Following its official admission into the East African Community (EAC) on June 17, 2007, Rwanda will officially join the region’s Customs Union today, implementing a lower external tariff whilst expecting to incur a significant amount of tax revenue losses.
Implementation of the Customs Union means that the country will adopt a three band duty rate structure, which will impose an import duty of 25 percent on finished goods, intermediate products 10 percent and zero percent on raw materials and capital equipment.
Finished goods entering Rwanda have been attracting 30 percent, intermediate products 15 percent, raw materials five percent and zero percent for capital goods.
The above taxes have been contributing above 30 percent of the total revenue collections.
James Musoni, Minister of Finance and Economic Planning in his 2009/10 budget speech said that the treasury will incur a financial loss of Rwf12.4 billion as government implements a lower common external tariff.
In addition to the above anticipated loss, exemptions on sensitive goods and computation of taxes based on Cost, Insurance and Freight (CIF) of the port of first entry into the community will increase Rwanda’s fiscal revenue loss.
Considering both trade and trade-related activities, Rwanda Revenue Authority (RRA) says that the loss based on changing effective tariffs represents 12 percent.
“However, in relation to Gross Domestic Product (GDP) the losses represent relatively small declines…estimated at 1.4 percent,” the authority’s position paper on Rwanda’s accession into the Customs Union reads in part.
However the tax body says that it will mitigate this fiscal revenue loss by intensifying recruitment of tax payers since government will have to heavily rely on domestic taxes.
Celestin Bumbakare, the Commissioner for Domestic Taxes said that RRA will use the Block Management System (BMS) to recruit more tax payers.
“To mitigate the loss, we will intensify efforts to mobilise government revenue using the Block Management system. We are also trying to reduce the size of the informal sector to increase the tax net,” he said.
The system targets small taxpayers by demarcating the areas in which they conduct businesses into sizeable and manageable areas called blocks.
Bumbakare said the new BMS system will re-enforce tax compliance as it will enable the tax body to reach mostly small and medium businesses that are not yet formally registered.
According to Bumbakare, the benefits of the Customs Union to the Rwandan community outweigh the anticipated government’s anticipated revenue losses.
He argued that tax payers’ local purchasing power will increase due to reduced prices resulting from calculation of taxes at the point of first entry into the community and eliminate internal tariffs.
“As more is purchased, tax payers will be able to make profit and pay tax,” he said, pointing out that as consumption increases, taxes levied on such goods such as Value Added Tax (VAT) and Excise Duty will eventually increase.
With implementation of EAC customs Union, Rwanda will also retain its prohibited and restricted goods.
It also has a new list of EAC exemptions including seeds for sowing, fish, crustaceans and mollusc, speed governors and preparations for cleaning dairy apparatus.
It is envisaged that EAC member states will enter into a fully fledged Customs Union in 2011.