The industrialists want the taxes to be cut in order to, among other things, enable the sector to create more jobs, make local firms competitive and boost the welfare of many households.
The other tax charges CTI wishes to see slashed drastically are the unpopular skills and development levy (SDL), pay as you earn (PAYE), corporate tax for non-listed companies and the capital gain tax on shares floated at the Dar es Salaam Stock Exchange (DSE).
According to its proposals to the Task Force on Tax Reform for 2016/17, cutting the charges would have multiple benefits to households, the local manufacturing sector and the national economy at large.
The lobby group has proposed the railway levy to be reduced by about 66 per cent from 1.5 per cent to 0.5 per cent. The government adopted the levy in the current financial year to be charged on imports to help raise US$14.2 billion to finance new rail projects and improve existing lines over the next five years.
“The levy increases cost of production as a charge on raw materials and intermediate inputs used in production. A lower rate will help to reduce the cost of importing intermediate inputs and raw materials therefore, making the domestic industry competitive,” Hussein Kamote, CTI director of Policy and Advocacy, told Smart Money recently.
PwC Partner Rishit Shah supports the CTI proposal saying it hurts both local and foreign investors making imports especially of heavy duty machinery and equipment very expensive. He told Smart Money at the American Chamber of Commerce – Tanzania (AmCham-Tanzania) breakfast meeting on the current business climate in the country and that the levy was generally a disincentive for big investments.
Going by the value of the import bill in the first half of the current financial year of about US$5.84 billion, the levy generated nearly US$88 million between July and December last year. The levy is also charged in Kenya, Uganda and Rwanda after EAC Finance ministers agreed to introduce it during their pre-budget consultations on May 3, 2014, in Nairobi.
While some quarters of the business community want SDL to be scrapped, CTI like most of corporate Tanzania want it to be significantly lowered proposing a rate reduction of 60 per cent from five per cent to two per cent. On Thursday, the executive director of Tanzania Private Sector Foundation, Godfrey Simbeye, said SDL was one of the many nuisance taxes they have forwarded to the government for abolishment.
“No other country has SDL in the region,” Shah told Smart Money on Thursday noting that it makes employment dear in the country compared to other economies in the region. “In South Africa, SDL is charged at two per cent but can be offset against training costs provided to staff by employers,” he added.
In his presentation at the AmCham Tanzania meeting, Shah called for removal of all small and nuisance taxes, including SDL, and introduction of a cap on social security contributions for higher earners. He said investors find high payroll taxes an unnecessary burden on their payrolls.
According to him, Tanzania was ranked poorly in the new Paying Taxes study both globally and in the region due to the multiplicity of taxes and the high rates charged on businesses. Among other things, the Paying Taxes 2016 report has it that although Africa shows the greatest overall drop in the Total Tax Rate since 2004, it is still a very difficult region in which to pay tax.
For many years, the Association of Tanzania Employers (ATE) has been advocating for the reduction of SDL saying it inflated the cost of doing business in the country. Initially, the Vocational Education and Training Levy Act (2001) made it mandatory for every employer to pay an SDL of six per cent of their wage bills.
The employers have since then been at odds with it because the paid amounts do not fully benefit the private sector. ATE has been able to establish that only two per cent of the collected amounts go to finance the intended purpose, which is capacity building of the workforce.
Instead of improving the skills of workers, which is one of the major shortcomings in the local market, the government uses most of the money to fill gaps in its budgets and for financing unbudgeted expenses such as foreign trips and national celebrations, which the administration of President John Magufuli has abolished.
The Head of State has been reiterating the intention of his regime to scrap nuisance taxes, which he promised to do during his campaigns for the October 25, 2015 General Election. When he met members of TPSF late last year, he said the government would scrap the notorious taxes and levies as a measure to attract more investments, empowers SMES and enable farmers to flourish.
