Like many in the developing world, Tanzania’s tax system faces several critiques that hinder the country’s economic potential while curbing illicit financial flows (IFFs) that undermine domestic resource mobilisation (DRM).
Over the years, the system has undergone significant reforms to broaden the tax base, improve collection efficiency, and promote transparency.
Although efforts toward reform have been made, concerns over complexity, inefficiency, and inequity persist. These issues impact businesses, particularly small and medium-sized enterprises (SMEs), the informal sector, and the broader public.
The Structure of Tanzania’s Tax System
According to a report by Sikika, the system comprises several tax instruments, including income tax, value-added tax [(VAT) – 18% in Tanganyika, 15% in Zanziber], excise duties, and customs duties.
The country relies heavily on indirect taxes, particularly VAT and excise duties, which contribute significantly to the national budget. Income tax is primarily collected from formal sector employees and companies, while customs duties are levied on imported goods.
Critical Examination of Tax System
1. Complexity and Inefficiency in the System
One of the most commonly voiced concerns about Tanzania’s tax system is its complexity. The country has many taxes and regulations that can often confuse taxpayers.
Multiple forms of taxation, including corporate tax, value-added tax (VAT), income tax, and excise duties, create a cumbersome tax environment that can overwhelm businesses, especially SMEs.
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Navigating the array of regulations and ensuring compliance often requires significant resources, which may be inaccessible to smaller businesses that lack legal or financial expertise.
This complexity also breeds inefficiency. Tax administration is still relatively underdeveloped, and the manual processing of many tax documents increases the likelihood of delays and errors.
For instance, an enterprise might face penalties simply because of administrative bottlenecks, even when the taxpayer attempts to comply with the law.
These inefficiencies are amplified because officers, often overwhelmed by the number of regulations they must enforce, may be unable to monitor or advise businesses effectively. REPOA reported in their research “Analysis of Tax Revenue Mobilisation in Tanzania”
One example of these challenges is filing corporate tax returns. Tanzanian companies are expected to maintain extensive financial records, often audited by the Tanzania Revenue Authority (TRA).
The process is burdensome for SMEs with limited accounting capabilities, leading some businesses to underreport earnings or avoid the system altogether.
2. High Tax Rates and Their Impact on Businesses
Another key critique of Tanzania’s tax system revolves around high tax rates, particularly for SMEs. While larger corporations may have the resources to absorb tax expenses, SMEs often operate on thin margins and face a disproportionate burden.
Tanzania’s corporate tax rate is 30%, which is comparatively high compared to other regional developing economies. The high tax rate and compliance costs can stifle the growth of businesses struggling to survive in a competitive market.
This situation is especially problematic for Tanzania’s burgeoning tech startups and informal businesses seeking to formalize their operations.
High taxes often discourage formalization, as informal operators perceive that the benefits of joining the tax net outweigh the potential costs.
For instance, a small retail shop may remain in the informal economy to avoid the 18% VAT and other tax obligations, thus perpetuating the informal sector’s dominance.
Moreover, high rates discourage foreign direct investment (FDI). Potential investors often seek tax-friendly environments that promote growth and innovation, but Tanzania’s tax regime can serve as a deterrent.
For instance, in contrast to neighbouring Kenya, which offers several tax incentives for foreign investors, Tanzania’s lack of competitive tax rates makes it less attractive for international businesses seeking to establish a foothold in East Africa. (Mr. Erik Offerdal, “Chapter 11 Taxation of Foreign Direct Investment”)
3. The Informal Economy and Taxation
Sikika reported that one of the most significant challenges for Tanzania’s authorities is the size of the informal economy. The informal sector accounts for a substantial portion of the country’s economic activity but remains largely untaxed.
This leaves a significant portion of potential tax revenue uncollected, further exacerbating the government’s inability to fund critical services such as healthcare, education, and infrastructure.
The difficulty in bringing informal businesses into the formal tax net stems from many factors, including the high cost of formalization, lack of financial literacy, and the absence of clear incentives.
Informal traders, street vendors, and small-scale artisans may not see the value in paying taxes if the benefits of formalization are unclear or inaccessible.
