World Bank proposes more taxes for the rich

What you need to know:

  • The World Bank has advised increasing the effective tax rate on large corporations in order to trim the gap between wealthy households and the poor, despite Tanzania’s fiscal policy reducing inequality to a greater extent than in most comparable countries

Dar es Salaam. Tanzania’s economic forecast remains bright, but the World Bank (WB) believes that to reduce poverty and income inequality, the country should consider tax reform.

 In its latest updates, the WB says Tanzania’s economy will grow by 5.1 percent in 2023 from 4.6 percent in 2022.

However, it says the economy can do even better if the country improves its tax productivity by strengthening taxation for individuals at the top of the income distribution as well as providing effective tax rates to large corporations.

This, according to the WB, would improve the equity of the tax system and increase fiscal revenue without adversely affecting the country’s growth prospects.

The WB’s country director, Mr Nathan Belete, said Tanzania also needs rigorous taxation on capital gains and immovable property, which could boost tax revenue and increase the progressivity of the tax system.

“Overall, the fiscal policy in Tanzania reduces inequality to a greater extent than in most comparable countries; however, more efforts should be devoted to expanding social protection programmes, especially cash transfers to the poor and vulnerable groups, to reduce poverty and income inequality,” said Mr Belete.

“Rising the effective tax rate on large corporations could also improve equity as the wealthiest households benefit the most from corporate capital assets and business income,” he said.

Mr Belete was speaking during the launch of the Tanzania Economic Update 2023, whose focus was on ‘The Efficiency and Effectiveness of Fiscal Policy in Tanzania’.

According to him, the taxes in Tanzania have not been progressive enough.

“Low productivity of value-added tax (VAT), inefficient corporate income tax, and low property and capital income tax collections have led Tanzania’s tax-to-GDP ratio to mirror that of lower-income countries despite achieving lower middle-income status in 2020,” said Mr Belete.

In their report, the WB also advises the country to rationalise exemptions and expand the tax base.

The institution also indicated that leveraging digital technologies to enhance tax administration and compliance management would also improve the country’s revenue collection.

Gracing the event, minister for Finance Dr Mwigulu Nchemba said the government would continue to implement friendly fiscal policies, which are key to attracting businesses and foreign investments in the country.

This, he said, has been done, as partly seen through the implementation of the Blueprint for Regulatory Reforms, where several so-called ‘nuisance fees and levies’ were removed.

“Revenue collections have improved,” he said, asserting that the government plans to manage this year’s tax targets by strengthening revenue collection and controlling unnecessary spending to reduce foreign aid and loans.

Dr Nchemba said: “The government would also continue to find alternative sources of revenue to finance development.”

Speaking on behalf of the private sector, the chief executive officer of the Tanzania Private Sector Foundation (TPSF), Mr John Ulanga, said the tax collection system should be integrated and digitised to improve compliance and convenience for taxpayers.

“When the tax collection system is simplified, it will ensure those who earn more pay more, and those who earn less also pay less,” he said.

Mr Ulanga also stated that when informal private sector businesses transition to formal, there should be one integrated centre where businesses can comply with the regulatory requirements.

This, he said, would create a positive attitude towards tax compliance.

According to the WB, the adoption of digital technologies, such as the use of Electronic Fiscal Devices (EFD), has yielded some success in increasing taxpayer registration; however, the costs that come with it have hindered its effective usage.

“The cost of using it (EFD) is high and must be borne by firms, which promotes informality and other forms of noncompliance, leading to lower-than-expected VAT collection,” the TEU reports stated in part.

On the overall economic prospects, Repoa’s executive director and senior economist, Dr Donald Mmari, emphasised the improvement of the domestic economy, especially through boosting the production of key products and reducing imports.

“Tanzania can continue to remain resilient to the global headwinds by improving its productive sectors’ performance, increasing local production, and reducing dependency on imports,” he said.

According to the World Bank, Tanzania’s import-dependent economy continues to face challenges on the external front due to the war, the global economic slowdown, and elevated commodity prices.

However, the institution says a robust recovery in the tourism sector, coupled with elevated demand for private credit, continues to support growth.