Four East African Community member states will on the 11th of June this year.
The countries, Kenya, Tanzania, Uganda and Rwanda will jointly unveil their Budgets for the Fiscal Year 2020/2021. The EAC Partner States except for Burundi and South Sudan usually unveil their budgets on the same day in June every year after holding Pre-budget Consultations of EAC Ministers of Finance and Economic Planning. Through the Pre-budget consultations, Ministers discuss and agree on various tax measures each Partner State is going to implement in the coming financial year.
This financial year, EAC Partner States are challenged with COVID-19 pandemic and some have reviewed their targeted economic growth downward by nearly 50 percent. The COVID-19 pandemic is both a health crisis and fundamentally an economic crisis. In the region, the impact of the pandemic has been felt differently across sectors depending on the measures instituted to contain the spread of the pandemic as well as the linkage of the particular sector to the global economy.
According to an analysis from the East African Business Council (EABC), the expectation of the EAC private sector is that the EAC budgets for 2020/21 will contain economic stimulus packages that will mitigate the impact of the COVID-19 pandemic on businesses and East Africans, stimulate economic growth and recovery.
EABC has compiled a set of budget proposals to help the countries navigate the trying times that the region is going through.
Customs Duty: Given the fact that EAC Partner States have not finalized the comprehensive review of EAC Common External Tariff (CET), EABC is proposing various changes of customs duty in order to promote local production and making locally manufactured products more competitive.
The first change of customs duty should be through;
- Extending duty remissions to inputs that are not available in the region.
Duty remission will enable manufacturers import inputs that are not available in the region at a competitive price. Some of the inputs which manufacturers are seeking for duty remission include: Completely Knocked Down (CDK) kits for motor vehicles and motorcycles; sugar for industrial use (HS Codes 1701.99.00 ); wheat grain (HS Codes 1001.99.00 and 1001.99.90.), inputs for manufacturing of beverages and food (HS Code 2106.90), & (HS code & 3302.10.00), inputs for the manufacture of baby diapers (7222.20.00), steel alloys for manufacturing of leaf spring, RBD stearin, inputs used in the manufacture of energy-saving stoves and 9612.10.00 (ribbons) and some Paper & paper products. Other inputs that the private sector expects to apply for duty remission include inputs to manufacture textile & leather products and plastics. Some of these inputs will be used in the manufacture of Personal Protective Equipment (PPEs) used in the fight against COVID-19.
- Applying Stays of Applications (SOAs)
Other changes of Customs duty are through some EAC Partner States applying for stay of applications on EAC CET and apply higher tariffs on products that are facing unfair competition from cheap imports or a particular Partner States have the capacity to produce sufficiently. These include ranges of products from iron and steel products (Headings 7209, 7212, 7213, 7214, 7216, and 7610) ceramic tiles (Headings 6802 and 6907), Portland cement (HS Code 2523.29.00.) and fishing nets (HS Code 5608.11.00).
In order to mitigate the impact of COVID-19 pandemic on businesses, EABC is proposing a raft of changes on domestic taxes. The changes will go a long way to sustain businesses during the COVID-19 pandemic period and offer recovery post-COVID-19 pandemic.
Some of the proposed changes include;
- Reduction of the existing Value Added Tax (VAT) rate from 18-16 percent to at l 14 percent
This will stimulate local consumption of goods and services as well as cushion consumers during the period of COVID-19.
- Zero rate VAT for essential goods
To encourage the manufacturing of essential products the Governments should zero-rate VAT for essential products. Most manufacturers have repurposed their manufacturing to produce products of high demand during COVID-19 pandemic which include PPE, sanitizers and face-masks. In addition, EAC Governments should set aside enough funds to repay VAT refund claims in order to improve the cash flows for businesses in the EAC region.
- Maintain or decrease Excise Taxes
On Excise duty, EABC is proposing EAC Governments to refrain from increasing excise duty for both petroleum products and non-petroleum products. Maintaining or decreasing current excise taxes on petroleum products and non-petroleum products will control inflation and hence cushion East Africans and businesses from the impact of COVID-19 pandemic.
