Diplomatic and trade relations between Tanzania and Uganda are currently on a strain following the former’s move to block Kampala exports for one month now, and it has emerged that this problem will not be resolved till sometime in January 2012, at the earliest.

Even more, this row is a test of the endurance of the East African Community (EAC) instruments and partner states’ commitment to the regional bloc’s integration process, particularly their adherence to the Customs Union and Common Market protocols that came into force in 2005 and 2010 respectively. 

These instruments were meant to ease unfettered movement of goods across the borders, with goods manufactured and exported within the EAC region not attracting duty. But Tanzania has blacklisted Ugandan companies that must pay a 25 per cent tariff to access Tanzanian market.

Citing continued unfairness over the infamous “Ugandan list of tax exempt raw materials,” Tanzania slapped the tariff on Ugandan-made products in November, arguing that the window under which these products are manufactured in Uganda attracts tax. This development has left thousands of tonnes of Tanzania bound goods stranded at Customs border points, while others have been returned to the companies’ warehouses.

“This is totally unfair. For the past three weeks we have not exported anything to Tanzania,” said Tony Gadhoke, Mukwano Group chief executive officer, whose company is one of those that have been blacklisted and affected by Tanzania’s arbitrary action.

Captains of industry and government executives in Kampala are scrambling to defuse this standoff, which some government officials have described as very sensitive and always causes friction between Kampala and Dar.

Moreover, it remains unclear when the EAC Secretariat will respond to Uganda’s appeal to Dar that most of these companies are no longer beneficiaries of the Ugandan list.

The Minister for East African Community Affairs Eriya Kategaya concedes that this standoff is “certainly our problem.”

Mr Kategaya hinted on efforts to resolve it but admitted that he did not know how long this process would take, a fear that other officials echoed. 

“Unfortunately, Arusha has closed for Christmas vacation. So this [responding to Uganda’s appeal] will be around January,” says Richard Kamajugo, the acting Commissioner General of Uganda Revenue Authority.

Mr Kamajugo added that the government is working on a new list of manufacturing companies which are still benefiting from the tax exempt list of imported inputs. Those that have grown and developed their own capacity to get inputs locally will be weaned off the list. This, it is hoped, will dissuade Tanzania’s action of slapping a blanket tariff on all finished goods from Uganda. 

Common external tariff

At issue here is a long running controversy that dates back to 2005 when the Customs Union protocol came into force, creating a three-band EAC Common External Tariff of 0, 10 and 25 per cent for raw materials, intermediate goods and finished products respectively, for only goods made outside the EAC region. Uganda’s tariff band of 0, 7 and 15 per cent [raw material, intermediate and finished products respectively] was the lowest in the region at the time of launching the CET.

Uganda, however, was given a five-year period within which to adjust to the EAC CET, allowing more than 100 Ugandan manufacturing companies to import raw materials and intermediate goods at zero per cent tariff, a scenario that gave rise to the Ugandan list of raw materials—a range of 135 products imported as industrial inputs, and hence exempted from tax.

In 2010, the adjustment period expired but Uganda applied for a further three years on a rolling one year basis for companies that had not matured. Several companies have since been weaned off this list, but Uganda has not notified Arusha, and critically, the Tanzanian taxman of this development. 

On June 23, 2011, the EAC Sectoral Council on Trade, Industry and Finance meeting resolved that products made from such inputs that enjoyed the remission should now attract duty under the bloc’s CET.

“A good number of companies have remained on the list although they no longer need to import under the [CET] duty remission scheme for inputs. We are going to degazette them, and once that is done, this problem will be resolved,” said Mr Kamajugo.

This, coming over one year since the EAC Common Market became operational, is a development that could wreck the region’s integration process. While Tanzania will emerge as the region’s villain for this action, other business executives have no kind words for Ugandan government and industry.

“The problem, to me is on the Ugandan side. This government should decide whether it wants to sit with EAC or not; you cannot accept to lose the position of your exports in regional markets just because you are protecting a few companies,” says David Njoroge, managing director of Hima Cement, which does not export to Tanzania.

“These companies should have grown in the five years they enjoyed tax exempt inputs. Rwanda and Burundi are our big markets outside Uganda. Now, what would happen if they too decided to impose this tax?” he adds.

A brief by the exporters to the Ministry of EAC Affairs, which The EastAfrican has seen, demands that the regional bloc’s summit reverse the decision of the Sectoral Council, describing it as “retrogressive to the spirit of EAC integration”. It argues, moreover, that the Council’s decision singles out Uganda, yet other partner states also have lists of products that require duty remission.

“The remission of duty is meant to enhance manufacturing activity in the region and to promote the competitiveness of our manufactures against similar finished products imported from other countries. By levying the EAC CET as agreed in the decision quoted above we are questioning the existence of the customs union,” the brief reads, in part.

Considering that most of the companies affected by Dar’s freeze are no longer beneficiaries of the Uganda list, Busingye Rwabwogo, Mukwano Group’s Operations General Manager argues that instead of applying a blanket decision on all Ugandan exporters, the customs union rules of origin should have been invoked. Rules of origin is an instrument that is used to determine where an agreed percentage a product’s inputs are made to qualify it as a product of a particular customs territory.  

While the proponents of the Uganda list argue that the country still requires duty remission for its industry’s inputs because the country still suffers from bad roads, energy crisis and non tariff barriers that were a major factor when the remission was granted in 2005.

Others, however, argue that these problems are not unique to Uganda. Rwanda and Burundi, which acceded to the bloc’s treaty in 2007 face similar challenges if not worse, but did not apply for the same exemptions as Uganda, which is considered a fairly stronger economy than the two.