16 March 2014

Tanzania: Yes, Informal Sector Should Start Paying Taxes

THREE months from now, the Minister for Finance, Ms Saada Mkuya is expected to table the 2014/2015 Budget in the National Assembly.

Recent reports say that next year's budget is anticipated to be 19.9 tri/-, the figure which is probably cracking heads of some officials working at the Treasury.

Revenue collection in this country is under the supervision of the Tanzania Revenue Authority (TRA), which assesses, collects and accounts for all Central Government revenue and also administers effectively and efficiently all the applied revenue laws.

TRA is also expected to advise the government on all matters related to fiscal policy, promote voluntary tax compliance, improve the quality of services to the taxpayers, counteract fraud and other forms of tax evasion and also produce trade statistics and publications.

Looking at these functions of TRA, I can easily see some loopholes where people do profitable businesses but unlikely they are not duly taxed. For example, my friend who conducts charcoal business at Sinza area in Dar es Salaam laughed at me two weeks ago, when I told him how much I earn monthly and the amount I pay under the Pay As You Earn (PAYE) scheme.

"Why are you wasting your time? The amount you get per month is what I collect in four days. If you can gather courage and decide to do this business, I am ready to give you the capital," he advised me.

I saw some logic in what he was saying, because the man normally sells one bag of charcoal for 50,000/- and every month he can sell an average of 200 bags, making him earn a cool 200m/- monthly.

If he deducts 25,000/- per bag that he pays charcoal vendors in Rufiji plus 5,000/- paid as transport charges for each bag from Rufiji to Dar es Salaam, this means he manages to collect a net profit amounting to 4m/- every month. This friend of mine is not taxed and TRA officials have not given him any TIN number.

I have another friend who sells 'Kitimoto' (roast pork) at a famous joint along Shekilango road in Dar es Salaam. He sells one-kilo portion at 10,000/- . At times he can sell up to 70 portions, making him make 700,000/- per day. One kilo of row pork sells at 5,000/-.

Do a quick estimation to find out the net profit he makes. This man does not pay any kind of tax. Generally, people involved in the informal sector are not taxed including Machingas, Shoe shiners, Bodabodas, bus and daladala touts.

Last year, I remember to have read an article by Viann Komba, a senior tax manager with Ernst & Young who praised TRA for advancing in terms of administration of various taxes.

He lamented that such efforts were hindered by TRA's natural inability to navigate through the informal sector, because activities associated with this terrain of life are informal while TRA is formal.

Komba charged that economists and tax experts have always confirmed that there is a big room to widen the tax base in the informal sector and therefore improve government revenue performance.

According to him, it is unfortunate that the government endeavours to navigate in the informal sector by using formal tools. Informal sectors are set of economic units which do not comply with legal regulations, yet whose products are considered legal and taken on board in national numbers.

Informal sector activities in Tanzania include construction, transport, tuition, medical services, recreational halls, animal husbandry, milling business, entertainment and urban agriculture, among others.

Economists say that the informal sector is sometimes linked with bazaar-economy, disorder, black market and at times, the world turned upside down. Some experts have labelled it with underground economy, hidden, parallel, black, clandestine and household.

According to Komba, different disciplines like economics, labour, finance and sociology also define the term differently. There is therefore no unique and uniform definition of the term, but instead researchers, based on the various criteria, have attempted to define it in accordance with the problem at hand, he says.

Recent reports say that Tanzania is considered to have a large informal sector compared with the other East African countries. The World Bank Doing Business database ranks Tanzania among the three countries in Africa with the largest such sector, together with Nigeria and Zimbabwe.

The presence of large informal sector renders it difficult for governments to efficiently work out and programme any development plans. It is also believed that economies with large informal sectors have lower capital return and growth rates because the contribution of public services to productivity decreases with informality.

Economists say that informal sector consume a large share of the public services that are financed by taxes mostly collected or paid by formal activities in the formal sector.

Performance of the government revenue in developing countries as well as other developed countries is therefore directly and seriously affected by the presence of large informal sector in the countries.

Komba's discussions centres on one of the possible methods to work around the challenges of taxation of the informal sector in Tanzania, a developing country with its own and unique characteristics and whose definition of informality is specific to itself.

The truth is that informal sector in Tanzania contributes little to the government revenue (or not at all) and it is not easy to work out a taxation model that is suitable for informal activities and/or the informal sector.

All sorts of blames may be wrongly directed towards the Tanzania Revenue Authority (TRA), the institution which is formal in itself and which requires a formal approach to assess tax. TRA requires enough information and reliable records, which is not the case with informal activities in the country.

There have been plenty of literature and discussions going around in Tanzania on how to tax the informal sector and therefore improve the government revenue performance.

Unfortunately most of the discussions turn around and discuss taxation of informal sector by employing formal tactics. Most of the arguments and solutions to taxation of informal sector turn to be only relevant to formal activities. As mentioned above it may be illogical to point fingers at TRA because TRA is itself formal, with its approach and tools all formal.

The institution is not vested with resources or the right manoeuvring tools for informal activities. Though TRA is vested with the obligation to tax and collect tax from any person who has taxable income, the agency requires well structured records and information to be able to register taxpayers and administer/assess their taxable amounts.

It is important to note also that it is difficult to draw a fine line between formal activities as opposed to the informal activities. They are sometimes intertwined.

However, all of us are pretty sure that there is enough tax revenue from the informal sector. How to go about getting the tax from the informal sector remains to be a headache. Taxation of informal activities has always posed challenges to governments.

Taxation is traditionally built on three pillars, namely tax policy, tax law and tax administration. However, it is the administration part of it that turns the wheel into money (government revenue) in the bank. Different tax regimes require different types of administrative arrangements.

For any tax system a decision has to be made as to which agency should be responsible for such tax and what is/are the tax-points (time and place). While the tax administration will have the main responsibility for the administration and collection of taxes in general, different methods suitable for different taxes might be chosen.

While VAT in Tanzania, for example, is administered and collected through registered traders and the customs offices, corporation tax is administered or assessed directly through the corporate tax offices.

It is the nature of different taxes that calls for such different tax points and tax agents or in general, tax administrative arrangements. However, their efforts have been hindered by their natural inability to navigate through the informal sector because activities associated with this terrain of life are informal while TRA is formal.

However, economists and tax experts have always confirmed that there is a big room to widen the tax base in the informal sector and therefore improve government revenue performance.

It is unfortunate that the government endeavours to navigate in the informal sector by using formal tools. Time has come for the informal sector to be taxed, so that the government gets more revenues to support development activities.

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