2008 Budget: Private sector lobbies parliament, wants taxes reduced

Around this same period last year, the Private Sector Federation (PSF)—the umbrella organisation of all private businesses in Rwanda became furious when the Finance ministry (Minecofin), in the 2007 budget proposals, announced changes in the tax regime and had completely ignored it (PSF) in the entire drafting process.

Around this same period last year, the Private Sector Federation (PSF)—the umbrella organisation of all private businesses in Rwanda became furious when the Finance ministry (Minecofin), in the 2007 budget proposals, announced changes in the tax regime and had completely ignored it (PSF) in the entire drafting process.

The government had slapped an increase of 60 per cent excise duty on consumption of beer, 120 per cent on cigarette, and a new 10 per cent excise duty on consumption of airtime. It sparked off argument that the move contradicted with the ideals of the Private Public Partnership (PPP).

But in crafting 2008 budget, the ministry took no chances—it sought the federation’s input on the budget. The PSF, through its department of advocacy and institutions relations, responded in a 21-page position paper that hinges on three major areas; taxes, financial sector, public expenditure, and regional integration.

In parliament

On Friday November 2, the Finance and Economic Committee of the Lower Chamber of Parliament, a team from Minecofin, the PSF leadership and one private company Bralirwa (the only brewery in the country) discussed the Budget position paper.

The federation delegation comprised of Robert Bayigamba, the chairman of PSF, Faustin Mbundu PSF 1st vice president and Emmanuel Hategeka the PSF Secretary General (SG).

In his introductory remarks the federation president commended the Finance ministry’s action of seeking private sector views on the budget, observing that it is indicative of improved public private partnership.

He explained to parliamentarians and government officials know how the federation is better organised to address private sector challenges.

Taxes

Regarding taxes, he said the current personal income threshold for exempted income of Frw30,000 per month on Pay As You Earn (PAYE) too low to boost the purchasing power of the common people in Rwanda and support the growth of industries in Rwanda.

He proposed that Frw70,000 would be neutral but sufficient to stimulate people’s disposable income and industrial production—which will in turn boost tax revenues.

He further proposed to the house that medical insurance contributions by the employer on behalf of the employee, and contribution made by the employee to a health insurance company to a maximum 15 per cent should be excluded from the taxable income resulting from employment to encourage savings among the Rwandan people, and to further enhance their purchasing power.

VAT

He said taxpayers registered for VAT are disgruntled with colossal amount of business capital that gets held up in VAT refunds—A thing that constrains business cash flows and operations. 

He then proposed that government handles VAT refunds expeditiously to enable the smooth running of companies paying VAT to Rwanda Revenue Authority (RRA).   

Excise duty

The current excise duty on juices and lemonades is 39 per cent including locally processed ones. Hategeka said this has rendered local companies in this line of business quite uncompetitive.

He cited Uganda currently charging an excise duty of only 13 per cent on juices and lemonades. The private sector says the imposition of a high excise duty on lemonades like soda water and locally processed juices contradicts the national drive to add value to horticultural products.

He read: “In light of this, the business community in this sector calls on the government to consider the removal of this tax completely by zero rating it or at worst scenario reducing it to at most 10 per cent.”

Protectionisms

Bralirwa, the sole local producer of beers is not happy about excise duty increment of 60 per cent announced last year, moreover much of its raw materials are locally sourced.

On this, the federation SG proposed protectionism by introducing differential tax system on beers with imported beers (outside EAC and Comesa) attracting a higher rate than locally produced beers.

Rwanda’s excise duty rates rank among the highest in the Comesa and East African regions. This makes Rwandan producers less competitive. This may in turn slow down the growth of volumes produced and the government revenue growth.

RRA charges excise duty using ad-valorem (lampsum) tax system. While other EAC countries use specific tax system. The private sector prefers the later, and urges government to adopt it for especially alcohols, cigarette and on raw materials like sorghum, tobacco, sugar and maize.

Industrialists who import sugar for raw material purposes feel the surcharge of 25 per cent charged is so unfair and contradict with a waiver of 5 per cent on all imported raw materials.

They wonder why the government is rigid on the matter yet the local capacity for sugar production is still not sufficient to serve the local demand. Kabuye Sugar Works (KSW) is the only sugar factory in the country with very low production capacity to satisfy local demand.

“We request the government to remove the surcharge on sugar imported by different industries as a raw material considering that it already benefits from zero rate import duty.”

Tax laws

Referring to article 22 of law number 16/2005 of 18 August, 2005 on direct taxes on income, the SG said it provides for the non-deductible expenses but leaves out some key areas.

The article states in part: “any interest expense incurred by a company, other than banks and insurance companies, on loans and advances which are more than four times of the company’s equity net of reserves is not a deductible expense”.

