The Tax Reform and Domestic Revenue Mobilization in Tanzania

THE INSTITUTE OF ACCOUNTANCY ARUSHA (IAA)

RESEARCH REPORT

TOPIC: THE TAX REFORM AND DOMESTIC REVENUE MOBILIZATION IN TANZANIA

PREPARED BY: MSECHU AISHA R
ADA III: 2007-2008

SUPERVISED BY: JEREMIAH ELIAH

RESEARCH REPORT SUBMITED TO THE INSTITUTE OF
ACCOUNTANCY ARUSHA IN PERTIAL FULLFILLMENT OF THE AWARD OF ADVANCE DIPLOMA IN ACCOUNTANCY (ADA)

Declaration ------------------------------------------------------------------------ i
Acknowledgement---------------------------------------------------------------- ii
Dedication ------------------------------------------------------------------------ iii
Abbreviation---------------------------------------------------------------------- iv
Abstract---------------------------------------------------------------------------- v

CHAPTER ONE--------------------------------------------
1.1 BACKGROUND OF THE PROBLEM----------------------------------------1
1.2 STATEMENT OF THE PROBLEM------------------------------- -----------3
1.3 SIGNIFICANT OF THE STUDY----------------------------------------------4
1.4 OBJECTIVE OF THE STUDY------------------------------------------------5
1.5. RESEARCH QUESTIONS----------------------------------------------------6
1.6 SCOPE OF THE STUDY------------------------------------------------------6
1.7 LIMITATION TO THE STUDY------------------------------------------------6 CHAPTER TWO--------------------------------------------
2.0 LITERATURE REVIEW
2.1 INTRODUCTION --------------------------------------------------------------8
2.2 THERETICAL LITERATURE REVIEW--------------------------------------9
2.2.2 EMPIRICAL LITERATURE REVIEW-------------------------------------11 CHAPTER THREE------------------------------------------ RESEARCH METHODOLOGY--------------------------------------------------12
3.1 INTRODUCTION--------------------------------------------------------------12
3.2 RESEARCH DESIGN--------------------------------------------------------12

3.3 RESEARCH TECHNIQUES------------------------------------------------13
3.4 SAMPLING TECHNIQUES-------------------------------------------------13
3.4.1 JUDGEMENT---------------------------------------------------------------14
3.4.2 SAMPLE RANDOM SAMPLING------------------------------------------15
3.5 SAMPLE SIZE-----------------------------------------------------------------15
3.6 DATA COLLECTION METHODS APPLIED-------------------------------15
3.7 SAMPLING METHODS -----------------------------------------------------15
3.8 TYPES OF DATA COLLECTED---------------------------------------------15
3.9 ANALYTICAL METHODS USED--------------------------------------------16

CHAPTER FOUR-----------------------------------------------
4.1 PRESENTATION OF FINDINGS IN RELATION TO RESEARCH OBJECTIVE------------------------------------------------------------------------19
4.2 DATA ANALYSIS AND PRESENTATION OF FINDINGS----------------20

CHAPTER FIVE-----------------------------------------------
CONCLUSION AND POLICY RECOMMENDATION--------------------------
6.1 CONLUSION -----------------------------------------------------------------26
6.2 RECOMMENDATION-------------------------------------------------------27
REFERENCE---------------------------------------------------------------------28

DECLARATION
I, Msechu Aisha here by declare that this research report is my own work and it has not been duplicated or submitted before in any award of certificate, diploma, degree or any other professional award in any institution of higher learning.

Signature……………………………………………………

Date………………………………………………………….

Supervisor………………………………………………....

Date………………………………………………………..

ACKNOWLEDGEMENT
I wish to acknowledge the indispensable and grateful support given to me by various individuals. Their assistance and encouragement contributed much to the success of this research report. First and fore most, I do acknowledge to my supervisor Mr.JEREMIAH ELIAH for his advice and constructive suggestion and comments that lead to construction of this research report. Further more, special thanks go to the administration of ISD whom they given me a chance to write this report. I wish to acknowledge my beloved brother Zidikhery Msechu and his wife Mwanaid for their support since I was in secondary school to where I am now, their advice and assistance will always be remembered and may God bless them so that they could stay longer.

I do acknowledge the generous advise encouragement and support from my brother Hussein and his wife Salma, my friends Grayson, Nelson, Maria, kibona Gloria, Chimwemwe and any one in one way or another extended some assistant advise to me during the whole period of my field work.

