Call for tax system harmonisation, formalisation of businesses
ZANZIBAR: STAKEHOLDERS have emphasised the importance of creating a friendly climate and harmonising systems among tax-collecting institutions to encourage more informal traders to formalise their businesses.
They stated that creating a friendly business environment in tax collection would yield numerous benefits for both governments and businesses as it results in enhanced cooperation, transparency and mutual respect between tax authorities and taxpayers.
Besides, they commented that when tax authorities adopt a friendly approach, it often leads to higher compliance rates among businesses as a supportive environment encourages voluntary compliance and consequently businesses feel more comfortable fulfilling their tax obligations.
This can be achieved through clear communication, accessible resources and responsive support systems that help businesses understand their tax responsibilities .
These were some of the main concerns raised by the people of Zanzibar who were reached by the President’s Tax Reforms Commission, which is in the Isles to gather input on the tax system.
The commission, chaired by Former Chief Secretary, ambassador Ombeni Sefue, is mandated to evaluate the current tax system and provide actionable recommendations to the government.
This move aims to address the ongoing tax challenges and enhance the country’s tax system to foster a more conducive business environment.
The commission is tasked with developing strategies aimed at promoting voluntary tax compliance, expand the tax base and addressing public grievances regarding taxation.
During the views collection exercise that began on Monday this week, both experts and ordinary wananchi insisted on the urgent need for more effective systems and an enabling environment that would encourage informal entrepreneurs to transition into the formal economy and begin paying taxes.
Once integrated into the formal system, these businesses could contribute to the national tax base, thereby boosting government revenues.
They believe that clear and efficient processes, along with incentives, would motivate informal businesses to formalise their operations. The transition would not only ensure compliance with tax regulations but also allow businesses to access better services such as financing and training, ultimately leading to sustainable growth and development.
These recommendations come at a time when statistics reveal that less than two million taxpayers are registered in Tanzania, despite a population of over 60 million.
This highlights a significant challenge in the country’s tax system, with a large portion of the population remaining outside the formal tax net. In line with this, a large portion of Tanzania’s workforce is employed in the informal sector.
According to available statistics, more than 50 per cent of the workforce is engaged in informal sector work. This includes agricultural activities, retail businesses and transportation, among others.
However, they noted that there are numerous institutional processes involved when an informal entrepreneur attempts to formalise their business. These processes often discourage many from formalising, leading to the country missing out on the taxes it is owed.
Commenting on the matter, Zanzibar Social Security Fund (ZSSF) Acting Accounting Manager Ahmed Talibu Ali stated that the process of formalising a business in the country is often complex and discouraging for informal entrepreneurs.
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He added that the process involves multiple institutions, hurdles and lengthy procedures, which often lead many to abandon the process altogether.
As a result, a large number of business owners choose to remain in the informal sector “Many taxpayers are outside the tax bracket and there are individuals engaged in economic activities that could contribute to national revenue, but they are not doing so. Instead, only a small number are contributing,” he revealed.
Adding: ” There are people in this sector who earn substantial incomes, but due to the limitations of our systems, we are unable to capture them.
This makes it a challenge to identify these individuals and collect the appropriate taxes.” Mr Ali’s views were echoed by the Commissioner for the Zanzibar Planning Commission, Ameir Haji Sheha, who stressed the importance of aligning tax systems with business registration systems to track the growth of informal businesses and determine the actual amount they should be paying in taxes.
“There are people who operate large businesses, yet to this day, they are still classified as small traders and do not pay taxes,” he stressed.
The Zanzibar Revenue Authority (ZRA) Manager for Stamp Duty, Shaaban Yahya Mzee, pushed for reduce institutional barriers that hinder small businesses from formalising their businesses.
He added that the costs of compliance have become increasingly high and many small traders and even some larger ones, are unable to formalise their businesses due to the obstacles in place. He said that different institutions each have their own regulations, which sometimes create challenges for business owners who are trying to register.
“This is because each institution targets expanding its own tax base, leading to a situation where businesses face multiple requirements.
For instance, a business might own a warehouse, but there are several institutions that all require the warehouse to be registered separately with each of them,” he noted.
Mr Mzee suggested that it would be more efficient if these institutions could harmonise their processes and work together to minimise the redundancy in tax requirements for businesses trying to formalise.
“By reducing the bureaucratic hurdles, it would make the process more accessible and less costly for traders seeking to register their businesses,” he pointed out .
Mr Mzee added that; “Many business owners today are effectively hiding in the informal sector, avoiding formalisation. it is high time to formulate the system that would encourage traders to willingly formalise their businesses.”
He further that instead of forcing them, the system should be designed in such a way that businesses would want to register and become part of the formal economy on their own. Besides, he proposed that there should be a single Value Added Tax (VAT) rate for both mainland and Isles.
“Currently, the VAT rate on the mainland is 18 per cent, while in Zanzibar it is 15 per cent. This discrepancy creates difficulties for businesses that need to transport goods from Zanzibar to mainland Tanzania, as they are required to pay an additional 3 per cent VAT to the TRA. According to Mzee, this creates unnecessary inconvenience at the port.”
According to the current law enforced by the TRA, where in respect of any taxable supply of goods, the value added tax has been paid in Tanzania Zanzibar at the rate lower than the rate applicable in Mainland Tanzania under this Act, the difference in the value added tax shall be deemed to have not been paid and shall be collected by the taxman from the taxable person upon transfer of goods to Mainland Tanzania in accordance with the provisions of this Act.
Mr Mzee insisted that to eliminate the conflict and unnecessary burdens on both the government and traders, it would be best to have a unified VAT rate across the entire country.
Tax Education
Mzee has underscored the importance of focusing significant efforts on educating the public about tax matters through the media to encourage citizens to pay taxes.
“If you turn on the radio from morning to evening, you find a continuous stream of betting advertisements. Therefore, I recommend having a system where tax issues are discussed regularly to increase awareness. Our two institutions, ZRA and TRA, should collaborate in implementing this,” he stressed.
The Principal Legal Counsel for the Tanzania Revenue Authority (TRA) in Zanzibar, Ms Fatma Hassan underlined the importance of closely examining tax exemptions, particularly for foreign investors who are involving in various projects in the country, as part of efforts to expand revenue collection. She noted that despite having tax exemptions in specific cases, not all taxes should be waived.
“We can exempt some taxes, but not all taxes. For example, there is the issue of services where we can collect withholding tax. Why are we letting foreigners who come to implement various projects and hire employees to avoid taxes such as payee taxes? All these taxes can be collected by the government to generate revenue,” she asserted.
Ms Hassan suggested that instead of offering general tax exemptions to foreign investors, the government could focus on targeted areas where tax waivers may be appropriate.
