EPRC in the news

The good news coming from the Nakawa-based Uganda Revenue Authority (URA) is that local firms, will effective July this year, be protected from external competition as government increases taxes on imported products similar to those produced locally.

However, the concern with the new move is that the taxes will be applied to goods coming in, and the local businesses are the ones that will be responsible for meeting the obligation and eventually pass them onto consumers in form of higher prices.

URA executives said the step is in response to the amendments in the customs laws for the financial year 2019 /2020 that comes into force on July1.

As such, a section of economic experts told The Independent that the move will push up the price of products and possibly affect people’s lives.

“The price (of these products) is likely to go up as manufacturers in the local market still experience high production costs,” Fred Muhumuza, an economist and lecturer at Makerere University told The Independentin an interview.

“….and given that producers will not be in position to respond quickly to meet the market demand given the shorter timelines there will still be imports that the consumers will pay at a high price.”

Muhumuza said the surge in prices could force the poor population to abandon a number of various products which might negatively affect their living standards.

Isaac Shinyekwa, the head of Trade and Regional Integration Department at the Makerere University-based Economic Policy Research Centre (EPRC), however, said the decision is welcome arguing that there is no country in the world that has developed without protecting its local firms.

He cites countries such as the US, China and Japan.

However, Shinyekwa says URA should have done a thorough analysis of the local demand viz-a-viz local production to ensure that there is no supply shortage that might push up prices.

Local firms says the new development is welcome as it will boost local production that have for a long time faced stiff competition from imported products.

In a notice issued to the newsrooms recently, URA said it will increase taxes on a number of products to protect the interest of local producers of similar products.

For instance, importers of ball point pens, exercise books, and tooth brushes will be required to pay 60% as tax, up from the current 25%. This represents approximately 140% increase in tax.

Similarly, chicken, peanut butter, processed tea, coffee, ginger, cooked potatoes fresh or chilled, potato and other crisps, bread spreads including Nutella as well as onions, shallots and garlic, will see importers pay 60%  tax,  up from the current 25%.

The same tax rate will apply to importers of refined sunflower seed or safflower oil, chocolate and other food preparations containing chocolate contents, refined cotton seed oil, butter and other fats and oils derived from milk.

On the other hand, toothpaste including Colgate and other mouth wash will attract a tax of 35%, up from 25% and so will television sets with the same margin. Importers of motorcycle tyres will pay 35% tax, up from 10%, a step URA says is intended to boost local production of motorcycle tyres.

Steel related products too, have not been spared. Flat rolled products of iron or non-alloy steel will attract US$250 per metric ton or 25% whichever is higher for a year as tax. Soap and organic surface active products including Dettol, blankets, furniture, mattresses, pictures, designs and photographs and toilet will also attract a tax of 35%, up from the current 25%.

Critics say the move contravenes the East African Common Market Protocol that allows free movement of goods and services within the region.

To make the situation worse, critics say, it is coming at the time the African Continental Free Trade Area (AfCFTA) is expected to take shape starting July 07.

Critics also argue that increasing taxes on imports could trigger retaliation, making consumers pay high prices for the products as the local firms struggle to meet the demand within the shortest available time.

They cite the case with the US, in which consumers are the biggest losers in the current US-China tariff feud. For instance, a paper published by the London-based Centre for Economic Policy Research (CEPR) shows that American consumers and firms  paid more than US$19.2bn and are still counting since President Donald Trump imposed taxes on  $283 billion worth of imported goods, including steel, washing machines, and solar panels in 2018 from China.

The study says the prices went up, as expected, disrupting supply chains and budgets.Though the results were still preliminary, the evidence suggested that Trump’s protection wasn’t working.

The authors – Mary Amiti, assistant vice president of New York’s Federal Reserve Bank, Princeton Professor Stephen Redding, and Columbia professor David Weinstein – said prices for the affected goods responded quickly to the taxes, increasing between 10% and 30%.

The jump closely matched the tax levels, which suggests that buyers –American consumers and importers – absorbed the increase, not the foreign sellers of those goods.

At the same time, US firms increased prices for their own goods, given the higher prices for their foreign competitors’ products.

However, as prices increased, demand for the taxed products fell by 25% –30% in the total value of imported goods as firms and consumers had less choice.

The researchers calculate Americans to have paid more than US$12.3 billion to the US government in taxes, and lost US$6.9 billion in income due to trade-war-related market disruptions.

For that, the study says the tax revenue the US is collecting is not enough to cover the losses to consumers and companies.

More research released by economists from the Federal Reserve Bank of New York, Columbia University and Princeton University found that the burden of  Trump’s tax fell entirely on U.S. consumers and businesses that buy imported products.

By the end of last year, the study says companies were paying $3 billion a month in higher tariffs and absorbing $1.4 billion a month in higher costs.

The researchers noted “that US responded to reduced import competition by raising their prices.”

Similarly, US introduction of taxes on other countries has also led to retaliation from member states of the European Union (EU). Others include Mexico, Russia, and Turkey, who all began levying retaliatory taxes on U.S. exports.

Gideon Badagawa, the executive director at the Private Sector Foundation of Uganda (PSFU) told New Vision that the move is good as long as it does not work at the expense of the consumers.

He said the move could either cause scarcity or push prices up, leading to inflation.

Going forward, Shinyekwa said the country should also work on creating conditions that will lower operational costs to boost competitiveness.This, he said, would make the country’s products compete favourably with the imported products.

Article published by The Independent Magazine of June 18, 2019