The cost of goods imported from outside the East African Community could rise from June this year as the regional bloc plans to introduce a new import levy to finance the Secretariat’s growing budget.

The proposed one per cent levy will be an additional charge on the existing import taxes. This could raise the prices of goods shipped from outside the bloc’s five countries — Kenya, Uganda, Tanzania, Burundi and Rwanda.

The prices of commodities such as fuel, food, cars, machinery and second-hand clothes — the most common goods sourced outside EAC — are likely to go up.

The total value of EAC member states’ imports from outside the region amounted to $34.29 billion in 2012, therefore the Secretariat could collect up to $342.9 million from the levy.

The proposal, which was approved by the EAC Council of Ministers and recommended to the Heads of State Summit in November last year, is expected to be considered during the Ordinary Summit scheduled in Nairobi this April. The Council of Ministers is said to be working on rollout details, as the bloc seeks to wean the Secretariat of heavy reliance on contributions from member states, donations and donor funding.

Inconsistent and inadequate flow of contributions from member states has constrained many crucial activities of the EAC executive arm, including the negotiation of an Economic Partnership Agreement with the European Union.

The new funding mechanism is expected to enable the EAC to meet its budget, largely funded by donors.  For example, of the $117.5 million 2013/2014 budget, partner states contributed $37.2 million while donors gave $79.8 million.

The proposed 2014/2015 budgets stands at $134 million — 2.4 per cent higher than the previous year’s. Each EAC partner state will be required to contribute $45 million, a 19.0 per cent increment from last year’s contribution.

However, the EAC development partners will in the 2014/2015 budget contribute a total of $83.8 million, a drop of 4.8 per cent. The donors, who include Canada, Denmark, Finland, France, Germany, DfID-UK, the European Union, the World Bank and Norway, however, finance their programmes directly instead of giving the grants to the Community.

After it became apparent that fundraising remains the Community’s biggest challenge, early last year, a team of experts was appointed from all the partner states to explore sustainable funding mechanisms that would guarantee that the bloc is able to raise adequate resources, and ensure that equitable funding and remittances are made on time to the Secretariat.

Among the proposals was one that contributions be based on the member states’ gross domestic product and introduction of an airline tax.

READ: Airlines in EA brace for a bumpy ride in 2014 as costs soar

“From all the modalities considered, the use of import tax was seen as a better and more reliable option. The other options are quite tough to implement,” said one of the experts, who did not wish to be named.

Kenyan consumers are already feeling the pinch after a similar tax was introduced mid last year. Nairobi rolled out a 1.5 per cent railway development levy on all imported goods. Whereas the country had targeted to raise Ksh8 billion ($91 million) by last month, it actually collected Ksh10 billion ($114 million).

The rail levy will be added to the Ksh22 billion ($258 million) that the Treasury has set aside for construction of a standard gauge railway line from Mombasa to Malaba.

READ: Kenya in tax measures to build infrastructure, cushion old and poor

Cost of doing business

Private sector players have already warned of consequences, saying the levy will increase the cost of doing business.

“All the five partner states have different import declaration fees and therefore there should be a mechanism for either unifying it at a lower rate or removing it completely to avoid increasing the cost of doing business,” said Vimal Shah, chief executive of Bidco.

Kenya, for example, charges an import declaration fee of 2.25 per of the value of the goods imported, Tanzania 1.2 per cent while Uganda charges a 0.08 per cent import declaration fee.

The EAC-wide import duty on food supplements for example is set at 10 per cent that of manufactured goods is at 18 per cent, while machinery and transport equipment attract a tax of 35 per cent. Fuels and lubricants are levied at 7.5 per cent.

Andrew Luzze, executive director of the East Africa Business Council, said the proposed levy risks facing legal hurdles because under the EAC Customs Management Act (2004), goods imported by EAC partner states under the Comesa and SADC bloc attracts preferential tariff treatment as prescribed in each of the EAC partner state’s legislation. 

Burundi, Kenya and Rwanda are members of the Comesa Free Trade Area (FTA). They therefore extend preferential tariff treatment to all Comesa FTA member countries of  zero per cent on all imports.

But the three countries charge a common external tariff (CET) of 25 per cent on all imports from SADC countries, because they do not have a trade arrangement with SADC. 

Tanzania on the other hand, is a member of SADC FTA and extends preferential tariff treatment to all the SADC member countries of zero per cent on all imports but charges CET on all imports from Comesa countries, because it does not have a trade arrangement with Comesa.

Uganda is implementing Comesa FTA trade regime and is currently according imports from all Comesa member countries preferential tariffs.