Personal Tax in Tanzania
In Tanzania, personal taxes are categorized into several types under the Income Tax Act, 2004, and related regulations, with specific rates and thresholds governing each category. Employment Income Tax applies to salaries, wages, bonuses, allowances, and benefits in kind, with employers deducting tax through the Pay-As-You-Earn (PAYE) system.
Mr. Heri Mrisho Musa, Consulting Manager at Elegance Professional Associates, elaborated on Tanzania’s Pay-As-You-Earn (PAYE) system, which operates under a progressive tax structure. Residents enjoy a tax exemption on monthly income up to TZS 270,000. For income between TZS 270,001 and TZS 520,000, an 8% tax is applied to the amount exceeding TZS 270,000. Income in the range of TZS 520,001 to TZS 760,000 is taxed at a base rate of TZS 20,000 plus 20% on the excess over TZS 520,000. For incomes between TZS 760,001 and TZS 1,000,000, the tax rises to a base of TZS 68,000 plus 25% on the amount exceeding TZS 760,000. For income above TZS 1,000,000, a base tax of TZS 128,000 applies, along with 30% on the excess. For non-residents, employment income is subject to a flat tax rate of 15%, which is treated as final.
Neema Nyandoa, Senior Tax Associate at PWC, clarifies the Business Income Tax system in Tanzania for individuals like sole proprietors. The general tax rate on net profits is 30%. For small businesses with annual turnovers under TZS 100 million that don’t maintain formal accounting records, a different regime, the Presumptive Tax system, applies which taxes turnover instead of profit. Here’s how it works: businesses with turnovers under TZS 4 million are exempt; those between TZS 4 million and TZS 7 million are taxed at 3% of the amount over TZS 4 million if they keep proper books, otherwise, they must pay a flat TZS 100,000. For turnovers between TZS 7 million and TZS 11 million, the tax is TZS 90,000 plus 3% of the excess over TZS 7 million with proper documentation, but without documentation, the tax jumps to a flat TZS 250,000. Lastly, businesses with turnovers from TZS 11 million to TZS 100 million face incremental rates up to 3.5%. This structured approach incentivizes proper financial documentation while aiming to simplify tax compliance and boost revenue collection from small-scale entrepreneurs.
Investment earnings which applies to dividends, interest, rental income, royalties, and capital gains in Tanzania are subject to various taxes, as explained by Mr. Raphael Duhia from Taxplan Associates based in Arusha, Dividend and interest income from financial institutions are taxed at a flat rate of 10%, while according to the Tanzania Revenue Authority, rental income is not subject to progressive taxation but instead taxed at flat rates. Specifically, resident individuals are levied a withholding tax of 10% on rental income, while non-residents face a 15% rate. This fixed-rate approach means that the tax imposed does not vary with the amount of rental income generated, contrasting with progressive taxation where rates increase with higher income brackets.
Capital Gains Tax (CGT) is imposed on the profit from the sale of assets such as real estate, shares, and securities. For residents, CGT is considered part of business income tax, while non-residents face a 30% tax on such gains. Additionally, Withholding Tax plays a crucial role in the taxation system, being deducted at source for certain types of payments. These include professional fees, rent, and royalties, with rates varying from 2% on goods supplied to the government to up to 15% for services provided by non-residents and for local royalty payments, as discussed by Ms. Nyandoa and her colleagues.
Tanzania’s social security contributions, though not classified as a direct tax, require employees to contribute 10% of their gross income, with employers matching this amount under schemes like the National Social Security Fund (NSSF), explained Lidia Temba from Premier Plus Associates. She noted that the government also provides a range of tax incentives to encourage investment and drive economic growth. For example, income earned from government bonds is fully exempt from taxation, contributions to approved pension schemes reduce taxable income, and reduced tax rates apply to income generated from infrastructure projects. This comprehensive approach ensures robust tax coverage, promotes compliance, and supports the country’s targeted development goals.
