The alarm bells were rung on Thursday in Dar es Salaam last week at the American Chamber of Commerce-Tanzania (AmCham-Tanzania) breakfast meeting that brainstormed on the current business climate.
This comes amidst incessant cries by many quarters of the private sector that decry high taxes hence citing the need for significant tax cuts in the next financial year, streamlining of the taxation regime and the scrapping of nuisance levies.
Tax matters were the thorniest issues on the floor with many participants expressing discomfort with the multiplicity of taxes and their administration. Taxation was also a major highlight in the presentation by one of the three resource persons, PwC Partner Rishit Shah, who said one could expect significant tax increases in the forthcoming budget to counter the reduction in aid inflow.
The other two were the executive director of Tanzania Private Sector Foundation, Godfrey Simbeye, and the Permanent Secretary in the Ministry of Industry, Trade and Investment, Dr Adelhelm Meru, who said many irritant taxes will be done away with under the new regime.
“Declining donor support and a stagnant tax base, suggests the new administration will significantly increase taxes in the forthcoming budget,” a senior member and leader of AmCham-Tanzania told The Banker on condition of anonymity reflecting the position of the lobby group on the matter.
He said the recent Millennium Challenge Corporation (MCC) suspension of the US$454 million aid package and potential wider donor pullout, were likely to influence a more aggressive tax policy and domestic revenue generation by the government.
According to him, the absence of a clear-cut strategy that’s driving the new administration’s policy of new pace, tone and tempo has led to some disruptions with both positive and negative effects
“On the positive, the new administration has sent a clear signal of zero tolerance on corruption and lack of accountability, which have been the bane to doing business in Tanzania,” he explained.
“On the negative, the new administration has not clearly communicated to stakeholders inside and outside government on its vision and how it plans to implement it. As a result, key stakeholders remain uncertain about its strategy, focus and priorities,” he further noted.
Dr Meru said these uncertainties, and other factors were among the things that the government is seeking to improve to ensure a sound business climate in the country- a part of the strategy of implementing Vision 2025 that will lead Tanzania to becoming a middle income economy.
AmCham Tanzania notes in its update on the state of the economy and business environment that so far there have been no signs of policy development to address constraints of doing business or broadening the tax base.
Depicting its narrowness, Shah said currently only 100 companies account for 43 per cent of tax revenue collections. On Tuesday, Ambassador Juma Mwapachu wrote in Smart Money that most of these were foreign owned businesses, which are also top drivers of GDP growth.
A World Bank report, the Tanzania Economic Update titled: Why Tanzanians Should Pay Taxes? The Unavoidable Need to Finance Economic Development has it that almost 90 per cent of taxes are collected only in Dar es Salaam.
“Businesses and investors are eager to know what will happen in June when the budget is tabled in Parliament. I myself don’t have an idea and therefore am excited,” Shah told AmCham Tanzania members when making his presentation titled: Investment in Tanzania – Overview of Economy, Business Environment and Taxation.
Finance and Planning Minister Phillip Mpango did not hint on the government plans on how to raise tax revenues to finance various development projects and recurrent spending when he presented the 2016/17 budget framework to lawmakers on April 6.
He however, spelt out other sources of financing the plan and said the government would cut foreign aid dependency by boosting domestic revenue collection of which tax collections would comprise the biggest chunk.
Dr Mpango said the government plans to raise about 2.1trn/-from external non-concessional sources and borrow 5.37trn/- from local domestic lenders. Development partners are expected to contribute 3.6trn/- in loans and grants, equivalent to 12 per cent of the 29.5trn/- budget.
Some 2.69trn/- will be non-tax revenue.
With the new budget expected to balloon by nearly 10trn/-, aid increasingly becoming unpredictable and external commercial credit being dear, the authorities’ options to mobilise funds for fiscal year 2016/17 will have to include significant tax increases.
Already provisional estimates of the budget to be tabled on June 9 show that the government will spend 31 per cent more of the current financial plan of 22.4trn/-. Tax revenues have been provisionally put at 15.1trn/-, which is an increase of nearly 3trn/- over the 2015/16 level.
“The government would have to find ways to increase its revenue base very quickly, most likely by strengthening its tax administration structure, increasing tax rates, increasing tariffs, and incentivizing firms in the informal sector to become official. None of this will come without massive domestic pushback,” Global Risk Insights analyst Kevin Amirehsani told The Banker last week.
According to him, it was unlikely Tanzania can maintain its institutions and policy programmes without aid, as this would require incredibly painful and politically unpopular domestic spending cuts by the government, as well as increasing the domestic tax base.
He said the country was the second-largest recipient of development assistance in sub-Saharan Africa and it was unlikely most of this aid will be cut in a short-period of time. Development partners are often sluggish to change their policies, along with being particularly wary of cutting general budget support quickly, he explained.
Amirehsani said it was also unlikely that the government will make do on its pledge to slash aid as drastically as many ruling party supporters are calling for. And one reason for this is that general budget support money can often be diverted for purposes of political patronage, he opined.
The government says it wants to see aid dependency falling to three per cent of the budget. The World Bank report also has it that while governments may access a range of different sources of funding, raising tax revenues is unavoidable.
“In light of recent economic development and in light of the growing demand for infrastructure and social services, it appears that Tanzania must make significantly greater efforts to improve its tax collection performance,” the July 2015 document reads.
“Tanzania will ultimately have to find means to finance its economic development with its own resources, which means improving tax collection. In spite of recent efforts, Tanzania’s record in this regard remains one of the worst in the world.
“Tanzania currently collects about US$6 billion in tax revenue per year, a figure equivalent to around 12 per cent of its GDP. This covers approximately three quarters of the government’s expenses. This is insufficient, particularly when other sources of funding, such as foreign inflows, are declining, or limited, such as borrowing and private sector finance,” it adds.
Fiscal experts and knowledgeable businesspeople aver that the government should broaden its tax base mainly through formalising the informal sector and incentivising compliance for it to enhance funding requirements.
Equally important was the need to quickly end the government’s tendency to ignore contributions of taxpayers when making fiscal changes. Shah cited the example of not involving the private sector when increasing the excise duty rate on money transfers and introducing VAT on insurance services.
Rajiv Biswas, Senior Economics Direct at IHS Global Insight of the US, said some of the government strategies of funding the budget would be counterproductive. He said he fears increased borrowing from domestic lenders would crowd out the private sector and significantly reduce credit to small businesses and other local borrowers.
“And when it comes to boosting revenue collection, President Magufuli has already tried to implement reforms within Tanzania Revenue Authority (TRA) and other government institutions tasked with collecting tax, customs fees, and other revenue. But this isn’t something that happens overnight,” he told The Banker via email.
“It involves instilling financial transparency, bringing in businesses from the informal sector to the formal sector, incentivizing tax payments and settling arrears, convincing taxpayers that their funds are well accounted for by government institutions and, in short, changing the revenue collection culture,” he added.
“It is unclear how much revenue can be raised this year by boosting these revenue-collection capacities – the government’s projection of 17.8trn/- looks more rosy than realistic – although it must be noted that Magufuli’s administration should be commended for significantly boosting the TRA’s monthly collections thus far.”
The taxman now has a new target of collecting at least 2trn/- a month, which would amount to 24trn/- a year. That would be about 80 per cent of this year’s budget.