External tariffs on finished goods will be lowered to 25 percent from the current levy of 30 percent while intermediate goods will be levied at 10 percent from the current 15 percent.
The treasury will incur a financial loss of Rwf12.4 billion in taxes this year as government implements the East African Customs Union, according to the Ministry of Finance.
Since Rwanda was officially admitted into the EAC in June 2007, a host of policy reforms including alignment of its budget calendar to that of other EAC member states, have been implanted.
The country will also align with the EAC Customs Union in July this year.
“A number of policy measures will be implemented in order to facilitate trade but also to fast track economic integration,” said James Musoni, the Minister of Finance and Economic Planning.
While presenting the 2009 /10 Budgetary Framework Paper to both chambers of Parliament recently, Musoni said that implementation of the Customs Union will entail applying a lower common external tariff.
Starting from July, external tariffs on finished goods will be lowered to 25 percent from the current levy of 30 percent while intermediate goods will be levied at 10 percent from the current 15 percent.
External tariffs on both capital goods and raw materials will have a levy of zero percent. The current tax on raw materials is zero percent and five percent on capital goods.
The new rates are good news to Rwandan importers who will view it as an important stimulus to consumer spending. It will however be more significant to the consuming public, which pays higher prices for imported goods.
It is also believed that local consumers are likely to boost their spending as the change in tax liabilities is expected to affect their take-home pay.
Among the policies to be implanted also include removal of surcharge on sugar to harmonise with the regional practices.
“This will cost government about Rwf2.2 billion for the financial year 2009/10,” Musoni said.
Slashing of the surcharge on sugar will possibly increase its supply on the market and probably lower its cost which is currently at Rwf850.
However, the change of the tax rates is not good for government which has forecasted that domestic resources are likely to remain flat as a percentage of Gross Domestic Product (GDP) at around 12 percent.
This is attributed to the economic downturn, which will affect the business activities and Rwanda’s tax base.
Rwanda’s expenditures are also expected to be constrained by limited resources. In order to generate efficiency saving in the budget, government plans to rationalize expenditures in goods.
Musoni said: “This implies cutting costs for some recurrent expenditure. The policy objective is to have sufficient domestic resources to cover at least recurrent spending by 2012.”
Government also plans to provide fiscal incentives in form of exemptions to alternative sources of energy including Liquefied Petroleum Gas (LPG) and Energy Saving Devices.
According to the Budget Framework Paper, fuel taxation will also be changed from the Ad-valorem method to the specific method.
Change in the taxation policy is said to be in line with government’s policy to align with the EAC member states.
The pressure on government spending and resources could have been eased by Rwanda Revenue Authority’s (RRA) good performance in the first quarter of 2009.
The tax body said that it collected Rwf95.9 billion of tax and non-tax revenues in the first quarter of 2009 compared to last year’s Rwf71.8 billion in the same period.
Mary Baine, RRA’s Commissioner General said that the benefits of the regional Customs Union are better than the Rwf12.4 billion tax revenue forfeited by government
“We are looking accessing a market of 120 million people compared to 9 million in Rwanda.”