Simple but crucial tax measures for Tanzania

One of the cardinal principles of any effective tax system is efficiency. Indeed, it was the father of economics himself, Adam Smith who wrote, “Every tax ought to be contrived as both to take out and keep out of pockets of the people as little as possible over and above what it brings, into the public treasury of the State”, in other words, it should neither cost the tax authority too much money to collect the taxes, nor should it impose an excessive compliance cost on the tax payer. This can only be achieved when the tax system is designed in such a way that the time it takes to comply is minimal and the costs are reasonable.

All ears and eyes will be towards Dodoma this week as Dr. Philip Mpango, Tanzania’s finance minister will be tabling his budget estimates for the coming fiscal year. While many will be keen to see which taxes rise and which ones fall, it is important to remember that tax rates are not the only thing that makes an economy efficient and attractive for investments. And I think Dr. Mpango has a real opportunity as far as tax administration is concerned.

Two years ago, the Tax Administration Act of 2015 came into force. The aim of the law was to streamline tax administration of all taxes. Last year, regulations to the Tax Administration Act were published. Among the key issues was the importance the regulations placed on Electronic Fiscal Devices and electronic filing generally. However, there are still some low hanging fruits for Dr. Mpango in the tax administration space.

The first would be to expand the scope of electronic filing. As it stands today, only VAT returns can be filed electronically. If we can expand this to other taxes such as corporate taxes, it would make the compliance burden much easier for tax payers. Tanzania still lags behind in global rankings when it comes to paying taxes. According to the World Bank, Tanzania is ranked 154 out of 190 countries. Compare that with Rwanda which is ranked 59. Part of the reason Rwanda is doing so well is the fact that it has embraced technology and tax compliance has become much easier.

Another area of potential improvement is dispute resolution. As of now, the law provides that once a tax payer has filed the return, TRA can propose an amended assessment as long as it is within a period of five years, beyond which any assessment becomes time barred. When TRA does an audit and issues an assessment, the tax payer has 30 days to respond or object to a response. One would expect that some reciprocity is afforded to the tax payer, but the law is such that the tax authority has unlimited time to respond to an objection, as a result the dispute resolution process may drag on for a long time, sometimes years. An added financial penalty for dispute resolution is the fact that interest accrues on unpaid taxes. It is therefore in the interest of both tax payers and the TRA that a provision is set that binds the tax authority to respond to the taxpayers objection within a specified period, say within 6 months.

Finally, let us remember that before an objection is entertained, the tax payer has to make a deposit equal to one third of the tax assessed or the undisputed tax amount, whichever is higher. This is already a burden to tax payers. It should be borne in mind that a tax assessment is not a tax liability, at least, until the tax payer has accepted it or the courts have ruled in TRA’s favor. It can therefore be punitive to ask a tax payer to essentially pay tax in advance. But even so, given the fact that audits and dispute resolution take a long time to be resolved, a tax payer’s liquidity may remain trapped bearing in mind the difficulties of getting refunds from the revenue authority.  To compound the situation, the other challenge is that in practice the TRA do not pay interest to taxpayers on tax overpayments / late refunds.

To sum it up, it is not sufficient for taxes to be easy to understand and fairly imposed, it should also be easy for tax payers to comply. Normally tax payers find it easy to comply when a tax administration system is easy to deal with. When tax payers for instance find it easy and convenient to make a tax payment, the likelihood to comply is high. Tax payers, both large and small, will be keen to see that the compliance burden is eased, and addressing the issues above will certainly improve our paying taxes ranking!

Written by Samwel Sebastian Ndandala.

The article was first published by The Citizen newspaper

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