Cost of import substitution: Tax measures begin biting fabric importers

By Ismail Musa Ladu & Racheal Nabisubi

Mr Farouk Nyanzi has a hard decision to make or else there will be repercussions to contend with.
He has to either invest the money he has left at his disposal to rebuild his tailoring and sewing machine business that has been struggling to cope with the effects of Coronavirus disease (Covid-19) containment measures or clear what he describes as “excessively punitive” tax obligation.
He says: “It is now difficult for an importer or a player in textile industry to sustain operations because there are too many things to worry about.”
He continues: “Taxes have doubled and in some cases multiplied because of a punitive tax rate. Besides paying taxes, we have many other obligations to take care of so we cannot spend all we have in just paying taxes!”
For Ms Grace Ssengooba, an importer of textile material, the situation is not any different from Mr Nyanzi. Unlike in the past 24 years that she has been in the importing business, running a business has never been as difficult as it is now, due to some of the punitive tax measures which took effect at the beginning of this financial year.
“From paying between Shs70m to Shs80m for the same import cargo, we are now asked to pay between Shs400 million to Sh500 million in taxes. I don’t think this is fair,” Ms Ssengooba says.
Cost of import substitution
“You can’t have your cake and eat it,” the director Economic Affairs at the Ministry of Finance, Mr Moses Kaggwa, responded when asked whether the government will consider reversing a new tax measure that importers of textile materials describe as “punitive.”
According to Mr Kaggwa, the petition against the new per kilogramme rating whose implementation started in July 01, 2020 is aimed at promoting import substitution, which became a buzzword at the peak of the lockdown.
Although local industry players dealing in textile fabrics are unhappy with the decision to stay application of the EAC Common External Tariff rate of 0 per cent, 10 per cent and 25 per cent as well application of a duty rate of 35 per cent, they are irked by the application of the $5 (nearly Shs20,000) per kilogramme rate in computing duties for textile imports, saying it worsens tax obligations.
Importers of textile materials are now up in arms over the $5 (nearly 20,000) per kg rate, saying it is an exorbitant rate aimed at pushing them out business, rendering multitudes of Ugandans jobless.
In an interview, Mr Kaggwa noted that industry players across the economic sectors should brace for the bitter pill to swallow, considering that the cost of industrialisation which is being promoted through import substitution, is not going to come cheap.
Uganda’s yearly imports normally stand at $7 billion (about Shs25.7 trillion), with textile and textile products, according to President Museveni, accounting for $243.72m (about Shs895.3 billion), - about the same budget allocated to the Agriculture Ministry.
“When you look through the list, you see that there is no reason why we should import many of these items: medicines, textiles, leather products, industrial sugar for use by Coca-Cola, industrial starch for use by the Pharmaceutical Industries, paper, packaging materials, glass products, automobiles, bicycles,” says President Museveni in his State of the Nation Address a week before Budget Speech was delivered by the Finance Minister Matia Kasaija in June.
President Musveni sees no reason why many of these items imported, including textile materials, cannot be made here.
The petition
To minimise if not eliminate the punitive tax rate of nearly Shs20,000 additional charge per kilograme of the textile imported material into the country, Kampala City Traders Association (KACITA) in an appeal titled: Petition Against Unfair URA New Tax Rates for Textile Materials, asks the government to reverse the decision on the ground that it threatens business survival, especially when the government should be helping economic industry players overcome shocks occasioned by Covid-19 effects.
The petition delivered on July 20, to among others, the Ministry of Finance and Ministry of Trade on behalf of the KACITA members dealing in textile materials, including the Uganda Tailors Association, made it clear that they are opposed to the new $5 per kilogramme rating whose implementation started on July 01, saying it is not equivalent to the value of goods in the container.
The importers are not opposed to paying taxes including the application of the EAC Common External Tariff rate beginning from 0 per cent, then 10 to 25 per cent, and a duty rate of 35 per cent, although many believe it is problematic as well.
Now they want reversal of the proposed rate (of $5) per kg, saying it increases the tax burden for the importer who is already struggling to comply with EAC Common External Tariff rate.
“With the introduction of the new rating, taxes have risen to an average Shs400 million for a 20 feet container and Shs900 million for the 40 feet container which is way beyond the total value of the goods in the containers.
“This has generated a heavy outcry from the importer of these items who used to pay just between Shs45 million and Shs50 million for a 20 feet container and Shs70 to 80million for 40 feet container respectively,” reads the petition signed by KACITA chairman, Mr Everest Kayondo.
The petition further states: “Application of the $5 per kg clearly means government is frustrating importation of polyester raw materials which in turn will suffocate the supply of the same required materials for the local production in the textile sector which includes tailors, designers, cutters and many others. This would encourage importation of finished products that would have been locally manufactured.”
According to the traders’ umbrella association, many of whom are importers, there is need for economic and business considerations before implementation any recommended policies whether at the regional or national level. This, they say, is as a result of thorough research they made on this specific polyester imported material which reveals that there is no factory including NYTIL, Sunbelt and Fine Spinners that produces it in the country.
As a result, members now import this raw material which they utilise in production of variety of textile products including curtains, masks, wedding gowns and accessories.
The importers of these fabrics cannot wait to start cottage industries to produce the textile materials here in response to the government’s import substitution initiative.
However, this is dependent on the government granting them some incentives including access to financing and land.
Resurgent issue
As for the manufacturers, the teething challenge is the Digital Stamp Tax (DTS) pronounced in the national Budget Speech read in June 2020.
“Manufacturers are in full support of the tax measure, given its benefits, and would not mind to have the DTS if government was paying for the costs of the stamps and the installation. This is because they are using DTS to collect what is due to them,” the executive director of Uganda Manufacturers Association (UMA), Mr Daniel Birungi said in a statement.
He further noted: “Besides, the timing was not good because the manufacturers with excisable goods were the most hit by the effects of the Covid-19 pandemic.
“These manufacturers depend on functions and gatherings that are still under lockdown, which is about 80 per cent of their addressable market. Their base market is the population which is not consuming. As such, if you go ahead and put an additional cost to an already struggling sector, then you are likely putting it to death.”
Mr Philip Ssekimpi, the national chairman of Uganda Tailors Association, noted that there must be a win-win solution or else the final consumers will ultimately pay the price. He notes most of the imported textile fabrics, mainly polyester are used as raw material to promote the Buy Uganda, Build Uganda (BUBU) initiative, saying it should not be discouraged by imposing punitive tax measures.
In the Central Business District alone, the textiles sector employs more than 30,000 people both directly and indirectly as casual labourers, designers and tailors, according to Mr Ssekimpi.
Not budging
For now, the government does not seem to relent on enforcement as it looks to domestically collect about Shs25.5 trillion in this financial year alone.
When contacted, the Deputy Secretary to the Treasury, Mr Patrick Ocailap, said: “Whatever we do is informed by evidence. So where is the detailed analysis which should be backed by data on demand and supplies quantities as well as pricing to inform policy ? Our decision is informed by well backed analysis and we always try to do things prudently,” Mr Ocailap said.

Tax measures
$5 per kg rate
Although local industry players dealing in textile fabrics are unhappy with the decision to stay application of the EAC Common External Tariff rate of 0 per cent, 10 per cent and 25 per cent as well application of a duty rate of 35 per cent, they are particularly irked by application of the $5 (nearly Shs20,000/=) per kilogramme rate in computing duties for textile imports, saying it exacerbates tax obligations.