OPTIONS FOR DUTY REMISSION SCHEMES FOR USERS AFTER 2010

TABLE OF CONTENT

LIST OF ABBREVIATION.......................................................................1

EXECUTIVE SUMMARY ........................................................................2

1.0 BACKGROUND..........................................................................4

2.0 REVIEW OF DUTY REMISSION SCHEMES............................................5

2.1 EXPORT COMPENSATION .................................................................................5

2.2 EXPORT PROMOTION PROGRAMMES OFFICE ..............................................................5

2.3 ESSENTIAL GOODS PRODUCTION SUPPORT PROGRAMME (EGPSP) .......................................5

3.0 ANALYSIS OF DUTY REMISSION SCHEMES .........................................9

4.0 PROPOSED POLICY OPTIONS ...................................................... 11

5.0 ANALYSIS OF THE POLICY OPTIONS ............................................. 12

6.0 RECOMMENDED OPTION............................................................ 17

7.0 ANNEXES.............................................................................. 19

8.0 REFERENCES ......................................................................... 20

9.0 Guidelines …………………………………………………………………………..19

1

LIST OF ABBREVIATION

APEC-Asia-Pacific Economic Cooperation

CBS- Centre for Business Statistics

CMA – Customs Management Act

CET- Customs External Tariff

CSD – Customs Services Department

EAC- East African Community

EACCU- East African Community Customs Union

EC-European communities

EPA- Export Partnership Agreement

EPC- Export Promotion Council

EPPO - Export Promotion Programmes Office

ERS- Export Remission Schemes

EU- European union

KAM-Kenya Association of Manufacturers

KRA- Kenya Revenue Authority

MTI- Ministry of Trade and Industry

RIAs- Regional Integration Agreements

SAFTA-Southern Asia Free Trade Agreement

TREO-Tax Remission for Export Office (synonymous to National Duty Remission

Scheme)

WTO- World Trade organisation

EACMR- East African Community Management Regulations

2

FOREWORD

The overall objective of the EAC Duty Remission Scheme is to enhance the

competitiveness of manufactured products within both export and local markets.

The primary objectives of the scheme include the following:

• To cater for manufacturers who are already established and are exporting

• To assist those manufacturers who have an installed excess capacity that

can be utilised for export purposes

• To assist those manufacturers who have a potential to export but are being

constrained by the taxes payable on the required raw materials to be used

for export purposes

It is expected that the scheme will enhance the competitiveness of the Kenyan

products by reducing the cost of production for industries that are engaged in both

domestic and export markets, while at the same time assisting firms that have the

potential to export but are constrained by taxes on raw materials.

This report has been published as a result of a study that was undertaken with the

aim of providing policy options for manufacturers to use to lobby for a smooth

transition to the East African Community Duty Remission scheme and a fully-

fledged productive Customs Union.

3

EXECUTIVE SUMMARY

Article (3) of the Export Promotion Schemes in the Protocol for Establishment of

the East African Community Customs Union proposes that the sale of goods within

the Customs territory shall be subject to authorisation by the competent

authority and that the 20 per cent annual production of a company allowed for

sale within the territory shall attract full duty in accordance with the Customs

External Tariffs (CET). This presents a problem to most Kenyan manufacturers

since most of there products are exported to countries within the region.

This report presents the results of a study that was undertaken with the purpose

of providing policy options which the manufacturers can use to lobby for a

favourable platform for transition to the East African Community Duty Remission

scheme and a fully fledged productive Customs Union.

Four policy options have been proposed as follows:

1. Compensation based on an alternative interpretation of the inward

outward processes and drawback

2. Compensation based on domestic taxes

3. Review the costs of fundamental inputs

4. Value Chain Analysis

We propose that these policies be implemented before 2010 to facilitate a

smooth transition and provide time for manufacturers to find alternative export

markets, improve productivity and competitiveness.

4

1.0 BACKGROUND

The EACCU will be fully effective in 2010. The five member states will be

considered one domestic market. This means that there will be free movement of

goods within the region, thus removing the administrative borders for the purposes

of trade. This essentially means that goods manufactured in Kenya and supplied to

any of the partner states will not be considered an export, but as domestic trade.

Article (3) on Export Promotion Schemes in the Protocol for Establishment of the

East African Community Customs Union states that:

“The sale of goods within the Customs territory shall be subject to authorisation by

a competent authority and such sale shall be limited to 20 per cent of the annual

production of a company.”

This means that it will be a requirement that 80 per cent of the total output from

export companies be exported outside the EAC region or else full duties, levies and

other charges become payable as provided for in the CMA. Furthermore, 20 per

cent of a company’s annual production that will be allowed for sale within the

territory shall attract full duty in accordance with the CET. Manufacturers

involved in export trade in Kenya may be affected negatively when EAC becomes a

fully fledged Customs Union by 2010 and the new duty remission scheme takes

effect. This is why KAM commissioned this study with the aim of providing local

manufacturers with policy options that would offset the anticipated negative

effects.

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2.0 REVIEW OF DUTY REMISSION SCHEMES

Duty Remission schemes were introduced in Kenya with the aim of promoting

export trade and making locally manufactured goods more competitive. The

schemes have evolved over the years, ranging from refunds on exported goods to

providing duty remission on raw material at the time of importation. Below is the

evolution pattern of export incentive schemes in Kenya, since the 1980’s to date.

