The beat for next year’s budget is live and high among businessmen as its in the final stages of the drafting process. It will be presented to parliament and public in November, becoming effective at the start of the new year.
The process last year was a big surprise to the private sector in Rwanda.
The tobacco, brewery and telecommunications companies were caught off guard when the government slapped an increment of 120 per cent Excise duty on cigarettes, 60 per cent on beer and 10 per cent on airtime.
The businessmen, through their umbrella organisation, the Private Sector Federation (PSF), expressed dissatisfaction to the Finance Ministry on the budget drafting procedures.
John Rwangombwa, the Secretary General of the Finance Ministry said this year, the PSF has been consulted.
The Finance ministry has already received a position paper articulating the businessmen’s concerns on the 2008 budget.
In a twenty-one page PSF position paper, compiled by the federation’s departments (trade and regional integration and advocacy and institution relations), concerns on the budget stem from four major areas.
These are: tax related issues, financial sector issues, public expenditure focus and regional integration issues.
On the businessmen’s tax worries, Rwangombwa says: “I cannot promise any changes for now, perhaps next year.
There are studies that are going on about the impact of Rwanda joining East African Community (EAC) on tax regime, a study on how to sensibly wide the taxable base, and the study on strengthening the Rwanda Revenue Authority (RRA) administration.
No amendments can be done until the studies are finished.”
Among the tax issues raised in the position paper are personal income tax.
The argument is that the economy has become more monetised, disposable income has increased, and poverty levels have improved.
The current income of Frw30,000 per month on Pay As You Earn (PAYE) is too low to boost the purchasing power of the common man in Rwanda and support the growth of industries in Rwanda. Similarly, a very low threshold comes with heavy tax administration costs. Businessmen, therefore, have requested the government to revise the PAYE exemption threshold to neutralise revenue but remain sufficient to stimulate industrial production which will in turn boost tax revenues.
The private sector estimates Frw70,000 would be a good starting point.
Another area of major concern is medical insurance contributions.
Contributors propose an effort to encourage savings among Rwandans and to further enhance their purchasing power, certain expenses such as insurance contributions should be tax deductible.
In this regard, payments such as medical insurance contributions made by the employer on behalf of the employee, and contributions made by the employee to a health insurance company (to a maximum of 15 per cent of the employee’s income with a maximum Frw1.2 million per year), should be excluded from the taxable income resulting from employment.
VAT registered businesses have a problem with RRA.
They say a large amount of business capital is held up in VAT refunds, thereby constraining their cash flows and operations.
Manufacturers claim the current excise duty of 39 per cent on juices and lemonades including those locally processed, makes them uncompetitive in the EAC.
The rate is prohibitive even in comparison with the regional situation which would make Rwanda a less attractive investment destination.
Brewers are still upset with the 60 per cent excise duty, which makes them less competitive, especially on locally produced beers that consume local raw materials.
They propose that in order to encourage local production, a differential tax system applied on imported beers (outside EAC and Comesa) with attract a higher rate than locally produced beers.
Rwanda is far away from being self sufficient in sugar production. Kabuye Sugar Works, the only sugar factory in the country, supplies only 13 per cent of the total local demand.
The rest is imported.
Manufacturers claim the surcharge of 25 per cent on sugar is still levied even for sugar imported as a raw material for industrial purposes.
Tobacco industries claim the ad-valorem tax regime for cigarette and tobacco products is not encouraging the industry to grow.
They prefer specific tax to an ad-valorem tax regime.
Although RRA has embarked on campaigns to educate the public on taxes, the public still says tax laws are introduced and implemented without enough clarification by the tax payers.
Tax payers may not complain about a certain tax, but concerns have been made about the manner in which certain taxes have been introduced, their rationale and main purpose.
In this regard, RRA is requested to do much more in the area of tax sensitisation and awareness campaigns by providing timely and adequate clarifications on newly introduced tax laws. Otherwise, RRA risks violating the canon of clarity.
RRA’s Director of Taxpayer’s Services, Gerald Nkusi Mukubu, acknowledges these concerns that were also raised by the Chairman of PSF, Robert Bayigamba (in his speech during this year’s taxpayer’s day).
He says committees are now in place and studies are being conducted to address the concerns.
Taxpayers say cases where taxes are imposed outside the tax laws should be set right as stated in the pledge made by the Minister of Finance in his speech during this year’s tax payers’ day.
2008 budget should address…
The businessmen feel the budget should address the lack of access to low cost and long term business finances, particularly for exports.
This is a major set back to the competitiveness of Rwanda’s firms.
Government injects Frw3 billion per year in Rwanda Development bank (BRD) to finance strategic priority areas like tourism, ICT, agriculture and infrastructure. The amount should perhaps be increased.
Power supply still poses a big threat to the growth of industries in Rwanda.
Statistics obtained from PSF indicates for the last three years, electricity and water charges have increased by about 180 per cent. This is causing the Rwanda private sector to be less competitive compared to the region.
Businessmen hope the budget addresses public investment in power generation, but also investment in power distribution, to improve access to electricity.
Claims have reported the Post Office has taken more than six months to pay their suppliers from the private sector.
This hurts the business community and discourages private sector development in Rwanda.
Suppliers want the budget to address the issue of big internal debts and also consider liquidating the non-performing government businesses.
Farmers have continued to suffer price fluctuations and inflation.
They want the budget to target rural areas and help them manage commodity price fluctuations to enhance agri-businesses and add value to their produce.
Land ownership and registration issues are very critical in attracting investments and to the existing business community in Rwanda.
Although PSF commends the government for efforts related to land reforms in Rwanda, it requests the creation of a land bank.
Rwanda is a landlocked country, making efficient transfer of exports and imports the top priority.
The various Non-Tariff Barriers that characterize the Northern and Central Corridors are a big problem to businesses.
Traders hope the budget suggests ways of accelerating the implementation of the single border post and payments of taxes based on the Free On Board (FOB) Mombassa or Dar es Salaam .
Also, accelerating the execution of the regional customs bond guarantee will reduce double charges to importers.
Ban on right hand drive vehicles
on Finally, arguments have continued with the recent ban of Right Hand Drive (RHD) vehicles by the Infrastructure Ministry.
Transport, crucial to trade, has suffered in Rwanda, especially heavy trucks and other heavy duty vehicles.
Left Hand Drive (LHD) vehicles, which the government recommends, are much more expensive compared to RHD and not as easy to find on the market.
If Rwanda joined the EAC and will not ban EAC-registered RHD vehicles to enter and compete on the Rwanda market, this will significantly penalize the Rwandan truck owners by putting them in an uncompetitive position.
Foreign registered vehicle companies owned by Rwandan entrepreneurs will flourish, which negatively impacts on the federal revenue and budget. Traders are looking forward to this banned in next year’s budget.
Rwandans are also wondering when the EAC requirement of harmonising the Rwandan budget with other member states will be adhered to.
In response, Rwangombwa said designing the roadmap to reading the budget the same day as other member states will start next year.
He says he is optimistic the 2009 budget will be read on the same day with EAC member states in June, instead of the end of the year.