Recently the East African Community (EAC) Ministers of Finance held budget consultations in Arusha Tanzania and agreed to make some changes in the EAC taxation structure.
To make regional industries more competitive, attract investments, and remove the remaining barriers to trade among African countries, the Ministers on behalf of EAC partner states agreed to change the taxes paid on goods coming from outside the EAC as follows:
i) 0% duty levied on imports of raw materials and capital goods;
ii) 10% duty charged on imports of intermediate goods (products not available in EAC);
iii) 25% duty charged on imports of finished goods not readily
available in the region;
iv) A maximum rate of 35% duty charged on imports of finished
goods readily available in the region;
v) Small adjustments to promote import substitution and value addition of our local industries
HOW BENEFICIAL WILL 0% DUTY LEVIED ON IMPORTS OF RAW MATERIALS BE TO UGANDA?
The 0% duty levied on imports of raw materials will to a bigger percentage have benefits to Uganda.
The duty exemption is favorable for industrial growth because by eliminating or reducing import duties on raw materials, it becomes cheaper for Ugandan industries to access the necessary inputs. This can encourage the development and expansion of domestic manufacturing and processing industries, leading to increased production and job creation.
In addition, the duty-free rate will lower or remove import duties on raw materials which reduces production costs for businesses in Uganda. This can enhance their competitiveness in the global market and potentially lead to increased exports, generating foreign exchange earnings for the country.
President Museveni has severally campaigned for exportation of processed products, asserting that the export of raw materials has heavily contributed to Uganda’s economic dependency.
The president, who has repeatedly discouraged the export of unprocessed coffee, says that this has been advantageous for purchasers of Ugandan coffee who enhance its value and generate significantly higher profits compared to Ugandan farmers.
“Coffee is a good example; 99% of our coffee is exported as unprocessed coffee. A raw material for cleverer people. We who don’t see far, we sell our raw material to cleverer people to earn big money out of our sweat. With unprocessed coffee, we get $2.5 per kilogram. With the same coffee processed, a kilogram will give us $40 increasing in value by a factor of 15. If this logic of value addition is extended across the entire spectrum of our raw materials, our economy would expand by at least a factor of 10. It would expand from $55 billion to $550 billion in the short term,” he said recently.
Uganda has in place all the factors that facilitate addition of value to raw materials, and subsequently, the exportation of processed products. These include; an educated workforce, electricity, transport network, piped water, telephone lines, and internet among others.
Since favorable import duty regime can make a country attractive destination for foreign investors, the duty waiver is favorable for Uganda to attract foreign investment. Companies seeking to establish manufacturing facilities or engage in value-added activities may consider investing in Uganda due to the availability of affordable raw materials.
The Tax-free imports of raw materials however, will not come without the disadvantages to Uganda. For instance, they will have a negative impact on domestic producers. This is because, removing import duties on raw materials might lead to increased competition for local producers who may not be able to match the low prices of imported goods. This can adversely affect the growth and sustainability of domestic industries, resulting in job losses and reduced economic diversification.
The 0% duty levied on imports of raw materials and capital goods will result into revenue loss for the government at a time when Uganda Revenue Authority (URA) has struggled to meet its revenue targets to finance the budget causing unending borrowing by government. It is therefore crystal clear that the 0% duty policy on raw materials will lead to a decline in customs revenue, potentially affecting government budgets and public expenditure on essential services such as infrastructure, healthcare, and education.
Furthermore, depending heavily on imports for raw materials can make Uganda’s industries vulnerable to fluctuations in global prices, supply chain disruptions, and trade policy changes in exporting countries. This dependence on external sources might hamper the stability and resilience of the domestic manufacturing sector.
Therefore, the impact of a 0% duty levied on imports of raw materials in Uganda is a complex issue with both advantages and disadvantages. It requires a careful assessment of the country’s industrial capabilities, competitiveness, revenue requirements, and long-term economic goals to determine whether such a policy would be beneficial to the country.