Used clothes and leather products are increasingly being smuggled from the Democratic Republic of Congo and Uganda into Rwanda after East African Community member states raised levies on the products to protect the local industry.
Analysts have warned that if the illegal trade continues, economies of EAC partner stated will suffer and the region's policies to promote domestic products will collapse.
"We have impounded 230 tonnes of clothes and 27 tonnes of used shoes and used leather products from July to December 2017," said Robert Mugabe, Commissioner at Rwanda Revenue Authority (RRA).
"The second-hand leather and textile products are in high demand," said Mr Mugabe, naming the two countries as major sources.
On January 28, police impounded one tonne of used clothes and shoes in Rubavu, a district near Democratic Republic of Congo.
In the last fiscal year, RRA reported it lost $1.4 million in tax fraud to smuggling.
According to Angello Musinguzi, a tax manager at KPMG Rwanda, every time policymakers raise taxes on goods to protect the domestic factories from competition, smuggling increases.
Tanzania, Burundi, Kenya Uganda, Kenya and Rwanda agreed in 2016 to a phased ban on the importation of second-hand clothes and leather products and restrict the use of old vehicles in the region by 2018, in order to boost their industrialisation programmes.
Rwanda raised the tariff from $0.20 to $2.50 per kilogramme to discourage importation of used clothes. Tanzania and Uganda doubled the levies, from $0.20 to $0.40 per kilogramme.
"Regional tax bodies have to intensify the crackdown on the smugglers. The businesses avoid taxes and sell the goods cheaply on the market, which distorts the business environment," said Ms Musinguzi.
Ms Musinguzi further said while the increase in duty has put imported clothes out of reach for small income earners, the supply of the new fabrics from domestic textile mills and garment makers has remained low, mirroring a still struggling manufacturing sectors in Rwanda.
Despite the increase in smuggling, a July-December 2017 report indicates the domestic revenue collections have not been affected much.
The RRA revenue collection performance report for July-December, 2017 shows that the tax body beat the collection target by $11.8 million, up from Rwf572.6 billion ($679 million) to Rwf582.7 billion ($691 million).
The taxman attributed the strong growth in the tax collections to a rebounding economy, low inflation rates and a strong performance of the agricultural sector.