Kenya has broken ranks with its EAC partners over the introduction of a new levy on imports that is designed to raise money for building regional infrastructure.

The 1.5 per cent charge on all imports into the EAC, referred to as the infrastructure levy, was agreed upon by finance ministers from member states during pre-budget consultations held in Nairobi in May.

Although the ministers agreed the levy was necessary, Kenya has since had a rethink because the tax would duplicate the railway development levy introduced last year to finance the Ksh425 billion ($5 billion) standard gauge railway (SGR).

“The tax that is being proposed is the same as the railway development levy that became effective last year. We will be duplicating it if we implement the infrastructure levy,” said a government official.

The official said Kenya was preparing a corrigendum to the EAC Secretariat to be exempted from implementing the infrastructure tax in view of the existing levy.

Uganda, Kenya and Rwanda agreed to implement the levy from the next financial year but Tanzania requested time to consult first before releasing a timeframe for implementing the levy.

The official said that Kenya, being the region’s biggest economy, was also apprehensive on how proceeds from the levy would be shared and was of the view that each country should raise funds for the regional projects falling under its territory.

In January, KRA Commissioner-General John Njiraini told parliament’s Public Investments Committee that the levy had raised Ksh10 billion ($112 million) by December 2013, putting it on course to surpass the Ksh13 billion($145 million) per year target and to hit Ksh20 billion ($224 million) by last month.

The taxman had targeted collecting Ksh6.5 billion ($74.6 million) from the levy in the first half of the past fiscal year.

Treasury intends to charge the levy for four years to raise counterpart funds for the SGR, which will be 85 per cent financed by the Chinese government.

READ: Rail levy collection exceeds target despite EAC deal

Kenyan officials are of the view that 2017 is the earliest Kenya can implement the infrastructure levy, effectively extending the railway levy, which has been criticised for increasing the cost of goods and going against the East African Customs Union Protocol.

At its November sitting in Kampala, the Council of Ministers granted the East African Business Council (EABC) its wish to have the levy abolished for goods in transit to Tanzania, Uganda, Rwanda and Burundi and those being imported from the partner states.

“The Council noted that the levy imposed on imports by Kenya for railway development is inconsistent with the EAC Customs Union Protocol as it is a charge of equivalent effect, which partner states agreed to remove,” the ministers said in a communiqué.

Nikhil Hira a tax partner at Deloitte & Touche, said the infrastructure levy should not apply on inter-EAC imports or to goods with country of origin in one member state imported into another member state.

EABC executive director Andrew Luzze said, “If Kenya continues with the railway development tax, it will collect more revenue considering the high volume of trade.

If it joins the rest to implement the infrastructure levy, it will lose out because it will not have control of the proceeds, which would be under EAC regulations.”

He said it could prove difficult to implement the infrastructure levy in the long run because of trade agreements EAC members have with members of other trading blocs such as Comesa (Common Market for Eastern and Southern Africa) and SADC (Southern Africa Development Community). Such countries, he added, would seek exemptions on their exports to the EAC.

It would be difficult, for example, for Tanzania to impose infrastructure levy on goods imported from South Africa since the two countries are members of SADC, which, like the EAC, has established a free trade area.

Polycarp Igathe, the chairman of the Kenya Association of Manufacturers, said the standard gauge railway should be given priority.

“Importers of bulk liquids and raw materials cannot wait for the rail, which will make logistics costs competitive. The railway development levy is an investment, not a cost,” said Mr Igathe.

Completion of the railway is expected to significantly reduce the cost of freight within the region.