imports and unfair competition.

Kenya’s Cabinet Secretary for the National Treasury Henry Rotich said taxation measures that will be agreed on by the EAC ministers for finance will be communicated through the EAC Gazette Notice and implemented from July 1.

“On matters relating to Customs, we have evaluated various proposals from stakeholders for consideration by the EAC ministers for finance during the pre-budget consultations meeting to be held in May this year,” Mr Rotich told lawmakers in Nairobi while presenting the country’s 2017/2018 budget.

The current CET is based on three bands of 25 per cent for finished goods, 10 per cent for intermediate goods and zero per cent for raw materials and capital goods, with a limited number of products under the sensitive list, which attract rates above the maximum rate of 25 per cent.

The three-band tariff has been blamed for killing competitiveness of local companies and obstructing intra-regional trade by forcing them to pay duty at the rate of 25 per cent on some imported inputs, which should have ordinarily attracted zero per cent or 10 per cent duty. The EAC CET was last reviewed in 2010 but the three-band rate was retained.

Hard hit sectors include soap, detergent, cement and manufacturing, which are paying a higher duty of 25 per cent for some finished products that end up being used as inputs qualifying for a lower duty of either zero or 10 per cent.

Clinker, which is used in the manufacture of cement, is imported as a finished product, attracting a 25 per cent duty but ends up being used as an intermediate input, which should be subject to a 10 per cent duty.

Palm oil, which is used to manufacture soap, is imported as a finished product and subjected to a duty of 25 per cent yet the product qualifies for a zero per cent duty.

Mr Rotich said the Customs-related taxation proposals seek to promote industrialisation, protect local industries from cheap imports and unfair competition and create incentives in the agricultural and manufacturing sectors.

“The EAC Common External Tariff, which sets the rates of duty applicable on imported goods, is undergoing a comprehensive review and the outcome will be released once adopted by the EAC Council of Ministers,” he said.

A group of 25 experts from Kenya, Uganda, Tanzania, Rwanda and Burundi has been tasked with the mandate of revising the CET and fine-tuning the existing rules of origin to enhance intra-EAC trade and attract new investments in the bloc.

The experts will consider the list of sensitive goods and the rates applicable on them and agree on the best method of classifying such goods as maize, wheat, sugar, textile and rice whose industries require protection from imports.

The proposed review of the EAC three-band tariff could see excessive protection given to sensitive goods such as maize, rice, wheat, textiles, sugar, milk and dairy products scrapped. A uniform duty would be applied on the products to eradicate the frequent applications for preferential treatment by some member states.

Kenya, for instance, requested a stay of application to apply 10 per cent duty on wheat grain instead of 35 per cent while Rwanda requested a stay of application of $0.4 per kilogramme on worn articles and $2.5 per kilogramme for worn clothing and $5 per kilogramme for worn shoes.

This work was initially scheduled to be completed by July 1 but the timelines have since been changed to September 2017.
The position taken by other EAC member states is not yet clear, but Kenya has proposed that the tariff bands of the current CET be increased from three to four to take care of industries that import industrial inputs.

“The dynamics in the region have changed from the time the current CET was formulated and therefore there is a need for the CET to be reviewed to reflect the current realities in the region,” said Chris Kiptoo, Kenya’s Principal Secretary in the department of Trade.

Other considerations include dropping some items from the basket of sensitive goods and opening them up for competition from imports outside the EAC.

A uniform duty could be applied on the remaining sensitive goods to get rid of frequent applications for preferential treatment of these products by some member states.

Tax experts however viewed Kenya’s 2017/2018 budget as cosmetic, crafted to please the public during an election year and cast doubt on the impact it will have on the economy.

“Overall the budget was fairly low key, which was to be expected in an election year. Some of the measures announced may well be viewed as electioneering measures but it remains to be seen if they have that effect,” said Nikhil Hira, a tax leader at Deloitte East Africa.

“On the taxation front, as expected the measures were limited given the time that Parliament has to pass them before it is dissolved.  Customs measures were not announced as the EAC Ministers of Finance are yet to finalise them, which will be done in their gazette notice on July 1,” said Mr Hira.

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