2.1 Export Compensation

During the late 80’s and early 90’s, “Export Compensation” was provided by the

Government as an export incentive. Under this scheme, import duties on raw

material were paid in full at the time of importation. However, manufacturers

were allowed to put in a claim of 20 per cent of the total value for compensation

upon exportation of manufactured goods.

The compensation under this scheme would only be made after the Customs

Department confirmed that the goods had been exported.

2.2 Export Promotion Programmes Office

The EPPO was introduced in 1994 after the Export Compensation Scheme ended.

Under this programme, the importer applied for duty remission on specific

quantities before importing the same. Upon approval of the application, the raw

material was imported into the country duty free against a security bond whose

value was equivalent to the duty amount remitted. This bond was used to secure

the taxes due, in the event that the raw material was not used in the manufacture

of goods for export. Once the goods were exported, the manufacturer/importer

applied for security bond cancellation.

2.3 Essential Goods Production Support Programme (EGPSP)

EGPSP was specifically introduced to cater for essential goods such as medicines.

Products that were manufactured using raw material imported under the EGPSP

did not have to be exported out of the country. Such goods were for consumption

locally although they could also be sold for export. The purpose of the EGPSP was

to provide affordable essential goods for domestic consumers.

Under the EPPO and EGPSP, the importer was required to provide returns and

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reconciliations of the quantities imported within nine months or more as per

advice from the Treasury. This was one way of monitoring manufacturers’

activities.

The Security bonds earlier executed to secure duties due on imported raw

materials were cancelled after detailed audits had been conducted by CSD EPPO

auditors to confirm that the products manufactured using the imported raw

materials under the particular EPPO account had been exported.

However, one limitation that was encountered under the EPPO was that

manufacturers only brought in the quantities approved by the Treasury duty free.

This limited their market to the approved volumes and the potential for expanding

into new markets was delayed.

2.4 Tax Remission for Export Office (TREO)

TREO is an office located in the Ministry of Finance which is responsible for

matters relating to the administration of the regulations that govern the Duty

Remission Scheme. The Ministry of Finance manages the scheme in conjunction

with the TREO Audit unit within KRA’s CSD. The objective of the scheme is to

enhance the competitiveness of Kenya’s manufactured products in both the local

and international markets.

The EPPO scheme was replaced by TREO which is provided for under the Customs

and Excise Act, cap 472 of the Laws of Kenya in 2002. The TREO regulations were

gazetted in Legal Notice No. 129 of 19th July 2002. Section 141 (2) of the Customs

Act provides for the remission of 100 per cent duty for raw material imported

under TREO, for the manufacture of goods for export and/or essential goods for

home use, with an exception of industrial sugar.

Unlike other raw materials which attract a 100 per cent remission, industrial sugar

when imported under this scheme attracts 25 per cent duty. Similar to EPPO,

Under TREO, a manufacturer can only import approved and gazetted quantities. All

goods imported under TREO are subject to a security bond whose value is

equivalent to that of the duty that is remitted.

This is a requirement that helps safeguard the remitted taxes in the event that the

imported raw material is diverted to other uses other than that for which it was

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imported.

Once the goods that are manufactured using raw materials imported under this

scheme have been exported, the importer applies for bond cancellation. The

cancellation is only effected after an audit has been conducted by the CSD audit

team. The objective of both EPPO and TREO was:

• To reduce the cost of production on goods manufactured in Kenya;

• To give local goods a competitive edge both in the international and regional

market;

• To support manufacturers who export locally manufactured goods;

• To assist manufacturers maximise the installed capacity of their plants by

manufacturing for both domestic and international markets.

The objectives of EGPSP, was similar to that of EPPO. Additionally, it was aimed at

making essential goods more affordable to the domestic market by virtue of their

essential nature and need.

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2.5 EAC Duty Remission Scheme

The EACCU is expected to become fully operational in 2010. The Union operates

under the legal framework of the EACCMA and the EACMR. Section 140 of the CMA

provides for duty remission on goods imported for the manufacture of export

goods. Operational guidelines focused on bringing Section 140 of the EACCMA into

effect was enacted on 1st May 2008. Section 140 (1) of EAC Customs Management

Act does not describe the rate of duty remission for imported industrial inputs used

for manufacture of goods for export under the EAC duty remission scheme.

When the EACCU comes into effect, the five member states will be considered as

one domestic market. This means that there will be free movement of goods

within the region, thus removing the administrative borders for the purposes of

trade. This essentially means that goods manufactured in Kenya and supplied to

any of the partner states will not be considered an export, but as domestic trade.

Article 25 (2) & (3) on Export Promotion Schemes in the Protocol for the

establishment of the EACCU states that:

25(2)

a. The Partner States agree that goods benefiting from export promotion

schemes shall primarily be for export.

b. In the event that such goods are sold in the Customs territory, such goods

shall attract full duties, levies and other charges provided in the Common

External Tariff.

25(3)

The sale of goods in the Customs territory shall be subject to authorisation by a

competent authority and such sale shall be limited to 20 per centum of the annual

production of a company.

This means that 80 per cent of the total output by a company will be exported

outside the EAC region or else subject to full duties, levies and other charges

provided in the Common External Tariff.

