Firstly, it is not a mystery that the state of tax administration in Tanzania is poor. Laws are oppressive and leave so much room for abuse. Regulations are left at the discretion of public officials, rendering them counterproductive. Processes are overly bureaucratic to the discouragement of taxpayers. The outcome is poor revenue collection relative to gross production.
The blogosphere is abuzz with protests against the government’s decision to expand the mobile money levy across all electronic transactions.
Tanzanians aren’t amused at all. They cannot believe that the government wants a piece of even what they send to their mothers in the villages, their children in schools, and their friends for funerals. Having survived the pandemic, and while battling spiralling fuel costs, galloping food prices, and hiked internet charges, people were desperate for a break. Apparently, none is in sight yet.
When the government taxes where no value is created, it is desperate.
But the government is between a rock and a hard place. On the one side, the tax-to-GDP ratio has virtually flat-lined for a decade. According to the IMF, the tax-to-GDP ratio of 13 percent is recommended for states to provide basic functions and make basic investments. In Tanzania, that has averaged around 11 percent, while in Kenya, Rwanda, and Zambia the ratios are above 15 percent. So, the government desperately needs more money for its political legitimacy. The people’s grumbles, though, on the other side, make increasing taxation a tough decision for the government.
However, while the government cannot risk the loss of this revenue, it is likely that this will be balanced with increasing number of loans. Either way, the taxpayers end up carrying the burden.
The government has found itself in this position by failing in three areas – how it collects revenue; how it spends it, and how it manages the economy.
Firstly, it is not a mystery that the state of tax administration in Tanzania is poor. Laws are oppressive and leave so much room for abuse. Regulations are left at the discretion of public officials, rendering them counterproductive. Processes are overly bureaucratic to the discouragement of taxpayers. The outcome is poor revenue collection relative to gross production.
A case in point is the sum of tax revenue trapped in tax disputes that have left the government bereft of more than Sh20 trillion in uncollected revenue. It doesn’t take too much imagination to deduce how corruption has contributed to this situation. As a result, the government fails to collect taxes where it should, and seeks to do so where it shouldn’t.
Secondly, extravagant expenditure and poorly thought-out investments.
The government’s devil-may-care spending on big cars, endless foreign trips, and needless allowances is not a secret. But when the government itself admits to the fact, as Finance minister Mwigulu Mchemba did in his Budget Speech, the situation becomes most alarming. Strangely, instead of plugging those holes, the government is compensating for the losses by introducing new levies!
Moreover, many of the government’s so-called strategic investments are not that strategic. The government invests in projects it should not invest in; it ignores worthwhile investments; it invests beyond the economy’s absorption capacity, and uses public funds where private funds would have sufficed. As a result, the nation finds itself with an unsustainable scenario that stretches the government’s resources to the limit.
In the current budget, the government has set aside funds for four power generation projects. The wiser move would have been for the government to engage independent power producers (IPPs) instead, as done elsewhere. That would have freed resources for other uses. But to do that, one has to think first.
Similarly, in the past seven years, tens of trillions of shillings have gone into the so-called ‘development projects’ with nothing in return. Think of the Nyerere Dam, Air Tanzania, Dodoma, and SGR. If the government was looking for the shortest road to bankruptcy, it has found it. Instead, the government could have invested in projects with quick returns and then utilise the dividends to invest in its desired projects.
Thirdly, the government is not generating enough economic opportunities to increase revenue. Tens of millions of Tanzanians work in subsistence agriculture and the informal sector, thus contributing little to government coffers. As a result, the government has to milk a few taxpayers repeatedly.
The situation is unsustainable. Consider the footwear industry.
With close to 50 million cattle, goats, and sheep, Tanzania has the third largest livestock population in Africa. Ideally, that would have made the footwear industry a billion-dollar industry, producing over 50 million pairs of shoes a year. But, alas, only $21 million is generated annually, only 29,000 people work in this sector, and Tanzania imports 19 million pairs of shoes annually.
In Vietnam, a country with only 6 million cattle, the story is quite different. Every year the Vietnamese produce a billion pairs of shoes in an industry that employs over 700,000 people. That is an economy that works.
Had the government invested about Sh200 billion in increasing recovery and the quality of hides, production would have increased six-fold, quality would have increased ten times, leather prices would have increased four times, and hundreds of thousands would have found formal employment. Even by conservative estimates, the return on the government’s investment would have been several times higher.
That is how the government ought to approach the business of managing the economy. However, when the economy is starved of development capital by investing in no-return development projects for years, those development projects can become under-development projects.
Mobile money levies put the cart ahead of the horses. Tax is a function of the economy, not the other way round. Financial dead ends are inevitable when the economy is not managed effectively. So, why resort to extortionate measures instead of fixing the economy?
