Fiscal response to economic effects of Russia-Ukraine War

THE world is arguably in turmoil with geopolitical tensions in the major parts of the world.

These geopolitics have in a way brought disruptions to most economies around the world, whereby countries now have to shun trading with certain countries irrespective of the impact on its economies.

For instance, sanctions imposed on Russia that is one of the largest energy producers in the world and the largest manufacturer of fertilisers and producer of grain, has had a big impact on Africa and Tanzania inclusive.

Experts around the world are coming to terms to the possibility that we are or could be heading to one of the worst ever recession.

Inflation rates around the world are at all-time high, with some countries experiencing three-digit inflation. To make it worse, we were just recovering from the social economic effects of the COVID-19 pandemic, which shattered the world economies.

According to the World Bank, the ongoing war in Ukraine has dimmed the prospect of a post-pandemic recovery for emerging and developing economies.

Tanzania is neither an Island nor immune to what is happening around the world. Whilst this may not be the current focus of Tanzanians, and may be the impact of the war may not seem so obvious, but a kilo of maize flour has climbed to over 1,500/- and no signs that this may go down and most farmers have of recent been complaining of the dwindling exports since our major customers were from European countries.

Whilst the UK and the EU members have responded to the rising inflation by hiking interest rates as well as energy caps, the government of Tanzania has also responded positively to the current economic situation, including subsidising the energy and fertiliser costs.

In the event, our favourite President Samia Suluhu Hassan, has also been tirelessly meeting investors to find new markets for our products.

It is therefore imperative, in addition to her efforts that the country responds to the much talked about recession with measures that provide relief to businesses and its people.

One could think of, and that has been widely been promoted by the Business Community, is widening on the tax base to include informal sector (herein “informals”) and reduce the burden employees and formal businesses (reduction of tax rates on employment and businesses).

This will help in plugging the country’s budget deficit, whilst leaving room for more expansion by businesses. Most of the recent attempts by the government in including the informals into the tax net have hit deadlocks in one way or another.

The reason being, to succeed taxing the informals, they have to buy into the tax system being established and voluntarily opt comply.

For instance, the recent attempts by the government to administer withholding tax on residential housing would only be possible if these landlords were consulted and accept to go ahead with the plan.

Another incentive for the informals to accept a certain tax system could be that, the manner of paying a certain tax be convenient to them. By convenience it implies that such tax to be levied at the time and manner convenient to the tax payer.

For instance, If I am an informal landlord renting one house and I am required to be filing tax returns and logging into the TRA system in order to register and make payments, this would mean that I would have to get a professional to assist, but the question is- does my margin support such expenditures?

What if the government could design a mobile application for me to plug in the rental income, when received and make tax payments directly in the mobile apps? We have seen great improvements in payment of utilities and parking since we moved into mobile money based GEPG.

Additionally, another way to encourage voluntary compliance, the tax to informals ought to be fair in the sense that it should be in accordance with the ability to pay.

The government should make efforts to come up with a completely new taxation regime for the informals and partly formal businesses. Going back to the example of the withholding tax on rent, I believe should the government reduce the rate to may be maximum of 3.0 per cent on monthly rental payments below 1.0m/-, and more landlords would have obliged?.

A similar case could be argued for businesses (informal and formal) whereby our tax rates have been uniform irrespective of the size of the business, as long as you have established incorporated entity. This harms compliance to SMEs.

I know quite a number of small businesses that, as long as they are incorporated (for one reason or another), they are subject to corporate tax at 30per cent and have the whole lot of administrative requirements of filing audited financial statements and well as tax returns, irrespective of their revenue threshold.

There is famous Swahili proverb by the “Wahenga” that goes by; “chururu si ndondondo” which means a flow of water is not similar to a drip.

A flow easily exhausts but a drip is likely to last long. This proverb teaches the need of using resources sparingly in order to use them over a long time.

If the Government could opt for a progressive based taxation to SMEs, similar to employment tax, may be could have helped bring more of them out of their hideouts. Imagine there are a number of Tanzanians engaging in small and medium scale agriculture (at least 80 per cent of the populations), and most of them in order to access finance have to register their businesses.

By virtue of their registration, they have brought upon themselves a mandatory requirement to have their accounts audited and every year they have to account corporate tax 30 per cent of their profits.

Additionally, there is also the tasking requirement to assist the government to withhold on payments to labourers, rents, employees etc. as well as ensuring you are up to date with your tax filings.

Ooh, and the penalties for not complying with these added responsibilities are massive that do not look into account your ability to pay and accumulate endlessly.

For this reason, very little of these do manage comply and pay tax. Therefore, as we are bracing for these tough times ahead as the war continues- a rethink of our strategy in reducing the tax dependency on employees and large businesses will create the needed resilience in our economy.

No one can dispute the immense contribution of small and medium enterprises in Tanzania in job creation and income generation.

This can be implicated in terms of tax collection with the right fiscal framework that addresses their situation and adapts to their needs.

Amani Michael is a tax director at Lexxon Consulting Limited. The views expressed by him do not constitute the views of the firm.

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