He said the list of exceptions was unfairly narrowed down to the exclusion of other worthy and deserving sectors, citing the coffee sector. He request that the sector to be included on the exception list.

He observed that some tax laws are introduced and implemented without the provision of enough clarification to the tax payers.

He called upon government to do much more in the area of tax sensitisation and awareness campaigns by providing timely and adequate clarifications on newly introduced tax laws.

In the government’s decentralisation programme, local administration organs have imposed their taxes outside the tax laws.

In fulfilment of the pledge made by the Minister of Finance during the launch of tax payers’ day 2007, the federation SG called for expeditious rectification of the problem.

Referring to tax law No. 16/2005 of 18th August 2005 on direct taxes on income, he singled out that the fact that: the cost of acquisition or construction and the cost of refining, rehabilitation, reconstruction of buildings, equipment and plant are depreciated annually, each on its own, on the basis of the rate of depreciation which is equivalent to 5 per cent of the cost price.

He pointed out that this approach fails to distinguish between buildings and plant and equipment which otherwise do not fall in the same category.

“Due to obsolescence associated with capacity and technological changes, plant and equipment can not be depreciated over a 20 year period at 5 per cent.”

He called on the government to make this distinction in the law and apply a rate equivalent to at least 10 per cent over 10 years to plant and equipment.

More financing businesses

Majority of businesses in Rwanda are small and medium enterprises. They are estimated by the PSF to be about 80 per cent.

These businesses are challenged by lack of access to low cost and long term business finance particularly for export. This puts them in a lesser competitive position in the region.

The government injects Frw3 billion annually in the Development Bank (BRD) to provide financial support to businesses in priority sectors; tourism, infrastructure, ICT and agriculture.

The federation proposes an increment of what the government injects in BRD to be able to finance more businesses at a much affordable terms.

Leasing—is a financing mechanism that allows a business (Lessee) to use an asset owned by another (the lessor) in exchange for specified periodic payments without necessarily assuming ownership of the asset.

The problem with it is that it requires collateral that most Rwandan business people lack. The PSF SG said that financial institutions providing the service wish the tax law to provide for lessors being allowed to claim capital allowances as the Lessees should claim the rentals as an expense.

“In order to attract international lessors that could bring competitiveness to the sector certain tax concessions need to be addressed.”

He further suggested that the Income Tax Act should explicitly allow the deduction of expenditure incurred by a lessee in the case of a lease or similar transaction in accordance with leasing rules issued under the Act.

On mortgaging, he pointed out that registration fee (2.25 per cent) charged on all collateral before a loan is advanced is prohibitive and should be eliminated or charged as a specific charge.  

Land

Hategeka called upon the government to expedite land registration issues to enable land owners to invest with confidence and to also enable them to use land as bank collateral.

Land ownership and registration issues are very crucial for investors and the business community in Rwanda and should be handled with the due importance and care they deserve.

In this regard, the government is requested to consider creating a land bank by designating pieces of land for key targeted sectors that have been prioritised, such as, horticulture, floriculture, sericulture, bamboo, etc.   

Financial bail out

It is alleged that Simtel recently suffered a big loss of about 90 per cent. In the process, banks having in shares have suffered related losses as well. The federation urges government to intervene in addressing the issue of Simtel.

“This eventually would have tax implications and the credibility of the financial sector of Rwanda,” Hateka said.

He added that government should save Simtel from liquidation by taking up appropriate measures including subsidies provision to revive the company.

Loans

It is difficult to acquire long term loans in Rwanda. As Rwanda settles in EAC businessmen are looking at alternative sources of long-tem borrowing abroad. But this may not be easy due to complexities associated with it.

Though PSF, businessmen demand for mechanisms to facilitate borrowing from abroad by waiving taxes that are currently imposed on loans borrowed from abroad.

Imposing 15 per cent withholding tax on interest on borrowed funds increases banks’ cost of funds which would in turn translate into increase in lending rates that banks charge to their customers. The SG gave an example of  European Union (EU) that has an agreement with various African Governments including Rwanda (the Cotonou Agreement) which makes it possible for interests from EU agencies (The European Development Bank – EIB for example) to be paid without any taxes.

The argument here is that the same principle should be applied on loans obtained from other Development Finance Institutions – DFIs.

Cost of doing business

The cost of doing business in Rwanda has continued to rise in the last couple of years. For instance, for the past three (3) years there has not been any improvement in power supply.

In the last three years electricity and water charges have increased by about 180 per cent. This is rendering the private sector less competitive in the region. The federation calls for urgent and appropriate measures to address the situation.

They propose; expediting public investment in power generation but also invest in power distribution to improve access to electricity; reduction in power tariffs per unit and also split in three categories—home consumption, consumption by small industries and consumption by big industries to boost the competitiveness of local industry the billing system.

