Local manufacturers have called for a review of the East African Community (EAC) common external tariff (CET) law, arguing that it does not support production and is making them less competitive. The CET is a uniform tax adopted by a common market and is often assessed on imports from countries outside the market.
The local industrialists say the tax criteria, especially on the so called sensitive list that includes items like brown rice, hard wheat, yogurt, juggery, primary cells and primary batteries, and kitenge cloth, among others, needs re-evaluation.
Alphonse Kwizera, a consultant at the Rwanda Association of Manufacturers (RAM), said there are inconsistencies in the rates especially on intermediate and final products, adding that some of the raw materials are taxed as finished products,” he said. He added that some finished products are often granted exemptions while some of the raw materials used to make them are taxed.
“There is need to align the CET with national and regional economic development policies, including the EAC industrialisation policy, to make them more supportive,” he said.
The current EAC CET has a three-band tariff structure on raw materials and capital goods, intermediate goods and finished goods.
Under the common market protocol, EAC member states agreed to eliminate tariffs based on the principle of asymmetry and set a three-band common external tariff (CET) zero rated for raw materials, capital goods, agricultural inputs, certain medicines and certain medical equipment.
However, intermediate goods attract a 10 per cent levy, while finished goods pay 25 per cent tax.
Despite this, local manufacturers say the current CET framework does not support production in sectors, like textiles, iron and steel and agro-processing (for fresh juice producers), and are now calling for its amendment to make it more supportive and efficient.
Under the customs union, levies for products on the sensitive list are higher than the 25 per cent maximum rate for non-sensitive products. Though there are maximum rates, where the “actual applied” tariffs are lower and varied due to the system of “duty remissions” that permits states to reduce or scrap tariffs under the Customs Union Protocol.
However, Garth Frazer, an associate professor of business economics at University of Toronto, said there is still room for improvement.
According to the don, capital goods and intermediate goods benefit the most from these tax reductions.
This is consistent with reinforcing a progressive tariff structure, with the highest tariff rates on consumption goods”.
“Some major exceptions to this tariff structure are the items on the sensitive items list, with tariff rates as high as 100 per cent (for sugar). Despite the exceptions of the sensitive list, on average the CET lowered import tariffs on goods from outside the EAC (as well as within the EAC) coming into Rwanda,” he said.
He said this could affect exports in a couple of ways, including shifting resources from import-competing sectors into both domestically-oriented and export-oriented sectors, adding that it also reduces the cost of intermediate inputs for all producers, including exporters.
Rajesh Shah, a tax expert at PricewaterhouseCoopers (PwC), urged the EAC to focus the review on key areas, including procedures and administration, classification rules and definitions and remission schemes.
He, however, noted that tax harmonisation need not necessarily mean uniform tax rates and laws, but in processes that will enable the EAC partner states to eliminate barriers that hamper the free movement of goods, services and capital, and to promote investment within the region.