East African governments have used taxes to cushion their local industries on the one hand and encourage imports that support key sectors, such as infrastructure and energy, on the other, in a balancing act that gives fresh impetus to implementation of the Common Market Protocol.

In budget proposals announced on Thursday, Kenya, Uganda, Rwanda and Tanzania have either reduced or removed duty on imports for key sectors such as energy, communications and infrastructure.

The push to build infrastructure, ease the cost of doing business and fast-track the flow of revenues from the nascent oil and gas discoveries in the region have seen the four governments loosen tax policy to allow more trade with their neighbours and foreigners as well.

“Massive budget allocations by East African countries to infrastructure development are a pointer to the seriousness with which they are focusing on this key aspect of the economy,” said Rishab Thakrar and Ravinder Sikand of Deloitte East Africa in an analysis. “It was never like this before.

“The trend is a pointer to the realisation of the importance of infrastructure and its multiplier effect on the overall economic growth and development of the region.”

READ: Region focus now on infrastructure

Rwanda has reduced taxes on imported motor vehicles, especially tractors, heavy trucks and public transport buses.

Tanzania has taken a similar route, reducing import duty from 25 per cent to 10 per cent on buses that carry more than 25 passengers for a period of one year.

Regional integration aims at easing trade and stopping revenue losses suffered by companies doing business in the region. However, frustration has been growing among businesses in landlocked countries such as Uganda and Rwanda, which are paying a heavy price for unnecessary and costly trade barriers, usually erected by regulators.

In order to remove some of these bottlenecks, Kenya announced it was reducing administrative barriers by abolishing the requirement for Customs security bonds on importation of industrial sugar and wheat.

Uganda has taken a similar route by eliminating transit bonds on goods and introducing a common payment system that is aimed at enhancing regional integration.

Business people have been opposed to the bonds, which are equivalent to the price of the imported goods and are paid in advance. They argue that it is difficult to raise the additional money on top of paying for the goods and clearing import duties.

Kenyan manufacturers praised the decision to remove the bonds, saying it will eliminate obstacles in the clearance of white refined sugar.

“Kenya is a net importer of industrial sugar, which is a critical raw material for the food and beverage sector and the pharmaceutical sector,” said Betty Maina, the chief executive of Kenya Association of Manufacturers. “The removal of these bonds will reduce the cost and burden of sourcing this raw material.”

Lagging behind

The states are however still lagging behind in implementing the Common Market Protocol, even as the 2015 deadline draws near. The protocol, which calls for the free movement of goods, labour, capital and services in the region, came into effect on July 1, 2010 and was to be implemented over five years.

READ: Harmonisation of EAC rules too slow

Business executives said the budget statements did not mention some key impediments to trade in the region. Kenya, for example, charges an import declaration fee of 2.25 per cent of the value of the goods imported, Tanzania 1.2 per cent and Uganda 0.08 per cent.

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

The Customs Union Protocol enables goods produced within the region to be sold across the borders without duty while imports from non-EAC states are subjected to a three-band common external tariff structure.

The countries are also giving priority to tackling insecurity — which has left the region under siege due to the conflict in South Sudan and Somalia, as well as terror attacks mainly in Kenya — in an effort to attract and retain foreign investments.

In the energy sector, Tanzania has amended the East Africa Community Customs Management Act to provide for import duty exemption to inputs meant for the manufacture of gas cylinders.

The amendments will also exempt from import duty inputs used in the development and generation of wind and solar energy.

Tax on capital gains

This is crucial for planned power projects, such as the 300MW Turkana wind power plant, as well as the 100MW Kipepeo wind farm.

Kenya’s Treasury Cabinet Secretary Henry Rotich announced that the country will remove import duty on machinery, spares and inputs for direct and exclusive use in the development and generation of solar and wind energy to support the use of cheaper and cleaner alternative sources of energy.

However, manufacturers complained about the removal of the duty, saying it would render local manufacturers uncompetitive.

In Uganda, the government has introduced a tax on capital gains from the sale of commercial property and a 1.5 per cent levy on selected imported goods, with a view to collecting taxes to fund the construction of the planned standard gauge railway line (SGR).

The move could place Uganda on a collision course with other EAC countries. However, the government said the levy will be on selected imports to be detailed in a gazette notice.

Kenya had introduced the same levy but regional traders filed a complaint with the EAC Council of Ministers, saying the tax went against the EAC Common Market agreement.