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3.0 ANALYSIS OF DUTY REMISSION SCHEMES

There is need to take an all encompassing and comprehensive view for the overall

development of the country’s foreign trade if Kenya is to become a major player in

international trade. While we appreciate that the increase in exports is crucial, we

have to be seen to support this course as a nation in all ways. Kenya must

facilitate those imports that are required to stimulate the growth of her exports

and the economy at large.

It is also important to acknowledge that fact that in order to achieve Kenya’s

economic objectives, the government must start looking at other economic policies

in order to maximise their possible contribution towards export promotion. It is

necessary to take an integrated approach to the developmental requirements of

manufacturing products for export purposes.

Trade is not an end in itself, but a means to economic growth and national

development. The primary purpose is not the mere earning of foreign exchange,

but the stimulation of greater economic activity. The export promotion policy

should be rooted in this belief and built around among others, the following

objectives:

a. Appreciation of the manufacturing sector as a Kenyan outfit; a partner of

the government in economic growth rather than individual private entities

b. Set percentage levels of growth in global market within set periods based on

the countries strategic plan and work towards achieving the same as a

nation

c. Look at the industry as an effective instrument of economic growth through

providing employment

d. Promote Kenya’s exports

e. Make Kenya’s goods more affordable.

If goods that are manufactured for export purposes within the region will not be

subject to duty remission schemes, then the cost of production will go up. The

purchasing power Kenya’s currency is stronger than those of her partner states.

When put together, these factors will direct capital and labour mobility towards

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partner states with favourable policies.

Therefore most Kenyan manufacturers will move their businesses to neighbouring

states and export their goods to Kenya while taking advantage of the profit

margin. The familiar trends of Kenya being the main exporter to the region will be

reversed to Kenya being the main importer. This undermines the political

feasibility of a union.

3.1 Field Visits

The following are our finding from the field visit:

1. The Ministry was of the view that the manufacturers have a good case to

present but only if the government is aware of the impact that the 2010 Duty

Remission Scheme reforms will have on manufacturers. This avenue can only be

created and operationalised once most if not all manufacturers indicate a

substantial reduction in exports when the reforms take effect. This will only be

possible if the manufacturers are fully on board.

2. The Ministry confirmed that manufacturers who are considered to be essential

in nature will continue operating under the EAC Duty Remission Scheme after

2010 for goods that are exported within the region.

3. Manufacturers are advised to capitalise on the investment incentives offered to

them by the government for capital equipment and refurbishment.

4. Manufacturers should improve the quality of their output to attain sustainable

export market competitiveness and minimise dependency on government

protection. This can be done through investing in professionally trained staff

and active targeted training.

5. Manufacturers should embrace modern technology.

6. VAT and Income tax remission being a domestic tax shall remain operational;

therefore manufacturers will continue benefiting from the domestic remissions.

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4.0 PROPOSED POLICY OPTIONS

Being a member of the EAC, Kenya has no option other than adopting the new

Remission Scheme. It is however important that she puts in place policies that will

safeguard manufacturers without interfering or going against the set protocol. We

are therefore proposing the following policy options to provide relief to

manufacturers currently operating under TREO. The options include:

1. Compensation based on an alternative interpretation of the inward-outward

processes and drawback.

2. Propose compensation based on domestic taxes.

3. Review the costs of fundamental inputs other than imported raw materials.

4. Value chain analysis incentives.

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5.0 ANALYSIS OF THE POLICY OPTIONS

5.1 Compensation based on an alternative interpretation of the inward

outward processes and drawback

Inward outward processing is provided for in Section 172-186 of the EACCMA.

Inward processing refers to the Customs procedure under which certain goods can

be brought into a Partner State conditionally and exempted from duty on the basis

that such goods are intended for manufacturing, processing or repairs and

subsequent exportation.

The principle here is similar to that of TREO. The fact that it is catered for in the

law (EACCMA) makes it an option that can be adopted easily and is sustainable in

the long term. However, there will be need to amend the terms “for export” in the

existing law and leave “for manufacture”.

5.2 Proposed compensation based on domestic taxes

48.01-News print in rolls or sheets

CIF 10 per cent

Duty

16 per cent

VAT

2.25 per cent

GOK Total cost

Uncoated paper

(duty pd) 1,000,000 100,000 176,000 22,500 1,298,500

Uncoated paper

(under TREO) 1,000,000 nil 160,000 5,000 1,165,000

Difference 133,500

The percentage increase in the cost of importation in this case if the scheme is

implemented will be 11 per cent.

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48.02-Uncoated paper and paperboard

Example of 4802.55.00- Weighing 40 g/m² or more but not more than 150 g/m², in

rolls

CIF 25 per cent

Duty

16 per cent

VAT

2.25 per cent

GOK

Total

cost

Uncoated paper (duty

pd) 1,000,000 250,000 200,000 22,500 1,472,500

Uncoated paper (under

TREO) 1,000,000 nil 160,000 5,000 1,165,000

Difference 307,500

The table above indicates that the cost of importation into Kenya will increase by

26 per cent using an initial CIF value of 1 million if the new scheme is adopted.

Based on this illustration and in view of the fact that the goods are not being

consumed in Kenya, we propose that the government reduces the domestic taxes

due or payable by manufacturers after exporting their manufactured goods, by the

relevant actual percentage increase for the different products. This action would

still be in-line with the government policy as earlier stated.

The government collects revenue through various avenues including import and

excise duty and income, cooperate and value added tax. If the government

exempts manufacturers from paying import duty on input materials used for

manufacturing goods that are intended for the international or domestic markets,

then manufacturers would be able to cost effectively produce goods for export.