Benchmarking African Comparisons
In East Africa, personal income tax structures vary significantly, reflecting each country’s fiscal policies and socio-economic goals. In Kenya, tax rates range from 10% to 30%, with monthly income up to KES 12,298 taxed at 10% and income above KES 47,059 taxed at 30%, enforced through the Pay-As-You-Earn (PAYE) system, as reported by the Kenya Revenue Authority (KRA). Uganda exempts income up to UGX 235,000, with rates of 10% on income between UGX 235,001 and UGX 335,000, 20% between UGX 335,001 and UGX 410,000, and 30% for income above UGX 410,000, according to the Uganda Revenue Authority (URA). In Rwanda, income up to RWF 30,000 is exempt, with rates rising to 20% for income between RWF 30,001 and RWF 100,000 and 30% for income exceeding RWF 100,000, based on data from the Rwanda Revenue Authority (RRA). Ethiopia exempts income up to ETB 600, with rates starting at 10% and reaching 35% for income above ETB 10,900, supporting public infrastructure and social programs, as detailed by the Ethiopian Ministry of Revenue.
In West Africa, Nigeria applies rates from 7% for income up to NGN 300,000 to 24% for income exceeding NGN 3,200,000, leveraging PAYE to ensure compliance, as outlined by the Federal Inland Revenue Service (FIRS). Ghana exempts income up to GHS 365, with rates climbing to 35% for income above GHS 240,000, focusing on expanding the tax base while aiding lower-income earners, according to the Ghana Revenue Authority (GRA). In Cameroon, rates range from 11% for lower incomes to 38.5% for income above XAF 25 million, supporting public services and regional integration, based on information from the Cameroon Directorate General of Taxes. These systems showcase the diversity of tax policies across Africa, emphasizing the importance of PAYE systems in aligning fiscal goals with national priorities.
Benchmarking Global Comparisons
Personal income tax systems in major economies vary significantly, reflecting differing economic policies, social welfare goals, and fiscal requirements. In the United States, federal income tax rates range from 10% to 37%, with the highest rate for incomes above $539,900 for single filers and $647,850 for married couples, notes New York-based tax consultant Emily Roberts. She points out the lack of income tax in states like Texas and Florida, in contrast to California, where rates can reach 13.3%. In Canada, tax expert David Wong from Toronto explains that federal tax rates span 15% to 33%, with the top rate for incomes over CAD 235,675. Combined with provincial taxes, rates in some areas exceed 50%, supporting universal healthcare and social programs. Meanwhile, in India, Mumbai’s Priya Desai describes a progressive system with rates from 5% to 30%, applicable to incomes over INR 1.5 million. Additional surcharges and levies can push the effective rate above 40%, with exemptions and deductions designed to foster savings and investment.
East Asian economies feature varied tax strategies. In China, rates vary from 3% to 45%, with compulsory social insurance contributions supporting social welfare and infrastructure, per Shanghai-based tax consultant Li Wei. Japan’s top marginal rate is 45% for incomes above JPY 40 million, with local taxes increasing it to 55%, aimed at supporting healthcare and pensions, explains Kyoto’s Hiroshi Tanaka. South Korea’s tax rates range from 6% to 45%, with local taxes raising the top rate to 49.5% to fund public services, notes Seoul’s Ji-Hyun Kim. In the UK, rates span 0% to 45%, with regional adjustments like higher rates in Scotland for certain income bands, according to London’s James Ellis. Finally, Australia, as Sydney’s Sarah Blake describes, has rates from 0% to 45%, plus a 2% Medicare levy and surcharges for high earners, focusing on healthcare funding.
Personal Tax Enforcement
Mr. Sylvester Machiya, Chief Accountant at Organia, detailed how the Tanzania Revenue Authority (TRA) facilitates tax collection primarily through the Electronic Fiscal Devices (EFD) system and the Online Tax System (OTS). Employers are obligated to withhold taxes using the Pay-As-You-Earn (PAYE) system. To enforce compliance, TRA levies stringent penalties for late tax filings. These penalties are the greater of 2.5% of the unpaid tax due or a fixed amount calculated in currency points—5 for individuals and 15 for corporates—charged monthly for each month the non-compliance continues. Additionally, interest on overdue taxes is applied at the statutory rate, compounded monthly. This robust framework of penalties and interest is a cornerstone of TRA’s strategy to ensure compliance and prompt tax payments. The emphasis on digital tax systems and mandatory employer deductions reflects Tanzania’s commitment to efficient tax administration and stringent enforcement measures to maintain compliance.
