Significant duty reductions on imported materials have been issued to textile and garment manufacturers, by the government.
Garment manufacturers will now pay 20pc duty for imported textiles, down from 35pc, starting Friday, December 28, 2012, announced the Ministry of Finance & Economic Development (MoFED). Both textile and garment manufacturers will also no longer pay any duty for imported spare parts.
The reduction was announced by Sufian Ahmed, minister of the MoFED, in a meeting attended by Mekonnen Manyazewal, minister of the Ministry of Industry (MoI), at the MoFED, according to sources. Senior officials of the Ethiopian Revenues & Customs Authority (ERCA), Ethiopian Textile & Garment Association (ETGAMA), MoI and Textile Development Institute (TIDI) also attended the meeting.
Dampening the joy of the garment manufacturers attending the meeting was the government's decision to not scrap the 10pc excise tax it charges upon production. Sufian said that they would now pay it as a sales tax, after selling their products.
The reductions were a result of a long negotiation that the ETGAMA has been conducting with the government, since December, 2010. The Association hired a consultant to conduct research, in order to analyse the constraints of the sector and to provide recommendations for improvement.
The Association said that high tax rate in the sector had negatively affected its competitiveness and proposed for the removal of excise tax and reduction of customs duty, on fabrics and textiles, from 35pc to 15pc.
The Association complained that the old duty was disadvantageous to manufacturers, as traders who imported finished materials were charged the same duty. The duty was also high compared to other east African countries, where the maximum duty levied is 25pc, the Association said.
The research was first presented to the MoI, which forwarded it to the MoFED for a decision, convinced by the findings. The MoFED thus composed a committee, comprised of experts from the MoI and TIDI, in order to discuss the issue in detail.
The committee did not accept the removal of excise taxes, but Sufian promised the Association that the tariff rate would be reduced, from 10pc, when shifted to sales tax, according to sources.
The customs duty on machineries is also reduced, only if the spare parts and accessories cannot be manufactured locally. The committee has already identified items that will be exempt from duty fees, sources said.
Sufian warned investors that if they misused the privileges, they could lose them altogether.
In order to control this, the garment factories are expected to add at least a 30pc increase when selling imported fabric. This will be checked using an input and output coefficient standard, which will be developed by the TIDI, according to the committee. The Institute will also certify the garment companies that are eligible for the privilege.
There are around 25 companies involved in the textile industry, with a capacity of 46,249tn of textile products, annually; a little over half of the demand, which is set at 87,348tn. Out of these, 11 have their own garment factories.
"We are pleased that such a decision that will change the gear of the textile industry is made, as their production cost will be reduced," said Fasil Tadesse, president of Ethiopian Manufacturers Association.
The government is expecting one billion dollars in revenues, from the sector, at the end of the GTP. The performance of the sector, however, is sluggish, as it only registered 84.6 million dollars, in the last fiscal year.
The Association says that the revenue the government loses, by reducing and scrapping duties, will be regained through increased profit taxes.