The Permanent Secretary in the Ministry of Industry, Trade and Investment, Dr Adelhelm Meru, told AmCham members that the government was serious on the matter and reforms to help do away with all bad taxes were on the drawing board.
The World Economic Forum’s Global Competitiveness Report for 2015/16 highlights an inadequately educated workforce among the notorious factors for doing business in the country. Other problematic factors related to employment are restrictive labour regulations, poor work ethics, high tax rates, complexity of tax regulations and poor public health.
“SDL increases the cost of doing business for domestic manufacturers, discourages sustainable employment generation and discourages compliance with payment of the levy,” Kamote said.
“Its reduction will help to promote competitiveness of domestic industries. Other countries in EAC do not charge the levy except Kenya, which charges two per cent on hotel sector...in many countries the levy does not exceed one per cent of payroll,” he added.
Kamote said cutting the SDL rate will not only enhance compliance with its payment but also boost government revenues. “With increased compliance and tax law enforcements, the measure can generate more government revenue in the long run,” he noted.
CTI has also proposed the current high PAYE maximum bracket rate of 30 per cent to be reduced to 25 per cent. In the 2015/16 budget, then Finance minister Saada Mkuya reduced the PAYE threshold from 12 per cent to 11 per cent.
She said the government made the move in order to relieve employees from the tax burden. The rate on the employment has been doing down since fiscal year 2006/07 when it was 18.5 per cent.
CTI says that despite the significant cut, PAYE still reduces purchasing power of the people. Further reductions, it argues, would greatly promote savings and investment necessary to improve welfare of the society.
The industrialists want the corporate tax cut to 25 per cent from 30 per cent since the current charge reduces competitiveness for non-listed companies. They say doing so would promote a level playing field among domestic companies.
On the capital gain tax on shares floated at the DSE, CTI members want the current charge of 30 per cent to be reduced to 15 per cent. Kamote said the current rate puts off companies that want to float capital through DSE and discourages acquisition of businesses by indigenous people.
He said the move would promote investments as the cost of funds would become cheap and this would make companies grow. It would also increase government revenue through corporate tax.
The CEO of the Dar es Salaam stock mart, Moremi Marwa, said the recommendation for a reduced capital gain tax during initial public offers (IPOs) requires consideration by the government. He said the cut would encourage more companies to consider off-loading part of their shares to the public.
“In the process companies will be able to raise capital that will facilitate their enterprise growth and expansion, which then, among other benefits, creates new jobs, generates more revenue to the government,” he told Smart Money last week.
He said some countries provide tax amnesty for companies that are willing to become transparent, raise capital from the public and grow their enterprises. On the corporate tax, he said the proposed charge seeks to encourage companies to list to allow the public to take part ownership in the businesses.
Apart from giving access to public ownership, he said listed companies also comply with listing requirements, some of which involves companies becoming more transparent and adhere to good corporate governance.
He said he found the proposal okay since it won’t affect government revenues very much since the tax applies for companies that have at least 30 per cent of their shares owned by the public and it is only applicable for the first three years from the date of listing at the bourse.
DSE’s head of Finance and Research, Ibrahim Mshindo, said the government should also consider providing more fiscal incentives to entice more listing on the stock market and make it more vibrant. He said that once listed, companies tend to be good tax payers, create employment, which in itself is a good source of direct and indirect taxes as well as enhancement of people’s standard of living.
Mshindo has however called on CTI to organise a consultative forum on its proposals and other issues for it to put a compelling argument to the appropriate authorities.
“Studies show that quite a significant amount of consideration needs to be taken by the appropriate authorities before tax incentives are made available to both issuers and investors,” he told Smart Money.
“This is the case because the general feeling is that most of issuers and investors will proceed with their business different decisions whether or not some tax incentives are in place, and where such incentives are offered, these only end up granting benefits to the target, as opposed to being the trigger for their different strategic business decisions on business financing and investments. Significant analysis is therefore required before approving tax incentives, to confirm that such incentives indeed are attractive to the intended target audience,” he explained.
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