This would then increase the rate of production enabling the government to realise

increased VAT collection due to increased domestic sales. This would encourage

the expansion of Kenya’s manufacturing industry and increase the domestic tax

base.

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Sustainability analysis of the policy

The use of income tax and VAT incentives will be a suitable alternative to the

custom duty remission incentive. However, the government must amass every coin

it can get through taxation and other sources of revenue so as to achieve the much

anticipated vision 2030. Consequently, this policy should be applied after a cost

benefit analysis has been done on the benefits of the tax revenue and an increase

in exports. In the long run, a tax incentive is only sustainable if the production

costs are low. Done any other way, a tax incentive only aims at masking the cost

inefficiency in production.

Offering inputs for the manufacture of goods duty free as opposed to on the basis

of rebate may result in the government arguing that the quality and accountability

of manufactured products would go down because manufacturers do not have to

account for the outputs before applying for a refund. This can be mitigated

through the formation of a committee, whose responsibility would be to take

record of manufactured goods, statistically analysing them and giving reports to

the Ministry of Trade which would then determine the productive industries and

those that are not. This would create accountability and result in the robust

growth of the manufacturing industries.

5.3 Review the costs of fundamental inputs other than imported raw

materials.

Why is Kenya viewed as an unsuitable location for the production of export goods

by some manufacturers? Why are products manufactured in Kenya non competitive

in comparison to products from other countries such as India and china and

Southern African countries? Some multinational companies such as Johnson &

Johnson have shifted their production bases from Kenya.

Though imported raw materials constitute the biggest percentage of costs followed

by labour; other costs including electricity, cost of fuel, cost of water and

telecommunication costs also have to be taken into account, for instance, the cost

of electricity in Kenya is higher compared to that in Uganda and Tanzania. We

therefore propose that the government absorbs the cost of electricity, fuel, water

and telecommunication to the tune of the fore gone duty exemptions on imported

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raw materials. The challenge here might however be how to quantify the cost of

the above inputs in manufacturing goods for export. Furthermore, the

sustainability of this option is doubtful and as such, we recommend its existence

until such a time when the government will work out ways of reducing the general

cost of production through increased competition or cost efficient production.

Sustainability analysis of the policy

By far, this policy will be the most effective in ensuring sustainable

competitiveness of Kenya’s exports in the export market arena. However, the

researcher recommends that the government should absorb most of these costs to

the tune of duty which ought to have been remitted. Such a strategy is only

sustainable in the short run. Economists recognise the use of market mechanism

and little intervention of government in business to foster good business practices.

Consequently, the government should only absorb these costs for a period of less

than three years during which it should be pursuing macroeconomic polices to

bring down the costs of production.

5.4 Value chain analysis incentives:

Any option that is taken must be fused with a measure of cost efficient production

for its sustainability. In this context, we propose that the government establishes a

value chain analysis function with the mandate of reimbursing manufacturers for

export a percentage of costs saved during production. Consequently, some of the

recommendations of this value chain authority would be that companies embrace

e-business in order to reduce costs on non value adding activities such as migration

from manual invoicing, manual employment, manual databases, and manual

customer care to e-invoicing, e-employment, e-databases and e-service.

Consequently, the reimbursements should either be equal to or be a percentage of

the duty which ought to have been remitted in the first place. Again, the challenge

of quantifying the costs saved needs to be looked into because arriving at

benchmarks for costs and base years is controversial.

Sustainability analysis of the policy

This policy will put into use individual manufacturer initiatives to cut down on

production costs while at the same time improving on quality. In our opinion, the

16

sustainability and importance of this policy in enhancing the competitiveness of

Kenya’s exports cannot be overemphasised.

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6.0 RECOMMENDED OPTION

We therefore recommend the following policies in order of their importance and

sustainability.

a. Compensation based inward outward processes and drawback;

b. Propose compensation based on domestic taxes;

c. Review the costs of fundamental inputs other than imported raw

materials;

d. Value chain analysis incentives

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7.0 ACTION PLAN FOR THE RECOMMENDED POLICY OPTIONS

Policy Deliverables Time frame To action

Compensation

based inward

outward processes

and drawback

Review and amend

Section 172-186 of

the EACCMA to

provide

manufacturers with a

long term relief

Over a period of

six to an year

TREO, KAM,

Government

departments

Propose

compensation

based on domestic

taxes

Review and amend

the current domestic

taxes rates

Immediately TREO, KAM,

Government

departments

Review the costs

of fundamental

inputs

Consultation

workshop with KPLC

and other related

parties to discuss

possibility

Over a six

months period.

Implementation

to be effective

from 2010

TREO, KAM,

Government

departments

responsible for

various inputs and

ministry of finance

Value chain

analysis incentives

Establishment of

value chain analysis

authority and its

mandate

Consultative forum

on the concept of

value chain analysis

Over a six month

period

Ministry of trade,

TREO, KAM and

Ministry of finance

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7.0 ANNEXES

Annex 1: Summary of the destinations and the value of exports from Kenya to

other EAC countries between 2001&2006.

