East African countries are reviewing their taxation laws in a bid to reduce tax exemptions that have seen their economies lose out on revenue.

In the past week, Rwanda and Tanzania have moved to effect new VAT Bills that deal with tax exemptions.

Last week, Tanzania’s Parliamentary Public Accounts Committee (PAC) asked the Minister for Finance to gazette the Vat Bill 2014 meant to reduce revenue leakage as a result of tax exemptions. This was after the Tanzania Revenue Authority (TRA) showed an increase in the country’s tax exemptions from $793 million for the 2012/2013 financial year to $964 million in 2013/2014.

According to TRA, exemptions for multinational companies engaged in exploration for natural gas and oil stood at $58.82 million while projects undertaken by state-owned firms enjoyed a waiver of up to $86.47 million.

The chairman of the PAC, Zitto Kabwe, said that the delay in enacting the VAT Act of 2014 would deny the government more revenues through the VAT-special reliefs in the current year.

TRA Commissioner-General Rished Bade said that in the 2013/14 financial year the VAT relief rose to $409.41 million from $335.90 million in 2012/2013.

“We have seen an increase in tax exemptions due to huge gas exploration projects and other donor-funded infrastructural projects. Projects that have enjoyed these exemptions include the construction of the pipeline to transport natural gas from Mtwara to Dar es Salaam and the construction of the Kigamboni Bridge,” said Mr Bade.

Tanzania is banking on the VAT Act 2014 to reduce tax exemptions, which will enable it to collect $500 million in additional revenue in the 2015/16 financial year.

The Act stipulates that the government, which previously had unrestricted powers to grant or amend exemptions, must seek approval from the National Assembly before it reviews, grants or abolishes a tax exemption. The Act also removes exemptions on imports for use in mining or oil and gas exploration.

Rwanda has also reviewed its taxation regime, reducing various exemptions and reforming its VAT laws. The Rwandan parliament last week passed a new draft law governing VAT, which awaits presidential assent.

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In the new law, VAT remains at 18 per cent of the value of goods or services sold. It also gives the line ministers powers to determine certain goods and services that may be exempted from VAT from time to time. The old law, which was enacted in 2012, was amended on the grounds that it did not provide for VAT exemption for certain goods and services that must be exempted.

“The IMF identified gaps in our tax system, including the issue of exemptions and incentives; they feel there is a lot of revenue leakage through the incentives, in particular legislative exemptions in terms of investment promotions,” Ben Kagarama, former commissioner-general of the Rwanda Revenue Authority told The EastAfrican last year.

Kenya also plans to remove most of the tax incentives that foreign firms who set up operations in the country have been enjoying in order to align the investment policies that county governments are formulating with those of the national government.

Kenya Investment Authority (KenInvest) chief executive officer Moses Ikiara said the plan is to remove the many tax incentives Kenya has been offering investors.

“We are seeing scenarios where these firms are making more than the country is gaining. These policies are not helping us any more and we are in the process of removing them,” said Mr Ikiara.

The tax waivers are estimated to cost the Kenyan economy $1 billion annually. The country offers several tax incentives to foreign firms that manufacture goods locally for export, including a 10-year corporate income tax holiday and a 10-year withholding tax holiday on repatriated dividends and other remittances.

The removal of these tax incentives will come as a relief for the Kenya Revenue Authority (KRA), which is struggling to meet high collection targets and has long opposed the incentives extended to foreign firms.

A 2012 report by Action Aid titled The Impact of Tax Incentives in East Africa-Rwanda case study said that Kenya, Uganda, Tanzania and Rwanda were losing $2.8 billion each year through tax incentives, which are promoting harmful tax competition in the region. Currently Uganda collects 45 per cent of its VAT, Kenya 58 per cent, while Tanzania collects 40 per cent.

In the 2014/2015 financial year, Uganda removed several tax exemptions in a bid to widen its tax collection bracket. In Uganda, tax incentives have been used to attract large foreign investors in the oil, mining, airline and farming sectors.

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Currently, mining operations are granted a 100 per cent deduction for any expenditure of a capital nature incurred in the exploration, discovery, testing or gaining access to mineral deposits in Uganda.

Last week, the Uganda Revenue Authority saw an increase in tax collection by $8.6 million, which it attributed to improved profitability of companies, value added tax on imports and withholding tax.