Tax reforms: What to expect?

Early January 2019, the Secretariat of the Taskforce for Tax Reform under the Ministry of Finance invited tax reform proposals from stakeholders for the 2019/20 budget.

The 2019/20 Government Budget is already in the making. The tax revenue to partly fund the 2019/20 Budget is expected to increase by 11.8 per cent.

That is from Sh18tr for the 2018/19 to Sh20.1tr for the 2019/2020 fiscal year. This is according to the Guidelines for Preparation of Plans and Budgets 2019/20 – 2021/22 issued December 2018 (the document is publicly available on the website of the Ministry of Finance). What does this increase tell us?

It is unlikely that such a double-digit tax revenue increase will come only from increased economic activities (GDP) or inflation or just administrative measures. Tanzania’s GDP growth for the past five years or so has been around 7 per cent.

Also, the average inflation rate has been below 6 per cent. Therefore, the expected tax revenue increase is likely to, mainly, come from some tax reforms. Tax reforms may take various shapes.

It may just be widening the tax base by imposing taxes on objects or subjects that are currently untaxed.

Properly taxing the informal sector, for example. In the past five years or so, we have witnessed mixed reactions towards tax exemptions and reliefs. Initially, there was a strong move to get away from tax exemptions and reliefs.

But recently the move has slowed down to some extent. Tax rates can also be changed so that the same objects or subjects are taxed more or less than others. Tax rates can, for example, be reduced to encourage more consumption of taxable objects and in return increase the tax revenue.

What would happen if the VAT rate is reduced to 16 percent? Would it lower the prices and increase the consumption of ‘vatable’ goods and services?

To encourage industrialization, tax rates on production may be reduced. Industrialization needs capital that can be obtained from investments (savings). People are able to save if their after-tax income is increased.

One way to increase after-tax income is to reduce taxes on income or profit. The limitations of tax administration effectively exempt certain types of objects and subjects from tax.

Therefore, tax reforms can also be around increasing the effectiveness of the tax administration to curb tax avoidance and evasion.

Reforms may also aim to clarify or rectify some provisions of the laws so as to smoothen tax administration.

The increasing number of tax cases each year is a strong indicator of possible problems in our tax laws that require rectification.

To what extent can the tax system leverage more on the new technologies such as telephony and internet to reduce both administrative and compliance costs?

Taxes may be reformed to serve purposes other than immediate tax revenue. Reforms can be used to encourage certain economic activities or economic activities in certain areas.

What sort of economic activities do we want to encourage in Dodoma, for example? Should tax policies be used? Tanzania still wants to attract Foreign Direct Investments (FDIs). To what extent are the existing tax incentives effective in attracting FDIs?

Tax reforms can also aim at removing or reducing economic distortions caused by existing tax laws or policies.

High employment taxes discourage people to work in the formal sector and hence stay in or move to the untaxed informal sector.

The combined effect of the uncapped social security contribution, the skills and development levy and the worker’s compensation fund may discourage formal employment and limit the benefits employers can offer their employees.

Sometimes court decisions may also trigger reforms. What are the implications of the recent Court of Appeal decisions on various tax cases? Also, a desire to conform to some international obligations or norms may trigger reforms.

Tanzania is a member of both the EAC and SADC and the two can influence the kind of tax reforms.