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Moreover, formalizing their businesses, including acquiring licenses, registering for VAT, and maintaining financial records, can be prohibitive.
Efforts to integrate the informal sector into the system are ongoing. For example, the government has introduced simplified tax schemes for micro and small enterprises. However, these initiatives have failed, as many informal businesses still prefer to operate under the radar.
4. Equity and the Tax Burden
Equity is another point of contention in Tanzania’s tax system. There is a perception that the burden is not distributed equitably across the population.
Wealthier individuals and large corporations often minimize tax liabilities through legal loopholes or tax avoidance strategies. In contrast, lower-income individuals and SMEs face a heavier burden than their income. SIKIKA reports, 2023/24
For example, multinational corporations operating in Tanzania may use transfer pricing, shifting profits to lower-tax jurisdictions to reduce their obligations.
While this is a legal practice, it deprives Tanzania of significant revenue that could be used for development. Conversely, a small business owner may find it impossible to avoid taxes and thus end up paying a disproportionately high share of their income in taxes.
5. Reliance on Indirect Taxes
Tanzania’s structure heavily relies on indirect taxes such as VAT, excise, and customs duties. Indirect taxes are often criticized for being regressive, disproportionately affecting lower-income households.
Since indirect taxes are applied uniformly on goods and services, they take up a larger percentage of a low-income household’s budget than a wealthier household.
For example, the 18% VAT on essential goods like food and healthcare services can significantly impact low-income families. While there are exemptions for certain basic goods, the reliance on VAT as a revenue source means that many everyday products still carry a significant burden. This regressive nature of indirect taxes raises concerns about the system’s fairness.
6. Corruption and Transparency Issues
Corruption within the tax administration is another serious issue undermining the system’s credibility. Taxpayers may be required to pay bribes to expedite processes, avoid penalties, or reduce their liabilities. This reduces the amount of revenue collected and damages public trust in the system.
If taxpayers believe their contributions are being siphoned off by corrupt officials rather than used for public benefit, they are less likely to comply with regulations. Corruption is a major problem in administration, REPOA report, pg. 31.
Improving transparency and accountability in administration is essential for restoring public trust. The government has made some progress in this area, such as introducing electronic tax filing systems to reduce human interaction and opportunities for corruption. However, the effectiveness of these measures is still limited by systemic issues within the administration.
7. Technology and Its Role in Reform
The limited use of technology in Tanzania’s collection system has been a longstanding critique. Digital systems, such as online filing and electronic payment platforms, have the potential to enhance efficiency, reduce corruption, and improve compliance. However, The authorities have been slow to adopt these technologies on a large scale.
In recent years, there have been efforts to digitize certain aspects of the system. For instance, the TRA has introduced electronic tax stamps to reduce evasion in the excise sector, particularly for alcohol and tobacco.
However, the full potential of digitalization has yet to be realized. Expanding these systems could significantly improve revenue collection and reduce taxpayers’ administrative burden.
8. Poor Revenue Mobilization and Policy Instability
Despite efforts to reform the system, Tanzania struggles with poor revenue mobilization. The country’s tax-to-GDP ratio remains low compared to other developing nations (according to WB, Tax revenue (% of GDP) in Tanzania was reported at 11.47 % in 2023, 15.6% in Kenya, 17% -in Rwanda), limiting the government’s ability to invest in critical infrastructure and social services.
This challenge is compounded by frequent policy changes, which create uncertainty for businesses and investors.
Frequent policy changes can disrupt long-term business planning and reduce investor confidence. Sudden shifts in incentives or the introduction of new levies can make Tanzania an unpredictable environment for both local and foreign businesses.
Ensuring stability and consistency in policy is crucial for promoting a healthy business climate and encouraging investment.
Conclusion
The system is at a crossroads, facing significant challenges that require urgent attention. Complexity, high rates, an informal economy, and equity issues are key barriers to a more effective and efficient regime.
However, there are opportunities for reform, such as simplifying the system, leveraging technology, improving transparency, ensuring a more equitable distribution of the burden, enhancing compliance, and ensuring fair revenue collection.
Tanzania can create an environment that promotes growth, encourages investment, and generates the revenue needed for development. Addressing these issues will be vital for Tanzania’s long-term economic prosperity.