YEAR Uganda Burundi Rwanda Tanzania

2001 29,527,356,624 1,812,301,036 3,437,178,986 13,437,689,031

2002 23,763,614,185 1,289,968,961 3,147,232,758 8,429,931,261

2003 30,243,476,500 3,106,758,604 6,088,368,870 15,301,229,307

2004 37,270,819,649 3,120,620,043 6,483,673,358 16,927,541,007

2005 43,254,573,653 3,726,738,982 7,240,876,490 20,209,636,298

2006 27,910,993,105 2,184,959,018 4,770,317,433 18,303,211,829

Average

values 31,995,138,953 2,540,224,441 5,194,607,983 15,434,873,122

NB. Includes Re-exports

Source: Central Bureau of Statistics (CBS); Economic Survey, 2007 Compiled by the

EPC

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8.0 REFERENCES

Bill Dymond, Michael Hart, 2005. Policy Implications of a Canada-US Customs

Union. The Centre for Trade Policy and Law, Discussion Paperwww.africa-

business.com/features/uganda_invest.html

EAC Customs Management Act

EAC Customs Regulations

EAC Protocol on the establishment of the East African Customs Union

Export Promotion Centre, Trade Statistics

Jeremy Everard John Streatfeild. 2003. An examination of regional trade

agreements: a case study of the EC and the East African community. Tralac

Working Paper No 11/2003

Kenya Revenue Authority

Langhammer, Rolf J. and Ulrich Hiemenz. 1990. “Regional Integration Among

Developing Countries: Opportunities, Obstacles, and Options.”

McKay, Andrew, Chris Milner, Oliver Morrissey, Chris Jackson, and Nick

Rudaheranwa. 1998. Study on the Economic Impact of Introducing Reciprocity into

the Trade Relations between the EC and EAC Countries. Nottingham: School of

Economics, University of Nottingham.

Ministry of Finance

Ministry of Trade and Industry

Radelet Steven. 1997 “Regional Integration and Cooperation in Sub-Saharan

Africa: Are Formal Trade Agreements the Right Strategy?” Development Discussion

Paper No. 592.

Viner, Jacob. 1950. The Customs Union Issue (New York: Carnegie Endowment for

International Peace).

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GUIDELINES

ON

EAST AFRICAN COMMUNITY [EAC] DUTY REMISSION SCHEME

PROCEDURES & REGULATIONS

1.0 INTRODUCTION

The objective of the guide is to ensure standardized interpretation of the

regulations. The guide explains the services offered, procedures and

regulations that apply to users of EAC Duty Remission Scheme. It is based

on East African Community Customs Management (Duty Remission)

Regulations 2008. The Regulations came into force on 1st May 2008 through

a legal notice No. EAC/10/2008 in East African Gazette, Vol. At 1 – No. 5 of

1st May 2008.

The guide will be reviewed regularly in line with any new amendments to

regulations. Any amendments will be made as soon as they have been

approved and gazetted by the EAC Council of Ministers. However, the Users

of EAC Duty Remission Scheme may assist in refining the guide by notifying

KAM whenever they encounter problems in the administration of the

scheme. All users of the Scheme must be gazetted for export and home use,

as applicable, before being allowed to utilise the facilities of the scheme.

2.0 PRIMARY OBJECTIVES OF THE SCHEME

• To cater for manufacturers who are already established and are exporting.

• To assist those manufacturers who have an installed excess capacity that can be utilised for export purposes.

• To assist those manufacturers who have a potential to export but are being constrained by the taxes payable on the required raw materials to be used for export purposes.

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The overall aim of the scheme is to enhance the competitiveness of the

manufactured products in both export and local markets.

3.0 BENEFITS OF TREO SCHEME TO THE MANUFACTURERS

• Duty Remission scheme enhances the competitiveness of the Kenyan products by reducing the cost of production for industries engaged in both domestic and export markets.

• Making use of installed excess capacity while assisting firms with potential to export yet constrained by taxes on raw materials.

4.0 ADMINISTRATION OF THE EAC DUTY REMISSION SCHEME EAC Duty Remission Scheme shall be administered by Committee called Duty Remission Committee under supervision of the Commissioner. Duty Remission Committee

The Committee is chaired by Ministry of Finance. The committee shall be

established by the Commissioner.

The Committee shall comprise of a representative from-

⇒ the ministry responsible for finance;

⇒ the ministry responsible for trade and industry;

⇒ the body representative of manufacturers;

⇒ the Customs; and

⇒ any body or institution the Commissioner may deem fit to appoint.

Quorum The quorum for the Committee shall be three members which shall include the representatives of the Ministry responsible for Finance and the Customs. Conduct of Business The Committee shall formulate its own procedures for the conduct of its business.

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Functions

The functions of the Committee shall be to –

⇒ receive, vet and process applications for remission and advise the Council, through the Commissioner, with respect to these applications;

⇒ advise the Council, through the Commissioner, on manufacturers and quantities of goods in respect of which remission may be granted under these Regulations;

⇒ perform any other function that may be assigned by the Commissioner.

Powers of Committee

The Committee shall have powers to-

⇒ require the applicant to furnish it with such further information or

document as it may deem necessary;

⇒ inspect the premises in which goods in respect of which these

regulations apply are manufactured or kept.

5.0 DUTY REMISSION

The Council may grant remission of duty under section 140 of the Act on -

(a) goods imported for use in the manufacture of goods for export;

(b) such goods imported for use in the manufacture of approved goods

for home consumption as the Council may, from time to time, by

notice in the Gazette, determine.

