Empowering SMEs: Proposed alterations -2

DAR ES SALAAM: TANZANIA’S SMEs are the lifeblood of the economy, contributing over 35 per cent to the GDP and creating countless jobs. Yet, many small businesses have been seen to struggle in attaining growth under the weight of a complex and costly tax system.

While initiatives like the Presumptive Tax System have provided some relief, significant challenges yet linger, particularly for rural and informal enterprises.

Building on the last discussion, we intend to examine how strategic tax reforms can address these issues and unleash the full potential of Tanzania’s SMEs.

By streamlining compliance, offering targeted relief and fostering fairness, the country can create a tax environment that empowers small businesses to innovate, expand and drive sustainable growth. For many SMEs in Tanzania, the tax system presents more hurdles than opportunities.

While designed to support business growth, several aspects of the current framework inadvertently hinder the success of small enterprises.

Many entrepreneurs perceive Tanzania’s tax system as punitive rather than supportive, discouraging them from transitioning to formal operations.

For example, Amina’s Tailoring Shop in rural Mwanza avoids formalisation, losing access to formal credit that could have doubled her monthly revenue of 2m/-.

Tax consultant Sophia Kileo, based in Kahama District, Shinyanga Region advises: “To address this fear, the government should introduce tax holidays or reduced initial tax rates for newly formalised SMEs during their first three years. This will encourage more informal businesses to register and help bridge the gap between compliance and perceived burdens.”

This approach has seen success in Georgia, where the introduction of simplified tax regimes for small enterprises significantly increased business registrations.

Tax consultant Teimuraz Tsertsvadze explains that between 2004 and 2012, Georgia implemented significant tax reforms that transformed the country’s economic landscape.

These reforms doubled the GDP within four years and tripled it within eight years, despite a global economic downturn in 2009.

“Revenue mobilisation increased from 10.9 per cent of GDP in 2003 to 24.2 per cent by 2008, stabilising at 22–24 per cent in the following years. This progress underscores the vital role of streamlined tax policies in fostering economic growth and formalising businesses,” he says.

Between 2010 and 2015, Tanzania took significant steps toward formalising its SME sector, which contributes over 35 per cent to the country’s GDP, according to the Economic and Social Research Foundation (ESRF).

Although specific data on registration growth during this period is unavailable, formalised businesses saw improved access to credit and government support, enabling many to expand operations and boost revenues.

Tax consultant Juma Temu from Shinyanga highlights the importance of formalisation in driving growth and enhancing the economic contributions of SMEs, particularly in rural areas.

However, he notes that for many businesses, formalising is only the first step in a complex and often costly process. For instance, an undisclosed merchant in Shinyanga incurred 5.0m/- in penalties after incorrectly filing VAT returns due to misinformation from an unqualified consultant.

To address such challenges, Mr Temu recommends that the government invest in free, tailored tax education programmes for SMEs, both online and offline. “Providing easy-to-understand resources and workshops will empower business owners to comply confidently and avoid costly mistakes,” he emphasises.

This recommendation aligns with the potential benefits of South Africa’s SME Connect programme. Complexity and digital divide The complexity of compliance is further compounded by the digital divide.

Joshi Ujenzi, a building material retailer in Sumbawanga District, Rukwa Region, struggles with late filings due to unreliable internet, incurring 1.0m/- in annual fines.

Tax specialist Abubakar Sadiki suggests that to bridge this gap, the government should develop offline-enabled tax filing systems and subsidise access to digital tools for rural SMEs.

“This would ensure that businesses outside urban centres can meet compliance standards without additional financial strain,” he says. The Bangladesh government introduced mobile-based applications and offline tax filing solutions to enhance accessibility for rural businesses.

In 2019, over 50,000 small businesses adopted these tools, resulting in an 18 per cent increase in timely tax filings.

Misalignment with cash flows Tax payment schedules frequently do not align with seasonal cash flow cycles, particularly in sectors like agriculture.

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Interviews with traders in Ilala District, Dar es Salaam, show that many businesses face cash shortages during off-peak seasons, leading to delays in tax payments and penalties of up to 2m/-.

Tax consultant Kelvin Alphonce suggests introducing flexible tax payment schedules tailored to seasonal industries.

“Allowing SMEs to align their tax payments with peak revenue periods would improve both compliance and cash flow stability,” he says.

This approach has been successfully implemented in Peru, reducing payment delays by 40 per cent. For growing SMEs, crossing tax thresholds can feel punitive.

An undisclosed handcraft business in Arusha Region experienced a 25 per cent reduction in operating cash flow after being forced into VAT registration.

Tax consultant Joyce Kachema suggests introducing intermediate tax brackets to ease the transition from the presumptive system to VAT.

“This approach would allow SMEs to scale gradually without the shock of sudden and significant tax obligations,” she explains. Industry tax gaps The one-size-fits-all approach to taxation stifles industries with unique dynamics. Twende Tech Solutions, a startup in Dar es Salaam, struggled to pay taxes during its first year due to delayed revenues.

Tax expert Lisa Kileghe proposes: “The government should implement sector-specific incentives, such as deferred tax payments for startups or tax credits for investments in technology.”

This approach has been applied in India, where tax holidays have supported startup growth and job creation. SME–Taxman disconnect The disconnect between SMEs and tax authorities often leaves businesses feeling unheard.

Tumaini Traders in Handeni District raised concerns about inconsistencies in VAT filings. Tax consultant Seleman Issa recommends creating an SME advisory council to improve dialogue and align policies with business realities.

Penalty-centric enforcement The current focus on penalising non-compliance, rather than offering support, instils fear among SMEs.

A business in Morogoro paid significant fines due to system glitches that delayed filings. Tax specialist Sophia Kileo recommends warnings or grace periods for first-time offenders.

“A more supportive enforcement approach would foster better compliance and reduce financial strain,” she says.

Cross-border tax collusion Cross-border SMEs face both formal and informal costs.

A business in Kigoma reported spending an additional 15m/- annually on unofficial payments. Stakeholders recommend improving oversight at border points and streamlining formal processes.

Uganda’s One-Stop Border Post model reduced clearance times by 60 per cent and improved trade efficiency.

SMEs often receive little incentive for consistent compliance. A mining business in Mbeya reported no tangible benefits despite years of compliance. The owner suggests tax rebates or reduced filing requirements as incentives.

A similar model in South Africa increased compliance by 15 per cent and improved SME cash flow. While Tanzania has made progress in supporting SMEs, challenges remain in complexity, compliance, enforcement and accessibility.

Addressing these through targeted reforms, flexible policies and improved engagement will be key to unlocking SME potential and strengthening their contribution to economic growth.