Research indicates that Tanzania’s use of digital systems like the EFD and OTS reflects a broader trend across Africa and globally, where technology and penalties are leveraged to ensure efficient tax collection and compliance. For example, in Kenya, the iTax system managed by the Kenya Revenue Authority (KRA) facilitates online registration, filing, and payment, while employers deduct taxes through the PAYE system. Non-compliance attracts fines of 5% of the tax due or KES 10,000, with a 20% penalty for late payments. Uganda employs the e-Tax platform under the Uganda Revenue Authority (URA), where PAYE deductions are mandatory, and fines include UGX 8,000,000 for violations of electronic invoicing requirements. In South Africa, the South African Revenue Service (SARS) operates the eFiling system, supported by PAYE deductions, with penalties ranging from ZAR 250 to ZAR 16,000 for late filings. Nigeria uses the Integrated Tax Administration System (ITAS) under the Federal Inland Revenue Service (FIRS), enforcing PAYE compliance and imposing fines of NGN 25,000 for the first month of late filings, with additional penalties for each subsequent month. Ghana’s Total Revenue Integrated Processing System (TRIPS), managed by the Ghana Revenue Authority (GRA), ensures efficient filing and payment, with late filings incurring a penalty of 5% of the tax due and interest on overdue amounts. Cameroon utilizes an electronic tax platform for filings, with penalties for non-compliance escalating based on severity, including fines and legal actions for repeated violations.
Expanding beyond Africa, advanced systems globally integrate digital platforms and strict enforcement measures. In the United States, the IRS’s e-file system facilitates online filing, with penalties for non-compliance including a 5% monthly charge on unpaid taxes for late filings. In Canada, the Canada Revenue Agency (CRA) manages the My Account system, imposing a 5% penalty on overdue taxes plus 1% for each additional month of delay. India’s e-Filing portal supports compliance through Tax Deducted at Source (TDS) mechanisms, with penalties such as INR 1.5 lakh or 0.5% of turnover for audit non-compliance. China’s Golden Tax System facilitates tax administration, with daily interest charges of 0.05% on overdue taxes. In Japan, the e-Tax system is used for compliance, where late filings incur surcharges starting at 5% of unpaid taxes, increasing after one month. South Korea’s National Tax Service (NTS) ensures compliance with penalties of 10% to 20% for late filings and interest on unpaid taxes. In the United Kingdom, the HMRC’s Making Tax Digital platform enforces compliance through penalties of £100 for late returns, with additional daily penalties after three months. Finally, in Australia, the Australian Taxation Office (ATO) uses the myTax platform, imposing Failure to Lodge on Time (FTL) penalties starting at AUD 222 per 28 days, escalating for longer delays or larger entities. These systems and penalties, tailored to each country’s economic and regulatory framework, highlight the global reliance on digital platforms and rigorous enforcement to uphold tax compliance.
Epilogue
Personal tax systems worldwide balance fiscal responsibility, compliance, and economic growth. Tanzania demonstrates a structured approach with progressive taxation, digital tools like the Electronic Fiscal Devices (EFD) system, and targeted exemptions to streamline tax collection and encourage investment. Similarly, countries like Kenya, Uganda, and South Africa integrate digital systems and enforce compliance through penalties, reflecting a regional focus on efficient administration.
Globally, diverse tax systems reveal unique economic priorities. Developed economies like the United States, Canada, and Japan rely on advanced platforms and strict enforcement to balance compliance and public service funding, while tax-free hubs like the UAE attract investment through fiscal incentives. The growing reliance on digitalization and employer-driven mechanisms unites modern tax practices, aligning with global economic demands.
As nations continue to innovate, the integration of digital tools, strict enforcement, and targeted tax incentives remains pivotal for achieving fiscal sustainability. Tanzania’s tax framework, shaped by both African and global practices, exemplifies the dynamic interplay between compliance and economic growth. Join us for the next installment in this series, set to release on December 24th, 2024, where experts will explore how shifts in personal tax policies can drive individual investment in Tanzania, providing fresh insights into fostering economic equity and sustainable development through taxation.
Kelvin Msangi is a financial analyst and a Tanzania Digest columnist. For suggestions, you can reach him at kelvin.msangi@protonmail.com or 0655963224.