Tax Reforms Are Necessary To Help Tanzania Finance Development and Solidify Economic Growth

July 3, 2015

DAR ES SALAAM, July 3, 2015 – Tanzania’s economy is on a positive trajectory with a 7 percent growth rate, yet the Government’s revenue levels are too low to finance the country’s ambitious public investment program, according to the latest Tanzania Economic Update published by the World Bank.  To meet its development agenda, the Government must take steps to increase its revenue, but success will come only if a comprehensive approach is adopted.

Despite good progress in the late 2000s, the current level of tax revenues in Tanzania remains one of lowest in the world. The Government collected US$6 billion worth of revenues or approximately 12 % of  GDP in 2014, enough to cover almost three-quarters of government expenditure, but insufficient to fund much needed investments in infrastructure and social services. This seventh Economic Update provides a number of suggestions, with the objective of stimulating debate on possible approaches to increase tax revenue.

“As one of the fastest growing economies in the East African Community Tanzania has maintained economic stability despite a volatile international market. Yet the need for public services, from roads to education,  is projected to increase dramatically in the coming years, partly due to Tanzania’s rapidly growing population,” says Jacques Morisset, World Bank Group lead economist for Tanzania and main author of the report. “Reforms of the tax system are vital for the country to secure the funds it needs to finance its economic and social development for the benefit of all its citizens.”

The need to collect more revenues has become more pressing because other sources of financing are declining (official aid) or remain restricted (commercial borrowing), according to the update.  Over the past two years, the Government had to cut its expenditure plans and accumulated massive arrears. While there is room to improve the efficiency of government spending, domestic revenues should increase with a sense of urgency.

To support the Government in forming a more productive and well-managed tax system the update lays out strategic recommendations in three complementary directions. The first direction examines ways to make the system affordable to all Tanzanians. These reforms suggest that 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 revenues collected should rise.

The second direction focuses on steps to help increase the fairness of the tax system. Tax revenues are disproportionally concentrated in a few sectors and in Dar es Salaam.  Approximately one third of income tax revenue is collected from the salaries of less than 2 percent of Tanzania’s total number of workers, and only a small number of goods are taxed because the large majority of businesses evade paying taxes. The update recommends the Government to broaden the tax base by promoting compliance in all regions, with an emphasis on fast growing secondary cities, implement simple presumptive  taxes on small businesses, and enforcing property taxes. Smart innovations such as tax lotteries can also encourage tax payments. Severe sanctions should also be applied on tax evaders, including from the top.

The third direction recommends that the system be transparent.  Already some major telecommunications companies in Tanzania have announced they will voluntarily publish full details of their tax payments, and the Tanzanian Government has signed on to the Extractives Industries Transparency Initiative, which sets standards for transparency and accountability in extractive industries and could be applied in other sectors as well. Transparency through the publication of comprehensive, accessible reports on its tax collection efforts will go a long way towards building trust among taxpayers, the update notes. Ultimately, the Government must also be able to report to citizen how it has used the collected revenues.

“This seventh economic update goes to the heart of one of the main challenges faced by Tanzania: how can the country finance its development? While securing the political commitment necessary for tax reforms will not be easy, improving the taxation framework is key to ensuring that Tanzania’s fiscal stability continues and that services are provided to all citizens," says Philippe Dongier, outgoing World Bank Country Director for Tanzania.

“The World Bank stands ready to support the government of Tanzania in renewing efforts to strengthen taxation policies and their implementation, using lessons from international experience, to achieve simplicity, fairness and transparency while creating a level playing field for investors," says Ms. Bella Bird, incoming World Bank Country Director for Tanzania.

Media Contacts
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Loy Nabeta
Tel : (255) 216-3246
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Aby Toure
Tel : (202) 473-8302