BUSINESS & THE ECONOMY

By Joseph Kilasara
Exchange rate £1 = TShs 2,222

The Budget

The mood from the finance minister Hon. Mkullo about the economy’s performance was both upbeat and optimistic. Coming at a time when his counterparts, particularly in Western Europe and America, are reeling in the fallout from the credit crunch and skyrocketing commodity prices he must be a very optimistic man.

He estimates that the economy will grow at 7.8% this year (2007, 7.1%) and at over 8.1% next year with inflation being controlled at below 7% by June 2009 (9.7% April, 2008). His confidence is evidenced by the increasing availability of commercial bank credit which rose by 42% with lending rates declining to an average of 15.1% to March, 2008. The signing of the US sponsored Millennium Challenge Compact Agreement totalling around US$698m over 5yrs for infrastructure projects will also play a part.

While he identifies inflation as one of the major challenges to the economy, faltering economies of most donor countries could also prove to be another headache, as they are estimated to contribute about 34% of the budget. The falling price of oil may facilitate the achievement of the inflation target but it is likely to affect the level of revenue as oil related taxes contribute up to 20% total revenue projected.

Some management gurus say that the good news is the bad news, as bad news at least allows you to focus on the solution while good news invites complacency. The good news is, it is being projected, that donor dependency will be reduced from 42% to 34% mainly through increased revenue collection by 31% to 18.5% of GDP (16.5% for 2007/08). The bad news is that the same sources of revenue are being squeezed more.

With 20% contribution if the current downward trend of the oil price continues he might have to revisit his numbers. Mobile phones, alcohol, tobacco and soft drinks industry together contribute about 12% in excise and VAT taxes – that is before corporate and payroll taxes.

With this contribution the increase in excise duty from 7% to 10% will be of great concern to the mobile phone industry as it is likely to hamper growth as well as penetration. Mobile phones are the only infrastructure which, with its 8.3m subscribers, connects almost the entire country. The argument is whether increasing taxes, which is likely to hamper growth, is more effective in increasing revenue in the long run, rather than allowing the sector to grow and reach more people. Obviously the government has chosen the former which is a more short term objective. An increase of 12% on specific excise duty on alcohol, soft drinks and the tobacco sector has also been proposed.

The dependency on Dar es Salaam and particularly Ilala for revenue speaks more about income distribution as is the impact of the GDP growth vis-à-vis wealth creation and sharing across the country. For the fiscal year 2006/07 Ilala contributed about 40% of direct and indirect taxes on domestic revenue (see table). This may explain the location of most of the major companies, government departments as well as private and non-governmental organizations.

Direct and Indirect Tax Domestic Revenue 2006/07

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter TOTAL %
ILALA – DSM 37,228 38,029 38,571 40,700 154,528 39.7
KINONDONI-DSM 8,519 9,307 11,011 14,239 43,075 11.1
TEMEKE-DSM 6,649 7,316 6,790 7,076 27,832 7.1
ARUSHA 11,942 13,017 13,231 12,516 50,705 13.0
KILIMANJARO 3,533 3,459 4,019 4,336 15,347 3.9
TANGA 1,899 1,913 2,025 2,516 8,352 2.1
MWANZA 5,239 5,299 5,706 6,211 22,456 5.8
REST 16,831 15,971 17,060 17,473 67,335 17.3
TOTAL 91,841 94,309 98,414 105,065 389,629 100

Source: Tanzania Revenue Authority (TRA); fig in TShs millions

This might be the reason the minister is attempting to widen his tax net by introducing an Alternative Minimum Tax (AMT) rate of 0.3% on turnover for perpetual loss making entities (Making losses for three
consecutive years). In the same spirit he is also re-introducing a withholding tax of 2% on government’s payments to suppliers without a Tax Identification Number (TIN).

A move to review the tax exemption scheme on investors, VAT conditions on NGOs as well as tapping into the revenue generated by regulatory regimes are also being mooted. As always the implementation of these measures will likely to say more than its mere intention. What is obvious however is widening the tax bracket will eventually make it possible to alleviate the tax burden on the few, hence effecting re-distribution of income, promoting growth and improving our competitiveness.

(To contact the author: sasaimi[AT]hotmail[DOT]com)

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