East Africa’s finance ministers will read the national budgets this year without a common position on the taxation challenges facing regional integration.

Traders will bear the brunt of the lack of consensus on points like the different taxation structures in each country, and the non-tariff barriers that hamper trade across the region.

Government officials partly blame the political crisis in Burundi for stalling discussions on the harmonisation of taxes as well as agreements on the time frame for achieving the measures on inflation, fiscal deficits and import cover.

“We are working towards harmonisation of the tax rates. A study has been done to show the extent of disparities in tax rates among the member states,” said Kenya’s Treasury Secretary Henry Rotich.

He said it is critical that the harmonisation be completed by the time the region ushers in a monetary union in six years.

Varying income, capital gains, excise and value added tax rates have complicated operational systems for companies doing business across the region and created room for illegal trade.

The EAC, with an estimated population of 143.5 million and a combined national output of more than $110.3 billion, has brought Customs duties under one law and one common external tariff.

The benefit of common Customs laws in creating a buffer against competition from cheap imports has been negated by domestic taxes that distort the costs of production, encourage tax evasion and hinder competitiveness of goods in some markets. 

According to Kenya’s Ministry of East African Affairs, a draft legal framework to guide the harmonisation of domestic taxes will be presented to the EAC Sectoral Council of Finance Ministers and economic affairs in July.

“We are almost there in terms of harmonisation of domestic taxes,” said Peter Njoroge, the director of economics at Kenya’s Ministry of EAC.

However, some ground has been covered with regards to valuation of used cars. Among the things that have been agreed on is the rate of depreciation by the age of the vehicle, the applicable insurance rate at the time of importation and the use of the open market price of cars as the basis for discounting.

Some aspects still need to be streamlined, such as the impact of common valuation without an agreement on the maximum age of used cars that can be imported into the region.

Loss of revenue fears

Tax experts say revenue loss in the face of expansionary budgets is one of the reasons for hesitant political support for harmonised taxes.

“In all countries, revenue collection is proving difficult and yet expenditure is increasing. The tax base remains narrow, so the same taxpayers are repeatedly being targeted. Harmonising of legislation is a possibility but I don’t think rates will be harmonised,” said Nikhil Hira, the head of tax practice at Deloitte & Touche East Africa.

Options for expanding that tax base are also growing fewer, leaving governments to increase revenues through administrative measures that reduce leakages and technology.

According to Mr Hira, EAC governments should pay more attention to agriculture and security following increased threats of terrorism that have scared investors and crippled the tourism sector.

High uncontrolled spending by governments has plunged EAC economies into large budgetary deficits, with experts warning of increased borrowing and higher taxes.

“I expect borrowing, such as sovereign bonds, will increase. Raising tax rates is possible, but I don’t think it will result in increased collections,” said Mr Hira. “We will see more borrowing bringing interest rate pressure. Also, with depreciating currencies, I expect interest rates will rise.”

The capacity to borrow could be limited, going by the criteria in the EAC Monetary Union Protocol agreed on by members.

The criteria could see some countries scale down on mega projects in order to meet the fiscal deficit (including grants) target of three per cent of the GDP.

The EastAfrican has learnt that Bills to establish the East African Statistics Bureau, East African Monetary Institute and East African Surveillance, Compliance and Enforcement Commission are yet to be reviewed by a task force, owing to the political crisis in Burundi.

A meeting that was to be held last month was cancelled after Burundi’s representative failed to show up.

“We are really falling behind schedule, but the progress is not bad.  These Bills are ready, but they are supposed to be negotiated by a task force consisting of representatives from the partner states. The crisis in Burundi is contributing to the delay,” said a source who requested not to be named.

According to the EAMU Protocol, the East Africa Monetary Institute should be in place before the end of this year; other institutions have a deadline of 2018.

“Pre-budget issues cannot be discussed before the budget is read, but the key thing has been operationalisation of the EAC Monetary Union Protocol, which was signed last year. Key decisions have been made including convergence criteria and the establishment of the  East Africa Monetary Institute and the East African Central Bank,” Geoffrey Mwau, Kenya’s Director General in-charge of Budget, Fiscal and Economic Affairs told The EastAfrican.

According to Kenya’s Ministry of East African Affairs, Commerce and Tourism, the partner states are expected to finalise the Medium Term Convergence Programme (MTCP) covering the financial year 2015/16 to 2019/20 before the next meeting of the Sectoral Council on Finance and Economic Affairs scheduled for July 2015.

“The monetary union is a top priority for the regional ministers of finance because they want to deliver on the targets they have set themselves,” said Mr Njoroge.