COLUMN: NEW THINKING. Tax Commission explores reforms to enhance revenue mobilisation

TANZANIA: THE Tax Commission, recently established by President Samia Suluhu Hassan aims to explore effective approaches for increasing tax collection and improving taxpayer compliance within a well-structured system.

My submission focuses on the key challenges hindering subnational governments’ ability to raise revenue and proposes potential reforms to address these issues.

Undoubtedly, the centralisation of tax policy, the size of the informal sector that is difficult to tax, the limited capacity of tax administration authorities, and the heavy reliance on centrally allocated revenue remain the primary obstacles to the ability of subnational governments in the country to mobilise their own revenue. Addressing these issues through targeted reforms could significantly enhance the country’s fiscal autonomy and revenue generation capabilities.

Given the available revenue potential, the country’s primary challenge remains the insufficient funds to support essential government functions. To address this, the government has formed a commission of highly experienced individuals to examine tax-related issues and identify factors hindering efficient tax collection in Tanzania.

And, after an extensively studying, analysing and examining our tax system, I can confidently assert that there is significant potential for improvement, particularly considering the country’s alarmingly low tax-to-GDP ratio.

Taxes are crucial for establishing an efficient government, distributing and allocating resources and influencing economic growth. Because taxation depends on the state’s ability to enforce law and order and deploy coercive authority, nations with subpar tax performance typically fail to protect property rights and lose the social contract.

As a result, a well-designed tax system helps the government generate enough money and exercise its authority according to the rule of law rather than at will, which boosts public confidence in the government and strengthens the so-called social contract between the voters and the government that serves them.

Taxes are essential for an efficient government, resource allocation and economic growth. Taxation relies on the state’s ability to enforce laws and exercise authority. Countries with poor tax performance often fail to protect property rights and undermine the social contract.

The logic is that decentralising tax collection could enable subnational governments to strengthen their finances by broadening the tax base to include more of the informal sector without affecting central government tax revenues. This would avoid significant political barriers to reforms.

Tanzania, like many countries with similar economic structures, has a large informal sector and SMEs that are difficult to tax, yet they benefit from public services that require funding. Strengthening the social contract in the long term will be possible as subnational governments are able to provide more services through higher revenues.

Therefore, Dr Samia’s audacious move to establish the commission on tax matters is appropriate and timely. Tanzania is not an exception to the tax reform trend for the reasons listed above, as well as the growing demand for fiscal decentralisation and call for good governance at subnational governments and their need to produce the bare minimum of revenue necessary for efficient management and the provision of essential basic services for voters.

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My message to the tax commission, which is currently delving into these intricate issues and how to develop a workable tax system for Tanzania, is that the challenges are not just about increasing revenue; they also involve who is responsible for paying taxes, how they are administered, how to have a watertight system from top to bottom and above all how the government spends the money it receives.

Indeed, tax reforms have been a priority throughout the administrations of our nation’s first president, Mwalimu Julius Nyerere, subsequent leaders and continue to be a focus under the current administration of Dr Samia. Why, because of fiscal pressures and the need to ensure that taxes collected are commensurate with the potential of current economic activities.

While Tanzania’s tax reforms have seen some success, much remains to be done, particularly in leveraging advanced IT systems like Fitch solutions. This is crucial given the extremely low revenue collection and the significant portion of taxes left uncollected due to poor planning, design and approach.

To create a sustainable system, we must address key questions: What are the primary constraints limiting subnational governments’ capacity to collect taxes? What changes can improve how these governments generate revenue? Understanding these challenges and exploring potential policy solutions is essential, as taxation plays a critical role in building an effective state and fostering economic development.

Many areas need close examination that could help boost tax revenue, but they need to be examined in their context. These include issues of transfer traps, challenges associated with revenue from natural resources, issues related to the dominant size of the informal sector, issues related to the capacity of subnational governments in tax administration, and issues of tax base and economic development, to mention a few.

I don’t have enough room to go into detail. Still, the first step in increasing tax revenue in the country is to conduct a diagnostic evaluation of the current system from a practical point of view. Following that, a comprehensive reform strategy that addresses the gaps found and a plan for implementing the changes should be developed with a timeline to measure progress.

I believe the potential reforms can be divided into three areas: The design of the legal tax framework, the organisational structure and operating procedures of the tax administration, and management, which should include the administration of human resources and the adoption and use of information technology tools by the tax administrator.

To increase voluntary compliance, enforce non-compliant taxpayers and broaden the tax base, a thorough reform strategy, in my opinion, would allow for a systematic approach by addressing both tax administration, i.e., organisational structure and management and tax policy, i.e., legal framework issues. Given the tax system’s complexity, the strategy should also mandate the creation of yearly plans for strategy implementation and key performance indicators that would be used to track actual performance against plans.

Strong political support is essential for the success of the reforms; without it, even the most straightforward changes could run into problems. Tax reforms will inevitably have both winners and losers. Those who oppose them include wealthy, well-connected corporations with greater political influence, as well as corrupt tax administration staff who stand to benefit from maintaining the status quo.