David Mugabe
4 November 2009
Kampala — Trade within the East African Community has grown by over 49% since the commencement of the East African Customs Union in 2005, a study has revealed.
Inflows of foreign direct investment (FDI) almost tripled from $692m in 2002 to $1,763m in 2007. During this time, Uganda and Tanzania have consistently attracted the highest inflows.
This analysis is contained in a study report commissioned by the EAC Secretariat titled: "An evaluation of the implementation and impact of the East African Community Customs Union." The study released last Friday looks at the three states of Uganda, Kenya and Tanzania because the other two states of Rwanda and Burundi only joined the union in July 2009.
The customs union came into force in January 2005. The arrangement was that during this transitional time, Uganda and Tanzania would maintain internal tariffs on selected imports from Kenya to be removed gradually in five years because of Kenya's superior manufacturing sector.
A fully fledged customs union starts in two months time on January 2010.
An analysis of the growth of exports for the three countries before and after the commencement of the union contained in the research adds credence to the argument about the benefits of the union and dispels the myths of integration.
Uganda's exports to the region for instance grew significantly in the years before 2003-2004 but especially after the launch of the Customs Union in 2005. Exports rose from $144.8m in 2005 to $274.8m in 2007 growing at an annual average of 16% (or $43.3m).
A customs union opens up intra-regional trade in goods, basing on mutually beneficial trade agreements among the partner states. Therefore goods originating from one partner state to another will circulate freely without incurring any duties. This in turn spurs business efficiencies that allow for greater trade growth.
The impact of a fully fledged customs union in the EAC is that territorial customs borders will shift to the borders between EAC and third countries and goods entering the union shall be subjected to customs control.
What is evident is that despite general fears across partner states outside Kenya previously that the elimination of internal tariffs would lead to reductions in revenue, there has been an upward trend in revenue collections.
The demystification of these fears has been through partner countries having to reorganise their tax administrations, simplify tax laws, improve staff competences and apply more relevant technological innovations like the online service at the Uganda Revenue Authority.
It also means that the realities of an open market where the unsophisticated, less skilled pit themselves against the very best has its rewards. This is by re-adjusting to the shocking realities that you either catch up or close shop.
For Uganda still, while exports have been growing, they have not been even.
"Over the years, the main export destinations have been Kenya and Rwanda. Even then, exports to Rwanda have been declining and started to grow in 2002. This means there was a lot of dependence on the Kenyan market as the export destination," says the report compiled by three consultants from the region.
The study notes a significant improvement for Uganda in the trend after the launch of the customs union in 2005.
"While Kenya is still in the lead, starting with 2006, there was a sharp increase of exports to all the four countries," reads the report.
The impact of the union on Kenya reveals that the value of import duties increased from $274m in 2001 to $408.8m in 2006. Although this growth in revenue is attributed to several factors like improved tax administration, electronic tax registers as well as increased trading activities. There was also increased trading activities with the rest of the world following the tariff reductions initially averaging 35% for Kenya, says the report.
During 2007, Kenya's total exports to the partner states were 22% while imports from them stood at a mere 1%.
This perhaps highlights the disparity in the ability of the rest of EAC to export to Kenya.
Uganda is still the largest destination for Kenya's exports.
In Tanzania, actual total tax revenue earnings continued rising at a much higher average rate of 35.9% per annum from 2005/06 to 2007/08 compared to the average growth rate of only 23.3% attained between 2003/04 and 2004/05.
"For the three years from 2005/2006 to 2007/08 revenue from import duties grew annually at an average rate of 61.9%."
Despite this impressive impact of the union, some huge structural challenges need to be overcome before the fully fledged union takes shape in January.
Margaret Chemengich, a consultant who, in a research study, analysed the transitional EAC customs union to a fully fledged customs union advised that wider involvement and empowerment of the private sector and other beneficiaries should be undertaken in order to strengthen and lengthen production and supply chains.
A whole set of bottlenecks including a poor business climate, inadequate trade facilitation, tax disharmony, lack of awareness and national sovereignty issues stand in the way of a fully fledged customs union.
"For instance, Tanzania is also in the Southern Africa Development Cooperation (SADC). You cannot belong to two customs unions," said Evarist Mugisha, another Kampala consultant who partly put up the report.
There is also a general lack of harmony in some very basic administrative issues that can be sorted out by mere instructions and compliance.
For instance, travelers to Tanzania via Arusha are asked for yellow fever immunisation cards. This is not the same case in Dar-es-Salaam which is in the same country. The rest of the other four EAC countries do not ask for these cards.
Meanwhile, a general failure to harmonize tax regimes across East Africa has hampered the smooth operations of businesses and slowed the integration of the East African Community (EAC), a research study indicates.
The study, commissioned by the EAC secretariat, says although the customs union was launched in 2005, the main taxes affecting the business community have all not been harmonized. These taxes include value added tax (VAT), withholding tax and excise duty.
"These disparities in the tax regimes result into distortions and have a negative impact on cross border business activities," says the report titled: "An evaluation of the implementation and impact of the East African Community Customs Union" released Friday at the EAC secretariat in Arusha, Tanzania. The most notable disparity in the tax regimes is highlighted in the structures of VAT. While Uganda charges 18%, Kenya charges 16% while in Tanzania it is at 20%.
Uganda's tax charges are in some cases not specific, a situation dubbed ad valorem which means the tax chargeable is a percentage of the value or price of the product. Kenya on the other had charges specific taxes.
Still the report point out that Uganda imposes excise duty on cement while Kenya and Tanzania do not. Also, Uganda offers tax incentives to investors and sections of businesses while Kenya and Tanzania do not.
In turn, partner states have been denied the benefits of smooth tax administration which result into higher tax revenue.
"In particular (these disparities increase the cost of compliance, affect the decisions by investors with regard to where to invest and where to source finance," reads the report compiled by three consultants in the region.
But a Uganda Revenue Authority (URA) commissioner, Richard Kamajugo, said there are already discussions on harmonization.
"The debate is should Kenya increase her VAT figures or should Uganda, Rwanda and Tanzania come down? The withholding tax at 6% is tagged to levels of compliance. It is a penalty for non compliance," said Kamajugo.
Businesses interviewed across the region during the research also complained about the slow process of claiming duty draw back or tax returns, a process that remains quite cumbersome and unnecessarily long.
"This has the impact of tying up working capital and affecting cash flow. Provisions on duty draw back for instance do not indicate a period within which a refund can be received,' says the report. Duty draw back is a refund on raw materials used on the goods locally made for export. Overall, the commencement of the union and the implementation of the zero rates of tariffs has had a negligible effect on revenue losses according to the report.
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