As East Africa Faces Slow-Down, Expect Few Surprises

By David Tarimo, The Monitor (Kampala), 12 June 2001

Finance ministers for Uganda, Kenya and Tanzania will present their respective national budgets on June 14, but as East African governments try to raise their dismal revenues, businesses across the region - big and small - are demanding for a tax reprieve: Revenue collections in the East African region in the past year have not been as robust as one would have expected.

To a large extent this is a reflection of the constrained business environment, as well as difficulties in tackling tax evasion, particularly on imports. In Uganda economic growth estimates have been revised downwards to 5.7 percent, well below the initial target of 7.1 percent.

For Kenya, last year's budget growth prediction of 2.6 percent was in hind-sight absurdly optimistic bearing in mind that the country was experiencing its worst drought in decades.

The room for manoeuvre in Kenya is additionally constrained because of much donor support being contingent on firm political commitment to structural reforms.

Growth in Tanzania for the year 2000/2001 is approximately 5 percent, compared with the original target of 5.8 percent, and real growth is much less once account is taken of population growth of just under 3 percent.

Indeed revenue collections in Tanzania give some indication of the tight economic environment currently facing business. While collections overall are on target, the actual revenue collected by way of corporate income tax for the 10 months to April 30 of TShs 23.8bn (US $15m) has significantly reduced compared to the equivalent figure last year of TShs 39.3bn (US $25m).

Against this background there's little anticipation for any significant give-aways in the forth-coming budgets in Kenya, Uganda and Tanzania. Nevertheless, there are a number of key concerns that business hope will be addressed, particularly in relation to the impact of taxes on competitiveness.

Traditionally customs duty rates are structured so as to encourage local manufacturing by imposing high duty on finished goods and low duty on raw materials.

However, the tax treatment of raw materials in this region is a matter of considerable concern. Ugandan business has argued vociferously for a reduction in the 7 percent duty rate currently applied on raw materials and semi-processed inputs.

In Kenya, duty rates create problems for manufacturers now in competition with other COMESA countries.

While duty rates on non-COMESA raw materials, industrial spares and semi-processed inputs remain apparently low at 2.5 percent to 5 percent, this must now be contrasted with zero percent to 2 percent duty rates on finished goods from COMESA countries.

With much of the raw material for Kenyan manufacturing coming from outside COMESA, a reduction in duty rates would help in the struggle to compete.

Tanzanian industry is also clamouring for the reduction or abolition of duties on raw materials (5 percent), industrial spares and semi-processed inputs (both 10 percent). Their argument is particularly strong, when one considers the infrastructural constraints.

In particular industrial consumers of electricity, both large and small, pay significantly more in Tanzania than in Kenya and Uganda. Although in part this reflects the cross-subsidisation of domestic tariffs, more than anything else it is due to the poor efficiency and financial management of the power utility Tanesco. As such the urgent need for power sector reform is imperative.

Apart from the structure of import tariffs, of equal concern in Tanzania is the enforcement of such tariffs. Industry will be looking for a forthright commitment by the government to ensure that evasion of tax on imported goods is plugged.

Although progress has been made on the notorious Zanzibar route, the concern is that this trade has simply migrated to other ports on the mainland.

This evasion, together with dumping and the ineffective enforcement of quality standards on sub-standard imported goods, is seen as threatening the viability of Tanzanian industry.

Indeed it is increasingly being recognised that such evasion, apart from representing mere revenue loss to the country, actually threatens the entire fabric of the economy.

Taxes on fuel are another area of debate. Although a major contributor to government revenue, any increases in these taxes affect the whole economy and can have a significant cost-push inflationary effect.

Uganda has the simplest tax structure for petroleum, with excise duty being the only tax charged on refined petroleum products and rates on petroleum and diesel being comparable to those in Tanzania.

However Tanzania also charges VAT on petroleum products, a cost to those other than VAT-registered businesses.

Unlike Uganda, both Kenya and Tanzania charge tax on industrial fuels such as furnace oil, batching oil and heavy diesel oil.

In Kenya and Tanzania there's a strong lobby for excise duty on industrial fuels to be removed, in recognition of it being essentially a raw material for business use.

The ordinary man in Tanzania will be looking for a significant reduction in tax on kerosene, which is very much higher than his counterpart pays in either Kenya or Uganda.

All three countries need to significantly raise economic growth.

Sustained growth rates of at least 8 percent are necessary to any real impact on poverty.

In Tanzania, agriculture comprises approximately 45 percent of gross domestic product and 80 percent of the people earn their living off the land.

Accordingly, an increase in productivity and yields is a prerequisite for increased growth. This year's budget will therefore have particular focus on how Tanzania's huge agricultural potential can be realised.

Part of the solution is seen in encouraging agro-related industrial sectors such as food processing, leather, textiles and wood processing.

The other key issue in relation to longer-term growth is education. One commitment made at the time of the recent Ugandan elections was to increase funding for education.

In Tanzania, which has the lowest secondary school enrolment in Africa, concern in relation to education is such that there has been a proposal to introduce an education levy.

The difficulty with such a move however is that it would accentuate the already large differential in tax to social security charges on labour costs in Tanzania, compared with Kenya and Uganda.

Rather than introduce new taxes, the government should be giving the tax paying public a commitment to more prudent and effective use of existing funds.

Put simply, the answer is on the expenditure rather than the revenue side of the equation.

There is a strong lobby in Tanzania for the current VAT rate to be reduced.

In contrast, Kenya enjoys a lower general rate of 18 percent, and reduced 16 percent rate for accommodation and restaurant services, while Uganda's rate is 17 percent.

Much rationalisation has taken place of income taxes in recent years. Corporate and personal income tax rates are harmonised at 30 percent in all the countries, and there is now a major divergence in withholding tax rates. So do not expect major changes in relation to income taxes.

We are unlikely to see dramatic changes. If anything, the focus will be on measures to improve tax administration and curb evasion. - East African

The author is a Tax Partner, PriceWaterhouseCoopers, Dar es Salaam.