Value Added Tax Discrepancies Create Trade Problems for East Africa

This is a debate that needs to be had some time ago – in fact, should be ongoing, and why we are putting it upfront in this month’s Newsletter. In a customs union like SADC or the EAC issues of tax will inevitably arise if the customs union works properly. In the EAC a row has broken out, with the East African Business Council (EABC) raising concerns that variations in tax policies are distorting oil deliveries and frustrating intra-EAC trade and investment. At the height of the recent fuel shortage at the pumps in Kenya, government officials pointed an accusing finger at oil suppliers, saying they were diverting supplies to the more lucrative Ugandan market. The officials’ said suppliers were trucking fuel to neighbouring countries where taxes were lower, and prices were not regulated.

The EABC suggests that differences in local taxation policies could cause scarcity of many other types of commodities in the future and that variations in domestic tax systems, including Value Added Tax, are distorting prices, and frustrating the free movement of goods and intra-EAC trade and investment. The EABC now wants EAC member states to start harmonisation of domestic taxes by July.

Tax experts furthermore are insisting on a clear common tax policy for the EAC. This is a wise proposal. In other customs unions, such as the EU, governments have the right to change VAT and other domestic taxes (e.g. on tobacco, alcohol, and petrol), but there are guidelines that should be followed to ensure that distortions are kept to a minimum. Finance ministers are very aware that raising or lowering domestic taxes will impact on their national businesses, particularly those in frontier areas – and today also ecommerce shops that sell online across borders. This fact ensures that finance ministers are careful how they deal with the tax issue and try to ensure that they do not create a situation where their neighbours’ businesses can profit from lower prices to the detriment of local businesses.