By John Naku
During last week’s Budget Speech, both sector players in the Edible Oil category referred to as Fast Moving Consumer Goods (FMCG) and their clients had expected the revocation of the 10% Import Duty on Crude Palm Oil (CPO) but their hopes were dashed when Hon. Matia Kasaijja (Minister of Finance, Planning and Economic Development) maintained it in the FY2022/2023 Budget worth UgX48.1 Trillion. This category has items like edible oils and cleaning products that are currently very costly.
This Tax which was introduced in July 2021, is in addition to another one of UgX200 levied on each litre of Cooking Oil despite CPO being a critical raw material for processors of Oil and Oil Products world over.
Prior to that on 1st May, 2021, URA introduced Digital Tax Stamps on Edible Oil at a cost of UgX40 per stamp which has further hiked the cost to the Oil Refining Companies in Uganda that are already burdened by the high input costs and lower volumes yet there is serious competition from neighboring countries in the East African Community who are into the same business operating at slightly lower costs.
In her July 5, 2021 letter to the Minister of Finance, Panning and Economic Development, Barbra Mulwana revealed that Uganda Manufacturers Association had noted with serious concerns that Uganda had allowed the imposition of 10% Import Duty on the Crude Palm Oil yet historically, Crude edible oil imports attract import duty at 0% (raw material), olein fraction attracts a 10% (processed) and refined edible oil attracts a 35% (final product). She further said that the sector contributes to domestic taxes such as corporate tax 30%, VAT 18%, withholding tax 6%, Excise duty UgX200 per litre as well as other Non- Tax Revenues and statutory contributions.She also argues that the objective of this tax regime is to enable the sub sector to improve domestic capacity, raise farmer output, develop the edible oil supply chain and ensure supply of edible oil products to Ugandans.
However, as Hon. Kasaijja maintained the different taxes for the Edible Oil sector, his Tanzanian counterpart in charge of Finance and Planning-Hon. Dr. Mwigulu Nchemba as he unveiled their TzS 415 Trillion proposed budget, he revoked the CPO tax from 25% to 0% for the next FY2022/2023 reflecting their annual theme “Accelerating Economic Recovery and Enhancing Productive Sectors for Improved Livelihoods”.
While Uganda’s National Budget is aligned to National Development Plan III (NDP III) with emphasis on Governance and Security, Tanzania’s Budget prioritizes productive sectors like Agriculture, Livestock, Fisheries, Energy, Investment and Trade. To them, rebuilding investor confidence as it proposes several measures aimed at improving business environment as well as maintaining stability in the tax system a key ingredient in attracting FDIs is a must follow. Their budget aims at finding other sources of government revenue with a view of reducing the burden on businesses.This move seems to be a welcome gesture to some of the sectors whereby taxes have been increasing annually thereby affecting their income and expenditure.
Tanzania’s new budget introduced fiscal and non-fiscal amendments that aim at promoting an inclusive and competitive economy that attracts private sector investment and increases employment opportunities by improving tax collection and administration as well as an overall business environment. On tax measures, there are important developments on both direct and indirect taxes which commensurate with the registered priority areas of improving the tax administration systems. Tanzania’s Gross Domestic Product grew by 4.9% in 2021 slightly higher than the 4.8% reported in 2020 (GDP TZS161.5 trillion compared to TZS151.2 Trillion in 2020) with a population of 57.7 million compared to 55.9 million in 2020.
With Tanzania among other East African Community States revoking the CPO tax to 0% means that Ugandan Manufacturers who have been subjected to the excise duty per litre of produced oil must compete for cereals with other East African counterparts who don’t have such tax in their countries. Whereas Uganda remains a key member of the East African Community that agitates for zero taxes on such products, the cost of production in other East African states is not only cheaper but investor friendly. Important to note is that the Ugandan market prefers palm oil products to sunflower products.
Until Government of Uganda revisits it’s decision, chances are higher that sector players are at the verge of departure with other East African States as their next destination due to investor friendly incentives. If this prospective decision is not addressed sooner than later, many people will lose their jobs as URA misses out on the tax.
According to Hon. David Isabirye Aga (MP Jinja City North Division), government needs to up its game lest the future looks blink with the wanainchi as the end user suffering the more by shouldering all the tax burdens being levied on to the sector players.
“Uganda does not do any serious business. It has no parastatals in business because all were sold to foreign firms. Kenya has things like KCB, Kenya Airways. It’s the same with Tanzania whose parastatals are functioning and bringing in the much needed revenue. For Uganda, it entirely depends on taxes from the private sector. In other words, taxation is the only government business”, he asserts noting that unless government clarifies on the same in the forthcoming budget breakfast organized by URA, the future promises to be harder. Noting that Crude Oil would be a key measure especially with souring soap and cooking oil prices, he reveals that sometimes the budget may be silent as it does not state all measures and that it usually states key measures not the in-depth and that many amendments can be made on the way during the financial year even after the budget. However, this remains to be seen with time being the best judge.
