A recent PwC China publication (titled “Forging Ahead: 2017 China tax policy review and 2018 outlook”) highlights a number of bold tax policy moves including adjusting consumption tax, individual income tax reform, legislation of property tax, relieving the tax burden of small-and-medium sized enterprises, optimising VAT tax rate brackets, optimising business environment and exploring the advance ruling mechanism.
Hapa kazi tu (“just work”) was the slogan at the last election – embodying an aspiration for a more work oriented focus for the country as a whole, and for those in public service in particular, with an overall objective to drive the country to prosperity. As we approach Thursday’s budget it is pertinent to consider how the Budget might best reflect this approach.
Of course much has already been done in relation to control of expenditure, with a clear message that a position in Government is not a license to live extravagantly at the state’s expense. These changes mirror changes in China with regard to expenditure control. At the same time China’s focus on expenditure control has been allied with a robust tax reform process. A recent PwC China publication (titled “Forging Ahead: 2017 China tax policy review and 2018 outlook”) highlights a number of bold tax policy moves including adjusting consumption tax, individual income tax reform, legislation of property tax, relieving the tax burden of small-and-medium sized enterprises, optimising VAT tax rate brackets, optimising business environment and exploring the advance ruling mechanism. It notes that on 5 March 2018, Premier of the State Council, Li Keqiang, delivered a report that committed China to further reduce the taxes and non-tax burden of enterprises and individuals by over RMB800 billion and RMB300 billion respectively.
So whilst expenditure control is commendable, the primary challenge in this year’s Budget must be how to further drive the growth agenda. In some previous Budgets, a challenge has sometimes been that the focus has been too narrow with a primary focus on increased tax rates or additional taxes to drive revenue growth – perhaps to rephrase the slogan, one might have characterised this as hapa kodi tu (“just [more] taxes”)! Yet, ultimately a primary driver for increased revenues has to be economic growth, and for this we need a tax environment that facilitates rather than inhibits such growth.
So, how is the current tax environment? While to some extent this perception will be a subjective one for different taxpayers, there are a number of studies that indicate the tax environment to be a very challenging one for business. By way of example, the World Economic Forum’s latest Global Competiveness Index (2017/2018) (which ranks Tanzania 113th out of 137 countries covered) includes in its list of most problematic factors for doing business in Tanzania the following: tax rates, tax regulations and policy instability, respectively ranked as 2nd, 6th and 8th most problematic factors. Another illustration is the World Bank’s Doing Business 2018 publication, which derives the overall ease of doing business ranking from ten indicators including a “paying taxes” indicator. Of relevance to Tanzania is that out of the 190 countries surveyed, we rank as 154th in terms of the “paying taxes” indicator. So I think we need to agree that objectively there is a challenge.
What to do? Well perhaps we can take a leaf from how many developed economies reacted following the global financial crisis so as to seek to stimulate growth. Here the thrust was for many economies to reduce income taxes, but at the same time increase indirect taxes (in particular VAT). Why? In brief, it rebalances the incentives for individuals in making choices between work, saving and consumption; in particular, with higher indirect taxes discouraging consumption and lower income taxes encouraging saving and enterprise; an approach completely consistent with a hapa kazi tu philosophy.
Such an approach also fosters compliance and formalisation, and thereby is a more effective means of widening the tax base. This becomes clear when you consider that indirect taxes are much simpler to collect – you simply deal with the supplier, and a relatively limited number of suppliers given the limited basket of goods and services consumed by most Tanzanians. By contrast, it is much more of a challenge for the Tanzania Revenue Authority to collect income tax from millions of potential taxpayers, particularly if the rates are perceived as high. Of course, reduced income tax rates as a way to generate additional revenues may seem counter intuitive, but there are precedents (including Mauritius) where bold reforms to rationalise and reduce taxes actually generated significant tax increases.
An additional challenge for Tanzania is the very high level of taxes on employment whether borne by employees (PAYE, social security) or employers (social security, skills and development levy, workers compensation fund). Excessive taxes on employment must work against aspirations to increase employment, and so are inconsistent with hapa kazi tu!
So, the question is will this budget see a “business unusual” scenario with bold moves consistent with the hapa kazi tu aspiration? Or, will it be kama kawaida (more of the same), with a hapa kodi tu approach? We await Thursday with bated breath!
David Tarimo, Country Senior Partner, PwC The views expressed do not necessarily represent those of PwC