6.0 CATEGORIES OF USERS OF THE TREO SCHEME

There are three categories of users in the Scheme:

(a) Direct Exporter

A manufacturer who imports goods for use in the production of goods for

subsequent export.

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(b) Indirect Exporter

A manufacturer who imports goods for supply to another manufacturer or

producer for use in the production of goods for export.

(c ) Manufacturers producing goods for domestic market.

Manufacturers who imports goods for use in the manufacture of approved

goods for home consumption as the Council may, from time to time, by

notice in the Gazette, determine.

7.0 APPLICATION PROCEDURES FOR GAZETTEMENT

Step 1: An application for remission of duty shall be made to the Council

through the Commissioner in Form R 1 in the Schedule to these Regulations.

Application form should be accompanied by the following documents:

• Certificate of Incorporation.

• A detailed production plan.

Step 2: Upon receipt of an application for remission, the Commissioner shall

forward the application to the Committee for its comments.

Step 3: The Commissioner shall after receiving the comments under sub

regulation (2) forward the application together with his or her comments to

the Council.

Step 4: The Council may accept or reject the applications for remission.

Step 5: In the case of rejection, the Council may communicate the reasons

for the rejection.

Step 6: The accepted applications shall be granted remission and gazetted

by the Council. The manufacturer and the approved quantities of the goods

with respect to which remission is granted shall be published by the Council in

the gazette.

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8.0 VALIDITY OF DUTY REMISSION

(1) Remission of duty granted shall be valid for a period of twelve months

from the date of the publication of the grant in the Gazette.

(2) The Council may on the application by a manufacturer, grant remission

on such further quantity of goods to be imported by the manufacturer.

(3) The Council may, on application by a manufacturer, extend the period of

twelve months for a further period of six months.

9.0 CONDITIONS ATTACHED TO REMISSION OF DUTY.

Export

A manufacturer of goods for export shall –

⇒ pay duty on any imported goods that are not used in the manufacture

of goods for export or where the goods so manufactured are not

exported;

⇒ submit returns quarterly, to the Commissioner giving relevant

information as the Commissioner may require.

Domestic market

A manufacturer of goods for home use shall-

⇒ pay duty on any imported goods that are not used in the manufacture

of goods for which such goods were approved;

⇒ submit returns quarterly, to the Commissioner giving relevant

information as the Commissioner may require.

10.0 AFTER GAZETTEMENT

When applying for duty remission, users should apply directly to the Ministry of

Finance using Form C 17 for those who manufacture for export or domestic

market.

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11.0 GOODS FOR WHICH REMISSION OF DUTY IS GRANTED:

Export Market

Goods imported for use in production of goods for export

Domestic market

The following goods imported to manufacture goods for domestic market:

� Paper for making educational text books.

� Paper for making exercise books

� Paper for making examination papers

� Paper for making covers

� Sugar for industrial use

� Waste and Scrape Batteries.

� Wheat grains

� CKD of motor cycles

� CKD of bicycles

12.0 REQUIREMENTS FOR APPROVAL UNDER FORM C17

(1) Imported goods to which these Regulations apply shall be entered using

Form C 17.

(2) A manufacturer of goods imported for use in the manufacture of goods

for export under these regulations shall execute a bond in accordance

with sections 106 and 107 of the Act using Form CBR 1.

(3) A bond executed under (2) shall cover the entire quantity approved and

published in the Gazette by the Council.

13.0 ADDITIONAL REQUIREMENTS FOR APPROVAL UNDER FORM C17

• A 6-month production programme indicating the usage of imported goods

• Import declaration Form or ex-warehouse for home use entry form

• IDF fees payable

Status of Pre-Shipment Inspection under TREO

• All approvals under Form C56 attract Kshs 5,000 processing fee.

• No Import Declaration Form (IDF) fee for Form C56 approvals

• All approvals under Form C60 attracts an IDF fee of 2.75%

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14.0 FREQUENCY OF MAKING APPLICATION

Export orders/contracts are submitted as and when necessary.

15.0 CONDITIONS APPLICANTS EXPECTED TO ABIDE BY WHEN GRANTING

REMISSION

• The user has to pay duty on the product that has not been;

� Used for approved exports where the remission has been granted.

� Used for approved goods where remission has been granted.

� Transferred to an approved bonded factory.

� Transferred to the next production period.

� Re-export in an used form.

• Complete and submit reconciliation declaration.

• Keep records.

• Provide security bond.

16.0 ADDITIONAL CONDITIONS FOR GRANTING REMISSION

• That the imports are to be used exclusively for producing goods for

exports.

• That the importer is not a member of any other fiscal based export

incentive scheme e.g. MUB, or EPZ.

• That the intended imports are not restricted under any other law on

security, health and environmental considerations.

17.0 TRANSFER OF GOODS TO ANOTHER MANUFACTURERS

Manufactured goods resulting from approved imported goods may be

transferred to another manufacturer, with the approval of the Commissioner,

to another manufacturer for use in the manufacture of goods for export.

The transfer of goods shall be in Form R 2 and be secured by a bond

executed using Form CBR 2 by the recipient of the transferred goods and

shall be in such amount as may be determined by the Commissioner.

