Focusing on bringing in new taxpayers to lower burden

Many have undertaken to draw up their account of the aspects considered necessary for the expansion of our tax and taxpayers base. Since myself have carefully followed up such debates, it seems good that I comment on these things. And so, few weeks ago I wrote a piece “The case for Tanzanians to Embrace Paying taxes”. This is the second article.

Among other words of wisdom said by Justice Wendell Homes (former Associate Justice of the Supreme Court of the United States) was: “I like paying taxes. With them, I buy civilisation’’ – implying, taxes are the cost paid for living in a society and for being part of civilisation.

Taxes are utilised to meet basic functions of the state like defence, law, justice, public services and good governance. Unfortunately, people take taxes only as a burden on their income and treat the filing of returns as a mere formality.

In one way or the other, we all pay indirect taxes, charged on goods and services that we all consume. I would therefore focus on the direct taxes. According to publicly available data, in the last three years, direct tax collection has increased by about 7 per cent, while the number of taxpayers has grown by 20 and 3 per cent for individuals/sole proprietorships and corporate types of direct taxes respectively. Direct taxes (PAYE, Corporate Tax, etc) contributes about 40 per cent of our total tax revenue. The total number of taxpayers in the lowest income bracket (i.e. below Sh100 million) comprises almost 99 per cent of total taxpayers, from whom 20 per cent of the tax revenues collected.

The highest bracket of the above Sh100 million comprises a 1 percent of total taxpayers, contributing 80 per cent of tax revenues. In FY2017/18 the numbers of corporate taxpayers in the Sh100 million bracket was about 67,000 and those above Sh100 million bracket numbered just 20,000 taxpayers. This suggests that the income tax base in revenue terms is very narrow and adversely affects tax buoyancy.

Tanzania has a low taxpayer base even as a percentage of the total population. With a population of over 55 million, only 2.75 million have a TIN and of these, 21,000 have filled for VAT and about 300,000 file income tax returns.

Only 5 per cent of the population pays direct tax, which is very low compared to 30 per cent in Botswana, 25 per cent in Namibia, 20 per cent in Mozambique, etc. One could argue, of course, this reflects Tanzania’s low-income levels, which, for a large part of the population, falls below the basic income tax threshold; yes, but yet significant potential remains to expand the taxpayer base.

However, due to various structural reasons that I will explain, the base could perhaps be doubled at most to say 10 per cent (i.e. 4.5 million taxpayers). A huge gap has also been noticed between the number of entities to which tax deduction and taxpayer identity number (TIN) has been allotted vis-à-vis the number of those filing income tax returns.

A significant cause for the difference is that not all those allotted TIN file returns. Even though widening the tax base has been one of the key action plan areas for the past recent years, achievement has fallen short of targets. There is, therefore, an urgent need to pursue efforts for enlarging the tax base as well as taxpayer base (which is currently not commensurate with the growth in income and wealth) through both policy as well as enforcement action.

Why the 4.5 million potential? Let’s do the maths, assuming an average family size of 7, there are then over 7 million families on the 55 million population.

Assuming, further, that 30 per cent of the households earn only subsistence wages and therefore below the income tax threshold, there will then be 5 million potential taxpaying families. If 70 per cent of this is assumed to derive income from agriculture, we remain with 1.5 million potential taxpayers’ families.

If three individuals in such families could potentially pay income taxes, these are 4.5 million individuals, compared to the current 2.7 million. Even from this simple analysis (with many faults), there is, thus, a significant scope to increase the tax payer base and a lot of this increase will need to come from both increasing the tax base and ensuring true income disclosures. Widening the tax base raises equity, because if all persons liable to pay tax are brought on tax records, the burden on existing taxpayers can be brought down.

The overall level of compliance improves when a large number of people who are legally required to file returns, do so. It also encourages others to comply with their legal obligation to pay their taxes dutifully.

As the President directs, the focus has to be on bringing in new taxpayers, rather than putting a heavier burden on payers who are already in the tax net by targeting sectors that are currently untaxed, especially the informal sectors. There also has to be a comprehensive review of exemptions, incentives, etc., with a view to rationalising them, which may require legislative changes.

Attention has also to be given to minimisation of tax avoidance/evasion by developing a better understanding of the “underground economy”, both in terms of its size and the economic behavioural factors that motivate players in the economy, identifying vulnerable areas of tax evasion, and co-ordination and collaboration with other government agencies for exchange of information on a real time basis and its effective utilisation.

Without impinging upon good taxpayers, tax avoidance needs to be examined very carefully in those identified areas. The tax administration also may consider to be oriented more towards customers; an idea adopted by many modernising tax administrations for improving voluntary compliance. This could go a long way in expanding the taxpayer base. To continue next week.