MANAGING TAX RISKS: Impact of virus crisis on tax collections

Thursday March 26 2020


By Shabu Maurus

Tanzania has recently reported cases of people with the deadly coronavirus (Covid-19). Like other countries hit by the pandemic, Tanzania is already taking several necessary steps to combat the spread of the deadly virus. Schools have been closed for a month. Social distancing and personal hygiene are highly being emphasized. Likely, further steps will be taken. Probably depending on the rate of spread and mortality. The economic impacts of the pandemic are far-reaching. Even to countries with no reported corona cases. The pandemic is likely to affect Tanzania’s Sh135 trillion economy. But how the economy and hence tax revenue will be affected may be difficult to accurately predict. It will depend on several factors, including measures taken locally and globally in fighting the virus.

In this fiscal year (2019/2020), Tanzania expects to collect and expend Sh33.1 trillion. The economy (GDP) is expected to grow by 7.1 percent this year. But it is unlikely that this budget factored in the impact of the current pandemic. And out of this budget, Sh19.1 trillion (almost 60 percent) is to come from tax. The total tax collected for the first half of the fiscal year is Sh9.2 trillion. An impressive 96 per cent tax collection performance. But if the economy is affected, tax collections will also be affected. There are several ways the pandemic may affect tax revenue including the following.

International trade: The pandemic will negatively impact international trade. Movement of goods and people become more restricted as one of the measures to combat the spread of the coronavirus. The tax collection statistics show that around 40 percent of tax is collected from importers. It is the biggest source of tax revenue. Accordingly, the extent of decrease in the imports will determine the impact on tax revenue.

Local consumption: VAT and excise duty are the biggest consumption taxes. Mainly coming from the use of mobile phones, beverages (particularly alcoholic drinks), cigarettes and petroleum products. How will the ‘social distancing’ measure impact consumption of these products? Well, I think it will depend on the extent of social distancing. A total lockdown (which I hope is unlikely), will have more impact. With less social events and similar gatherings, consumption of beverages may go down. The use of telecoms products (data, airtime) may go up for both individuals and corporate. Whether staying at home may make smokers take more cigarettes may be difficult to tell. Consumption of fuel may also go down. But staying at home may raise the consumption of other products.

Tax compliance: The pandemic and the measures taken against it will affect individuals and businesses in several ways which may impact both the amount of tax that can be paid and the extent of tax compliance. A complete lockdown, for example, would mean no business at all and hence no tax to pay. With social distancing, filing of tax returns may be affected. If due to, say quarantine, people are unable to go to the banks or if the bankers are not working then tax-paying will be a challenge.

Tax administration: What happens if tax collectors are restricted to work or meet taxpayers? Efficient digital tax administration platforms would have been so helpful. But even in the digital world, tax administration involves people. Social distancing may hence affect tax administration.