What tax relief should be expected?

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 payable to the government by way of a withholding system.

Under this system, an employer is required by law to deduct income tax from employee’s taxable income at various rates from 9 to 30 per cent and remit to the government.

Let’s assume your monthly gross salary is Sh1 million. 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).

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 = 17,100 shillings]. 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]. Then, lastly, any excess of 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].

So, your employer remits Sh100,000 to your pension fund and Sh152,100 as a tax to TRA and only Sh747,900 may reach your wallet! The more your employer deducts other repayments and contributions, the lesser the amount going into your wallet.

So, should employees complain of high taxes? For those who do not follow closely TRA’s tax collections statistics, they may be tempted to think that PAYE is just a peanut. The statistics paint a different picture!

Employees in Tanzania pay more income tax than all businesses (corporations and individuals). The average PAYE contribution for the past ten years stands at around 16 per cent while the average for businesses is around 12 per cent. Surprisingly, the average PAYE collections are even higher than the average for domestic VAT (excluding imports), with the latter being around 15 per cent.

Looking at these statistics, there is still a room to relieve employees of the income tax burden.

In recent years, the focus appears to have been only on the tax rate of the second band of the taxable income. Over the past ten years, the rate for this band has gone down from 15 per cent (the 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 per cent to the current 9 per cent, the amount of relief to employee brought by the change was only Sh3,800 per month! Also, the bands have not been significantly restructured since 2008 despite the changes in inflation rates and the depreciation of our currency (shilling). For example, the highest taxable band (taxed 30 per cent) starts monthly taxable income of 720,000. This has been the case for the past ten years or so.

In 2008, the amount Sh720,000 was equivalent to around $600. But today, $600 is equivalent to about Sh1.4 million. The current band structure is clearly outdated is needs some reforms to provide some relief to employees. The relief that would allow employees to save and in turn bring positive socio-economic impacts.

Mr Maurus is a partner with Auditax International