- Reduce Resident Income Tax (Corporation Income Tax-CTI) from 30% to 25%
On Employer taxes, EABC is proposing EAC Governments to reduce Resident Income Tax (Corporation Income Tax-CTI) rate from 30% to at least 25% percent. The reduction of Corporate tax will cushion companies and businesses against challenges of liquidity. The funds saved from the reduced tax would be used by companies to sustain the business and boost their working capital. Also, lower Corporate Income Tax will attract more businesses and investment in the region. In addition, EAC Governments should abolish other tax on employers such as Skill Development Levy and turnover tax rate in order to provide tax relief to employers so that they can continue to retain existing employees and sustain their businesses.
- Reduce Income Tax (Pay-As-You-Earn PAYE) from 30% to 25%
In order to cushion employees from the impact of COVID-19 pandemic, EABC is proposing the EAC Partner States to reduce Income Tax Rate (Pay-As-Earn-PAYE) from 30% tax to at least 25%. In addition, the EAC Governments at this time of economic crisis should give 100% tax relief for persons/employees earning a gross monthly income of up USD250. These measures will increase the net income of employees which in turn will enable workers to have more disposable income to spend during this period of the pandemic.
For the tax measures to yield the intended outcome, EABC is proposing EAC Governments to complement them with injecting more money in the market through government spending and adoption of monetary measures.
- Stimulus packages
EAC governments through 2020/21 Budgets should unveil stimulus package aimed at injecting money to the sectors which are adversely impacted by COVID-19 pandemic. Some of the sectors include tourism, agriculture, manufacturing, health, education and infrastructure. During this period of the pandemic, it is high time for EAC Governments to substantially increase the budget allocation of the health sector in order to effectively combat COVID-19 pandemic and other health challenges. In order to realize EAC integration agenda, EAC Governments should set aside fund to implement the EAC commitments such as Customs Union, Common Market and Monetary Union protocols. The stimulus package will inject more money into the economy especially hard-hit sectors to stimulate economic growth, cushion east Africans and businesses as countries recover from COVID-19 pandemic. The stimulus package should also target to boost the liquidity of Micro, Small and Medium Enterprises (MSMEs) which have been adversely affected by the pandemic.
EABC is proposing the allocation of a specific fund for the SMEs Credit Guarantee Scheme which will provide affordable credit to MSMEs.
Instead of applying austerity measures EAC Governments should efficiently target their expenditure to areas or sectors which have more impact in terms of stimulating the economy, cushion special groups, retain jobs and businesses.
- Debt relief/reschedule debt servicing
In order to acquire enough funds to finance these expenditure measures, EABC is proposing EAC governments to negotiate with Development Partners on debt relief or rescheduling of debt servicing. Money saved from debt relief should be used in fighting the disease as well as mitigating the impact of COVID-19 pandemic on EAC economies.
On monetary measures, EABC is proposing EAC Budgets to unveil a raft of measures which will be adopted by financial institutions to boost liquidity in the EAC markets.
- Lower the Central Bank Rate and Cash Reserve Ratio
Some of the monetary measures proposed by EABC include lowering the Central Bank Rate and Cash Reserve Ratio. These measures will boost the liquidity of the commercial banks and enable them to lend to the private sector at lower rates.
Other monetary measures proposed by EABC include central banks setting a stimulus fund (lending facility) for private-sector borrowers, buying back government bonds/securities at the prevailing market rates and Governments suspending or reducing borrowing from the domestic economy to avoid crowding out the private sector. In addition, commercial banks in the region should provide relief to borrowers on their loans due to the COVID-19 pandemic
Indeed, the COVID-19 pandemic poses multiple and diverse socio-economic impacts to the EAC Partner States. To address these impacts, it will require a well-coordinated approach at the regional level as well as the involvement of the private sector.