HAPPY New Year 2025! As we step into this promising year, it’s the perfect time to reflect on Tanzania’s progress.
On December 18, 2024, the International Monetary Fund (IMF) released a comprehensive report detailing the country’s achievements under the Extended Credit Facility (ECF) and the Resilience and Sustainability Facility (RSF).
These programmes have been instrumental in stabilising Tanzania’s economy, advancing fiscal reforms and enhancing resilience to climate challenges.
Since its launch in 2022, the ECF has played a pivotal role, with four successful reviews completed by the end of 2024.
Meanwhile, the RSF, introduced in mid-2024, complements these efforts by focusing on environmental sustainability.
Together, these facilities represent a holistic approach to economic reform, with tax reform as a cornerstone, aiming to lay a foundation for sustained growth and resilience.
With the release of this report and a deeper understanding of its findings, we turn our attention to the recommendations outlined by the IMF. Let’s explore how these strategies align with Tanzania’s goals and their potential to drive meaningful reform.
Enhancing revenue mobilisation
The IMF has consistently emphasised the importance of enhancing revenue mobilisation as a cornerstone for Tanzania’s fiscal sustainability and economic stability.
One key recommendation focuses on broadening the tax base, which is essential for generating more stable and predictable revenue streams.
The IMF suggests that this can be achieved through enhanced enforcement and compliance measures.
By tightening enforcement, Tanzania can ensure that all taxable entities and individuals contribute their fair share, reducing evasion and avoidance that currently diminishes government revenue.
Furthering this objective, the IMF also recommends adopting strategies that improve the efficiency of tax collection.
This includes the modernisation of tax administration systems through technology, which can streamline processes and minimise the time and resources spent on tax collection.
Additionally, improving taxpayer services to facilitate easier compliance and providing clear and accessible information can help to reduce the administrative burden on taxpayers and encourage timely payments.
These measures, combined, aim to create a more robust tax system that not only supports Tanzania’s current financial needs but also lays a strong foundation for future economic challenges.
By implementing these IMF recommendations, Tanzania can move towards a more equitable and effective fiscal environment, essential for its long-term development goals.
In a study published on May 10, 2019, by Bernardin Akitoby and colleagues titled “Case Studies in Tax Revenue Mobilisation in Low-Income Countries,” the focus was on how low-income countries can enhance tax revenue collection to finance their development needs.
This study highlights Burkina Faso’s tax reform from 2009 to 2013 as a prime example of implementing the IMF’s recommendations for improving revenue mobilisation.
During this period, Burkina Faso undertook substantial tax eforms that simplified its tax system and broadened the tax base, which led to an increase in tax revenue from 11.9 per cent to 16.8 per cent of GDP.
Key reforms included streamlining tax incentives, revising VAT exemptions and introducing a unified and reduced corporate income tax rate.
The success of these measures, bolstered by IMF technical assistance, exemplifies the effectiveness of simplifying tax systems and strengthening compliance to enhance fiscal capacity.
This case underscores the potential benefits of similar reforms in other low-income countries aiming to improve their tax revenue performance.
Streamlining tax exemptions
The International Monetary Fund (IMF) has put a spotlight on Tanzania, urging a strategic overhaul of tax exemptions to turbocharge economic growth.
This isn’t just about tweaking numbers; it’s about making sure that every tax break handed out is a seed well planted, promising a harvest of economic benefits.
Tax exemptions, after all, should be more than financial relief they should be catalysts for development. Take, for instance, the tax incentives in Tanzania’s Export Processing Zones (EPZs) and Special Economic Zones (SEZs).
These zones are designed as launchpads for export-led growth, but it’s crucial to check if they are truly pulling their weight in attracting genuine investment and fostering technology transfers, or if they’re merely tax loopholes in disguise.
Similarly, the agricultural sector enjoys various incentives intended to boost productivity. Yet, it’s vital to ensure these perks aren’t being hijacked by those outside the agricultural fold, diluting their effectiveness.
The same goes for investment incentives like reduced corporate income taxes in key sectors such as mining or tourism.
Are these incentives really drawing in the kind of longterm investments that sustain not just businesses but communities and ecosystems?
And then there’s the broad brush of VAT exemptions, particularly on luxury goods. Streamlining these could not only simplify the tax system but also prevent luxury benefits from siphoning off resources that could serve the wider populace.
By zeroing in on key reforms like streamlining exemptions and simplifying the tax framework, Tanzania is set to not just boost its revenue but to revolutionise its fiscal landscape, creating a fairer, more efficient system.
This isn’t merely a strategy for filling the coffers it’s a bold move toward harnessing well-crafted tax policies to thrust the nation forward towards its development aspirations with precision and dynamism.
