On Expanding the Tax and Taxpayers Base (III)

This is the continuation from last week, and last piece on the topic. As it were, these are personal recommendations, further to what many others have undertaken already, i.e. drawing up accounts of what are considered necessary in the expansion of our tax and taxpayers base. Read on:
On presumptive taxation
In concluding last week’s comments on this aspect – in the ultimate analysis, under no circumstance should a taxpayer be allowed to hide for his entire productive life in the comforting embrace of an unduly favorable presumptive taxation system, or non-filling of returns. Progressive assimilation of these into the tax net should be not only through tax education, but also through increased risk perception regarding the likelihood of penalties being imposed.
It is equally important to ensure that small to medium enterprises which are in the normal tax system should not be allowed to migrate into the simplified system to avoid paying tax. In addition, an effective method to monitor small enterprises that opt for presumptive taxation would be to insist on their filing declaration of their accounts annually and it should be made mandatory for them to issue receipts for each transaction, with serial numbers of course.
On small and medium-sized enterprises (SMEs)
Perceived or real high tax rates, the inability to understand a complex tax system and procedures, and the lack of confidence in government’s efficiency in the use of revenues are usually key reasons for low voluntary compliance. Therefore, tax administration measures to improve SMEs tax compliance could include quick and easy processes for registration and TIN issuance; clear and easily available information on tax registration, filing and payment obligations and procedures; a turnover based regime and audit activities that take into account specific characteristics of different groups of SMEs.
Once compliance behavior is understood, raising compliance is likely to again call for simplified returns, with simple profit and loss statements and a simplified capital allowance so that whichever SME is selected, their audit remains fair and transparent and not prone to disputes. Also, setting up of call centres in major TRA regional offices for responding to and resolving basic queries and visit by specialized officers in a group for SME support could be another milestone.
On retail/small traders
Informal and unorganized small traders often have a tendency not to pay taxes and most are not even TIN registered. A conducive environment and tax culture should be created to encourage them to pay their tax dues voluntarily. In addition to Special IDs that are being distributed to small traders, they could also be encouraged to use debit cards/mobile transaction more extensively, this way they could be attracted to enter the formal sector. Further to that, they also would leave an audit trail of transactions undertaken by them, which could be leveraged for widening the taxpayer base. The small retail traders could also be encouraged to enter the banking network by providing the facility of fast-tracking applications for business, educational, housing loans, etc once they are categorized as tax payers.
On high net worth individuals
Wealth tax base can be increased by following international practices, where revenue authorities, exclusively focus on high net worth individuals (HNWIs). On this, administratively there is need for a separate unit for HNWIs within the revenue authority structure with a view to improving the understanding of different customer needs and behaviours in order to respond to them appropriately, assisting them to get their affairs right and pursuing those who bend or break the rules.
On special tax treatments
Further to what has been the approach in these recent years, there could still be a room for a comprehensive review of exemptions. Both the Ministry and revenue authority could consider measures to phase out some forms of unwarranted tax exemptions that continue in the form of various fiscal preferences. The revenue authority could endeavor to analyze the outcomes of these exemptions and inform better decisions.
Specific economic parameters like growth rates of specific sectors, growth of businesses and households, etc could be identified and analysed for increasing the taxpayer base. Such economic parameters, once selected, could be periodically verified, improved and modified. Cases of broad parameters should be narrowed down into more specific ones as experience in parameter analytics is gathered and consolidated.
Exemptions/deductions based on specific economic areas and industries could be minimized. If at all, investment incentives could receive a tax preference because they directly affect growth; then such incentives should be for specific periods of time. A comprehensive review of exemptions will facilitate the deepening and widening of tax base.
On survey and searches
Surveys and technology-based information and intelligence systems should be used to identify potential taxpayers. Databases from different government agencies could be used to locate those do not file tax return and also those who stopped filling for returns.
Such surveys should be based on growth trend in sectors and industries especially clusters of business units known for use of undocumented and cash transactions; expenditure and lavish life style etc. Tax administrators could develop/use software to zero-in on such behavioral indicators.
Enforcement could be strengthened to heighten the perception of the risk of being caught and of penalty for non-compliance being high. Anti-avoidance provisions should be incorporated in our tax laws and then be implemented with great care and sensitivity.

