Harmonise excise tax in the EAC

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BY BETTY MAINA

In 2012, Kenya collected Sh93.3 billion in excise taxes, up from Sh69.9 billion in 2009. Similar figures for the other East African countries are hard to come by but one gets an idea of the kind of figures involved.

According to the East African Community integration schedule, the time is well nigh for the harmonization of excise tax which continues to be administered as a domestic tax in all partner states. It will be a gargantuan task given that the levels of maturity and experience in handling this tax differ in the region.

Burundi to date has no Excise Tax Act. It relies on a ministerial order and the revised budget law issued a year ago, while Tanzania and Uganda have legislation dating back to 1954. Approvals are required in Kenya, Uganda and Tanzania while there is no formal approval structure in Rwanda.

As Burundi has no Excise Tax Act, the approval process is not outlined. There are also disparities in the rates and structures and practices of the different revenue administrations. Each state collects taxes differently hampering the attainment of four of the freedoms of the common market protocol. Different countries tax different goods. Soft drinks and juices are subject to excise tax in Tanzania in addition to the traditionally excisable goods.

Other challenges include the fact that excisable goods are classified differently in each EAC state for excise duty purposes imposing a compliance burden on taxpayers and hindering products from doing well across all borders. Discriminatory excise tax remission schemes also exist based on local raw materials which are entitled to lower rates since these schemes are geared at making locally manufactured goods more competitive.

Juices and soft drinks, for example, are some of the goods affected most by cross border movement. Given the current excise tax rates on fruit juice, Kenyan made fruit juice exported to Tanzania is more expensive than Tanzanian juice made using local raw materials.

Since trading blocs require certain and equitable tax systems, these variances must be ironed out, if we are to attain to the Single East African Market envisioned in Article 32 of the Common Market Protocol. The goal to aim for is tax neutrality. A good tax system should not tamper with the flow of the factors of production; neither should it cause firms or individuals to shift their economic choices. Without neutrality, taxes will drive investment decisions and create non tariff barriers.

Government loses revenue and the manufacturing sector loses legitimate business. Illicit trade, which currently occurs through the smuggling of excisable goods, presence of counterfeit products and tax stamps, or through diversion of export products into the local market, will continue to thrive as people look for ways to avoid paying taxes. A study in 2012, estimates losses of up to US$28 million in government revenue in the EAC countries due to illicit trade in cigarettes.

A drastic overhaul of the systems currently in place is bound to meet with resistance from partner states. So far it is unclear what effect this exercise will have on the revenue collection of the various countries but political will power will be necessary to avoid an integration impasse caused by countries that will be adversely impacted through a decline in excise revenue or reduced industry growth.

The process will require securing trade-offs and agreement on principles. For example, one recommendation would be to abolish indirect taxes levied in only one country such as Sugar in Kenya or cement in Uganda.

Unifying tax regimes will also eliminate price distortions that encourage tax evasion and allow more investment in the region since goods can move more freely. This will increase cross border trade volumes and widen the markets, protect markets from smuggling and allow investors to reliably forecast returns. After all, the raison d’ĂȘtre of the common market is to capitalize on a consumer population of around 134 million.

In any case, unity does not imply uniformity. A recent study carried out by this year by the Kenya Association of Manufacturers (KAM) indicates that the Tax rates can remain different in the member countries so long as the trade steering impacts are weak and no discrimination is involved.

The idea therefore is to proceed with due care and propel progress to a fully fledged market through stages. First through the use of a model excise act for a limited period that will allow all the EAC countries to hash out the details on administrative procedures, structures, regulations and remission schemes. The countries will then formulate their own excise acts in line with the model one.

The next step will be the formulation of an EAC Excise Management Act similar to the EAC Customs Management Act except that it will set out country specific schedules outlining the applicable duty rates.

The final stage will be complete harmonisation with the view to attaining a single excise rate for each product. Full alignment will not be instantaneous. A transition period will be required for certain products which attract an excise tax in only one country such as milk in Rwanda or cement in Uganda.

We can also expect a list of sensitive goods, just like with the Common External Tariff (CET) that will require time to adjust to the common rate. But perhaps the trickiest thing to work out will be the revenue sharing agreement among the member states.

(The writer is the chief executive of Kenya Association of Manufacturers and can be reached on [email protected])

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