The Sh2 trillion tax hole

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The Sh2 trillion tax hole

Sunday, 26 June 2011 09:06

By Costantine Sebastian, Weekend Editor THE CITIZEN Experts have warned that the new tax waivers announced by the Treasury will further increase revenue losses incurred by the government through excessive exemptions and other generous fiscal incentives, which are currently put at nearly Sh2 trillion. Apart from expanding the tax hole in government finances, the concessions in this year’s financial Bill will also create more room for corruption and increase the already many loopholes for tax evasion. The experts also argue that contrary to the government’s position, the fiscal incentives – which mostly comprise tax holidays, investment allowances and tax credits, timing differences, and general tax reductions – will not necessarily attract investments. Research undertaken by local and international institutions has established that the concessions play only a marginal role in influencing investors’ decisions. “In 2008, it was estimated that the government lost about Sh1.8 trillion through exemptions and tax incentives. The decision to offer more tax relief to investors and mining companies starting next financial year means that more revenue will be forgone,” a tax adviser in Dar es Salaam told ‘The Citizen on Sunday’ on Friday. Speaking on condition of anonymity, the expert with an international audit company warned that the concessions trend and scenario was fiscally unhealthy. He said that excessive exemptions and overgenerous tax incentives not only shrink the tax base, but also complicate tax administration in addition to being a major source of revenue leakage. On Wednesday, the government offered more tax concessions to mining companies and investors in special economic and export processing zones despite persistent opposition to the privileges. Tabling the Finance Bill 2011, Finance and Economic Affairs deputy minister Pereira Ame Silima said mining firms that had signed mineral development agreements with the government before July 1, 2009 would be given VAT special relief. The relief will also be enjoyed by mining exploration companies on commodities and services required for exploration. The controversial concessions also saw investors in the special economic zones and export process zones being granted a ten-year tax holiday. The government also re-introduced VAT exemptions on household consumables such as food, clothes and soap to orphanages and other institutions caring for orphans and children from poor families, which minister Mustafa Mkulo had scrapped in the Budget proposals. “Experience shows that a high occurrence of tax exemptions reduces the tax base, creates room for bribery and corruption, and increases the appearance of loopholes for tax evasion. Hence, the extent of tax exemptions can be seen as an indication of a government’s political will to fight fiscal corruption and tax evasion,” researchers at the Christian Michelsen Institute of Norway noted in their June 15, 2011 report on tax opportunities and challenges in Tanzania, Zambia and Mozambique. Last year, the African Developed Bank (AfDB) said in a study titled ‘Domestic Resource Mobilization for Poverty Reduction in East Africa’ that exemptions and tax incentives in Tanzania could account for up to six per cent of gross domestic product (GDP). At the current GDP level of Sh33 trillion, that amounts to about Sh1.98 trillion, which is more than the non-concessional loans in this year’s Budget and more than the local component of the development expenditure during 2011/12. Research and analysis undertaken by Tanzania Revenue Authority (TRA) suggests that the tax revenue effort could be considerably higher if exemptions estimated at 20 per cent of total tax revenue collections were eliminated. An analysis of the exemptions given between July 2008 and April 2009 indicates that a total of Sh283.5 billion ($ 180.7 million) or 48 per cent of the total waivers was granted to the Tanzania Investment Centre (TIC). Under the Tanzania Investment Act of 1997, TIC offers investors: import duty and VAT exemptions on project/capital goods; and refunds of duty charged on imported inputs used for producing goods for export and goods sold to foreign institutions under a duty draw back scheme. Similar incentives are offered in export processing and special economic zones. Revenue loss arising from tax exemptions was estimated at Sh587 billion ($403 million) by the TRA between July 2008 and April 2009. Apart from projects under the TIC, other beneficiaries included state owned institutions, the Government of Zanzibar, religious and non-religious NGOs. “Among the controversial issues in the budget are tax exemptions as incentive to attract foreign direct investments. The granting of tax incentives is ineffective and a loss of revenue for the Treasury they are not the only and necessary conditions for attracting and retaining investments,” economist Honest Ngowi of Mzumbe University wrote in The Citizen on Saturday yesterday. CUF chairman Ibrahim Lipumba said abolition of the exemptions and review of mining contracts would see tax revenue collections surge from the current 15 per cent of GDP to 20 per cent. He criticised the government for continuing to grant “huge” tax concessions despite public disapproval, including by its own commissions and committees. Saying the authorities have been dishonest on the matter, policy analyst Deus Kibamba equated the tax incentives given to large foreign companies in Tanzania to a form of subsidy. Additional reporting by Beatus Kagashe

 

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Eliminate all allowances (sitting allowances, sleeping allowances, gas allowances, car allowances etc) in order to reduce budget deficit to less than 1 Trillion shillings.