Consider highest employment tax band to catalyse economic growth

The idea of giving the rich a tax break may sound absurd in the first place. Yet, it might be the key to sustainable economic growth. This is particularly the case in the current environment where the government is putting in its best to sustain its economy by way of tax collections and reducing dependency, something that we fully support. Currently, tax at 30 per cent applies on incomes above Sh720,000 regardless of whether a person is earning 1 million or 10 million.

Although it is debatable whether a person earning 1 million is rich as one might conclude, it is worth mentioning that the top slice includes rising consumers who have jobs in the formal sector and are possibly investing in a new car, business or home. Some may recognize them as the ever elusive but emerging ‘middle class’.

Thepresent reality undermines the ability of these taxpayers to save or invest in job creating opportunities. And while the new budget promises some relief for incomes in the lower tax bracket (a maximum benefit of Sh3,800 per month in the current budget), robust incentives need to be put in place for middle class households to reinvest a portion of their income back to the economy. Simply allowing tax payers to have 2 per cent of their hard-earned income back only to lose it to imported goods isdefinitely not the way forward.

Introducing similar reductions policies for the middle class can stimulate the local economy especially given the high differential between taxes on imports as compared to taxes on local supplies. Whilst the tax on local supplies is normally limited to the 18 per cent VAT (other than items subject to excise duty), the total taxes on imported items is normally not less than 50 per cent (and even higher if excise duty applies). The practical effect of rigorous recent anti-evasion measures is that higher import duties are being paid, and if thiswere coupled with reduced personal income tax rates could encourage taxpayers to procure locally available products leading to a stronger economy. Such a change could create the necessary demand to catalyze the emergence of a manufacturing economy, create blue collar jobs and subsequently improve the nation’s tax base.A mere 5 per cent reduction in PAYE for taxable incomes say between Sh720,000 and Sh4,500,000 would be a notable step forward. From this small cut, we can expect an increase in savings or business capital of around Sh200,000 per month.

Against this background and in order for Tanzania to experience rapid growth, the Government needs to equip taxpayers with sufficient means to generate wealth. A relatively higher disposable income makes it possible for households to invest such sums in income generating investments (small to medium scale), creating new employment and most importantly new tax revenues.

Catherine Misigaro is a Tax Associate at PwC Tanzania. The views expressed do not necessarily represent those of PwC