EAC partners split on ‘sin tax’

The East African Community headquarters in Arusha, Tanzania.

Photo credit: File | Nation Media Group

East African Community (EAC) partner states have failed to agree on the minimum excise duty to be levied on fuel, cigarettes, alcohol and non-alcoholic beverages with added sugar as part of a broader regional domestic tax harmonisation plan, prompting intervention by the International Monetary Fund (IMF).

The EAC member states have developed a policy to harmonise domestic taxes in the region, which was approved by the Council of Ministers in May 2019, but the process has been slower than expected, with some member countries fearing loss of revenues.

The EAC Sectoral Council on Finance and Economic Affairs (SCFEA) is now urging the partners to conduct studies on the impact of the harmonised excise tax regimes on their economies and share the report with the EAC Secretariat, noting that there is a need to fast-track domestic tax harmonisation to allow smooth implementation of the Common Market.

The findings of the study were to be shared with the EAC Secretariat by December 2024.

The main aims of harmonising regional domestic taxes are eliminating harmful tax competition, promoting the region as a single investment destination and facilitating cross-border trade and investment.

The EastAfrican has learnt that tax experts from the member countries failed to agree on the harmonisation of excise (sin) taxes, particularly on the lowest rates to be levied on the products considered harmful and costly to the society across the region, as well as the proposed timeframe for the removal of incentives for excise tax, which is inconsistent with the draft EAC Council Directive on Harmonisation of Excise Tax.

“Following a request from the Tax Policy and Tax Administration Sub-committee, the EAC Secretariat engaged IMF experts to support the determination of the EAC-wide minimum excise rates on alcohol, tobacco, non-alcoholic beverages and fossil fuel,” says a report by the EAC Sectoral Council on Finance and Economic Affairs dated May 2024 and seen by The EastAfrican.

“The IMF experts analysed the tax data submitted by the partner states and recommended a range of possible minimum rates for each product for consideration by partner states. The primary purpose of excise duty is to improve information in the market by having prices that accurately reflect their costs.”

In the approved EAC Domestic Tax Harmonisation Policy, partner states agreed to introduce EAC-wide minimum excise rates by type of goods and services, with regular adjustments and periodic realignment to take into account inflation and exchange rate movements.

IMF experts

Experts from the member states (Tax Policy and Tax Administration Subcommittee of Committee on Fiscal Affairs) with support from the IMF experts have developed a draft EAC Council Directives on harmonisation of excise tax.

The draft calls on partner states to levy excise tobacco products, alcoholic beverages, non-alcoholic beverages and fossil fuel, whether locally produced or imported.

“The meeting of Committee on Fiscal Affairs (CFA) that was held in Dar es salaam from 26th to 28th March 2024, was informed that the Tax Policy and Tax Administration Sub Committee had divergent views on the draft EAC Council Directive on Harmonisation of Excise Tax, particularly regarding to the proposed EAC minimum excise rates as well as the proposed time frame for removal of tax incentives for excise that are inconsistent with the principles of Article 7 of the draft Council Directive for harmonization of excise tax,” the report says.

The Council is expected to review the mandatory excise duty categories at least once every three years, or as determined by the Council.

In determining whether to add or remove a product from the mandatory excise categories, the Council will consider health issues, negative externality, environmental problems, social costs, luxury goods and revenue.

In line with draft Council directive, once adopted by the Council, partner states will progressively adopt the requirements of the directive over a period not exceeding five years from the commencement.

During discussions with the IMF experts last year, the EAC member states agreed that the prices of the targeted goods reflect the full cost (including cost of externalities) of production and consumption of such goods, and that appropriate excise rates be set based on the harmful content of those goods.

Excise rates

For alcohol, it was agreed that a minimum harmonised rate be set in dollars per litre of 100 percent alcohol content and, based on the IMF expert’s analysis of the data shared by the partner states, the experts suggested a range for the minimum rate.

For alcohol, the proposed range was $6 to $10 per litre of 100 percent alcohol, with the IMF recommended rate being $8. The partner states agreed to adopt the minimum rate of $6 per litre of 100 percent alcohol content.

With regard to excise duty on tobacco, it was suggested that a minimum harmonised rate be set at an amount of dollars per kilo, which applies to tobacco, cigarettes, cigars and other traditional tobacco products. It was agreed that this rate be used to apply risk-based taxation to other tobacco and nicotine products. 

The IMF experts suggested a range for the minimum rate for tobacco in the range of $0.04 to $0.08 per gramme of tobacco, with the recommended rate being $0.06.

Partner states had divergent views, with Uganda preferring to adopt the IMF-recommended rate of $0.06 per gramme, and Kenya, Burundi, Rwanda and South Sudan preferring $0.05 per gramme of tobacco. Tanzania preferred $ 0.014.

With regard to excise duty on non-alcoholic beverages with added sugar, the experts suggested a range from $0.0008 to $0.0012 per gramme of added sugar, with the recommended rate being $0.001.

Again, partner states had divergent views, with Kenya, Uganda, Burundi, Rwanda and South Sudan proposing to adopt the IMF-recommended rate of $0.001 per gramme of added sugar while Tanzania proposed $0.00043.

On excise duty on fossil fuel, there were proposed ranges for different fossil fuels, including $0.29 to $0.41 per litre of petrol, $0.26 to $0.82 per litre of diesel, $0.15 to $0.17 per litre of kerosene and $173.71 to $245.97 per tonne of coal.

The experts recommended $0.35 per litre of petrol, $0.38 per litre of diesel, $0.16 per litre of kerosene and $195.63 per tonne of coal.

Uganda, Rwanda, Kenya and South Sudan recommended $0.29 per litre of petrol, $0.26 per litre of diesel, $0.15 per litre of kerosene and $173.71 per tonne of coal.

Burundi preferred to maintain its current rates: $0.12 per litre of petrol, $ 0.11 per litre of diesel and $0.08 per litre of kerosene.

Tanzania noted that EAC partner states do not yet produce fossil fuels, neither do they trade in those products and, for this reason, proposed the removal fossil fuels from the list of mandatory excisable products.

Further, Kenya, Uganda, Rwanda, Burundi and South Sudan proposed to gradually remove tax incentives that are inconsistent with the principles of Article 7 of the draft EAC Council Directive for harmonisation of excise tax within five years.

Tanzania, on the other hand proposed to delete Article 7 from the draft Council Directive and suggested that all tax incentives be discussed in a broader forum in the context of harmonisation of investment regimes. Article 7 provides principles that will guide partner states in determining the framework for tax incentives.