Tanzania badly needs tax reforms

Among her first directives as the leader of Tanzania, President Samia Suluhu Hassan asked tax collectors to use common sense (akili na maarifa) in their duties. She asked them to refrain from being overzealous in their approach to enforcing tax laws. She counselled them to avoid “killing the goose that lays the golden egg” by focusing on short-run revenue targets. While the President’s directive will encourage civility and lawfulness in enforcing tax laws, there is also an urgent need to carefully examine the whole tax system and make important reforms.

But first more on the call to use akili na maarifa – the overwhelming positive reaction from the public to the President’s message reveals how frustrated the public was with some of the tactics used by the Tanzania Revenue Authority (TRA). However, it would be disingenuous to criticize the TRA alone, as if their behaviour was unique. Gentleness and civility had become a rare commodity in Tanzania. Public humiliation by some government officials, including cabinet members, Regional and Area Commissioners, and others, had supposedly become a way to hold people accountable. The uncivil tactics used by some TRA officials to enforce tax laws were just part of the general pattern of behaviour in the country. The hope now is that the President’s message is heard and adhered to by people of all walks of life.

Of course, taxes must be collected, and lawful actions must be taken against those who try to evade paying taxes. The government cannot fulfil its responsibilities without tax revenues. However, there are some taxes and/or tax rates that make no economic sense. An honest review of the tax system must be undertaken, followed by necessary reforms. The focus must be on the tax system itself.

Here is an example, a very small one in the context of overall taxes, but it can still shed some light. Imagine a small, registered NGO that provides services to a community completely free of charge. Its funding comes solely from pure donations by its members and benefactors. It is then perplexing that those donations are treated as taxable income. In addition, the tax rate is arbitrary, so the NGO is at the mercy of a TRA official’s own determination. Two tax assessors can examine the same financial statements of the NGO but end up determining completely different amounts of tax liabilities. Worse still, under the current system, the tax liability is also determined by account balances at the end of the calendar year, instead of basing it on the source of income.

There have been pleas by government leaders for businesses and organizations to save their money in banks where it would be safe from termites (mchwa). The latest plea came earlier this month from the Minister of Finance and Planning, Dr Mwigulu Nchemba, soon after being sworn into that position. He assured people that the government will only tax according to the law. However, even if one accepts that promise at face value, some tax laws are flawed.

Imagine again the example of an NGO discussed above. Suppose it could build an endowment to ensure sustainability of its services for years to come. If the tax liability is assessed, in part, based on the account balances at the end of the year, the endowment will be taxed multiple times until it is depleted. In that tax environment, it would be irrational for any NGO to establish an endowment. The tax system would be like the mchwa people are cautioned against.

President Hassan’s recent pronouncements with respect to tactics used by some TRA officials to collect taxes and many other aspects of life in Tanzania as a nation have many people breathing a sigh of relief. It is as if there is more oxygen in the air. Her efforts must be enthusiastically supported. Nonetheless, many of the country’s challenges she has touched on are structural in nature. Therefore, while directives are very important, they are not sufficient, alone. Many structures need to be reformed. The tax system, for one, needs to be examined objectively and reformed. It is a process that will take time, but the work must start now.