‘20/20’ tax regime for 2020?
What does ‘20 20’ mean to you? Good eyesight, as in ‘20/20 vision’? Or, if thinking about the year 2020 then the Olympics (in July and August) or elections in Tanzania and the United States (in October and November respectively).
But given President John Magufuli’s recent call for imaginative solutions to create a more conducive tax landscape, and with the 2019/2020 budget imminent, I raise the question: what about a ‘20/20’ taxation vision for the year 2020?
An unfriendly tax regime and unrealistic tax rates were highlighted by the President when recently expressing exasperation with the current narrow tax base (of only 2.7 million taxpayers). The ‘20/20’ concept might be an apt metaphor to convey the need for clear vision to see our way through the current tax “fog” and in so doing identify steps to rationalise and simplify the tax regime so as to encourage compliance and thereby widen the tax net.
But my thinking on ‘20/20’ goes wider than this - to extend to potential changes to tax rates. In particular, might 20 per cent be an appropriate reference point in terms of tax rate adjustments to income tax as well as VAT? An increase in VAT from 18 per cent to 20 per cent would not be welcomed by many, but it was the rate applicable in 1998 when VAT was first introduced in Tanzania and we survived! I would however only advocate such an increase if used to enable appropriate surgical incisions to cure some of the ills that bedevil the current tax structure. Rationalisation could include employment taxes, the VAT regime, and income tax.
Employment taxes (including PAYE, a 20 per cent social security charge, 4.5 per cent skills and development levy (SDL), and 1 per cent workers compensation fund (WCF)) cumulatively are much higher than elsewhere in East Africa, or for that matter most of Africa.
Why not fund a reduction in these taxes by slightly higher consumption taxes and thereby encourage employers to take on more employees by reducing the cost of taking them on? Ironically, whilst globally the “zeit angst” is about machines taking over the role of human beings, our tax structure actively encourages this by punitive levies added on labour costs!
A significant increase in the VAT registration threshold could create a “win win” for taxpayers and the Tanzania Revenue Authority (TRA) alike. In particular, fewer taxpayers would be burdened with the complex accounting and record keeping that VAT entails, including very detailed information requirements for VAT invoices.
At the same time, TRA would have more time to monitor compliance by those businesses generating the largest amounts of VAT revenue.
This observation leads me neatly from ‘20/20’ to ‘80/20’ or the so-called “Pareto rule”, axiomatic for business managers whose mantra is ‘80 per cent of sales come from 20 per cent of clients”. No differently, the top 20 per cent of VAT registered businesses will account for at least 80 per cent of net VAT payments.
Now, I am not necessarily suggesting deregistration of the bottom 80 per cent, but there must be scope for a significant increase in the current registration threshold of Sh100 million pa - perhaps to Sh300 million pa (which assuming a six day business week would mean average daily turnover of roughly Sh1 million per day), or even up to Sh500 million pa.
A further suggestion is to reduce income tax rates to 20 per cent, but maintain the 30 per cent rate for certain exceptions (in particular (i) large corporate entities (say turnover in excess of the VAT registration threshold) and (ii) on personal income above a high threshold (say Sh50 million pa, or Sh4 million per month)). At the same time SDL could be reduced, say to 2 per cent from 4.5 per cent, and WCF funded out of mainstream taxes.
These may seem like radical ideas - but they are not without precedent. In 2006 Mauritius embarked on radical tax reforms whose objectives included to: widen and deepen the tax base; remove disincentives to work, saving and investment; increase international competitiveness; and make the tax system simple, easy to administer and more transparent.
One of the Mauritius reforms was a move to a flat rate of 15 per cent, which actually resulted in significant tax increases on the back of increased compliance.
Going back to Tanzania, I do understand that the suggestion of a VAT rate increase would not find much favour - but I would then ask the following questions: Would you prefer to remain with high taxes on employment? Might higher taxation on consumption not encourage more of a saving rather than consumption culture, and result in more effective taxation of the informal sector? …..and, lastly: could a “20/20” tax regime be a winner in 2020? I leave you to ponder.
