Price Water House Coopers (PWC), a global consultancy firm has said the removal of Value Added Tax (VAT) on petroleum products and mobile handsets demonstrates the government’s progress in harmonizing its laws with those of other EAC countries.
In his maiden budget speech last week, John Rwangombwa the Finance Minister announced two major VAT proposals to be adopted by the government in the new financial year 2010/11.
Rwangombwa proposed the removal of VAT on mobile handsets and import duty on SIM cards to increase penetration of telecommunication services to the lower segments of the population.
He also proposed removal of VAT on petroleum products while the specific tax of Rwf250 per litre of diesel and Rwf283 for petrol will replace the current ad valorem excise duty rate.
“The proposed amendments demonstrate the Governments commitment to harmonize its tax laws with other EAC Partner States,” PWC says in its budget analysis report published this week.
However PWC warns that the proposed VAT exemption may result in additional VAT costs to stakeholders in the petroleum sector due to non- recoverable VAT.
While the removal of VAT on mobile handsets will make handsets cheaper, PWC says 3 percent increase in excise duty on airtime is likely to have a negative impact.
“The mobile handset suppliers may be unable to claim all their input VAT, and as a result may attempt to pass on this additional cost to their customers,” the firm said in a statement.
In the new financial year government intends to increase excise duty on airtime from 5 percent to 8percent in order to align with taxes in the EAC.
“To better align with taxes in the EAC we will continue to progressively raise excise duty on airtime, this time increasing it from 5percent to 8 percent which will generate an additional Rwf 2 billion,” Rwangombwa said.
The firm suggests that an alternative proposal toward making mobile handsets more affordable would have been to zero rate the items.
“This would allow suppliers to recover all the input VAT related to the supply of the product and minimize the additional cost arising from non –recoverable VAT,” PWC says.
However despite the increment, PWC observes that excise duty on airtime in Rwanda remains the lowest within the region.
This is compared to the 10 percent charged in Kenya and Tanzania while Uganda charges 12 percent.
“However, the Minister took note of this and suggested that the rate will continue to be raised progressively to align the taxes within the EAC region,” the firm says.
“The import duty on SIM cards is likely to be removed. This is unlikely to have a major impact since the price of SIM cards is normally insignificant,” PWC will officially launch its services in the country this week on Thursday.