18.0 BY-PRODUCTS, SCRAP OR WASTE FROM PROCESS OF MANUFACTURE

Where a by-product, scrap or waste of commercial value results from a

process of manufacture or production utilizing goods subject to duty

remission, duty shall be payable on the prevailing value of the by- product,

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scrap or waste in accordance with the Act, unless the by-product, scrap or

waste is exported or destroyed under the supervision of the proper officer.

19.0 COMMISSIONER MAY AUTHORISE RE-EXPORTATION.

The Commissioner may authorize re-exportation of goods on which duty

remission is granted under these Regulations.

20.0 CANCELLATION OF SECURITY BONDS

A security bond shall be cancelled upon –

(a) proof of exportation of the manufactured goods;

(b) payment of duty and the penalty under regulation 7;

(c) proof of transfer of goods under regulation 11;

(d) proof of destruction of the goods.

(e) re-export any unused imported goods

21.0 MAINTENANCE OF BOOKS AND RECORDS.

Regulations requires that users of the scheme to keep and maintain detailed

books and records related to purchase, importation, stocks of goods

packing, sales, shipping and exportation of goods for a period of five years.

Separate books and records shall be kept and maintained for locally sourced

goods, goods imported by the manufacturer and goods received by a

manufacturer by way of transfer.

22.0 SUBMISSION OF RETURNS

Manufacturers shall be submitting quarterly returns, to the Commissioner

giving relevant information as the Commissioner may require.

23.0 AUDIT / VERIFICATION PROCESS [POWERS OF A PROPER OFFICER].

A proper officer may inspect and verify books and records, production

facilities of a manufacturer and examine any goods or materials within the

production facility or any storage place relating thereto.

24.0 REVOCATION OF GRANT

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The Council may for reasons to be communicated to the applicant revoke a

grant of duty remission.

25.0 PENALTY

Where a manufacturer is liable to pay duty under 9, the manufacturer shall, in

addition to paying the duty applicable, be liable to pay a penalty of ten

percent of the dutiable value.

A person who fails to submit returns as required under this regulation commits

an offence and shall be liable on conviction to a fine of two thousand dollars.

26.0 EAC DUTY REMISSION FORMS

• Form R 1 - used by applicants who want to be gazetted under the

EAC Duty Remission Scheme.

• Form R 2 - used by manufacturer to transfer goods to another

manufacturer for export purposes.

• Form CBR 1- Bond for Goods Imported for use in the production of

Goods for Export

• Form CBR2- Bond for the transfer of goods imported for use in the

production of goods for export from one manufacturer to another.

27.0 THE DUTY REMISSION COMMITTEE

The Committee is composed of Representatives from:

1. Ministry of Finance

2. Department of Customs Services

3. Department of Domestic Taxes

4. Commissioner-General –KRA Headquarters

5. Kenya Bureau of Standards (KEBS)

6. Ministry of Trade and Industry

7. Kenya Association of Manufacturers (KAM).

8. Kenya Sugar Board

9. Fresh Produce Exporters Association of Kenya (FPEAK)

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28.0 ROLE OF THE MEMBERS THE DUTY REMISSION COMMITTEE

• Ministry of Finance - Convening committee meetings and processing all the application forms on the prescribed forms C.56 and C.60.

• Customs Services Department - Verify compliance and establishing

importation, utilizations and disposal of the finished products

• Value Added Tax (VAT) - Ensure that the manufacturers are compliant

with VAT requirements.

• Kenya Bureau of Standards - Ensure that that the raw materials to be

imported are in conformity with the Kenyan Standards and that they

are not prohibited under the security, health and environmental

considerations.

• Kenya Association of Manufacturers – Preliminary screening and

processing of applications, initiating Duty Remission Committee

meetings and ensuring that all applicants are genuine manufacturers

• Ministry of Trade and Industry - Ensure that all applicants are genuine

manufacturers

• Kenya Sugar Board - Ensure that only genuine users of sugar who have

been licensed by the KSB are allowed remission.

NB:

While every reasonable effort has been made to ensure that this guide is

accurate, it does not substitute the legal notice No. EAC/10/2008 in East

African Gazette, Vol. At 1 – No. 5 of 1st May 2008 and in the event of any

inconsistency then the law shall prevail.

31

SCHEDULE

FORMS

FORM R 1

APPLICATION FOR GAZETTMENT UNDER THE DUTY REMISSION SCHEME

FOR ALL INFORMATION PROVIDED, ATTACH RELEVANT SUPPORTING

DOCUMENTS. COMPLETE THE APPLICATION AND ATTACH SUPPORTING

DOCUMENTS. (If the space provided is not enough, attach extra sheets)

1. Company name, TIN, address and location

________________________________________________________________

________________________________________________________________

________________________________________________________________

________________________________________________________________

32

2. Company Telephone Nos. (including area code)

________________________________________________________________

3. Company Fax No and E-mail Address

________________________________________________________________

4. Company Directors

________________________________________________________________

________________________________________________________________

Company contact person & title

________________________________________________________________

________________________________________________________________

(i) Company Auditors, Address and Telephone Nos

________________________________________________________________

________________________________________________________________

33

(ii) Company Bankers, Address and Telephone Nos

________________________________________________________________

________________________________________________________________

(iii) Customs Agent(s) Address and Telephone Nos, where applicable

________________________________________________________________

________________________________________________________________

6. State your annual import requirements for inputs

Tariff No. Description Quantity Unit of measure

_________ ____________ ____________ _____________

_________ ____________ ____________ _____________

_________ ____________ ____________ _____________

_________ ____________ ____________ _____________

7. Indicate the finished products to be manufactured using 6 above

34

Tariff No. Description Quantity Unit of measure

(if available)

_________ ____________ ____________ _____________

_________ ____________ ____________ _____________

_________ ____________ ____________ _____________

_________ ____________ ____________ _____________

8. Indicate the source(s) of your inputs

________________________________________________________________

________________________________________________________________

9. List the market(s) for your products

________________________________________________________________

________________________________________________________________

________________________________________________________________

10. Please attach copies of the following documents:-

(i) Company Incorporation Certificate (ii) A detailed production plan processes for your company

indicating standard formula for manufacturing, throughput period and estimated wastes or losses incurred.

