Mathew Bhuki's Reflections on 'The Tax Question':
Here is the latest Tanzania's economic update from the World Bank.
This seventh economic update goes to the heart of one of the main challenges faced by Tanzania: how can the country finance its development? This is a fundamental question when aid is coming down as a proportion of a growing GDP, and as access to financial markets remains limited. One option would be to rely more on the private sector to deliver education, health, roads, ports and electricity. This is possible as demonstrated by many such experiences around the world, and therefore this approach needs to be one important part of the solution to finance development. The argument presented in this economic update is that higher tax revenues will come only if a comprehensive approach is adopted. The tax system has to be affordable, fair, simple, and transparent. The government also has to be accountable for the money it is receiving. It is only when these basic conditions are met that tax compliance will increase. Because a strong social contract between the State and its citizens is not yet sufficiently in place in Tanzania, a number of suggestions are proposed in the update, with the objective of stimulating debate on possible approaches to increase tax revenue.
I find part II of the report very interesting. It asks a question: why should Tanzanians pay more taxes? Here are some highlights:
Tanzania currently collects approximately USD 6 billion in tax revenues per year, a figure equivalent to around 12 percent of its GDP. This covers approximately three quarters of the Government’s expenses. This is insufficient, particularly when other sources of funding, such as foreign inflows, are declining, or limited, such as borrowing and private sector finance. Put simply, Tanzania must collect more taxes.
Tanzania’s tax system relies on a combination of VAT, income tax, import duties and excise tax. Reliance on these four main taxes is not unusual in low-income countries. However, Tanzania’s performance in the area of the collection of VAT is one of the worst in the world.
The low VAT contribution in Tanzania is also unusual compare to other low-income countries.
The Tanzanian tax system might be the worst of two worlds: on the one hand, taxes are theoretically quite high, which discourages taxpayers from paying. On the other hand, weak collection efforts result in a failure of the State to collect the taxes it needs.
Thus, Tanzania, like other low-income countries, must intensify its tax revenue collection efforts. Tax collection performance is obviously linked to prosperity, with a strong correlation between tax revenues and GDP per capita…… A recent survey indicates that many Tanzanians are reluctant to pay taxes because they see them as burdensome, unfair and lacking in transparency.
To meet these three challenges, Tanzania will need to implement bold and innovative actions that go beyond the traditional administrative measures:
1. The system must be affordable: The actual cost of paying taxes is higher than on paper as demonstrated by Tanzania’s poor ranking in the “ease of paying taxes” indicator in the World Bank’s Doing Business survey. Here, the solution is to simplify the system. Tanzania should streamline the numerous small taxes, which impose a high burden on businesses without corresponding gains to government revenues. The Government must also reduce the use of tax exemptions. The explosion in the use of mobile devices represents a great opportunity for tax authorities to use accessible, cost-effective systems for taxpayers to make payments.
2. The system must be perceived as fair: In particular, it is necessary to broaden the tax base. In Tanzania, close to 90 percent of tax revenues are generated by Dar-es-Salaam, yet the city contributes to less than 20 percent of the national GDP. Almost half of Tanzanian VAT revenues on domestic transactions are collected from three sectors (telecommunications, beverages, and cigarettes). There is a huge imbalance between the taxation on labor and capital income. Tax collection should be diversified to under-taxed sectors and regions….. Similarly, public recognition of high taxpayers can also incentivize payment. Of course, stronger and effective sanctions against tax evaders are also vitally necessary.
3. The system must be transparent: The Government needs to publish comprehensive, accessible reports on its tax collection efforts. In this area, the private sector can play a role. Some major telecom companies in Tanzania have announced that they will voluntarily publish full details of their tax payments. Such a level of transparency should be mandatory for all public enterprises and agencies.
The implementation of these actions may test the Government’s political commitment. Without doubt, if the measures described above are implemented appropriately, there will be winners and losers. While these actions will provide gains for Tanzania as a whole, those gains may occur to the detriment of politically powerful vested interests. This may make implementation politically challenging.
Read the whole report here: