Dar es Salaam. The story of 60 years of our political independence is the story of shouldering the burden of building the country through paying taxes. Whether Tanzanians should pay more or less taxes has been the question that has dominated the debate around paying taxes for decades. This is because one thing is certain. Since the Tanganyikan flag was raised at midnight on December 9, 1961 till today, Tanzanians’ tax revenues have never funded the national budget by 100 percent.
However, no country can fund its own budget entirely. Tanzania gets a significant aid, grants and concessional loans from bilateral and multilateral donors. But aid comes with conditionalities. As the country commemorates 60 years of independence it is vital to put strategies that will wean it off aid in the near future to enable it take full control of the steering wheel of its own economic and-political journey, analysts say.
History of paying taxes
At independence the government inherited the tax system that was left behind by colonialists. In the financial year 1964/65 the government amended the Personal Tax Ordinance and increased the tax rate, according to the Finance Act 1965. The new tax ranged from the minimum of Sh30 for a personal income between £100 and £150 per annum to the highest total of Sh650 on a personal income between £600 and £700.
The tax system inherited by colonialists could not generate enough income to fund the national budget and in 1969 tax system reforms were made and the Sales Tax was introduced. Researchers say during this time, when Tanzania was implementing socialist policies, the tax rate was very high “both by historical and by international standards, ranging from 20 percent to a top tax rate of 95 percent,” Professors Ted Malyamkono and Hugh Mason wrote in their book titled Why Pay Tax.
In the late 1980s when Tanzania was under much pressure to liberalise the economy, it was faced with the problem of having a high tax rate, a complex tax system that had almost destroyed compliance, dealing a blow to revenue collection that could not fund the budget. The challenge was, therefore, to reduce the tax rate and simplify the system to encourage compliance, according to experts. That was the beginning of tax reforms that were undertaken as part of efforts to enable Tanzania to achieve budgetary self-sufficiency.
Reforms culminated in the formation of the Tanzania Revenue Authority in 1996 and the introduction of the Value Added Tax in 1998. Experts say the establishment of TRA contributed to notable success with the revenue collection as percentage of GDP increasing from 9 per cent in 1998/99 to 15 per cent in 2007/08.
The history of taxation in the country has led to a situation where many people and companies see no shame in avoiding paying tax and where small businesses will find it beneficial to remain outside the formal, taxed economy, Prof Malyamkono and Mason note. The most difficult problem that the Tanzanian taxman has been struggling with for decades has been to ensure that every eligible Tanzanian pays income tax willingly.
Personal income tax
To solve this problem the government imposed a development levy in FY-1983/84. This was similar to the poll tax of the colonial period and became the single largest source of tax revenue for district councils in Tanzania. The poll tax was levied on every person above the age of 18, although in some areas women were exempted. In 1997, revenue from the development levy contributed on average about 30 percent of total revenue of district councils, according to a research conducted by Prof Joseph Semboja and Odd-Helge Fjeldstad.
Compliance in the poll tax was very small and led to much use of force by the collectors. According to experts, people’s resistance to pay the development was, partly, due to the failure of the government to improve social service provision and the basic infrastructure, factors that built the perception that the tax was unfair. The poll tax was abolished in June 2005. Since then collecting income tax to people who are outside the formal economy has become more difficult. As a result millions of people in the informal sector who gain a good annual income have failed to pay their requisite tax and the government has not yet found a way of obliging them to pay.
As a result salary tax - also known as Pay as You Earn (Paye) tax - has remained the major source of personal income tax that the government relies on. Trade unions have been up in arms with the government for what they claim is the high rate of Paye, coupled with low salaries. They have been calling for a reduction in the Paye and an increase in salaries to give workers a reprieve. Intensive lobbying of trade unions have been paying off minimally as the government has in recent years moved to reduce Paye. In the financial year 2020/21 the government reduced Paye by a maximum of one percent. In FY-2021/22, the government again reduced Paye by a minimum of one percent.
But experts say reducing Paye to the satisfaction of workers is difficult. Paye is the easiest tax to collect. An eligible employee must pay the tax come rain, come shine. It does not matter whether that employee is in debt, has huge hospital bills - or what! But, by comparison, corporate income tax is only paid if a firm gets a profit.
In the past, Paye was collected by the employer and submitted to the government. The identity of the employee who pays the tax was not reflected in the tax. This means when the tax was submitted to the revenue body there was no way to know which employee paid how much.
Some cunning employers added Paye to the other tax they paid and touted it as their contribution to the economy. Even in the years when they did not pay taxes such companies could hide behind Paye in their public relations campaigns. But in FY-2020/21 the government made reforms that obliged employers to use employees’ Tax Identification Numbers (TIN) when filing Paye returns. Effectively from January 2021 payment of PAYE started to reflect on individual employees. Since January, therefore TRA records would show which employee paid how much.
Despite these changes, however, the challenges still remain on how to get the non-salaried workers and people operating in the booming informal economy get tax.
TRA has been trying to collect tax from operators in the informal economy who have a permanent physical base, such as shopkeepers by making general assessments.
Also, programmes such as Mkurabita (Property and Business Formalisation Programme) were established to bring more businesses into the formal sector to increase the tax base.
But as Tanzania commemorates 60 years of independence the challenge that remains to the taxman is how to bring every eligible Tanzanian into the tax net as soon as possible to wean Tanzania off aid and guarantee total political independence.