Kenya was forced to scrap it.

Rwanda has removed all duty on sugar imports, but this will be done subject to import quotas, while that of unprocessed rice has been cut from 75 per cent to 45 per cent.

Telecommunication equipment will now be allowed into Rwanda duty-free while cement dealers will now pay 25 per cent from the previous 35 per cent they were being charged to get the product to Kigali.

Tanzania however doubled exercise duty on imported sugar.

Rwanda and Tanzania are seeking to allow more importation of wheat as the region faces a possible rise in prices. Kigali has zero-rated duty on wheat from the previous 25 per cent while Dar announced an extension of stay of an import duty rate of 10 per cent on wheat grain.

All the five East African states suffer wheat deficits and rely heavily on imports to meet demand, which far outstrips local supply.

Fears of political upheaval in Ukraine could also push up the world prices as it accounts for six per cent of the world’s wheat export market.

READ: Wheat prices in EA to go up over Russia-Ukraine crisis, bad weather

Kenya has also moved to protect the local steel industry and cushioning local manufacturers against cheap imports through an increase in duty rate on iron and steel products available locally from zero per cent and 10 per cent to 25 per cent.

In Rwanda, the government has lowered duty on cement from 35 per cent to 25 per cent.

The country is a net importer of cement and the move is expected to make the market even more lucrative for regional cement manufacturers, who will also be pleased by Tanzania’s removal of cement imports from the list of products considered capital goods and hence taxed at a lower rate.

In 2012, more than 200,000 tonnes of cement was imported from Pakistan into Tanzania and in 2013 the figure was about 300,000 tonnes.

Local cement manufactures have been lobbying the government to adopt stricter tax measures so as to deter these imports, arguing that they were killing the local industry.

Kenya has exempted from import duties inputs used in the processing and preservation of seeds for planting to address food security challenges.

In Nairobi, withholding tax on the consideration from assignment of rights in the oil, gas and mineral exploration has been abolished. Instead, income tax will be applied on the net gain.

In a major departure from the past, Tanzania has scrapped tax exemptions and removed the power to offer them from the Finance Minister.

READ: Tanzania scraps tax exemptions to increase revenue collection

It is estimated that the country could be losing as much as 3.8 per cent of GDP, or about 20 per cent of tax revenue collection, to such exemptions. According to a study by CRC Sogema, a Canadian firm, the move can help the county increase the tax to GDP ratio by as much as five percentage points, from 15 to 20 per cent.

It is estimated that Tanzania loses as much as $1.8 billion in potential revenue due to exemptions.

“Of alarm to the airline industry will be the proposal to abolish the withholding tax exemption on aircraft leased from non-residents,” said David Tarimo, a tax partner at PricewaterhouseCoopers Tanzania. “Typically, such contracts will provide for any such withholding tax cost to be for the account of the local lessee.

“In other words, the result will be significant additional costs for the local airline sector.”

Telephoning and transferring money across the region is also set for a shake-up in the coming months.

Single area network

Uganda has introduced a 10 per cent excise duty on mobile money withdrawal fees.

A similar 10 per cent excise duty was introduced last year on mobile money transfer fees.

Kampala has also introduced a 10 per cent excise duty on bank charges and money transfer fees.

Tanzania has, however, reduced from 15 per cent to 10 per cent the excise duty on money transfers through banks and telecommunication companies.

In Rwanda, the excise duty on airtime has been increased from eight per cent to 10 per cent, meaning callers will pay more to communicate on mobile phones.

Mobile phone users in East Africa are, however, expected from August to enjoy a 20 per cent cut in tariffs on cross-border calls as the countries move towards a single area network by the end of the year.

Last month, ministers from Kenya, Uganda and Rwanda agreed during the fifth Northern Corridor meeting in Nairobi to harmonise taxes, leading to a reduction in charges for short text messages, voice and data. Regulators have been asked to enforce the decision.

READ: Cross-border calls, Internet to cost less in new single network agreement

The single area network will be set up after a two-phase consultative process: All regulators will meet in Kampala this month, followed by a joint meeting of regulators and mobile network operators.

Uganda, Tanzania, Rwanda, Kenya and Burundi had introduced taxes on international calls, making it more expensive to call across borders.

The taxes, averaging $0.12 per minute, have been cited as a non-tariff barrier that could slow trade within the East African Community.