East African Community (EAC) member states, like many African countries, struggle to collect an adequate amount of tax revenue to support needed investments in public services.
Only one EAC member state, Rwanda, collected tax to GDP ratio of 15 per cent in 2022/2023 financial year, which is widely considered as a tipping point to make a state viable and put it on a path to growth.
World Bank (WB) says countries collecting less than 15 per cent of GDP in taxes must increase their revenue collection in order to meet basic needs of citizens and businesses.
Other member states had below 15 per cent ratio which indicates that a significant part of the economic activity is untaxed and that there are fewer actors contributing to the country’s tax revenue.
Brookings Institution says in its annual Foresight Africa report that Africa’s average tax-to-GDP rate is 16.5 per cent which is lower than other regions: Asia and Pacific (19.1 per cent), Latin America and the Caribbean (21.9 per cent), and OECD countries (33.5 per cent).
It is generally agreed that raising tax as a share of GDP is an important part of the development process and a key component of building an effective state.
Below is how some EAC member states fare in tax to GDP ratio;
Tax to GDP ratio for 2022/2023 financial year reached 11.9 per cent and the government projects it will increase to 12.4 per cent in the 2023/2024 financial year, the Minister for Finance, Mwigulu Nchemba announced in Parliament when he presented budget framework for 2024/25 financial year.
According to a World Bank senior economist, Jaffar Al-Rikabi, Tanzania had made progress in increasing tax collection but there was a room for improvements as collection rates were still below peer countries.
“Tanzania is a county with a lower middle income economy, yet it collects taxes at the level of low income countries. Tax collection to the GDP ratio was around 11.6 per cent in 2022 compared to 14.2 per cent average of sub-Saharan Africa,” he said in a video-conference at the launch of the 19th Tanzania Economic Update in September this year.
A Country Senior Partner of PwC Tanzania, David Tarimo suggested the government should invest more in digital solution to ease tax administration and improve voluntary compliance for the Small and Medium Enterprises.
Mr Tarimo, who is currently the chairman of the Board of Directors of CEO Roundtable of Tanzania, told the ‘Daily News’ that leveraging on digital technology was important to streamline tax operations, enhance efficiency and foster compliance on SMEs.
“Make tax system simple to and investing in digital solution to make administration and compliance easier. That will make it simple for SMEs to comply,” he said.
Kenya’s tax revenue as a percentage of economic output or GDP is set to cross the 15 percent threshold in the current 2023/24 fiscal year, meeting the World Bank’s minimum recommendation.
The ratio of tax revenues to GDP is set to reach 15.8 percent in 12 months to June 2024, the National Treasury stated in its final 2023/24 Budget Review and Outlook Paper published mid this month.
The government has highlighted aggressive revenue mobilisation including the deployment of technology by the taxman as actions set to enhance domestic tax collection.
“Emphasis will be placed on aggressive revenue mobilisation through a combination of tax administrative and tax policy reforms. In this regard, the government will also finalise the development of the Medium Term Revenue Strategy for the period 2023/24 to 2026/27 which will provide a comprehensive framework for guiding tax reforms in the medium term.”
Uganda plans to boost domestic revenues to 14.3 per cent of GDP in 2023/24 financial year from 13.5 per cent of GDP in the 2022/23 financial year.
The Finance Minister, Matia Kasaija in his budget speech for 2023/24 financial year in June that under the Domestic Revenue Mobilization Strategy, the objective is to improve revenue collection to between 16 and 18 per cent of GDP over the next five years from about 13.5 per cent of GDP in 2022/23 financial year.
Next financial year priority has been placed on improving tax administration, including use of ICT to fight tax evasion, and rationalizing tax exemptions to improve their effectiveness and reduce revenue leakage, he said.
Since 1993, tax revenue collection has increased from about 8.8 percent of GDP to 15.8 percent in FY 2019/2020, according to Medium Term Revenue Strategy 2021-2024 by the Ministry of Finance and Economic Planning.
The figures show Rwanda outperforms other EAC countries, with the highest tax-to-GDP ratio in the EAC since 2016.
Vision 2050 sets a target for domestic revenue mobilisation of 21.5 percent of GDP by 2035.
Increasing tax revenues by 5.7 percent of GDP in the next fourteen years will be reached through a comprehensive strategy that reduces rates, broadens the domestic tax base, improves tax compliance, and curbs tax evasion.