Thursday, June 14, 2018

MANAGING TAX RISKS : Some quick wins in taxation

 

Today the Minister of Finance and Planning unveils the 2018/19 government budget. As usual, there are several and different expectations. For an individual like me in the tax space, I do expect tax reforms.

Tax reforms that would reflect the country’s desire to industrialize. Tanzania aims to become a semi-industrialized country by 2025. Within the next seven years! By that time the contribution of manufacturing to the national economy must reach a minimum of 40 per cent of the GDP.

But industrialisation needs a strong business enabling environment. Tanzania’s ranking in the ease of doing business has not been good. The tax regime is an important facet of the business environment. Recently the Minister of Industry, Trade and Investment unveiled the Blueprint for Regulatory Reforms to Improve the Business Environment, popularly known as “Blueprint”.

One paragraph in the Preface to the Blueprint reads as follows: “This Blueprint provides a guide to achieving the industrialization dream of creating, in the shortest period possible, the required business enabling environment (BEE) for the government and the private sector to work hand in hand in realiding the dream. It seeks to put in place a framework to enable the review of BEE for [an] improved business climate in Tanzania.” This is surely a very bold statement.

The document proposes several areas that need reforms. There are reforms that can be made now, called “Quick Wins”. And there are reforms that can be made in the medium terms. The proposed reforms are cross-cutting.

The Blueprint proposes several tax specific Quick Wins including the following:

(a)Tax disputes: Review the requirement to deposit one-third of disputed tax for an objection against a tax assessment to be admitted. For industries such as construction, this requirement has a huge implication since the amounts involved in the sector are inherently very huge.

(b)Mainland and Zanzibar VATs: Harmonise the VAT laws in Tanzania. The differences in the VAT laws applicable to the two sides of the Union poses a number of challenges to businesses.

(c)Underestimation penalty: Rationalise the income tax underestimation penalty. Charging the penalty on the whole profit instead of just the excess profit (understatement) is rather unnecessarily punitive.

(d)Imported fresh milk: Introduce fiscal measures to protect local producers of fresh milk. Fresh milk, either imported or locally produced, is exempt from the VAT. This makes locally produced milk uncompetitive as producers cannot claim VAT they pay on some of their inputs.

(e)Horticultural inputs and equipment: Expand the current VAT exemption list in the VAT law to accommodate a range of modern horticultural inputs and equipment including dam liners for irrigation technology, spare parts for greenhouses, biological control agents, agro-nets, plant protection substances, storage and post-harvest and cooling equipment.

Of course, there are several tax reforms areas not covered by the Blueprint. The Skills Development Levy (SDL) impedes employment.

PAYE at 30 percent kicks in for a monthly salary exceeding Sh720,000 (about USD325). This threshold has been there for the last 14 years and its review is overdue. What about the Workers Compensation Fund (WCF)? Isn’t it possible for the roles of WCF to be taken over by the two social security funds - NSSF and PSSSF? Shouldn’t the SMEs have a special tax regime? The current VAT registration threshold and the presumptive tax regime do not accommodate SMEs appropriately. Should there be a tax amnesty regime?

It will be interesting to hear how the government intends to address the Quick Wins proposed in the Blueprint but also these other areas.

Mr. Maurus is a Partner with Auditax International

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