Enhancing Domestic Resource Mobilization: What are the Potentials?

At a nation, we can still enhance on the effective and equitable strategies for domestic resource mobilization. The impetus for such emanates from considerations of possible tools and process of financing our development, it basically calls on us to step up our efforts to collect more taxes to achieve development and growth plans that we have set before us, especially the one for achieving a middle income status within this decade. To reach there, we need to constantly engage in these discussions, especially those related to potential impediments—political and structural—in raising domestic resources.
The challenge of mobilizing domestic taxes should be considered against the funds required to achieve our development goals. To achieve the development target funds required. For instance, to achieve targets in education, health, roads, railway, electricity, water and sanitation requires an annual growth of at least 15 percent of GDP until 2030.
Where are we on mobilizing taxes domestically?
According to the publicly available data, in these last 4-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 contribute about 40 percent of our total tax revenue.
Much as there are noted progress, we still have a low taxpayer base even as a percentage of the total population. 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.
On average, our tax-to-GDP ratio has risen by about 3 percentage points of GDP in these past few years, which is higher than the average rate for Sub-Saharan Africa (SSA) countries, which ranges between 2 and 3 percent. That said, we are still among the 10 countries in SSA where the tax-to-GDP ratio is below 15 percent. Thus, whatever angle this debate takes, the level of tax capacity requires enhancing for us to ensure sustainable growth.
So far, higher indirect tax collections, have been driven primarily by rising revenues from value-added tax (VAT) and domestic duties, despite the significant revenue potential from international trade taxes. Revenues from corporate income taxes have held up at less than 5 percentage points of GDP. These revenues are less than what we can potentially mobilize because of profit shifting by multinational companies.
A key question for us, going by this argument, is whether the increased reliance on VAT and duties causes the overall tax system to become regressive to the detriment of the poor. Unlike in advanced economies, the ratio of direct tax revenues to indirect tax revenues has remained broadly unchanged.
What seems to be the problem?
Let us consider the political economy of taxation. While there has been noted improvement in these past few years, and there is still room for further improvements in the techniques of tax administration, the fundamental problems in revenue mobilization, across a wide variety of sources, are sometime rooted in inequitable power structures. These power structures create widespread perceptions of unfairness, corruption, and a lack of transparency, which compromises compliance and enforcement mechanisms. In some cases, political forces exempting the rich and powerful compound the already difficult technical problems of bringing large, informal sectors into the tax net. The “tax culture” that many advanced societies rely on, in part to ensure regular tax payments across smaller taxpayers, does not exist. This gap opens a vicious circle of distrust in the government: low resource mobilization means services are not provided regularly and efficiently, and the lack of service provision discourages tax payments. This the one major area that the current government is facing head on and we all can observe the positive outcome coming out of it, and we remain grateful.
Essentially, the social contract needed to make any revenue effort more credible can be broken by the above. Like it is in many of our countries, the general populous is unclear about the benefits of paying taxes and is skeptical about their social duty to contribute to a revenue system where they see large and powerful players—be they individuals or corporations—opting out, sometimes because of tax exemptions. The economically powerful in a country can sometimes keep even the tax authorities at bay. We are however, much grateful that this is no longer the case.
Is there a sustainable solution?
There are a variety of solutions to the challenge of domestic resource mobilization. They include increasing resources for audits; establishing well-resourced large taxpayer units; simplifying tax processes to lessen the administrative burden; using digital technologies for better record-keeping, monitoring, and auditing; increasing transparency in granting tax exemptions; and harmonizing tax policies across sectors. These are all well-known recommendations and can potentially assist tax authorities in mobilizing more revenue.
What’s next?
Implementing these measures, costs money and takes time. Difficult choices are made and will have to be made—tax authorities are victims of low tax revenues just as other government service providers. What advice can one give to craft effective strategies for inculcating a tax culture that will provide the domestic resources needed for the pressing human and physical infrastructure needs of the country? That’s the question that is being answered through action following various strategies implemented by the current government. Obviously, the room for improvement is large.

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