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World Bank Recommends Tax Reforms For Tanzania

by Lorys Charalambous,, Cyprus

08 July 2015

Tanzania's economy is on a positive trajectory with a seven 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, the World Bank said.

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 USD6bn worth of revenues or approximately 12 percent of gross domestic product (GDP) in 2014, which was enough to cover almost three-quarters of government expenditure, but this amount is insufficient to fund much-needed investments in infrastructure and social services. The World Bank's 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," explained 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. 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 World Bank said.

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 fewer than two 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 report said. The update recommends the Government should broaden the tax base by promoting compliance in all regions, with an emphasis on fast growing secondary cities; that it should implement simple presumptive taxes on small businesses; and it should enforce property taxes. Smart innovations such as tax lotteries can also encourage tax payments, it suggested, adding that severe sanctions should also be applied on tax evaders.

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 World Bank said.

Philippe Dongier, outgoing World Bank Country Director for Tanzania, said: "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."

TAGS: compliance | tax | investment | small business | business | tax compliance | property tax | gross domestic product (GDP) | education | tax reform | standards | Tanzania | services | Africa | Tax

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