why VAT rate should be increased amid revenue challenges

There are key challenges in meeting the domestic revenue budget, collection statistics cited in the Budget speech reveal.
Although tax revenues are not too far off target (at 95 per cent of budget), collections for non-tax revenue and local government authorities are significantly off budget (67 per cent and 59 per cent, respectively).
The 2013/14 Budget targets a significant increase in revenue collection of Sh11,154 billion for tax revenue and non-tax revenue combined, equivalent to 20.2 per cent GDP (in contrast to the 2012/13 target of 18 per cent of GDP).
Given the performance to date, the targets for 2013/14 (29 per cent increase on the budgeted tax revenue figure for 2012/13, and 15 per cent for the equivalent non-tax revenue figure) are very ambitious.
The focus of the revenue increase includes significantly increased taxes on telecommunication services, fuel, as well as the removal of exemptions (for example, for tourism and the airline industries).
The increase in the specific excise tariffs on fuel is understandable as none have increased in recent years and have, therefore, been eroded by inflation in real terms.
The telecommunication companies generate the largest amounts of indirect taxes (VAT and excise), and the proposed 2.5 per cent increase in excise duty on telecommunications services will mean that total taxes/levies on gross revenue will now be 36.5 per cent.
From a pure economic perspective, it is difficult to justify the loading of such significant taxes on communication costs.
The services in question are not luxuries – traditionally, the justification for the imposition of excise duty.
It will not help improve Tanzania’s current low Internet penetration rates. Importantly, it will impact profit made in the sector – demand will be impacted by increased costs – and, therefore, may not encourage further investment.
To a great extent the telecommunications sector has become a victim of their own success – for example, mobile money has enabled much wider access to money transfer services.
Having become a de facto financial intermediary, and against a background of taxes being collected from a very narrow base, the sector is now in essence being asked to act as a tax collector. Many years ago Heineken had a slogan “Heineken refreshes the organs other beers cannot reach”.
The telecoms sector it seems is being treated as a de facto tax collector that reaches parts of the revenue base that TRA does not reach!
Apart from domestic revenue and local government authority collections, the budget assumes significant revenues in terms of general budget support, foreign loans and grants, as well as domestic borrowing and non-concessional borrowing from overseas.
Against the backdrop of the global financial crisis, taxpayers in donor countries would be entitled to question the level of support to Tanzania, and in particular whether Tanzania is raising an appropriate level of taxes from domestic sources.
There is no doubt that tax revenues need to increase. So, given the criticisms made in a number of articles of the tax measures proposed, the question that many ask is: how would you fill the gap?
Here we can take a leaf from our friends, the donor countries, who in the recent financial crisis have in most cases sought to balance their books by moving towards increased indirect tax rates (in particular VAT) and reducing income tax rates.
In other words, a focus on taxing consumption (thereby indirectly encouraging saving) and encouraging endeavour by not excessively taxing income.
General Budget Support is financed by nine bilateral development partners together with the European Commission, the World Bank and the African Development Bank.
VAT rates of some of the bilateral development partners include the following: Denmark (25 per cent), Finland (24 per cent), Germany (19 per cent), Ireland (23 per cent), Norway (25 per cent), Sweden (25 per cent), United Kingdom (20 per cent). If one takes a wider view, and looks at the European Union, you find that 22 out of 27 countries have VAT rates of 20 per cent or more.
So – and this may not be popular – my suggestion would be to increase the VAT rate to 20 per cent, whilst at the same time: reversing some of the more controversial Budget proposals (for example, the excise duty change on telecoms, and the 5 per cent withholding tax on services); (reducing skills and development levy to 2 per cent (let’s tax consumption rather than employment!); and exploring the scope that such an increase might give to enable income tax rate reductions and other rationalisations of the tax system.
But, back to reality: whilst the economics of the proposals is sound, the politics may not be.
In particular, an increase in VAT would be felt more discernibly by a wide sector of the population – this contrasts with the impact of other tax changes whose more immediate impact is on business, and therefore, not as immediately transparent in terms of impact on the cost of living.
But if we move out of the Tanzanian political sphere to the political sphere of the donor countries, citizens there might well ask why their taxes should fund donor support for a country which charges a lower rate of VAT.
Source: The Citizen, written by David Tarimo, Tax Partner, PwC In Dar es Salaam. The views expressed do not necessarily represent those of PwC. To see the PwC summary on the Budget, go to: www.pwc.com/tz
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