DEDICATION
To the sincere everlasting love for my parents Msechu Rahib and my mother Sophia Hussein and Msechu’s family as a whole.

To the love of my younger sister Hawa, my friends Grayson, Nelson and Maria.

ABBREVIATION
ISD -Insurance Supervisory Department
IAA -Institute of Accountant Arusha
GDP -Gross Domestic Product
TIC -Tanzania Investment Centre
VAT -Value Added Tax
PAYE -Pay As You Earn
BOT -Bank Of Tanzania

ABSTRACT
The study was aimed at assessing the contribution of tax reform and domestic revenue mobilization in Tanzania. The study was conducted by the use of secondary data which was related to the study and coming up with conclusion. Literature review shows the theoretical information of the impacts of application of tax reforms. Also it has operational definition related to tax reform The study consist of five chapters, chapter one deals with historical background of the organization and also historical background of the problem, statement of the problem, objective of the study, significant of the study and limitation of the study. Chapter two comprises literature review, chapter three is covers research methodology, chapter four is research analysis and findings, and lastly chapter consists of conclusion and recommendation.

CHAPTER ONE
1. 1 BACKGROUND OF THE PROBLEM
A tax reform is a change in status quo. Many tax reforms carried out in developing countries have been on tax structure rather than on tax administration. A tax reform is made according to the response to the need for economic and social development. The study focuses on tax reforms as an instrument of raising tax yield and productivity in Tanzania. Over 100 attempts at tax reforms in developing countries have recorded since 1945. At this situation tax reforms turns to be desired task to solve the problem (Gillis 1989 a).
Tax elasticity is due to growth in the tax base that an increase in tax revenue from profit because of higher profit. Elasticity greater than unity is desirable feature of a tax system if there is increasing demand for public services and if a country would like to pursue relative financial stability.
After independence tax system in Tanzania has undergone fundamental reforms in response to the need for economic and social development. A series of tax reforms has been undertaken particularly since the fiscal year 1969/70, the central government has failed massively to generate sufficient tax revenue to meet the current needs for government services. The tax burden measured by the ratio of tax to GDP, has averaged around 21.6%. Over the 1979/89 period (Osoro, 1995).Over the 1979/84 period the tax ratio has exhibited a zero trend. At the period of 1984 registered an increasing trend, suggesting that reforms have increased the tax burden over the period.
The main elements of the reform programmes include;
i. Imposing a small number of taxes with the broadest possible base and moderate rates (World Bank, 1991) ii. Using VAT to replace commodity taxes in order to minimize disincentives for investments and exports (Thirsk, 1991) iii. Avoiding tax incentives and shifting to broader, simpler tax bases on which lower rates are applied.

iv. Lowering distortions that reduce economic welfare and growth.
Tax reforms measures are mainly undertaken in order to restore buoyancy to revenues, strengthen modern taxes, and drastically reduce the complexity and lack of transparency of the system (World Bank, 1990). The main factors contributing to an improved revenue performance are changes in tax legislation tax administration and minimal tax evasion(morrisset and izaquierdo,1993).Tax reforms in developing countries involves broad issues of economic policy as well as specific problems of tax structure design and administration (Musgrave,1987)

1.2 STATEMENT OF THE PROBLEM
For a long period of time Tanzania has been under utilized tax collection. Tanzania is suffered to the deficit of budget and over-dependence on a small number of sources of tax revenue. As in other less developed countries, the fiscal sector in Tanzania is the focal point of many challenges posed by development. The apparent failure of tax system to generate sufficient revenue has led to large burden deficits to the government budget and current; particularly during fiscal year 1978/9.Consequently bank borrowing and external finance were sought as temporarily measures to finance the deficits. These two sources of deficit financing are not suitable in the medium and long-terms efforts must be made to design a tax system that is viable and able to support government services without recourse to printing money and seeking external funds.
In order Tanzania to deal with deficit of budget and over-dependence on a small number of sources of tax revenue in Tanzania the solution was the tax reforms.
The revenue structures of most developing countries have not been as
Productive as desired. The growth in revenue has failed to catch up with government spending pressure, a situation that has occasioned huge imbalances between the demand and supply of public budgetary resources. The countries have then had to reform their tax structure, with general objectives of revenue adequacy economic efficiency, equity and fairness and simplicity (Osoro, 1993).
Therefore this study aimed examines the tax reform and domestic revenue mobilization in Tanzania.

