Implications of more taxes, regulations for new businesses

Ask small and mid-sized businesses to explain the benefits of paying taxes and you might wait a long time for an answer. In recent conversations with local business owners, it became clear to me that, while there are many investment opportunities in Tanzania, it is often a challenge to make these opportunities profitable due to various registration processes and taxes imposed by government authorities.

Corruption and burdensome taxes often detract entrepreneurs from setting up or even staying in business. Therefore, the current administration’s highest priority should be to address the issue of declining tax morale if it expects to restore public trust in the next 4 years.

Small businesses in Tanzania bear significant tax compliance burdens despite a number of initiatives to move to digital platforms for registration, payments and filing to reduce such burdens. Arbitrary tax assessments for new businesses are unfortunately still common. In most cases, tax offices would not accept a nil statement of estimated tax payable for start-ups regardless of the fact that significant set up costs in the first years of operation may mean no initial profit. The concern, therefore, is that small enterprises either eventually close shop or, more likely, hide in the informal sector.

Although local entrepreneurs received significant focus under the Mkapa administration in the early 2000s to encourage such establishments to be part of the formal sector, it appears to have been a challenge to maintain this momentum in recent years. One anecdote given to me recently related to an advert for a salon business being used as justification to demand tax. That same salon would also be obliged to renew its business licence every year and was recently advised to make payments for additional payroll taxes (4.5 per cent SDL if it employs more than 4 people and 1 per cent WCF) – and this is before social security contributions of 20 per cent shared between the employer and employee. In my view, subjecting such small businesses to these payroll taxes is a bit excessive – considering the type of revenue that an average salon or local business usually earns, which is roughly about Sh12 million to Sh20 million annually. More than that, it discourages such enterprises from offering high wages, hiring more people, and pushes them to simply go informal. Indeed, this reality was brought home to me in the anecdote in question as the salon owner apparently decided to close shop and instead provide a “home to home” service.

Other areas for the government to also focus on include simpler dispute resolution processes at district level for businesses that are too small to be audited and providing necessary relief for start-ups and companies with modest turnovers.

Small taxpayers could also benefit from standard training on financial management and general tax compliance, which could later inform the dialogue between businesses and tax collectors.

The other area of complaint is a tendency for tax revenue to be spread to various jurisdictions regardless of the source so that businesses struggle to link the payments they make with infrastructure or other improvements to their business environment.

Given this concern, the government might need to consider an effective devolution system, which could more easily enable taxpayers to perceive the value and see the accountability for the sums contributed. More generally an overhaul of multiple taxes on businesses needs to be considered especially for small and medium sized enterprises.

It has to be acknowledged that the tax system does not work in isolation. Despite the President’s efforts, corruption in government institutions has not been removed entirely – a particular challenge for businesses, especially those with very significant interaction with such institutions like construction companies.

Although awareness campaigns are generally helpful, more informative and persuasive examples of how kickbacks and bribes are rationalised by the general public need to be incorporated to these campaigns. We cannot simply ask citizens to refuse to grease palms without adequately speaking about the environment in which these dealings take place and proposing a better alternative that will ensure their legitimate needs are met.

Thus, a flawed tax system and high levels of corruption cause a rift in trust between citizens and the government. This mistrust emboldens and legitimises tax evasion across various sectors of the economy, which frankly stops us from moving forward as a country. The government will not only do well by continuing to address corruption, but also revamp its focus on reforming the tax system to support local businesses.

The author is a tax associate at PwC Tanzania. The views expressed do not necessarily represent those of PwC.