Declaration

I declare that all the information provided above is correct to the best of my

knowledge -

Name______________________ Title____________________________

35

Signature _____________________ Date__________________________

Company Stamp____________________________________________

Form R 2

TRANSFER OF GOODS FOR EXPORTS

PART A: TO BE COMPLETED BY THE

TRANSFEROR

1. Name and Address of Transferor 2. Name and Address of Transferee

36

PIN/TIN PIN/TIN

3. Legal Notice No. (Transferor) 4. Legal Notice No. (Transferee)

Date: Date:

5. Transferor Customs

Bond No.

6. Transferee Customs

Bond No.

37

7. Description of goods to be

transferred

8. Ex-factory value (US$)

9. H.S. Code 10. Quantity

11. I certify that l have transferred the above goods and duty liability to the

transferee named in box 2.

Name ……………………………………………………………………………………………

…..

Title ……………………………………………………………………………………………

……

38

Signatur

e

……………………………………………………………………………………………

……..

Date ……………………………………………………………………………………………

……..

PART B: TO BE COMPLETED BY THE

TRANSFEREE

FOR OFFICIAL CUSTOMS USE

I hereby certify that the transferor

has duly

12. I certify that l have received the above

goods and that l

transferred the goods

manufactured

undertake to comply with the conditions

of the EAC

under the Duty Remission

Regulations as

Duty Remission

Regulations

gazetted under Legal Notice

No……………

dated…………….to the transferee

named in

39

Name ……………………………………………

……………

box 2 above.

Date………………………………………

……

Title ……………………………………………

……………

Signatu

re

……………………………………………

……………

……………………………………………

…….

Proper Officer

Date ……………………………………………

…………

40

FORM CBR 1

BOND FOR GOODS IMPORTED FOR USE IN THE PRODUCTION OF

GOODS FOR EXPORT

I/we..……………………….………………………………………………………………

of …………………….…………………………………………………………………………

and. ……………………………………………………………………………………………

of ………………………………………………………………………………………………

hereby acknowledge that I am/we are bound to the Commissioner in the

sum of ………………………. dollars to be paid to the Commissioner for which

payment I/we bind myself / ourselves jointly and severally and also to my /

our heirs, executors, administrators and assigns and every of them firmly by

these presents.

41

Dated this………day of ………………. 20 ……

I/We have given notice of my/our intention to import goods for use in the

production of goods for export as gazetted under Legal Notice No.

……………………….

I/We understand that the condition of this obligation is that the specified

imported goods shall be used in the production of goods for export as

specified in East African Community Customs Management (Duty

Remission) Regulations 2007.

That I/we further understand that the fulfillment of this condition shall

discharge this obligation, but that this obligation shall be and remain in

force in the event of non-fulfillment of this condition.

Signed sealed and delivered by

the above named………………………

in the presence of………………………(name)

……………………………………………(designation)

of………………………………………… (address)

Signed sealed and delivered by

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the above named………………………

in the presence of………………………(name)

……………………………………………(designation)

of…………………………………………(address)

Approved :

………………………

Commissioner

FORM CBR 2

BOND FOR THE TRANSFER OF GOODS IMPORTED FOR USE IN THE

PRODUCTION OF GOODS FOR EXPORT FROM ONE MANUFACTURER

TO ANOTHER

I/We ……………………………………………………………………………(transferee).

of……………………………………………………………………………………………

and……………………………………………………………………………(guarantor).

of……………………………………………………………………………………………

hereby give notice of the transferee’s intention to transfer imported goods for

use in the production of goods for export as gazetted under Legal Notice No.

……………………….from ……………………of…………………………………..(the

transferor)

And

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The transferee hereby undertakes to receive imported goods for use in the

production of goods for export and that the transferee and the guarantor are

collectively bound to the Commissioner in the sum of ……………………….

dollars to be paid to the Commissioner for which payment we bind ourselves

jointly and severally and also to our heirs, executors, administrators and

assigns and every of them firmly by these presents.

Dated this………day of ………………. 20 ……

Both the transferee and guarantor understand that the condition of this

obligation is that the specified imported goods shall be used in the

production of goods for export as specified in East African Community

Customs Management (Duty Remission) Regulations 2007.

That we collectively further understand that the fulfilment of this condition

shall discharge this obligation, but that this obligation shall be and remain

in force in the event of non-fulfilment of this condition.

Signed sealed and delivered by

the above named transferee………………………

in the presence of………………………(name)

……………………………………………(designation)

of………………………………………… (address)

44

Signed sealed and delivered by

the above named guarantor

in the presence of………………………(name)

……………………………………………(designation)

of…………………………………………(address)

Approved :

………………………………

Commissioner