Counsel Alex Yafesi (a Tax Expert) revealed that Uganda’s budget is externally financed.
“The challenge with Uganda’s government is that it’s budget is above 50% financed by external sources and as well as wage, non-wage and pension expenditures in the budget are above 75% of the total expenditure. That type of budget is not sustainable at all”, the expert asserts noting that it’s very hard for the government to suspend taxes because whenever there is high consumption, government will milk as much as possible to get funds in the treasury adding that politics overrides policies and procedures whereby less development costs that government budgets for deepens poverty levels in the populace. This means that our leaders look more at consolidating their grip on power than empowering domestic production.
Prior to this year’s budget speech, impatient traders had resorted to dealing in tax free products. Information from border points mainly at Busia and Malaba indicates that with the need to make some abnormal profits off their sales, traders resorted to tax-free Kenyan products compared to the Ugandan made products that are said to be costly. Unfortunately, some of these products are illegally smuggled into the country through shortcuts locally known as Panyas making it inevitable for them to be sold at a giveaway price.
On a sad note, some of these products are substandard and do not necessarily conform to acceptable standards. This in other words implies that both Uganda National Bureau of Standards and Uganda Revenue Authority must style up and up their respective games. However, this current situation affects the end user who is none other than the consumer.
Border towns cited in this illicit trade include but not limited to Nalwire, Nankoma, Nabigingo, Busekei, Namayingo, Lumino, Malaba that are taking a leading role in dealing in cheap Kenyan edible products like Rhapso (Fortified Edible Vegetable Cooking Oil manufactured by Kapa Oil Refineries Ltd), Somo Fry and Top Fry by Manengei Oil Refineries Ltd, Nyota Fry, Fresh Zait, Halisi Fry, Pika, Salit. These products are over flooding the Ugandan market and are being sought after due to their pocket friendly prices. This is due to the fact that the cost of production in other East African states is very cheaper compared to Uganda.The consumers who are the end users feel that established companies in the edible oil sector are allegedly cheating them due to their need to maintain standards in addition to remitting the imposed tax.
Matters are also worsened that blended oil of cotton and soya can’t be determined by the customers in terms of dictating the amount of the mix. Here government agencies concerned ought to determine what type of oil can be mixed, what is the percentage mix which is healthy for human consumption, certification by UNBS, why do the prices vary and then quality of the products. Our findings are that established companies in the sector are selling standard products since they are certified by UNBS while rival companies are selling cheap products but harmful to human life since they tend to be short of the required standards.
As earlier noted, Mulwana anticipated the current crisis as a result of the implementation of the 10% Import Duty on Crude Palm Oil (raw material) to include but not limited to partner states for example Kenya charging a 0% import duty on Crude Palm Oil, an increase of Uganda’s imports duty from 0% to 10% will lead to dumping and smuggling of Kenyan products (refined edible oils, cooking fats and soaps, made from the non-taxed CPO) by traders on to the Ugandan market. It’s important to note that a similar scenario has been experienced in the wheat sub sector and has resulted into massive wheat smuggling along the country’s Eastern border, the introduction of a 10% import duty on Crude Palm Oil (raw material) is affecting prices of edible oil products as well as byproducts such as soap used as a key product in the fight against COVID19, Distortion of the import substitution effort, introduction of a 10% import duty on Crude Palm Oil (raw material) will encourage local edible oil refiners to import already processed oleim fractions (refined clean processed from CPO which is the raw material) instead of raw materials (CPO) Leading to value addition happening outside Uganda as opposed to within the country.
Crude Palm Oil prices hit record high in May 2021 along with Soya bean oil, Sunflower oil and other soft oils which compete for a share in the vegetable oil market. The prices in Uganda have increased to USD2000 (UgX7.6m) per metric tonnes from USD500 (ugX1.8m) close to two years ago. One Kilogram of such products was at UgX6500 last year from UgX4500 over the last three years thereby tampering with the prices of several household items in modern times.
For example soap which for long had been sold at UgX4000 is currently being sold at UgX8000 at known sales points throughout the country with a litre of cooking oil increasing from UgX7000 to UgX13,000. The price changes have not spared margarine and other edible oils whose costing has shot up by over ugX9000.
The business environment further deteriorated by extreme depreciation of the UgX by 7% and may go higher as we see the USA Treasury recently increased the rates by 0.75% basis point after 28 years to control inflation which subsequently depreciated the UgX and has the ability to depreciate4 further leading to excessive inflation and lower demand. Therefore, Government of Uganda needs to have a strong plan to resurrect the economy under these challenging times lest it’s 2022/2023 Budget Object of Revenue Collection will be defeated.
Research shows that currently, available sector players can produce between 3000-4000 metric tonnes compared to the local demand which stands at 15,000 metric tonnes.
This means that with the current crisis in the sector, cereal oils like sunflower and soybean would have been a good substitute. However, their production remains at the lowest.
Although government of Uganda has the final say on the CPO tax, it’s prudent for it to create a favorable working environment for its investors just like it is in other East African states.
John Naku is a Retired Journalist