Push for local manufacturing to hurt East Africa integration

Saturday June 11 2016

The four East African countries increased their

The four East African countries increased their annual budgets for the 2016/2017 fiscal year, with the focus on increased taxes, even as the integration policies took backstage. TEA GRAPHIC |  NATION MEDIA GROUP

By ALLAN OLINGO

East African governments want to implement taxation measures that will see them make good their promise to promote local manufacturing and reduce importation of goods, particularly second-hand clothes and shoes.

Rwanda increased taxes on used clothes from $0.2 to $2.5 per kilogramme, and on used shoes from $0.2 to $3 per kilogramme, while Tanzania increased taxes on the second-hand clothes from $0.2 to $0.4 per kilogramme, coming into the same band with Kenya, which effected a similar increase in the previous financial year.

“Taxes on used clothes and shoes will increase as a way of supporting locally made products and industries. East African heads of state agreed to promote industries that can produce textile. Now someone has to take the bull by its horns. Let used clothes go to other regions, because we want our industries to grow,” said Claver Gatete, Rwanda’s Finance Minister.

Rwanda is also targeting the cement, sugar, rice and clothing sectors, where it believes local production can reduce imports, as it enhances ongoing export promotion efforts by the export promotion fund. Meanwhile, Kenya is exempting garments and leather footwear produced in the export processing zones from VAT.

Clive Akora, the associate director, tax and regulatory services at audit firm KPMG said the move would protect the EPZs, which face competition from imports.

“Kenyans will now have access to locally made high-quality clothes and footwear previously exclusively made for the export market. However, EPZ enterprises have a quota for exports into Kenya and it will be interesting to see how the exemption will be implemented in view of this quota,” said Mr Akora.

Common external tariffs

Tanzania’s Finance Minister Philip Mpango said the government would also introduce a 10 per cent Customs duty on flat rolled products of iron and increase the Customs duty on iron rods and bars and steel from 10 per cent to 25 per cent to ensure that the locally produced products can compete with imports.

This is in line with the region’s finance ministers’ agreement to amend the common external tariffs (CETs) in the region’s Common Market Act.

The amendments to the CETs range from iron products, cement, automotive bolts and nuts, fishing nets and oil and petrol filters. These amendments have not been mentioned in the Kenyan budget statement. However, it is likely that the proposed amendments to the CET will be implemented.

“All these measures were agreed to by the finance ministers from all EAC member states to protect local industries,” said Dr Mpango.

Tax amnesty

The region has also reduced the cost of doing business in a bid to attract more investors with Rwanda proposing to scrap corporate income tax for international companies with headquarters in Rwanda and with an investment of $10 million. Furthermore, any person investing more than $50 million in Rwanda will enjoy a seven-year tax holiday.

Kenya is also proposing a tax amnesty for 2016 and prior years for all principal taxes, penalties and interest for those who repatriate assets and income to the country, provided the taxpayers submit their return and accounts for the year of income 2016.

Rwanda has proposed to introduce capital gains tax (CGT) at five per cent on the disposal of shares or immovable property. The country however proposes to exempt from CGT gains on disposal of affordable residential houses and immovable property acquired through inheritance.

According to Mr Gatete, this is in line with the recent developments in the region such as in Kenya where CGT was reintroduced in 2015.

Integration policies

Overall, the four countries increased their annual budgets for the 2016/2017 fiscal year, with the focus on increased taxes, even as the integration policies took backstage.

Regional finance ministers have proposed taxation measures that seek to rope in the informal sector, which contributes about 55 per cent of sub-Saharan Africa’s gross domestic product.

Kenya is poised to reintroduce a new tool to collect revenue from hard-to-tax parts of the economy, while Uganda also set out plans to improve compliance in the informal sector.

Uganda, where one in five households run an informal business, is proposing to expand the tax base by gradually formalising the informal sector, improving efficiency in tax collection and compliance.

Kenya’s National Treasury Cabinet Secretary Henry Rotich said that everybody must pay taxes, including the informal sector. “We must widen the tax net so that every eligible tax payer, including the informal sector, pays tax. In this regard, I propose that the revenue authority applies the presumptive tax to achieve this,” said Mr Rotich.

ABC Capital corporate finance and advisory manager Johnson Nderi said Kenya has tried to strike a balance but needs more revenues avenues. “I am hopeful that this will work. Its about how the revenue authority goes about it,” said Mr Nderi.

Job Kabochi, a tax partner at PwC said that more novel approaches ought to be pursued such as raising taxes through the permit and licensing infrastructure and making use of existing county government structures to undertake collections on behalf of the KRA.

“Due to its very nature, the informal sector is largely off the grid hence it has limited contact with the tax system. Most of the sector’s interaction with the tax system is in the form of indirect taxes on consumption. There is a need to include this sector in the tax base,” said Mr Kabochi.

Both Tanzania and Kenya have reduced the tax burden on low-income earners with Tanzania reducing the lowest tax rate applicable to individuals or employees from the current rate of 11 per cent to nine per cent.

Kenya also gave some relief to low salaried workers by delaying their entry into the higher tax bands with the promised widening of the ceilings by 10 per cent. This means the lower band will now start at $111.81, up from $10.164, while the ceiling for the bottom tax band will rise to $427.82 from the current $388.93.

Cost of doing business

For those who own vehicles, both Kenya and Uganda increased their taxation on fuel and road maintenance levies. In Uganda, petrol and diesel have been slapped with a tax increment of $0.03. This, according to the manufacturers, traders and the private sector apex body, is bad news for the sector that is already grappling with high cost of doing business.

“This increment will hurt us (manufacturers) in the long run,” said the executive director of the Uganda Manufacturers Association Kigozi Ssebagala, adding, “The government should work towards reducing the cost of doing business otherwise it will be difficult for us to compete. One way of helping the manufacturers produce more and compete favourably is by ensuring that the cost of production is affordable.”

Kenyan motorists will pay an additional 50 per cent for road maintenance, pushing the tax to a new high of $0.18 per litre. Last year, Kenyans consumed 3.9 billion litres of diesel and petrol. The government is looking to raise $234 million in new funds to maintain and repair roads in the coming years from the increment alone.

Fred Omondi, a partner at Deloitte East Africa, said that while the current low global petroleum prices may have provided the incentive to load additional taxes on fuel, the ongoing recovery of crude prices means motorists have to bear a heavier mobility burden in the near future.

Kenya’s kerosene prices are also set to rise by at least Ksh7.25 ($0.07) per litre in a move that Mr Rotich said is aimed at curbing its use in the adulteration of petroleum.

In tourism, Tanzania has proposed to impose VAT on tourism services including suppliers of tourist guiding, game driving, water safaris, animal or bird watching, park fees and ground transport services, while Kenya has taken the opposite route, instead exempting entry fees charged at national parks and commissions earned by tour operators from VAT.

Instead, Kenya has increased air passenger service charges for external travel from $40 to $50 and for internal travel from $5 to $6.

“The revenue realised from the increase will be used exclusively for the promotion of tourism. In this regard, the National Treasury and the Ministry of Tourism will develop a Special Tourism Promotion Fund for this purpose,” said Mr Rotich.