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Countdown to Independence Day: Tax reforms then and now in attaining a robust economy

Countdown to Independence Day: Tax reforms then and now in attaining a robust economy

ON 9th December 2021 we will be celebrating 60 years of independence. It is with no doubt that Tanzania has been through a journey full of interesting moments worth reflecting on-a journey of building her economy and enriching her people.

Tanzania has historically engaged World Bank and IMF on Economic Recovery Programmes (ERP) since 1986. The Government on the other hand has been undertaking various policy reform measures, including trade and exchange rate reforms, banking and financial sector reforms, and reforms in agricultural marketing.

We have also over the years witnessed comprehensive tax reforms process, which have improved and strengthened our tax administration system. Tax reform initiatives in Tanzania have mainly been driven by being a member of the East African Community but also due to a need to manage fiscal challenges.

This is reflected in the fact that most of the proposed and implemented tax reforms in Tanzania have been guided by the need to increase revenues. Extensive efforts have been made to improve taxation in Tanzania.

Since 1969 there have been several tax reforms which have included:

• Introduction of sales tax in 1969; • New income tax legislation in 1973; • Amendment of the then existing tax legislation to revise the tax bases and rates;

• Abolition of some excise duty in 1979 and export duty in 1985/86; • Re-introduction of previously abolished excise duty in 1989. In recognition of the then continued dwindling functioning of the tax system and the need to look at the tax system as a whole, the Government did appoint a Tax Commission in October 1989.

The Commission’s primary task was to study and review the central and local government tax system and its administration and make recommendations to the government. Specifically, it was to recommend changes to the existing tax system on how to:

• widen the tax base; • enhance revenue collections; and • promote greater efficiency of production in the economy.

An important goal established by the Tax Commission was to increase Tanzania’s fiscal self-reliance in terms of achieving a surplus in the recurrent budget instead of the significant deficit at the time. The Commission’s principal proposals for tax structure reform which remain relevant to date can be summarized as below: Direct taxes

• Broaden the tax base by taxing fringe benefits and improving compliance, aided by more effective enforcement. • Further reduce the tax rates on individual and company income but apply these rates on a broadened base.

• Make some adjustments for the effects of inflation. On Indirect taxes the Commission proposed a replacement of the multiple-rate structure of sales and excise taxes by a value added-tax (V A.T) and a limited number of excises on traditional excisable goods and luxury items but also simplifying the customs duties by reducing the number of rates and reducing exemptions from both customs and sales taxes.

Looking 60 years down independence, we all have a reason to pat our backs, there is still a long way to go but at last we have the right platform we can build on and have a clear vision of where we want to be as a nation.

The recent World Bank upgrade of Tanzanian economy to low middle-income country is a product t of the efforts employed over the period of time and must be sustained to grow the economy to the next rank.

The focus remains to have a fiscal regime that is self-sustaining. As a country we need to be able to meet our expenditures out of our own revenues, strive to have a surplus balance of payments.

As we celebrate our 60th birthday as a country, there is need to aim at reducing and focusing on eliminating dependence on foreign aid for budgetary support. In achieving self-fiscal reliance, there is need to enforce three important parameters, which need highest level of country’s self-discipline to achieve.

• the level of tax revenues; • the level of expenditures; and • the difference between the two (3=1-2), or the deficit. There is need by the Government to focus on increasing the tax base and take advantage of the country’s competitive advantage in natural resources and strategic location to increase revenues.

But there is a bigger need for careful review and substantial curtailment of expenditures in all spheres of government activity, spending discipline.

Improving and strengthening the country’s tax administration system including efficient tax enforcement and mechanisms in tax collections, will help fast track the achievement fiscal self-reliance and improving the revenue collections. Just like the private sector who are focused on maximizing revues and minimizing costs, the Government similarly has no option but must minimize her expenditure to attain self-reliance and be able to eliminate budgetary challenges in the long run.

As we celebrate the 60 years of independence under the stewardship of Her Excellency Mama Samia Suluhu Hassan, there is a renewed hope and opportunity in achieving economic sustenance.

Looking at the 2021/22 budget and economic diplomacy underway, it is definitely clear that the Government is looking at improving the busines environment for taxpayers with a view to attracting investments including nurturing small and medium businesses to widen the tax base. In a recent move by President Samia Suluhu Hassan, we have witnessed abolishment of nuisance levies.

This will be helpful in improving business and investment environment. The private sector is keen to support Government’s initiative in making a more attractive investment environment for both locals and foreign investors.

On the expenditure side, the government has committed to allocating funds to priority areas which stimulate economic growth. It is undisputable that 60 years down independence, Tanzania has continued to enjoy steady economic growth from a 3.1 percent during the 1967 – 1985 period to an average of 6.5 per cent in 2016/2021.

While we celebrate the 60th birthday as a nation there is need for the government to consider continued effort to reform the tax structure by reducing the tax rates and abolishing tax exemptions which according to various studies are generally revenue neutral, if fully implemented.

Low import duties and excise rates on a broad base of critical goods not locally available rather than high rates on a narrow base will stimulate compliance but also reduce any form of smuggling/cheating given the substantial fixed costs associated with smuggling.

This will also increase tax collections. Unnecessary exemptions with no economic gains leading to unanticipated shortfalls in revenues should also be reviewed and abolished.

It’s now time the Government should consider innovative ways of widening the tax base by taxing the informal sector. Several studies clearly indicate that the informal sector has significantly expanded during the last few years and bringing them to the country’s tax net will help on the revenue side of Government coffers. Efforts to reduce tax evasion and tax avoidance should also continue.

Tax evaders should be subjected to higher penalties, penalties can generally be increased without any pecuniary costs to the government.

A better tax administration system should be prioritized with more investment on technology of taxing the emerging E-economy.

Better administration, on the other hand, normally requires additional spending both on technology, skills, salaries, and tools of work. The Government needs to continue investing on technology and skills.

While we ponder on our next way forward as a nation, the country’s natural resources remain our biggest economic strength and undoubtedly the low hanging fruit, that need to be strategically repositioned to unearth the potential economic benefits and contribution to the economy.

Tanzania being a mineral rich country, the development of an active minerals sector can easily transform the economy The potential in our resource sector needs to be unearthed.

Attracting FDI in the sector remains an important policy objective that will fast track unlocking of the country’s natural resource potential.

As we celebrate our 60 years of independence our hope to the country is to continue maintaining a favourable investment climate that will attract requisite foreign direct investments in the various strategic sectors to mention a few, mining, tourism, agriculture etc. as we transition into a post Covid scenario that has seen a decline in FDI’s globally.

  • The writer, Godvictor Lyimo is the President of Tanzania Association of Accountants (TAA), reachable via godvictorl@ yahoo.co.uk and phone: 078751401
Author: Godvictor Lyimo

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