Tax waivers

Hategeka strongly asked the government to consider a tax waiver on heavy fuel oils which are used as raw materials but continue to attract import duty and tax.

Heavy fuel oil attracts 6 per cent import duty and an additional 4 per cent which is paid for storage and 18 per cent VAT.

He said this should be revisited so that import duty is waived for this industrial raw material and the storage charges revisited in favour of specific service charge.

The private sector also proposed a tax waiver on all innovative energy saving devices such as ‘inverters’ used in tea factories which have the capacity to save about 50 per cent of energy, and industrial appliances that could use peat energy.

“Incentives should be given to industries that produce environmentally friendly sources of energy such as solar power, biomass and wind energy.

Infrastructure

The federation commended the government for improvement in road surfacing and maintenance in Kigali City.

However, they propose that measures should be taken to further continue improving the road network countrywide to support trade and commerce.

He suggested that government allocates more resources to improve import routes between the capital and the borders with neighboring countries such as Byumba – Gatuna; feeder roads from major agricultural areas to the main export road; rural roads leading to important tourist sites such as national parks.

Investment incentives

On investment incentives to attract investors especially to rural areas, the federation said that the threshold for investor incentives is still high for local investors and suggested it be revised to take on board investors in value addition to the tune of $50,000 capital outlay.

Whereas it is generally known that Rwanda is faced with big human resource gaps, the government is slow to soften on the issue of work permits and resident visas.

The federation suggests that the charges of Frw400,000 per annum should be extended to cover a longer period of at least five years.

“The charge should also be paid once to avoid the hassle of having to renew permits every year”.

Liquidate the Post Office

Claims have been reported where some government parastatals, such as the Post Office, have 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.

In this regard, the private sector requests the government to take appropriate measures to address this issue, including the consideration to provide budget support or liquidating such non-performing government parastatals.    

Price fluctuations

The federation further suggests that the 2008 budget should target rural areas and help farmers to manage commodity price fluctuations and for agri-businesses to add value to their produce.

That, this will certainly, ensure more firm profitability and competitiveness in local and international markets. The SG told parliamentarians that the government should put in place a fund to provide subsidies for affluent treatment in the “Hides and Skins” sector. 

He also said government should put in place land development funds for new niche products such as, bamboo, sericulture and flowers.  

Export strategy

Export promotion is vital for the economic development of Rwanda – this is well known by all stakeholders and at all levels and as such practical measures must be taken accordingly.

Much so far has been done by the government and more initiatives are in the pipeline, but the private sector calls on the government to; revisit the national export strategy with a view to prioritise new niche sectors; to provide special facilitation to some lucrative exports to take advantage of foreign markets.

In an effort to encourage and promote exports from Rwanda to foreign market, the private sector intermediate products imported to Rwanda as raw materials such “dye products” used in handcrafts, should be exempted from import duties and be zero rated.

Regional integration

On regional integration, the private sector calls on government to expedite the implementation of the single border post and payments of taxes based on Free On Board (FOB) Mombasa or Dar El Salaam—a very important aspect to consider, given the fact that Rwanda is land locked and the transport costs account for over 40 per cent of the cost of goods.

Right hand vehicles

The ban on importing right hand drive vehicles continues to hurt the business community especially for heavy trucks and other heavy duty vehicles which are significantly cheaper than left hand drive cars that are only allowed in Rwanda.

Considering that Rwanda has joined the EAC and will not ban EAC registered right hand drive vehicles to enter and compete on the Rwanda market, the private sector calls on government to revisit the law expeditiously.

Parliamentarians’ view

Hon. Gatabazi Jean Baptiste expressed his dissatisfaction with the businessmen for their monopolistic behaviors and failure to cite any business that has failed due to high taxes.

On the issue of cigarettes and tobacco parliamentarians said BAT should be taxed like a foreign company since it ceased its operations in Rwanda.

The law makers also demanded to know the federation’s stand on the ever increasing prices of cement, sugar and fuel.

What empirical evidence is there to convince the government to go in for specific tax other than advolorem tax system?

In response, Hategeka said the problem of prices of cement is something to do with low capacity to produce locally and it is a regional challenge.

The federation chairman Mr. Bayigamba said deciding on specific tax system was after studies and consultations in the region (EAC).

He however said the federation has no reliable statistics on trend of businesses in the country, but was quick to add that the recent census done by the federation would provide factual information on the issue.

One MP suggested that the proposals highlighted in the position paper are pertinent but could not be thoroughly discussed during that forum. He advised the house to discuss it the position paper in other plenary sessions.

Government’s position

Finally, the Minecofin SG and Secretary to the Treasury John Rwangombwa gave a precise statement, appreciating PSF for the proposals in position paper.

He promised that further discussions on the paper would be held with the budget department to come up with concrete resolutions before the year ends.

Ends

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