TAX NEWS - June 2010

Tanzania Tax: Stimulus Budget and Tax Reliefs

The 2010/11 Tanzania Budget tabled in Dodoma yesterday by Finance and Economic Affairs minister Mustafa Mkulo will please many and offend a few, as the government puts in place a catalyst for economic recovery and relief to the low income earners, analysts are saying.
 
 Most of the experts who spoke to The Citizen yesterday commended the government for delivering a budget that addresses the expectations of a wide cross-section of stakeholders who have been affected, in one way or the other, by the global economic crisis.
 
Experts' views of what the Budget entails are based on indicators such as the various tax and expenditure measures in key areas that Mr Mkulo have spelt out. There will a number of tax reliefs aimed at giving a boost to agriculture and manufacturing sectors.
 
The government has also increased spending in social services, namely health and education. It has also allocated more money in infrastructure and agriculture.

These four sectors have consumed about Sh5.6 trillion, equivalent to 50 per cent of the whole Budget. The focus on these areas, according to Herwig Polders, the tax director of Deloitte Consulting Ltd, is a continuation of the trend set five years ago by President Jakaya Kikwete's government.
 
"Overall, the 2010/11 budget will please many and offend a few!  In many ways, it is clear that government has listened to stakeholders. The Budget has introduced some commendable measures to curb government spending and stimulate investment in the Tanzanian economy," Mr Polders told The Citizen yesterday.

Dr Haji Semboja of University of Dar es Salaam's Economics department noted too that the government has tabled a budget that tries to restore economic growth following the slowdown resulting from the global economic crisis.

He added that the huge spending on health, education and infrastructure will go a long way to improving people's standards of living.

"This Budget takes into consideration the plight of low income earners... it could be government's reaction to increasing people's complaints about on high cost of living," he said.


Boosting agriculture, investments
 
In order to boost agriculture, the government has introduced many tax exemptions with the most notable being the scrapping of Value Added Tax on transportation of agricultural products within the estates (intra-transport); on agricultural implements such as combine harvesters, pick-up balers, hay making machinery and the mowers used in agricultural production and livestock.
 
The government is also granting VAT exemption on machines and equipments used in the collection, transportation and processing of milk products.
 
The aim here is to promote investment in the dairy sub-sector and improve the income of livestock keepers. The government has also granted special VAT relief in the supply of goods and services to organised farms and those under registered cooperatives unions.
 
But in a quick rejoinder to what the Budget entails, Prof Marjorie Mbilinyi, an activist with the Dar es Salaam-based Tanzania Gender Networking Programme (TGNP) faulted the Mkulo's proposals, saying they have ignored the peasants.

Said she: "The government is bending over backwards to meet the demands of agribusiness and other large-scale producers in agriculture. How will this benefit the small-scale producer? Or the low-income consumer?

"Will there be price controls and/or subsidies to ensure that poor households can afford basic foodstuffs? And where are producer subsidies that specifically target low income small-scale farmers, pastoralists and fisher people?"

And then, to reduce the cost of doing business and boosting recovery, the government has granted tax exemptions and reductions. Most notable is the re-introduction of VAT exemptions on "redeemed capital goods" and reduction of excise duty rate on heavy furnace oil (HFO). This will have a significant impact on reducing industrial production costs.

"The measure conforms to the government's intention to promote industrial growth, create employment and generate revenue. This reduction is in line with the decision reached between the government and stakeholders in the industrial sector to reduce it in phases and subsequently eliminate the whole duty within three years," Mr Mkulo said.

The government has also provided special VAT relief in the supply of building materials and construction services to EPZ developers, as well as exempting VAT on the supply of packaging materials for fruit juices and milk products.

To check the rise in the cost of living, the government just has refrained from increasing fuel taxes. The Income Tax for individuals has also been reduced from 15 per cent to 14 per cent. This will be coupled with salary increases to be announced in the course of the Budget session.

The "few who will be offended" by the Budget include vehicle owners, for both vehicle registration and annual licence fees have been increased. Mining companies have also been tightehened through "ring-fencing", meaning they will be required to pay taxes based on the profitability of a single mine, and not of the whole company.


Implementation is the key

Despite meeting people's expectations to a high degree, the 2010/11 Budget will achieve its objectives only if it will be implemented effectively, stakeholders said.
 
"Whether or not the Budget will achieve its objectives will depend on its implementation," Mr Polders said.

Experts also said this Budget, like past five before it, has failed miserably in instituting clear-cut measures to address the problem of income poverty as well as public funds mismanagement.
 
"Since 2006, there have been improvement in resource allocations in key sectors but the government has failed to seriously address the problem of poverty, mismanagement of public resources and corruption," said Dr Semboja.
 
Prof Mbilinyi said the failure of the government to mention full employment and livelihoods strategy, which is the most effective and efficient means of reducing poverty and ensuring a higher quality of life for all Tanzanians, shows that the Budget is pro-rich.
 
There is also the charge that government has been faulted for its seemingly total incapacity to tax the natural resources, which are abundant in this country.
 
The Sh351 billion revenue collection from non-tax sources is only 6 per cent of the total revenue of Sh6 trillion.

"This is unacceptable for a country that is rich in minerals, fish stocks, forests, livestock, and land. It shows that government has a wrong political and policy perception of the natural resources potential that is available," Dr Semboja said.
 
The economist suggested, for example, that all exemptions on fuel taxes to mining companies should have been scrapped altogether to increase the much-needed government revenue.
 
These exemptions are not included in the mineral developments agreement with the mining companies, according to Dr Semboja, and could therefore be removed through consultations between the two parties.

He, however, commended the government for coming up, this time around, with detailed, focused and concrete taxation system and administration in the Budget.