Tanzania: Dar Snubs Fragile EAC Customs Union by Granting NIDA Mills $18 Million Tax Waiver The East African (Nairobi) August 22, 2006 Posted to the web August 22, 2006 Wildred Edwin, Special Correspondent Nairobi Tanzania's decision to unilaterally grant a Tsh22.5 billion ($18 million) tax waiver on imported fabrics to NIDA Textile Mills Ltd, has raised new doubts about the commitment of the authorities in Dar es Salaam to the fragile East African Customs Union. Under the common external tariff (CET) of the Customs Union for the partner states of the East African Community, a 25 per cent import duty must be charged on all fabrics imported into the Customs Union with the exception of imports from Comesa and SADC countries. Other textile manufacturers are now up in arms complaining about discrimination and selective application incentives for NIDA. Under the EAC Customs Management Act, ministers of member countries have no powers to abrogate the CET and must seek the authority of the Council of Ministers of the union before making any move. Tanzanian Minister for Finance Zakia Meghji last week granted the waiver to the company on condition that the mill is able to prove that that over 50 per cent of the products it will have made from the imported fabrics will be re exported. She however last week toldThe EastAfrican that "it is possible under EAC Customs Union procedures to grant tax waiver first, and later seek council minister's endorsement." She said under the circumstances, Tanzania Attorney General Johnson Mwanyika will prepare necessary documents to be submitted to the EAC Council of Ministers. "There is nothing unusual about this. A country may decide unilaterally, according to prevailing circumstances, only to present the issue at the Council of Ministers later. Kenya has done this before on imported drugs, and Uganda on some items," she said. However, the EAC Direct or of Customs Union and Trade Issues Peter Kaguta told The EastAfrican last week; "The matter has not been brought to our attention yet," but added that the Customs Management Act summarises exemption procedures to be followed by member states. NIDA Textile Mills (T) had in 2005 requested the Tanzania Investment Centre (TIC) for a Strategic Investor Status under which it was allowed to import grey fabrics of a width of 80 inches and above at zero rate import duty, on conditions that the products will be sold locally to attract Value Added Tax. However, TIC had stated that if the required materials are produced in the EAC member states, NIDA was to source them from within the region. In the course of establishing its investment plan according to the existing performance contract, NIDA was to establish integrated textile mill for wider width fabrics' production at a total cost of $12 million, with its total employment rising from 500 to 2,000. Its plants and machinery is worth $8 million. But in a report prepared by a team of experts assembled by the government to investigate the tax waiver matter early this year, the government was advised against granting such exemptions, for it would be creating an estimated foregone loss of up to $18 million for the two years of exemption, whereas "the highest range of revenue loss annually is more than the total investment of the existing NIDA factory." Furthermore, the government was warned that granting exemptions would create serious revenue loss resulting from abuse of the privilage companies get involved in misclassifications of their imports by bringing in khanga and kitenge instead of grey fabrics. This would further lead to immense loss of government revenue and ultimately affect local manufacturers of khanga and kitenge, given the difficulties in administering the scenario. But the granting of a tax waiver is a big blow not only to the growth textile industry in Tanzania, but to also the cotton farmers in the hinterland, stakeholders say, threatening employment of more than 10,000 people currently working in the textile sector, while another 100,000 are involved in cotton growing. This fact alone outweighs NIDA's anticipated employment of about 2,000 employees. Results of tax exemption could also ultimately affect social welfare of the country starting from families of employees in the clothing industries to cotton growing farmers. The decision to grant tax waiver have also come just two weeks after President Jakaya Kikwete promised to convene a meeting of textile stakeholders to discuss the future of the industry.