On Expanding the Tax and Taxpayers Base (II)

This is the continuation from ended last week. They are personal opinions to what many have undertaken already to draw up informed accounts of what could be considered necessary for the expansion of our tax and taxpayers base. The broadening of the tax base and greater compliance could boost tax collections, even while the overall tax rate could fall – for resource mobilization and economic growth. Therefore, further to the general observation in the last article, these are high level summarized specific recommendations:
On increasing the number of taxpayers
There is a gap in the number of corporate tax payers registered with the TRA vis-à-vis the number of working companies registered with the Registrar of Companies (BRELA), even though most of them are legally required to file returns mandatorily. The revenue authority should pursue this lead to identify corporates that are registered but are not filling returns.
As we noted last week, 2.75 million have a TIN among us and out of these about 300,000 file income tax returns, i.e. about 89 per cent of registered taxpayers are not filing returns. In here, a mechanism needs to be put in place to ensure the filing of returns by all registered taxpayers. The revenue authority could investigate and carry out a robust analysis on why the percentage of returns filed is so low compared to the number of registrations.
Furthermore, we know that the tax base is not commensurate with the growth in both corporate and individual incomes especially in recent past. An effective mechanism for collecting information from varied sources should be put in place to identify potential taxpayers and bring them into the tax net and broadening the tax base. The compliance system could be made simple and more user friendly to encourage voluntary compliance, thereby broadening the tax base.
On Withholding Tax
The beauty about withholding tax (WHT) is that it leaves an audit trail that acts as a deterrent to tax evasion and in early collection of tax as soon as a transaction takes place; it is also a non-intrusive method of expanding the base. Therefore, regular monitoring of tax deduction transactions therefore could be made and compared with the tax return data to identify whether deductees do file tax returns.
It would be ideal if WHT deductors would file the WHT returns on time, each quarter and must include the details of name of the deductees, their TIN and amount of transaction.
WHT coverage could be expanded to capture more and more transactions, especially those that involve large amounts of cash but remain outside the tax net.
It is however important to note that the taxpayer base may not necessarily increase merely by introduction of WHT unless deductees and deductors file correct returns. To ensure that correct returns are filed, WHT needs to be supplemented by enhanced enforcement methods.
On the cash economy
In my opinion, the cash economy is a major problem in our economic system as large-scale transactions reportedly take place in cash, especially in land dealings, the construction sector, etc. In this aspect, a non-intrusive verification system could be designed so that more cases of capital gains liability are detected and taxed.
Certain measures could also be put in place to discourage cash transactions. For example, local authorities and the revenue authority could be encouraged to bridge the gap between the tax computation rates that is used for property valuation for tax imposition, and the market value of properties (even allowing for a lower property tax rate) and increase the digital footprint of transactions.
Coupled with this, there is also a need to develop better assessment of the “underground economy” both in terms of its size and the economic behavioral factors that motivate the players in that economy. There is no recent study that I have come across on the issue, and if this is generally the case, there is an urgent need to promote research which is Knowledge, Analysis and Intelligence-oriented in this area. That would provide much needed insight into the functioning of the “black economy” and how to harness it with appropriate revenue yielding administrative measures.
Meanwhile, there is no robust instrument at present that captures details of bank accounts/transactions, as they relate to tax payments. The availability of such information could help the revenue authority in widen its information base on the use of black money.
On presumptive taxation
This is the particular area that in recent years has played a major role in enhancing the widening of tax and taxpayers base. However, there is still a large number of individuals in businesses, trade, services and professions, (especially in the informal sector and sectors where large scale transactions take place in cash) who are outside the tax net. Therefore, the presumptive income estimation scheme should further be reviewed based on appropriate analysis and its scope be enlarged with the view of attracting more into the tax net.
Many small businesses are still in the informal economy and remain untaxed. For these groups, in addition to the ongoing efforts following the President’s directive, the tax administration could design, promote, and establish simple, optional presumptive tax schemes, including those based on a compounding (turnover) basis, for example in the service tax that are below a threshold.
Since there is still some scope for presumptive taxation in the Finance Act, currently applicable to only some business sectors with a turnover below a threshold limit, data mining remains crucial for analysis-based strategies to examine if its scope should be expanded.
However, the presumptive taxation scheme should always be backed by taxpayer education programs to bring taxpayers up to the point at which they can enter the regular tax system. The revenue authority has in recent years increased the visibility of tax education and awareness programs; this should continuously be an important goal of the presumptive scheme. To be continued next week.

On Expanding Tax and Taxpayers Base

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) is: “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 3-years, direct tax collection has increased by about 7 percent, 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 percent of our total tax revenue. The total number of taxpayers in the lowest income bracket (i.e. below Tsh 100 million) comprises almost 99 percent of total taxpayers, from whom 20 percent of the tax revenues collected. The highest bracket of the above Tsh 100 million comprises a 1 percent of total taxpayers, contributing 80 percent of tax revenues. In FY2017/18 the numbers of corporate taxpayers in the Tsh 100 million bracket was about 67,000 and those above Tsh 100 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 tax payers). 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 percent 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 2.7million. 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 persons 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.