9 June 2019

East Africa: Third Time Around, EAC States Fail to Agree On Joint Tax Bands

East African member states have failed for the third consecutive time to agree on a common tariff for goods entering the region, casting doubts on the proposed review of the Common External Tariff (CET).

At a recent meeting in Entebbe Uganda, countries maintained hardline positions on how they expect the three-band tariff structure to be amended.

The dispute largely revolves around the number of tariff bands to be included in the new structure and the type of goods to be put in each new band.

Kenya's Principal Secretary in the department of Trade Chris Kiptoo told The EastAfrican that member states have now gone back for further consultations in their home countries and hope to resume talks in October.

"We agreed to undertake further consultations at the national and regional level with a view to finalising by October this year," said Dr Kiptoo.

The first two meetings were held in Kigali and Dar es Salaam in March and April this year respectively.

Currently, finished goods imported into the regional bloc attract a duty of 25 per cent, intermediate goods 10 per cent and raw materials 0 per cent, under the EAC's three-band tariff structure which came into effect in January 1, 2005.

Sensitive items

In addition, there is a list of sensitive items such as sugar, wheat, rice, garments and milk which attract higher duty of above 25 per cent, with an aim of protecting local industries from competition.

However, the partner states have not agreed on a proposal to introduce an additional fourth tariff band. They have also not agreed on which goods should belong to which band.

It has been proposed that all goods under the current three-band tariff structure be reclassified, and some shifted to the fourth band whose tax rate is yet to be determined.

The additional band is designed to cater for goods imported as finished products, attracting a 25 per cent tariff, only to end up being used as raw materials which in essence should have attracted 0 duty.

Such goods include clinker that is used in the manufacture of cement and palm oil used in the manufacture of soap.

It is also argued that the excessive protection granted to sensitive goods should be removed and the products opened to competition as most member states have abused this window by asking for frequent stay of applications to be allowed to import these products at lower duty.

The EAC Council of ministers had agreed that the removal of stays of applications and duty remissions should inform the comprehensive review of the three-band CET.

In February this year, the EAC Heads of State directed the Council of Ministers to review the relevant rules and harmonise the CET in three months. Implementation of the new tariff structure has lagged behind schedule by close to two years.

The EAC Sectoral Council on Trade, Industry, Finance and Investment in a meeting held in Arusha in May 2016, directed the EAC Secretariat to finalise the comprehensive review of the CET by December, for implementation from July 1, 2017.

Concerns

According to the Council of Ministers, the special tax treatment accorded to sensitive items is not anchored in the EAC Customs law, and is stifling intra-regional trade.

Their concerns are shared by researchers at the UKAid funded International Growth Centre who say the first step in the review of the CET should be to phase out the "sensitive" items list followed by the entire reclassification of the existing tariff bands in line with the end use of the products in mind to avoid unwarranted lobbying by affected countries for preferential tax treatment.

"The existing band structure is not overly complex in principle, but there are suggestions that its application has been imperfect, with some goods placed in incorrect (higher) tariff bands," they said in a report dated November 2017.

"Even capital goods, which are not produced in a major way domestically are subject to non-zero rates of protection, which directly undermines manufacturing competitiveness."

The EAC ministers of finance in April 2014, decided to do away with stays of applications and directed that a phase out proposal be developed, which was subsequently adopted by the Sectoral Council of the ministers of trade, industry, finance and investment in May of that year.

But the directive is yet to be implemented as countries still pursue this window for stays of applications and tax exemptions on various sensitive goods.

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