Last Friday President John Magufuli met with businessmen from across the country at the State House in Dar es Salaam, a meeting that largely dwelt on the challenges faced by businessmen with respect to paying taxes in Tanzania.
Almost every businessman who spoke complained about the unconventional methods used by the taxman in collecting taxes as well as the multitude of taxes imposed on businesses, a major hindrance of operating successfully in Tanzania.
Needless to say, successful businesses create employment, pay taxes and contribute positively to GDP growth through expansion of the economy.
The President stated that it is the government intention of having a successful but law abiding private sector and that his government will do whatever is necessary to ensure that this happens.
Furthermore, the President went on to say that he will be happy to see 100 Tanzanian billionaires created by the time he leaves office.
This afternoon the Minister for Finance and Planning Hon. Dr Philip Mpango (MP) will table the 2019/2020 Budget, which is pegged at Sh33.1 trillion, up from Sh32.5 trillion approved in the 2018/2019 budget.
As it has been the case in previous years, the biggest challenge faced by the government is financing of its proposed budget and it is where the importance of having a business friendly tax regime together with a smart and likewise business friendly Tanzania Revenue Authority (TRA) cannot be underestimated.
To be smart, the TRA should look to technology and data analytics as a way to expand the tax base. TRA’s recent announcement that it intends to extend usage of electronic tax stamps to all alcohol, cigarettes, soft drinks and bottled water effective June 15th this year is an attestation on how technology can be leveraged to improve revenue collection.
Electronic tax stamps were introduced in the last budget to replace paper tax stamps. I still repeat my last year’s recommendation that the government, not the taxpayer, should bear the collection cost of using the technology.
The government needs also to shift more into consumption based taxes and less on other forms of taxation such as income tax.
Examples of consumption taxes include Value Added Tax (VAT), excise taxes and sales taxes in countries like the USA. VAT is a tax on consumption of goods and services supplied or imported into a country and like other consumption taxes, it is an efficient means for governments to collect revenues as opposed to other forms of taxation. However, to succeed, our current VAT law needs to be reformed to make it more effective and inspire economic growth.
VAT law imposes a duty on the supplier of goods or services who is registered for VAT to collect and remit the tax to the Tanzania Revenue Authority (TRA) by the 20th day of the following month thus making companies that are VAT registered to be collection agents of the government.
Recent experience shows that the VAT legislation has led into unintended consequences by the requirement that companies remit the tax to the TRA even before the tax is collected by them. In other words, companies are required to remit VAT to the government even before they are paid for the goods or services which they have supplied. To comply, many companies end up financing VAT payments with bank loans or from other sources, which are often expensive, thus imposing an unnecessary burden to the businesses and so potentially limiting their growth.
The reality on the ground is increasingly proving that things are not working as smoothly as envisaged in the law because most companies are facing liquidity crunches caused by the current economic situation.
It is, therefore, necessary for the VAT law to be reformed to force buyers of goods and services to honor their payment obligations within say 60 days or face legal action.
This will be similar to the current deadlines for payment of VAT or PAYE. This proposal should likewise be applicable to service providers with respect to remittance of VAT to the government.
With such reform, cash flow constraints will be minimized and companies will be free to reinvest available cash in the companies towards growth, which will in effect lead to more taxes to the government in the future.
Hopefully the proposed reforms and others will be addressed by Dr Mpango when he tables his 2019/2020 Budget at the National Assembly in Dodoma.
Mr Godfrey Mramba is Managing Partner at Basil & Alred. The views expressed do not necessarily represent those of Basil & Alred. Email: firstname.lastname@example.org