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1000% increase in Tanzania's tax revenues

The aim of development cooperation is to enable developing countries to take care of themselves. With Danish support to Tanzania’s tax authority, the country has taken a major step in the right direction. Tanzanians can now pay their taxes on their mobile phones, and with over a 1,000% increase in tax revenues, there is room in the Tanzanian state budget for, among other things, education and healthcare.

Danida project, PS-Programme, Dar Es Salaam, Tanzania

Danida project, PS-Programme, Dar Es Salaam, Tanzania.

Photo: Jørgen Schytte/Danida

Steady and stable tax revenues are one of the fundamental preconditions for enabling developing countries to finance their own development. Tanzania is one of the developing countries that has taken the largest leap forward in terms of taxes. In the period 1999-2012 alone, tax revenues in the country increased by over 1,000 per cent.

The Tanzania Revenue Authority, TRA, was established in 1996 and has since 1999 been supported by Danida. In just 18 years, the TRA has achieved impressive results. The new institution got off to a flying start with an increase of 26% in tax revenues in the first year alone. But after a couple of years with stagnant tax revenues totalling 11-12% of GDP, which was below the level of many other countries in Africa, an intensified effort from a number of donor countries injected renewed energy into the TRA.

Tanzania’s five-year plan from the financial year 2002/2003 set ambitious goals: New funds were allocated for building the capacity of the TRA so that the number of staff could be increased and their training improved. At the same time, the tax system was streamlined and expanded to include more individuals, goods and enterprises. Results were not lacking, and tax revenues grew significantly from10.8% of GDP in 2003/2004 to almost 16% in 2011/2012. In the most recent five-year plan leading up to 2018, an increase to 19.9% of GDP is expected.

The number of registered taxpayers has grown from 190,000 in 2003 to 1.7 million in 2013. An especially successful measure has been requiring large enterprises to report wage payments and to withhold tax from wages. Similarly, imposing a corporate tax on large companies is also beginning to show results. 18% VAT is paid on goods, partially through the help of a special VAT registration unit which uses a network to connect stores’ cash registers with the TRA’s database.

Success – but with challenges

Putting an ambitious tax strategy into action, though, does not happen without problems. One of the challenges that many developing countries, including Tanzania, face is a fast growing informal sector – estimated to comprise approx. 40% of the economy – which is difficult to tax. With a population of over 47 million people, there ought to be quite a few more registered taxpayers.

The informal sector consists primarily of unregistered people such as small vendors, small-scale farmers and manufacturers, and tradesmen but also of many small enterprises. Even though the TRA now has a staff of 4,000 and many of them travel around the country, it has not yet been possible to create a tax system fine-meshed enough so as to catch all relevant money and goods transactions in a country covering almost 1 million square kilometres.

Another obstacle is that the whole idea of having a tax system and a public sector that takes of care of the people goes against the customs and way of thinking of the Tanzanian people. They are not used to being able to demand services in exchange for paying taxes. In Tanzania, you pay for school and healthcare on your own, if you can afford it that is.

Many Tanzanians, especially those living outside of the major cities, are sceptical about the tax authority and consider its staff to be corrupt. In addition, the level of service of the TRA can be poor in certain situations. For example, until recently paying the motor vehicle registration fee on a new car meant waiting on a motor vehicle office, often for one or two days, in order to receive your new license plate.

Despite the impressive increase in tax revenues, the results in some areas have not lived up to ambitions. For example, for certain periods of time, the introduction of quicker customs clearance procedures for import goods at the harbours has gone rather slowly. Nor have expectations regarding the taxing of small and medium-sized enterprises been met as of yet. On the other hand, it has become significantly easier to pay your taxes through the use of modern mobile technology. In Tanzania, citizens and enterprises can now pay their taxes using their mobile phones and the country’s mobile payment system. Mobile payments are now widespread in Tanzania and other developing countries in Africa, and with the new system the country’s tax authority has made it possible to use the same method of payment that the people in the country are already used to using.

Less dependent on donor countries

Denmark plans on continuing its support to Tanzania’s tax authority until 2018 together with, among others, Great Britain and Norway. The support is solely used for institution building, i.e. procuring and building IT systems, building up efficient tax systems, training staff members etc.

The total development assistance to Tanzania has remained constant or has actually fallen in recent years. Still, the state budget has grown by an average of 18% per year since 1999/2000. First and foremost, tax revenues have made Tanzania less dependent on development assistance, and at the same time the growth in state expenditures has benefitted the country’s roads, power plants, water supply, schools and healthcare. There are now doctors in the majority of the outlying districts, and, for example, the appropriations for education have increased fivefold since 1999.

The size of Tanzania’s state budget is, though, still limited. The annual budget at the moment lies at an amount equal to approx. DKK 60 billion, which is just 5.6% of the Danish state budget even though 6 times as many people live in the country. The tax authority in Tanzania is, in other words, a tentative success story, but it can sow the seeds for major development in the whole country.

Results

  • From 1999/2000 to 2012/2013 annual tax revenues increased from 687 billion Tanzanian shillings (approx. DKK 2.2 billion) to 8,032 billion Tanzanian shillings (approx. DKK 25.9 billion). This represents an increase of 1068%.
  • Tax revenue as a percentage of GDP has increased from 10.8 per cent in 2003/2004 to almost 16% in 2011/2012. The goal is to increase tax revenues to 19.9 per cent of GDP before 2018.
  • The state budget has grown by 18% annually since 1999/2000.
  • In total, Denmark has supported strengthening Tanzania’s tax authority with DKK 90.2 million in the period 1999-2013.

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