1.3 SIGNIFICANY OF THE STUDY
As in other less developed countries, the fiscal sector in Tanzania is the focal point of many challenges posed by development. The resources mobilization for redistributive, a locative, and stabilization functions of the government is seriously comprised by this challenge. The fiscal performance of over 1980s and early 1990s was discouraging. The response by the individuals and by the government had created options and blocked others.
Due to deficit of budget and over-dependence on a small number of sources of tax revenue in Tanzania the solution was the tax reforms. Sources of tax revenue which constitute a major source of revenue in many developing countries are; include import and export taxes on mineral products, the prices of which are determined on world market and tend to be volatile.
In Tanzania tax system has undergone fundamental reforms in response to the need for economic and social development. A series of tax reforms has been undertaken particularly since the fiscal year 1969/70; the central government has failed massively to generate sufficient tax revenue to meet the current needs for government services. The tax burden measured by the ratio of tax to GDP, has averaged around 21.6% over the 1979/89 period. Over the period 1979/84 the tax ratio has exhibited a zero trend. At the period of 1984 registered an increasing trend, suggesting that reforms have increased the tax burden over the period.
Most multilateral macro-policy documents in Tanzania emphasize the importance of the quality of tax administration system; however, there is no sound empirical base for directing such reform in Tanzania. Moreover, there are few empirical studies on the assessment of the impact of exemptions and tax evasion on revenue mobilization in the country. The study fills this gap in information by piecing together empirical evidence on some aspects of the Tanzanian tax system.

1.4 OBJECTIVES OF THE STUDY
i. To determine the contribution of tax reforms to the Revenue productivity in Tanzania. ii. To analyze the productivity performance of the tax System in Tanzania. iii. To assess the impact of exemptions and tax evasion on Revenue mobilization process in Tanzania.

1.5 RESEARCH QUESTIONS
(i) To what extent the contribution of tax reforms to the Revenue in Tanzania?
(ii) What is the productivity performance of the tax System in Tanzania?
(iii) What are the impact of exemptions and tax evasion? On revenue mobilization process in Tanzania?

1.6 SCOPE OF THE STUDY
The study will be limited to the references used in construction of this report. Thus the conclusions and recommendations and recommendations drawn will mainly be based on those particular references.

1.7 LIMITATION OF THE STUDY
i. Data availability: it was difficult to get important data in some confidential document. The study required substantial data which are scarce or non-existent in many developing countries. ii. Time constraints: The period provided to carry out the study was not enough for exhaustive findings. Thus the result will be narrowed due to shortage of time iii. Tax reforms have experienced lack of administration capacity in virtually all developing countries, showing the need to simpler administrative structures.

CHAPTER TWO
2.0 LITERATURE REVIEW
2.1 INTRODUCTION
This chapter elaborates in details the theoretical and empirical background with respect to the tax reform. This involves review of previous writing and studies relevant to the problem under study.
Due to deficit of budget and over-dependence on a small number of sources of tax revenue in Tanzania the solution was the tax reforms. Sources of tax revenue which constitute a major source of revenue in many developing countries are; include import and export taxes on mineral products, the prices of which are determined on world market and tend to be volatile.
In Tanzania tax system has undergone fundamental reforms in response to the need for economic and social development. A series of tax reforms has been undertaken particularly since the fiscal year 1969/70, the central government has failed massively to generate sufficient tax revenue to meet the current needs for government services. The tax burden measured by the ratio of tax to GDP, has averaged around 21.6% over the 1979/89 period. Over the period 1979/84 the tax ratio has exhibited a zero trend. At the period of 1984 registered an increasing trend, suggesting that reforms have increased the tax burden over the period. After the reforms they introduced five types of tax revenue. Those taxes revenue are sales tax, import duty, Pay as you earn tax (PAYE), income tax, company tax. All of this tax revenue contributes to National income of Tanzania.

