EAC plan to raise revenue from fourth tax band faces headwinds
Sunday July 09 2023
Cargo trucks from Tanzania ferrying tons of maize await offloading outside the Mombasa Maize Millers Factory in Kenya. PHOTO | KEVIN ODIT | NMG
East Africa’s plan to generate an additional $18.9 million worth of intra-regional trade from the revised Common External Tariffs (CET) is facing headwinds as partner states seek preferential tax treatment, putting implementation of the four-band tariff structure in jeopardy.
Last year, the EAC Secretariat underscored the enforcement of the 35 percent duty on finished products imported into the region, under a new tariff structure that took effect on July 1, 2022.
The secretariat through a report dated January 2022 analysing the potential benefits of the fourth band argued that the maximum tariff of 35 percent will eliminate frequent use of stay of applications (SOAs) by partner states by adoption of mixed customs tariff structure and help promote intra-regional trade, investments and employment creation.
Read: Easier tariffs increase trade across EAC
However, a review of an EAC gazette notice dated June 30, 2023 shows how virtually all EAC member states have sought preferential tax treatment through stays of applications and exemptions on several finished and sensitive items.
These products include vitenge, ceramic tiles, sugar, bread, toys, processed coffee and tea, ginger, Jams, marmalades, jellies, sausages, chicken, meat, peanut butter, bread spreads, butter and other fats and oils derived from milk.
Others are mineral water, toilet paper, exercise books, cooked potatoes, fresh or chilled tomatoes and honey.
Four structure
The four-band tariff structure includes include zero percent import duty for raw materials and capital goods, 10 percent import duty for intermediate products not available in the EAC region, 25 percent import duty for intermediate products available in the EAC region and 35 percent duty on imported finished products.
Sensitive items attract a duty higher than 35 percent.
The revised CET was expected to harmonise taxes on finished and sensitive items to avoid frequent requests for tax exemptions and stay of applications by member states, which have been blamed for stifling intra-regional trade.
The EAC Council of Ministers at a meeting in Arusha in September 2016 decried the frequent stays of applications by partner states, arguing that they create distortion and erode the harmonisation of the tariff regime.
Read: Private sector pushes harmonised taxation to ease cost of business
Boosting trade
According to the EAC Secretariat, the 35 percent duty on finished products has the potential of growing intra-EAC trade by $18.9 million, adding 6,781 jobs and growing the region’s tax revenues by 5.5 percent.
“The overall impact of the maximum CET rate will lead to increased intra-regional trade leading to greater economic growth and enhanced regional integration for all EAC partner states,” the EAC said.
“With the changing economic structures in the region, the three-band tariff structure could not sustain expansion of value addition to higher levels, hence persistent applications of SOAs to complement the existing use of DRS (duty remission schemes) in promoting industrialisation.”
Read: EAC to digitise tariffs for imported goods
The revision of the EAC three- band structure had the overall objective of realigning the tariff structure and rates to respond to global changes in trade and the current economic environment in the EAC by safeguarding revenues and eliminating use of SOAs to cure restrictions embedded within the three-band CET structure.
The revised tariff structure aims at promoting intra and extra regional trade through further liberalisation and deepening of the regional integration agenda.
Other benefits include creation of employment opportunities, welfare improvement, and expansion of trade and investment as part of building the supply capacities and improving on competitiveness.