East African countries are dragging their feet on tax harmonisation because of concerns about tax sovereignty, failure to agree on a common excise policy, fear of losing revenue, and the difficulty of converging excise rates, given the differences in per capita income.
A study by PriceWaterhouseCoopers (PwC) on the impact of EAC excise tax harmonisation recommends that in order to move faster on the matter, the EAC partners need to focus on key areas including procedures and administration, classification rules and definitions and remission schemes.
Rajesh Shah, senior tax partner at PwC, said tax harmonisation need not necessarily result in the same tax rates and laws, but in processes that will enable the EAC partner states to eliminate barriers that hamper the free movement of goods, services and capital, and promote investment within the region.
These freedoms are provided for in the EAC Treaty and Common Market Protocol.
“We need common warehousing procedures, declaration and documentation for products destined for another partner state,” said Mr Shah. “This should only apply on products released for consumption and not consumed due to setbacks such as spoilage and expired products.”
So far, only Customs duties have been harmonised by setting a common external tariff (CET) for imports into Kenya, Uganda, Tanzania, Rwanda and Burundi.
Building the foundation
Although the EAC faces challenges such as illicit trade and wide disparities in rates and structures, it should be possible to build the foundation of a harmonised excise tax system and secure long term growth in revenues as well as allow industry players to trade with minimum cross-border issues, the study notes.
“Significant differences in tax rates induce trade in counterfeits and smuggling of goods across borders which leads to tax evasion and criminal behaviour including corruption,” said Mr Shah.
The EAC partner states impose excise duty on the same products — alcoholic beverages, tobacco, motor vehicles, petroleum products, soft drinks and bottled water.
However, in order to be in line with international practice, Mr Shah said that EAC should adopt a list of the main excisable goods including alcoholic beverages, cigarettes, motor vehicles and petroleum products.
“The bulk of the excise duty is collected mainly from alcohol, tobacco and motor vehicles with the former two contributing to an average of 58 per cent of excise tax revenue in the EAC,” said Mr Shah.
He added: “While most partner states have data on the volumes of excise duty collected, there is no adequate documentation of excise duty fore gone from the remissions granted in the various partner states.”
Currently the EAC lacks a common list of excisable products and this is the cause of the variations in the excisable products from partner state to partner state
The partner states therefore need to define a common list of excisable goods that will then be adopted across the EAC, notes PwC.
“For alcohol and tobacco, EAC partner states are still charging excise duties on highly different tax bases. Since the partner states are at different economic stages, proposing common rates will not be feasible,” says the report. “We therefore propose the setting of a minimum rate and a maximum rate within which all countries will have to operate.”
The report adds that in the same way that the excise duty structures for motor vehicles and petroleum products are aligned, those of tobacco and alcohol need to be considered too.
Among the partner states, Uganda has the most comprehensive local raw materials regime with regard to its alcoholic beverages, followed by Tanzania. Kenya also has a remission scheme targeting certain alcoholic products brewed using local sorghum and millet.
“Clear criteria and an agreed basis for the remission schemes between partner states would ensure that their effects are fairly spread in the EAC and thereby guard against price distortions in the trade among partner states” notes the report.
According to the PwC report, although the remission schemes in the partner states are supposed to promote the domestic agricultural sector by creating a ready market for raw materials, the overall effect is that excisable products made from domestic raw materials are cheaper than imports.
This in itself discourages the importation of these products into countries where such remission schemes exist.
Furthermore, the distortions facilitate smuggling whereby consumers move across the borders to buy the beverages in the country where prices are low and bring them into their own countries, notes the report.