The annual 2016 Article IV Consultation conducted by the International Monetary Fund (IMF) suggested that the Tanzanian Government's tax revenue levels are too low to finance its infrastructure investment and social service plans.
The IMF stressed that to achieve its development agenda, the Government must take steps to increase its domestic revenue collections. However, the IMF was "encouraged by the authorities' plans to strengthen tax administration and to consider further tax policy reforms."
It was noted that Tanzania's tax revenue, at about 13 percent of GDP in 2015/16, remains below low-income country standards. The IMF has estimated that the country's tax performance was about four percent of gross domestic product (GDP) below tax capacity in 2009-13, although that has been cut to between two and three percent of GDP currently following the increase in tax revenue seen in 2015/16.
The reason for Tanzania's low tax-GDP ratio is, according to the IMF, largely due to "poor performance in value added tax (VAT) collection [that] appears to be driven by administrative inefficiency, low taxpayer compliance, and policy gaps."
In order to close the tax revenue gap, the IMF concluded that, although the new VAT law implemented from July 2015 was "a good step forward, more needs to be done to further streamline exemptions and improve the refund mechanism."
A staff paper on selected issues that accompanied the IMF's Article IV Consultation confirmed that "VAT collection has suffered from creeping exemptions, compliance issues, and a weak refund mechanism. The new VAT law has broadened the tax base by removing some exemptions, although there may still be some room for further base-broadening measures."
"It would be particularly pertinent to review the experience with exemptions that were added to the VAT law before the legislation was finally approved by parliament," the paper continued. "The fact that businesses continue to push for these exemptions is an indication that the VAT refund mechanism does not work satisfactorily."
The IMF also commented that significant revenue could be mobilized through the elimination of corporate income tax holidays and exemptions. The staff paper noted that generous tax incentives undermine the corporate tax base, as do accelerated tax depreciation allowances and preferential dividend withholding tax rates for some sectors and asset types, and that they could be phased out or eliminated.
In addition, it was thought that property tax "remains an underutilized source of revenue particularly for the rapidly growing urban centers. Combined efforts are required to expand the property cadastre, improve the valuation method, and provide more flexibility to increase the property tax rate in some municipalities."
In the area of tax administration, "the need to step up reforms is pressing," the IMF also stated. "Areas for policy actions include cleaning up taxpayer registration and accounting, upgrading the IT system, and strengthening compliance risk management."
In reply, the Government agreed with the need to raise revenue collection. However, it pointed out that it is already taking action to fight tax evasion, streamline exemptions, widen the revenue base, and strengthen the capacity of revenue-collecting agencies. It also said that it has begun to consider further tax policy reforms, and that a strategy is expected to be adopted by the end of this year.
- Source: www.tax-news.com
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