EAC under pressure to extend special trade window

East Africa’s industrialists are pushing for the extension of a five-year window allowing them to import key inputs and raw materials duty-free following the launch of the Customs Union in 2005.

The window, also known as the duty remission scheme, was scheduled to close on December 31 last year as per the Customs Union protocol that EAC member states signed five years ago.

It allowed local manufacturers and producers duty-free importation of raw materials and other inputs from non member states for purposes of manufacturing goods sold in non-member states. The window was exclusive to a list of 135 inputs considered critical to the survival of the region’s fragile industrial sector.

The products included wood free paper, newsprint, cover paper and white lined chip board used in the manufacture of texts and exercise books; industrial sugar for making of bread and biscuits and complete knock down kits (CKDs) used in the assembly of motorcycles and bicycles.

Concern has been rising among industrialists that expiry of the duty remission scheme has created a legal vacuum that may negatively impact on the flow of inputs needed to produce critical goods for export.

EAC secretariat left the industrialists in a cloud of uncertainty last December after the team mandated to harmonise national tax laws in preparation for the planned launch of a common market later this year went on holidays without determining the fate of the duty-free imports scheme.

The scheme is one of the instruments that Kenya, Tanzania and Uganda settled on when they launched a custom union five years ago. It allows industries — considered too sensitive to compete in a liberalised market — to procure raw materials and other industrial inputs outside the provisions of the Common External Tariffs (CET).

EAC phased out import tariffs on goods traded in the region on January 1, a move that was to be accompanied by closure of the duty remission scheme window. But industrialists have been pushing for a revision of the CET protocol to allow for its extension.

“The duty remission scheme should have lapsed at the beginning of the month but ongoing discussions mean that its status will remain unclear until next month when the EAC secretariat completes its review of the CET,” said David Nalo, the PS in the Ministry of East African Community.

Talks on the duty free instrument began late last month but were suspended when the team — made up of government and private sector representatives — took a break for Christmas. In Kenya, the scheme has mainly benefited horticulture and manufacturing sector operators.

On Monday, a senior Treasury official revealed that a number of firms had applied for extension of the duty free import window but insisted no decision would be made until the EAC team reconvenes.

The Kenya Association of Manufacturers (KAM), an industry lobby, which participated in previous negotiations, said its members were ready for closure of the imports window but urged its members to continue tapping from it.
“KAM advises its members who have been using the duty remission scheme to continue doing so until otherwise advised,” KAM said in a statement issued to its members last week.

Ugandan industrialists have been pushing for extension of the scheme that covers importation of 135 industrial inputs from non-EAC countries, citing inability to compete on an equal footing with the more advanced Kenyan counterparts.

PricewaterhouseCoopers – an advisory services firm -- found in a recent study that Kenya’s tax regime remains the most punitive in the region with total tax charges constituting a bigger proportion of operating expenses that firms have to bear.

The study, whose findings were released last month, has sparked calls for harmonisation of national tax laws to level the playground for all firms in the region.

Concern has been mounting over the possible impact of the scheme on the regional market, but some studies have indicated that it has acted as a driver of trade while at the same time increasing revenue losses for member states. The EAC Secretariat says the number of firms seeking duty remission and exemption schemes have been steadily growing, leaving in its wake a negative impact on tax revenues.

The value of goods that qualified for exemption and duty remission in Kenya increased by 71.2 per cent to $1,370.8 million in 2006 compared to only $588.8 million in 2004. That figure rose by 36 per cent in Tanzania from $ 798 million in 2004 to $1,225.9 in 2006 while Uganda’s grew from $109.8 million in 2004 to $178.8 million in 2005 before falling to $174 million in 2006.

During the same period, value of duty forgone rose by 14.3 per cent in 2005 to $289.5 million in 2006; Tanzania’s by 36 per cent to $405.4 million and Uganda’s by 9.9 per cent to 36.4 million in 2006.

EAC Director General in charge of customs and trade Peter Kiguta appealed to partner States to “show their commitment to the Customs Union” by refraining from activities that are protectionist, such as imposition of taxes and levies of equivalent effect to tariffs. 

“They should also refrain from granting duty exemptions outside the current customs regime because failure to do so will jeopardize the impact of the region’s CET,” he said.

The Customs Union protocol allows member states to import industrial inputs and raw materials duty free through the respective Export Promotion Schemes to manufacture goods for export outside the EAC.

However, up to 20 per cent of the goods produced annually by a company benefiting from the export promotion schemes is allowed into the EAC market after payment of applicable import duties, levies and other charges provided for in the EAC Common External Tariffs.