In an effort to reach common ground on the harmonisation of
domestic taxes in the region, EAC partner states have agreed not to levy
value added tax on some essential goods and services that are consumed
domestically.
They have also agreed to offer tax incentives under an agreed set of rules and regulations to avoid unhealthy tax competition.
The
EAC’s Committee on Fiscal Affairs noted that although the best practice
is to subject all domestically consumed goods and services to VAT, the
reality in all partner states is that, for various considerations, some
goods such as medical supplies and educational materials are given some
tax relief.
Currently Kenya levies 16 per cent VAT on
books and other learning materials and eight per cent VAT on fuel. In
Uganda, Rwanda, Tanzania and Burundi, learning materials have been zero
rated.
Kenya’s standard VAT rate is 16 per cent, while Uganda, Tanzania, Rwanda and Burundi are at 18 per cent each.
However,
a domestic taxes harmonisation progress report prepared by Kenya’s
Ministry of East African Community Affairs shows that the process of
harmonising domestic taxes (VAT, income tax and excise tax) is moving
slowly largely because some member states think it will lead to loss of
revenue.
The partner states had criticised the domestic tax harmonisation
policy for failing to provide guiding principles, and ordered that the
document be reviewed by February.
However, some partner
states like Uganda had not submitted their country-specific comments on
the draft policy by the time of its consideration by the Eighth Meeting
of Ministers for Finance and Economic Affairs in April.
As
a result, the Council directed the EAC Secretariat to convene a meeting
of the region’s tax policy and tax administration sub-committee to
finalise the draft policy document, and urged Uganda to consult and
submit comments on the document.
“Despite the progress,
there are challenges in the harmonisation of domestic taxes. The
process is taking too long to conclude, especially considering that the
EAC is already operating within the framework of a Common Market,” the
report says.
The report notes that failure to harmonise
domestic taxes will cause market distortions through harmful tax
competition, cross-border smuggling and constrained movement of goods
and services around the region.
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