DAR ES SALAAM, July 3, 2015 – Tanzania has maintained a high level of economic stability over the past decade making it the fastest growing economy in the East African Community. Although per capita income is near $950, the country’s low performance in tax collection threatens fiscal stability. A new tax reform strategy will provide higher revenue to support the Government meet its ambitious development agenda and expand benefits to many more Tanzanians, according to a new World Bank Group report.
While the report provides an analysis of the Tanzanian economy, the seventh Tanzania Economic Update, Why Should Tanzanian’s Pay Taxes: The Unavoidable Need to Finance Economic Development, explores options for developing an affordable, fair and transparent tax collection scheme and the benefits from a well-designed and managed tax collection system for the country’s poor population and future economic growth.
“Tanzania’s remarkable economic growth has helped to improve the quality of life for millions of people, yet the country’s poor performance in tax collection threatens to chip away at the fiscal stability and the Government's ability to fill the existing and future needs of its rapidly expanding population,” said Jacques Morisset, World Bank Group lead economist for Tanzania and main author of the report. “Put simply, Tanzania must collect more taxes.”
The report’s recommendation to develop an affordable, fair, simple and transparent tax collection program to finance the country’s development comes after a deep change in the country’s public finances in recent years. Domestic challenges including a drop in aid contributions, stagnant tax collection revenue and an accumulation of arrears with contractors and pension funds chipped away at the country’s fiscal stability. Recently the Government’s expenditures slowed to grow by an average of 3% per year against over 10% during the 2000s.
Tax revenues reached $6 billion in 2014, enough to cover almost three-quarters of the government expenditure, but not enough to provide new investments for infrastructure and social services for a rapidly expanding population, according to the report. Not only will a renewed tax collection system help shore up Tanzania’s positive economic growth, it will usher in new revenues for services that benefit a larger number of poor families struggling to make ends meet.
To help the Tanzanian Government finance its development, develop its private sector and maintain economic stability, the report presents the recommendations in three pillars:
Pillar I: The System Must be Affordable
Currently, paying taxes in Tanzania for individuals and businesses alike is expensive and often requires a professional to understand the complicated tax code. To simplify costs the Government can streamline the many small taxes businesses must pay, cut back the use of tax exemptions, and accept payments on mobile devices. Once transaction costs drop tax compliance and collected revenues should rise.
Pillar II: The System Must be Perceived as Fair
Arguably, the tax burden in Tanzania is highly inequitable. A few trades − such as food, drink, and telephone − pay high taxes, while many in agriculture, construction and mining pay very little. Almost all of the country’s tax revenue (close to 90%) is generated in Dar-Es-Salaam. The report recommends the Government broaden the tax base, promote compliance in all regions, especially in larger hubs, and alter property taxes to improve land management as a means to increase the pool of available revenues.
Pillar III: The System Must be Transparent
Steps to publish revenue collection and tax exemption data, along with verified company payments from all sectors, and actions to strengthen enforcement of sanctions for tax evaders will all help to build the trust among citizens that the taxes are being used to deliver public services, according to the report. Progress is underway: Tanzania has signed onto the Extractives Industries Transparency Initiative, which sets standards for transparency and accountability in extractive industries.
Without doubt, if the measures described above are implemented appropriately, there will be winners and losers. While securing the political commitment necessary for tax reform will not be easy, it is vital if Tanzania is to secure the funds it needs to work with the private sector to finance economic and social development for the benefit of all citizens.