By Al-amani Mutarubukwa BusinessWeek Reporter
Dar es Salaam. Faced with a widening budget deficit, the government is considering re-introducing Value added Tax (VAT) on petroleum products and capital goods in the next financial year as one of the measures to increase revenue.

In the last two financial years recurrent expenditures have risen significantly beyond revenue, forcing the government to borrow funds from both foreign and local sources to pay salaries and other bills.

But determined to keep the recurrent expenditure in check the government has launched plans to either raise revenue or reduce expenditure from the next financial year.

In a letter to the International Monetary Fund (IMF) last December the Finance and Economic Affairs minister Mustafa Mkulo said the government was determined to maintain prudent fiscal policy in 2012/2013 and beyond focusing on ensuring that recurrent spending is kept to an affordable level.

“To ensure that recurrent spending is not debt-financed and to create fiscal space for growth-promoting development spending, the government intends to ensure that recurrent spending does not exceed 97 per cent of recurrent incomes in 2012/13 and 95 per cent in 2013/14 and beyond,” Mr Mkulo said in his letter to the IMF.

On the revenue side the government plans to re-introduce the VAT on fuel and capital goods such machinery and equipment, increase user fees in hospitals and other social services and limit exemption given in export processing zones.

Mr Mkulo said both the expenditure and revenue could be carried out concurrently. But plans to cut expenditure would see the government privatize, commercialise or close some learning as well as cutting on some allowances.

The VAT on petroleum products was removed at the 2006/2007 budget by the then Finance minister Zakia Meghji to relieve consumers from the burden of skyrocketing oil prices.

Currently, besides several fees paid by petroleum products importers to various regulatory authorities, the government collects fuel levy of Sh200 per every sold litre of petrol and diesel.

 It also charges excise duty of Sh339, Sh215 and Sh400.30 on every sold litre of petrol, diesel and kerosene respectively.

Experts say, if affected, the planned measure will raise pump prices of the commodity by 18 per cent and thus add pressure to production and transportation costs that will push the skyrocketing inflation to further hurting levels.

Tabling the government’s 2011/12 Budget in the June parliament, the minister announced a reduction of various levies on fuel to cut petrol and diesel pump prices, which had risen by almost 25 per cent in the course of previous 12 months.

The recent sharp rise in the cost of fuel was attributed to spiraling global prices fuelled by uncertainties in major oil producing countries in the Arab world, on top of numerous levies charged locally.

The planned reforms could also see rationalized tax exemptions, including avoidance of preferential treatment under income and indirect taxes, elimination of tax holidays, and limitation of Special Economic Zone and Export Processing Zone preferences to indirect taxes, among others.

According to the document to the IMF, the government seeks to discuss with the fund a mix of fiscal policies to rebalance recurrent incomes and spending in the context of the fourth policy support instrument (PSI) review.

On the expenditure side, the government would also pay particular attention to the scope for expenditure savings in the central government wage bill and associated allowances regime (equivalent to 5.3 per cent of GDP in this financial year).

Furthermore, the planned reforms are expected to strengthen delivery of social services such as education, health, water and others even as the costs of the decentralized expenditure program were high and rising.

“Transfers to local authoritues to fund this programmes are projected to rise from 5 per cent of GDP in 2009/10 to more than 5.6 per cent of GDP this year,” reads the latter in part.

In the scope of cutting expenditure, also the government says it keep attention on the student loan programme, where annual costs are around 0.6 per cent of GDP, and that reforms to strengthen the targeting of assistance were being adopted.

Starting the coming financial year and beyond, Mr Mkulo said, the government would assess transfers to public institutions, including colleges, universities, institutes, agencies, boards and commissions.

Excluding the Tanzanian Revenue Authority and Tanzanian Road Fund, which benefit from important self-financing, current grants to bodies are projected at 1.6 per cent of GDP in 2011/2012 alone, the minister said.

Going further, the reforms could lead to commercializing, privatizing or closing these institutions with the aim to make potential savings.

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