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East Africa is the fastest growing region for the fifth straight year, DRC & Somalia ask to join EAC

By Morris Kiruga, in Nairobi
Posted on Friday, 14 June 2019 15:50

Kenya's Cabinet Secretary for National Treasury (Finance Minister) Henry Rotich holds up a briefcase containing the Government Budget for the 2019/20 fiscal year in Nairobi, Kenya, June 13, 2019. REUTERS/Baz Ratner

East Africa plans to fund its next year by expanding and streamlining their tax bases, exempting strategic industries and goods from taxes, and boosting local industries.

The finance ministers of four of the six members of the East African Community (EAC) presented their national budgets before their respective parliaments on Thursday. Kenya’s budget remains the biggest in the region at nearly $30 billion. Tanzania’s 2019/2020 budget is $14.3 bn, Uganda $9.1bn, and Rwanda $3.2bn.

At a total of $56.6bn, the budgets are ambitious in their continued spending on infrastructure which has plunged the region into unprecedented levels of public debt.

Part of the common solution to fill the coffers seems to be to attract investments in specific sectors and boost tax collection.

The other two members, Burundi and South Sudan, have not synchronized their financial years with the other states yet.

  • Two other states, Somalia and the Democratic Republic of Congo, are being considered for membership to the bloc, which would bring the total number to eight. Congolese President Felix Tshisekedi wrote a formal request to the current chair of the community, Paul Kagame, on June 8th expressing his country’s desire to join the six-member bloc.
  • Tshisekedi has been on shuttle diplomacy in the region before the formal request, and Congo, which borders all but one of the current EAC members, is likely to be considered for membership during this year’s Summit in November.

East Africa is the fastest growing region in Africa for the fifth straight year, according to the African Development Bank’s (AfDB) Economic Outlook for 2019. 

According to the AfDB, the region grew by 5.7% in 2018, and is projected to grow by 5.9% in 2019, and 6.1% in 2020. To fund this growth, the region has been investing heavily in infrastructure and other sectors, which has also increased the fiscal gaps and debt burden.

Kenya’s Treasury Cabinet Secretary, Henry Rotich, said the government would take a second stab at getting parliament to repeal the interest rates cap. A similar attempt last year failed, as legislators were wary of removing it despite its pronounced negative effect on the credit market.

  • To fund the massive budget, Kenya announced increased sin taxes on alcohol and cigarettes by 15%, and introduced a 10% tax on gambling stakes.
  • Rotich also proposed a 7.% increase on Capital Gains Tax, the most significant increase since it was introduced at 5% four years ago. He also increased the railway development levy to 2%, and impose export levy on hides and skins to 10 percent.
  • Kenya intends to borrow $6bn locally and internationally in the next financial year, which will definitely raise questions about its budget deficits, spending, and growing public debt.

The winners in that budget included local furniture makers for whom import duty on raw timber was removed, and IT companies for whom locally-made motherboards were exempted from tax. Kenya also intends to zero-rate activities around plastic recycling plans, and give investors a low corporation tax of 15% for the first five years.

  • Rotich also said the government will buy exclusively from local motor vehicle and cycle assemblers, while increasing taxes on imported cars, and reducing duty on electric cars to 10%.
  • In a bid to attract more companies to list on the struggling Nairobi Stock Exchange (NSE), Kenya also proposed an amnesty on penalties, interest and outstanding taxes for two years prior to any companies joining the bourse’s Growth Enterprise Market Segment (GEMS) program.

In Tanzania, President John Magufuli’s government is seeking to streamline the tax revenue model. In the $14.3bn Budget Speech, the minister for finance outlined tax provisions exempting companies making TZS 100m and below from preparing and filing audited financial statements. He also introduced a presumptive tax regime for taxpayers with an annual turnover of TZS 4m to TZS 100m.

If approved, 7.5% of Tanzania’s budget for the next year will go toward building the standard gauge railway from the economic capital, Dar es Salaam, to the lake side city of Mwanza.

  • Tanzania also plans to reduce the corporate income tax for new companies involved in the production of sanitary pads from 30% to 20%, and exempted sanitary pads from VAT. Others exempted include imported refrigeration boxes, grain drying equipment, and aircraft lubricants and aircraft tickets, calendars, diaries, labels, and employee uniforms.
  • The budget also zero-rated electricity supply from the mainland to Zanzibar. Among the tax increases were artificial hair, imported pipes and plastic materials.

Tanzania plans to borrow $1.009bn from external sources.

In Uganda, the government redefined its laws to define a citizen as a person or company of any EAC partner state after a decision by the EAC court of justice on domestic legislation and the EAC treaty. To boost tax income and widen the tax net, the finance minister also said that the government will pay 5% of tax or duty to informers who provide information on tax cheats.

  • Uganda proposed increased tax exemptions for ten years for industrials parks and free zones, and businesses that use at least 50% locally sourced raw materials and employs 60 percent citizens dealing in certain sectors.
  • It also proposed income tax exemptions for interest paid on infrastructure bonds, as well as drugs, educational materials, agricultural sprays aircraft insurance services and others.
    Some of the biggest import duty tax increases include on honey, ready to drink juices, processed coffee and processes tea, refined cotton seed, sunflower oil, cocoa containing preparations, tomato sauce mineral water, biscuits. Like Tanzania, it also increased taxes on wigs.
  • Uganda’s spending in the next year will rise by 23%, and the government plans to borrow $2.7bn from external sources.

Rwanda, which presented the smallest budget among the four, wants to boost growth by encouraging importation of certain equipment. This includes ICT equipment, manufacturing raw materials, road tractors, and public transport vehicles above a certain sitting capacity.

  • Rwanda’s budget will increase by 11% in the next year, while the government projects slower growth. About 86 percent of the total budget will come from internal sources.

For consumers, budgets are always a mixed bag. Alcohol will now be more expensive in Kenya, for example, while wigs and human hair will cost more in Tanzania and Uganda.

Smart tip: If you live in a town like Malaba on the Kenya-Uganda border though, it’s simple; go to Kenya for the hair, and to Uganda for the beer.

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