Addressing the ‘elephant’ in the room-Tanzanian VAT on tourist service

21Feb 2017
The Guardian Reporter
The Guardian
Addressing the ‘elephant’ in the room-Tanzanian VAT on tourist service

There is no doubt that tourism provides Africa with major socio-economic opportunities, given the pro-poor nature of the industry, and the abundance of the continent’s nature and culture resources.

However, tourism is an increasingly competitive industry, and successful tourism industries require excellent planning and management. The tourism industry in Tanzania is no different.

Tourism is a key foreign exchange earner for 83 percent of developing countries, and the leading export earner for one-third of the world’s poorest countries. The United Nations World Tourism Organization (UNWTO) Vision 2020 for Africa forecasts a growth in Africa’s share of global tourism arrivals from 3.6 percent in 1995 to 5 percent in 2020.

While African governments are increasingly realizing the potential value of tourism, the lack of practical government support, in the form of increased budgets and appropriate operating and investment incentives, is one of the biggest challenges facing industry development.

According to Jacques Morisset, a World Bank Group lead economist for Tanzania, "Tanzania is poised to reach middle-income status, and tourism can be leveraged to promote faster economic growth, additional productive jobs, more fiscal revenues and additional foreign exchange earnings ". But the question is, are we there yet?

The tourism sector plays a significant role in the Tanzanian economy. According to Tanzania Tourism Sector Report 2015 by Tanzania Invest, tourism alone generated around USD 2 billion which constitutes 25 percent of Tanzania’s foreign exchange earnings and 17 percent of Tanzania’s GDP in 2014, and directly employs around 600,000 people and up to 2 million people indirectly.

In mid-2016, Tourism industry in Tanzania saw the government proposal to impose the Value Added Tax (VAT) on tourist services. The prepositions were later endorsed into law. We note that whilst this move aims at increasing the tax base, it has made the Tanzania tourism package more expensive.

The previousVAT exemption regime on tourist services made Tanzania one of the more attractive destinations in terms of costs for foreign tourists. In 2013 for example, Tanzania was listed in the World Bank’s Africa Tourism Report as one of the five countries, with the highest potentials for tourism.

The move by the Government of making tourist services vatable, means that the consumers will now have to bear the VAT burden on their tourist packages, which may impact the flow of tourists in the country.

Changing costs in particular destinations relative to others, and adjusted for exchange rate variations, are regarded as the most important economic influence on destination shares of total travel abroad.

The impact of competing destinations has a positive influence on the demand for international tourism, meaning that a rise in price to one destination may boost visitor numbers to substitute destinations. Conversely, it may lead to a decrease in the revenues from tourism in the destination whose costs increase.

Consequently, it is still to be seen if Tanzania will continue to woo the same number of tourists it attracted before the introduction of VAT on tourist services, and remain in the list of the five countries with the highest potential for tourism in Africa.

In our view, for Tanzania to reach middle-income status, achieve faster economic growth, create additional productive jobs, more fiscal revenues and additional foreign exchange earnings, the government must create an enabling environment for tourism stakeholders to operate in, so that the revenue ladder can smoothly be ascended despite the introduction of VAT on tourist services.

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