And it’s not just theory; numerous global case studies vibrantly illustrate how such strategic tax reforms can ignite economic growth, proving that Tanzania is on the right track.
Ashery Mbasha from Valiant Associates during an interview explained following the 2003 Rose Revolution, Georgia undertook significant tax reforms that simplified the tax system by reducing the number of taxes and adopting a flat income tax rate.
This overhaul not only improved compliance but also broadened the tax base, contributing to economic growth and a more robust fiscal environment.
Similarly, in 2006, Utah moved from a progressive tax system with multiple brackets to a single flat-rate income tax, aimed at simplifying the tax code and making it fairer.
This reform proved effective even during economic downturns like the Great Recession, highlighting the stability such changes can offer.
Meanwhile, in developing countries like India and Mexico, reforms have focused on enhancing tax administration and expanding the tax base.
These reforms have successfully increased revenue and sustained economic growth, demonstrating the importance of well-planned tax policies that are tailored to specific economic contexts.
These examples collectively illustrate the transformative impact of well-executed tax reforms across different economic landscapes.
These examples illustrate that while the specifics of tax reforms can vary significantly across different countries, the underlying principles of reducing complexity, enhancing fairness and fostering compliance are universally beneficial.
These case studies offer valuable insights for other nations considering similar reforms to boost economic growth and fiscal health.
Advancements in VAT processing
The International Monetary Fund (IMF) has emphasised the essential role of technological advancements in reforming VAT (Value Added Tax) collection and refund systems in Tanzania. Recognising the potential of automation to transform tax administration, the IMF advocates for the integration of advanced technologies to streamline VAT processes.
This move is aimed at increasing efficiency, reducing human error, and preventing fraud, thereby ensuring that VAT collections are both timely and accurate.
To bolster the technological advancements in VAT systems, the IMF underscores the critical need for robust legislative support.
It is essential for Tanzania to develop and enforce new legislation that facilitates the seamless integration of automated systems.
This legislative framework should conform to global best practices, providing a solid legal base that not only fosters technological innovation but also protects taxpayer rights and enhances transparency.
By enhancing legislative conditions, Tanzania can more effectively manage VAT operations, which would lead to better compliance, increased trust among taxpayers and, ultimately, a notable increase in revenue collection.
This strategy does more than streamline tax collection efforts; it also strengthens the nation’s economic infrastructure, making it more robust and resilient as evidenced by the positive outcomes observed in other nations that have embraced similar reforms.
Mr Kambarage Nyakasaga, a seasoned tax consultant from Dar es Salaam, highlights that around the globe, nations are leveraging VAT automation and digital transformation to revolutionise their tax systems with staggering success.
For instance, in Germany and Australia, the introduction of integraed computerised tax systems has not only streamlined the taxing process but also dramatically cut costs and enhanced services.
These systems have transformed tax administration, making payments more precise and efficient, boosting compliance and drastically reducing administrative burdens.
Transitioning to Africa, research from the International Journal of Emerging Market Studies reveals that in Nigeria, the shift towards an automated VAT system has ushered in an era of heightened security and flexibility in tax payments.
This change is part of a wider initiative that includes the Integrated Tax Administration System (ITAS), which simplifies all tax administration procedures, leading to a more streamlined and efficient process for revenue collection.
Further supporting this trend, Irene Chaji from the Kenya School of Revenue Authority, along with her colleagues at Moi University, point out that Kenya’s journey towards digital tax systems has significantly impacted VAT compliance among businesses.
By minimising the cost and complexity of compliance, these systems have boosted compliance rates and enhanced tax collection efficacy.
This example serves as a strong endorsement for other nations contemplating similar paths, illustrating the widespread benefits and transformative potential of adopting advanced tax technologies.
Postscript
As Tanzania welcomes the new year, the IMF’s recommendations present not just a roadmap but a compelling challenge to rethink and reimagine the country’s fiscal future, drawing inspiration from the transformative successes of other nations while paving its own path forward.
As you reflect on these insights over the weekend, consider the transformative possibilities these strategies could bring to our nation. What does a more equitable, efficient and resilient tax system mean for Tanzania’s future?
How can these reforms unlock opportunities for growth and prosperity for all citizens?
This conversation doesn’t end here. Join us again when we unveil the final part of the IMF’s recommendation set. Together, let’s explore how Tanzania can take these bold steps to redefine its economic trajectory. Until then, let these ideas inspire your weekend reflections!
● Kelvin Msangi is a financial analyst and a Daily News columnist. For suggestions, you can reach him at kelvin. msangi@protonmail.com or 0655963224
