MANAGING TAX RISKS: Why EA should harmonise excise duty

Thursday September 6 2018

Shabu Maurus ,

Shabu Maurus ,  

This is the second article in a series focused on tax harmonisation within the East African Community (EAC). Successful establishment of the EAC common market requires harmonised tax systems.

The several fiscal divergences, including those related to the excise duty, between the EAC partner States give rise to several implications for the Partner States.

The excise duty is an indirect tax mainly intended on local production, consumption, or supply of selected goods and services.

Apart from the traditional revenue objective, the excise tax may be also levied to protect public safety or health, to protect public morals or to protect the environment.

Across the EAC, there are several variations in excise duty, both in terms of policy and law. The glaring variations tend to affect the free movement of goods under the envisaged under the EAC common market protocol.

Excisable products: Currently the EAC lacks a common list of excisable products. Alcoholic beverages, tobacco, motor vehicles, petroleum products, soft drinks, and bottled water seem to be common excisable products across EAC.

But there are several outliers, including plastics, cosmetics, sugar, cement and milk powder.

Rate structure: Excise duty can be levied on either a per unit basis or an ad valorem basis or a hybrid of the two. The per unit basis (also known as specific rate) the tax is denominated in terms of money per physical unit. Ad valorem structure is based on a percentage of the value of the product.

The rate structure, even for the common products, also varies across EAC. For example, Tanzania levies juices and soft drinks at specific rates, while the other EAC partner States use ad valorem basis. Kenya uses a hybrid structure for cigarettes while Tanzania uses specific rates.

And even for common products and similar rate structure, the excise duty rate also varies across the EAC.

Exemptions regimes: The EAC partner States have varied exemption schemes. There are no criteria for these exemptions across the partner States.

This has an impact on the attraction of investments and promotion of EAC as a single investment destination. Partner States may need to establish agreed criteria for granting excise tax exemptions that will guide each Partner State in establishing its own list of exempt items or institutions.

Local content: The excise tax remission schemes (based on local content) varies across the Partner States. Remissions are all geared towards promoting the domestic agricultural sector through the creation of a ready market for the raw materials.

Unlike Kenya, both Uganda and Tanzania levy a lower rate for wines, beer from malt, and cigarettes with specified domestic content compared to imports. The overall effect is that excisable products made from domestic raw materials are cheaper compared to imports and this discourages the importation of these products into countries where such remission schemes exist.

Administrative matters: There are also variations in classification rules and definitions for products as well as the procedures and administration of excise duty.

A harmonised system of excise will, improve the efficient working of the common market, reduce cross-border formalities for movements of excisable goods, reduce the incentives for cross-border smuggling and reduce distortions from excise-induced differences in cost structures.

Despite the advantages, there are several barriers to full harmonisation.

Mr Maurus is a partner with Auditax International