MANAGING TAX RISKS: Challenges in Tanzania tax system

Recently there has been a debate on the need for lower tax rates both on incomes and consumption taxes. There has been a concern that tax rates in Tanzania are high thus discouraging savings, doing business and creation of employment and thus overall hindering sustainable economic growth and broadening of the tax base.

Why imposing taxes?

The main objective of imposing taxes are to raise revenue to finance government expenditure.In an ideal world a tax system of a country should be able to raise adequate revenue without excessive government borrowing. Further, imposing of taxes should ensure economic efficiency i.e. collection of revenue without discouraging economic activities.Imposition of taxes should also promote equity (fairness) by ensuring that those with high incomes contribute more to the tax net. There is also an expectation that the tax system should not be too different from tax systems of other countries with similar levels of economic activities.In Tanzania, the tax system has not been able to keep pace with the growth in government expenditure as tax revenue collections have always been below budgeted expenditure leading into consistent annual budget deficits.

Tanzania tax system

Tax system involves the choice of taxes to be levied, who should pay what, what should be the tax rates, and how should tax be collected. Broadly a tax system is comprised of tax policy, tax laws and tax administration.

The Tanzania mainland tax system is comprised of four major categories of taxes namely income taxes, Value Added Tax (VAT), import duties and excise duties. In 2015/2016 these four taxes   accounted for about 98 percent of total gross tax revenue collections. Income taxes which is made up of Pay As You Earn (Paye), corporation tax, individual income tax and other income taxes accounted for 37 per cent of the total gross tax revenue collections. Paye, corporation tax, individual and other income taxes contributed 46, 28, 3 and 23 per cent respectively. Taxes on employment is significant compared to other income taxes. Also the contribution of individual income taxes is very insignificant. These imbalances should be addressed to promote fairness.

VAT which is made up of domestic and import VAT accounted for 27 per cent of total gross tax revenue collections.  Import duties and charges accounted for 18 per cent and excise duties of both domestic goods and services and on imports accounted for 16 percent of total gross tax revenue collections. As per a recent World Bank report, VAT contribution to total gross tax revenue collections is among the lowest in Africa. Further about half of VATrevenue collections on domestic transactions are from only three sectors i.e. beverages, cigarettes and telecommunications.

Challenges facing the Tanzania tax system

Some of the challenges facing the Tanzania tax system include large agricultural and  informal sectors, high tax rates, low level of compliance, complicated tax system (several rates, multiple deductions and complicated rules), excessive application of exemptions, multiplicity of taxes (many small taxes, levies and fees) and tax administration challenges.

These series of articles shall provide an analysis of these challengesand propose measures to address them.

Mr Makundi is a Partner with Auditax International