Imported clothes in the region to cost more after tax review

Workers of Phenix Logistics Uganda make textile garments for export. PHOTO | MORGAN MBABAZI 

In Summary

• The move is in line with a plan to protect textile industries that have been identified as strategic to the region.

By JAMES ANYANZWA
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East African citizens will pay more for imported clothes should governments go ahead with plans raise taxes on imported textiles by between 30 and 35 per cent.

The move is in line with a plan to protect textile industries that have been identified as strategic to the region.

Part of the regional tax reforms will also see iron and steel, agro-processing, and wood and wood products imported into the region attract similar duty.

The EastAfrican has learnt that imported second hand clothes will now be classified as “sensitive”, and attract duty higher than finished products.

The regional private sector businesses are demanding a 32.5 per cent duty on finished products to protect local industries.

FOUR-BAND STRUCTURE

The proposal will be presented to the next East African Community Heads of State summit, scheduled for Arusha on February 29, for consideration.

Under the EAC’s three-band tariff structure which came into effect on January 1, 2005, finished goods imported into the regional bloc attract a duty of 25 per cent, intermediate goods 10 per cent, and there is no duty on raw materials.

Sensitive items such as sugar, wheat, rice and milk attract a higher duty of above 25 per cent to protect local industries from competition.

The EastAfrican has learnt that as part of the review of the EAC Common External Tariff (CET), member states have agreed on a new tariff structure of four bands, but failed to agree on the rates to be imposed on goods in the new band.

The new four-band tariff structure includes zero per cent import duty for raw materials and capital goods, 10 per cent import duty for intermediate products not available in the EAC, and 25 per cent import duty for intermediate products available in the region.

However, partner states have disagreed on the rate for the highest band, which will be either 30 per cent or 35 per cent for finished products.

The East African Business Council (EABC), the region’s top organ for private sector business associations, has proposed a fourth band, with a rate of 32.5 per cent for finished products

“Under the CET there is a need to have the fourth band. We are considering having either 30 per cent or 35 per cent for the fourth band,” said Peter Mathuki, EABC executive director.

“However two countries, Rwanda and Burundi, prefer the 30 per cent band while the rest prefer 35 per cent. As EABC we propose that the countries come to 32.5 per cent band. We are in discussions and hope that eventually we will come up with a solution,” he added.

Researchers at the UKAid funded International Growth Centre argue that the first step in the review of the CET should be to phase out the “sensitive” items list followed by reclassification of the existing tariff bands to avoid unwarranted lobbying by affected countries for preferential tax treatment.

HIGHER RATES

At a meeting in Zanzibar last month, EAC member states submitted 1,294 products for consideration to pay above the rate of 25 per cent.

Of these, there was consensus on 327 tariff lines and an agreement to retain 566 products at their current rate. However, there was no agreement on 401 tariff lines, which remain under consideration.

“The tariff lines that were not agreed on are mainly from the textiles, iron and steel, agro-processing, and wood and wood products sectors,” said Phyllis Wakiaga, chief executive of Kenya Association of Manufacturers.

At the meeting, Kenya, Uganda and Tanzania proposed 174 additional tariff lines for consideration to attract a rate higher than 25 per cent; these are up for consideration in the next meeting.

In March 2016, EAC Heads of State expressed their intent to progressively eliminate importation of used clothing as a means to support the region’s textile and apparel industry.

On June 30, 2016, the EAC, through Legal Notice No. EAC/32/2016, increased the specific duty rate on worn clothing and other worn articles from $0.20/kg to $0.40/kg to the applicable rate of 35 per cent or $0.40/kg, whichever is higher.

At the time, Rwanda was granted a stay of application of the CET to apply an even higher duty of $2.5/kg for worn clothing, and $5/kg for worn shoes or 35 per cent, whichever is higher.

In 2018, Kenya suspended the EAC’s 25 per cent CET on imported clothes and introduced a specific rate of import duty of Ksh500($5) per unit or 35 per cent whichever is higher, terming the textile sector critical to the country’s job creation under President Uhuru Kenyatta’s big four agenda.

USED CLOTHING

The US supplies approximately 20 per cent of total direct exports of used clothing to the EAC, while Chinese exports of cheap, ready-made clothes to East Africa is estimated at $1.2 billion per annum according to a study by the US Agency for International Development.

In April 2014, EAC ministers for finance removed stays of applications, and directed that a phase out proposal be developed, which was adopted by the sectoral council of the ministers of trade, industry, finance and investment in May 2014.

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

According to the EAC Council of Ministers, the stability of the EAC CET has been affected by the frequent stays of applications by partner states, creating distortion and eroding the harmonisation of the tariff regime.