East African Community (EAC) Secretariat has settled on a 35 percent duty on imported finished products as part of a regional tax reform programme seeking to bolster intra-regional trade, industrial production, tax revenue and employment creation in the six-member bloc.
This is after an in-depth analysis by the Secretariat showed that the region will achieve the greatest economic benefits if the maximum Common External Tariff (CET) on imported finished products is set at a rate of 35 percent instead of 30 or 33 percent.
The Secretariat’s recommendation is a landmark development in stopping a protracted controversy over implementation of the four-band revised CET, in which member states are holding divergent views on whether the rate on the 462 tariff lines should be fixed at 30 percent, 33 percent or 35 percent.
Among the tariff lines in this 4th band include cotton/textiles, iron & steel, edible oil, chemicals, leather & leather products and automobiles.
According to the report of the analysis seen by The EastAfrican, introducing 35 percent duty on imported finished products has the potential of growing intra-EAC trade by $18.9 million compared with $13.03 million and $16.51 million if the rate was set at 30 percent and 33 percent respectively.
In addition, the region’s industrial production will increase by 0.04 percent ($12.1 million) if the duty was fixed at 35 percent and rise by 0.02 percent ($7.7 million) and 0.03 percent ($10.3 million) if the rate was set at 30 percent and 33 percent respectively.
Mixed tariff structure
East Africa’s tax revenues have the potential of increasing by 5.5 percent on an import duty rate of 35 percent and 3.9 percent and 4.9 percent if the duty is set at a rate of 30 percent and 33 percent respectively.
In terms of regional employment the report shows that if a duty of 35 percent is imposed on finished products imported into the region then an additional 6,781 jobs will be created while an extra 5,055 jobs and 6,089 jobs will be created if the rate is set at 30 percent and 33 percent respectively.
According to the report, which was presented to the EAC Extra-Ordinary Meeting of the Sectoral Council of ministers on Trade, Industry, Finance and Investment (SCTIFI) on February 18 the maximum tariff of 35 percent eliminates the use of Stay of Applications (SOAs), and adoption of mixed Customs tariff structure.
It also ensures that the protection embedded in the 35 percent tariff has the potential of increasing investment, enhancing technologies and productivity in response to better market opportunities within the region through intra-regional trade.
“From the simulation findings it is recommended that a maximum CET of 35 percent be adopted for products falling under the fourth band (462 tariff lines as per the EAC CET 2017 version,” according to the report
“Regularising a rate of 35 percent would reduce or eliminate the frequent use of Stay of Applications (SOAs) or mixed tariff structure. The EAC has significant unexploited comparative advantage in the products in the 4th Band.”
The EAC partner states are expected to review the analysis undertaken by the Secretariat on the proposed maximum CET rate and submit comments to the Secretariat by March 15 to allow for the implementation of the delayed revised CET by July 1.
‘Sensitive Items List’
According to the report Tanzania and Kenya have proposed a rate of 33 percent while Uganda and Burundi maintained their positions of 35 percent and 30 percent respectively.
Initially, Kenya had proposed a maximum rate of 30 percent before changing tune to 35 percent and eventually to 33.
Currently, finished goods imported into the regional bloc attract a duty of 25 per cent, intermediate goods (10 per cent) and raw materials (0 per cent) under the EAC’s existing three-band tariff structure, which came into effect in January 1 2005.
In addition, there is a list of sensitive items such as sugar, wheat, rice and milk which attract higher duty of above 25 per cent with an aim of protecting local industries from competition.
The member states have agreed to review the bloc’s CET by replacement it with a new tariff structure of four bands.
The new four-band tariff structure include 0 per cent import duty for raw materials and capital goods, 10 per cent import duty for intermediate products not available in the EAC region and 25 percent import duty for intermediate products available in the EAC region.
According to the report the rationale of the fourth band is to support development through increased intra-regional trade and continental markets diversification of product base and building on informal sector potential. It notes that the proposed maximum CET rate of 35 percent has the potential of increasing investment, enhancing technologies and productivity in response to better market opportunities within the EAC region through increased intra-regional trade.
Kenya’s manufacturing sector agrees with the fourth band tariff structure but prefers a 35 percent duty on finished products.
On the other hand, the East African Business Council, the region’s top organ for private sector business associations has proposed a fourth bad with a rate of 32.5 percent for finished products.