East African members states (Burundi, Kenya, Tanzania, Uganda and Rwanda) must be applauded for taking a bold step to implement a one market protocol as from July 1, 2010. The quest for one market may however run into hurdles if some of the provisions in the common market protocol are not brought at par with national goals and members fail to harmonize governance standards.
Business people keen to reap the benefits from the 120 people million strong market will find provisions in Article 32 and Article 33 in conflict. Article 32 of the East Africa Common Market Protocol on Harmonization of Tax Policies and Laws stipulates that: "The Partner States undertake to progressively harmonize their tax policies and laws and remove tax distortions in order to facilitate free movement of goods, services and capital to promote investment within the community." The next article 32 then focuses on prohibited business practices. If the budgetary estimates that were read out in early June on how individual member states plan to raise revenue through taxes are anything to go by; then the EAC team must be ready for a surge in "prohibited business practices."
If a corporation that supplies similar goods across the East African market is hit with different taxation regimes (because of progressive law); its products will have different prices for each member state. The state with lower taxes will have cheaper products from the same corporation while the one with higher taxes will have higher prices. The outcome of such an arrangement will be magendo (prohibited business practice.) for products that are from one source. The differences in Excise Duty on malted beers in Kenya, Uganda and Tanzania leads to price variations of Ksh 32.50; Ksh 16.05 and Ksh 10.61 respectively. The cumulative effect of varying taxation regimes result in for example, one Tusker beer in the East African Common Market costing Ksh 90 in Kenya; Ksh 63 in Uganda and Ksh 78 in Tanzania. What will stop unethical enterprisers from taking advantage of the tax effect on prices to sneak Ugandan Tusker to the Kenyan and Tanzanian market ?
Varying tax regimes in one market may also complicate the operational costs of businesses that are keen to tap into the larger market. It will be costly for industries to seek to relocate their bases because of taxation regimes. Variation in tax policies also touches on Article 34 on prohibited subsidies. Although focused only on resources from government, prohibition of subsidies may also include favorable taxation regimes to distort competition in the market. If one member state taxes lower, it undercuts those who tax highly! It is important therefore that member states prioritize a calendar of implementing a harmonized tax policy for the region.
On matters of governance, the signals emanating from Rwanda whose political leadership exhibits high levels of intolerance to opposition may not augur well for the common market. Rwanda's traumatic past calls for urgent attention to help nurture it into a culture of positive pluralism. A stable political environment will attract both indigenous and foreign investors to the region's common market. Kenyans must seize the moment presented by the ongoing referendum to enact a new constitutional dispensation and give leadership to the region.
Member countries must harmonize their national policies with the regional policy framework to avoid wastage, duplicity and conflict. A slow approach to harmonization of critical policies will only breed corruption and slow economic growth. We must strengthen productivity in the region so as not to turn East Africans into consumers of exports from outside the trade bloc.
By James Shikwati
James Shikwati firstname.lastname@example.org is Director of Inter Region Economic Network.