MANAGING TAX RISKS: Employees: Largest taxpayers in TZ

If you were to pull out your latest pay slip, chances are, you would see two important lines among the list of deductions taken out of your salary – the pension contribution and the PAYE. In most cases, it is the PAYE that makes the biggest chunk of the statutory deductions.

PAYE stands for Pay-As-You-Earn. It is a tax on employment income in Tanzania payable to the government by way of a withholding system.Under this system, an employer is required by law to deduct income tax from an employee’s taxable income at various rates from 9 to 30 percent and remit to the government.

Let’s assume your monthly gross salary is Sh1,000,000. How much of that would you‘take home’? First your employer will deduct your pension contribution, generally 10 per cent of your gross salary. In this example Sh100,000 will be deducted before PAYE is determined. Your income, for tax purposes, becomes Sh900,000 (i.e. gross salary less pension contribution).

Under the current tax rates Sh900,000 is then divided into five bands. The first Sh170,000 will be taxed at a zero per cent –first band [Tax=0 shillings]. The next Sh190,000 is taxed at 9 per cent – second band [Tax = Sh17,100]. Then, the next Sh180,000 at 20 per cent –third band [Tax = Sh36,000]. Again, the next Sh180,000 is taxed at 25 per cent – fourth band [Tax = Sh45,000]. Lastly, any amount exceeding Sh720,000 is taxed at 30 per cent – fifth band[Tax = Sh54,000, i.e.30 per cent of (Sh900,000 less Sh720,000)]. Therefore, total tax in this case is Sh152,100 i.e. 0+17,100+36,000+45,00+54,000]. The employer will remit Sh100,000 to your pension fund and Sh152,100 as tax to TRA. Only Sh747,900 will reach your wallet! So, should employees complain of high taxes? For those who may not have followed closely the TRA’s tax collections statistics will be tempted to think that PAYE is just a peanut. The statistics paints a different picture! Employees in Tanzania pay more income tax than all businesses (corporations and individuals). According to the statistics published by TRA on tax collections in the fiscal year 2015/16 (excluding Zanzibar), PAYE accounted for 17 per cent of the total collections while income tax from all businesses (large, small and individuals) accounted for only 11.5 per cent. The average PAYE contribution for the past ten years stands at 16 per cent while the average for businesses is 12 per cent. Surprisingly, the average PAYE collections is even higher than the average for domestic VAT (excluding imports), with the latter being 15 per cent.

Looking at these statistics, there is still a room to relieve employees of the income tax burden.In the recent years, the focus appears to have been only on the tax rate of the second band of the taxable income. Over the past nine years the rate for this band has gone down from 15 per cent (year 2008) to the current 9 per cent.

However most of the employees may not have felt any relief because the rates for the other bands remained unchanged. As an example, when the rate for the second band changed from 11 percent to the current 9 percent, the amount of relief to employee brought by the change was only 3,800shillings per month! Also, the bands have not been significantly restructured since 2008 despite the changes in inflation rates.