2.2.0 THEORETICAL LITERATURE REVIEW
2.2.1 DEFINITION AND CONTENTS OF TAX REFORMS IN TANZANIA.
Tax reforms is a change in status quo Osoro, N.E(1993). It has been one of the major precautions of most developing countries in the 1980s.One of the main objectives of the tax modernization programme (1986) was to implement organizational reforms that would modernize the tax collection.
Bird (1990) identifies three different approaches to reforms of tax structures and tax administration e.g. the reforms of tax structures and tax administration second is the reforms of tax structure followed by administrative changes, third and which is commonly accepted is consider administrative changes and reforms of tax structures as being independent.
The legal base of each tax is not available, the yields of the five major types of taxes in Tanzania accounting for close to three –quarters of total tax revenue has been related to GDP. These are: Sales tax –this tax brings in the bulk of sales tax revenue. It is levied on locally manufactured goods, imports and few services: e.g. electricity, telephone and hotel services. In the 1976 sales tax Act allows for exemption on all types of goods. At the same time, tax collection shave slightly accelerated in proportion to the growth of the tax base (manufacturing output).The low coefficient of tax-to-base elasticity probably reflects the combined effect of granting exemptions and inefficient tax administration.
Import duties are the charge on all imports. In practice, however, exemptions for some capital goods, raw materials, and even consumer goods are generally granted by the import duty legislation. The elasticity was less than unity (0.55).Base –to-income elasticity (1.59) was higher than tax –to base elasticity (0.43)(Osoro, 1995). The elasticity of this tax was less than unity. The low tax- to- base elasticity seems to have been attributable to exemptions, tax evasion and poor overall tax administration. The high base-to-income elasticity apparently reflects rapid growth in imports, in particularly during the second half of the 1980s arising from the trade liberalization initiated in 1984. Company tax is the next most important to income tax, contributing over two –thirds of income tax revenue According to the company legislation, the tax is levied on corporate profits, private and public. In 1989, parastatal accounted for 65.2% of total company taxes. Private corporate profits were excluded from base.
PAYE (pay as you earn) show an interesting pattern in that wage bill grew much less slowly tan income (with a base-to-income elasticity of 0.42), But the tax-to-base elasticity was considerably higher (1.51). The income elasticity of less than unity (0.66) is a product of a high tax-to-base elasticity and a low base –to-income elasticity. The low base to income elasticity reflects sow growth in the wage bill in relation to GDP; the level of pay has been far below the living wage since the beginning of the last decade.
Income taxes –the income elasticity of income taxes was less than unity. This is a product of low base-to-income elasticity (0.87) and tax-base elasticity of around unity. A relatively low base to income elasticity suggests the monetary to GDP has grown less in proportional to GDP. The marginally elastic tax-to-base elasticity reflects net ineffective tax collection arising from weak tax administration Osoro, (1993)

2.2.2 EMPIRICAL LITERATURE REVIEW.
In this part, the researcher tries to look what the previous researchers wrote on the similar topic. For instance. McMahon and Berrios, 1991, P.S suggests that there is a need for tax reforms that arises from the deficiency of the existing tax system in achieving objectives. They also suggest that there is the need for and manageable tax system. Ironically justice has not been done to tax administration in the literature on the subject (Mc Mahon and Barrios (1991).A sharp contrast can be seen between the real conditions for implementing tax systems and the degree of complexity with which the structures have been designed. Advisers should stress the need for clear and simple tax structures and real administrative capacity to implement them.

CHAPTER THREE
3.0 RESEARCH METHODOLOGY
3.0 INTRODUCTION
Research Methodology refers to the methods the researchers use in performing research operations. (C.R. Kothari 2004). This is something to do with the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. The study was based on narration of fact. The study concentrated on tax reform in Tanzania and analysis of its contribution in solving the problem of deficiency budget.
3.1 RESEARCH DESIGN
The researcher used books, journal and other reports in data collection.
3.2 RESEARCH TECHNIQUES
Qualitative research technique is mostly be used as the facts and phenomenon of the study that can be expressed in terms of quality and kind however; quantitative techniques in a small extent was used in phenomenon relating to or involving quantity or amount .Mostly qualitative research techniques has been used.
Where by Brian White (2000) defined quantitative research as the type of research in which the results are given numerical values and the researcher uses a mathematical and statistical treatment to help evaluate the result. In addition, he defined qualitative research as the one which researcher use non-mathematical procedures when interpreting and explaining their research.
3.3 UNITS OF INQUIRING
The units of experiment were all references used in construction of this report. Those references are Castro, L., C. Kraus, and Manuel de la Rocha (2004), “Regional Trade Integration in East Africa,Fjeldstad, Odd-Helge (2002), “Fighting Fiscal Corruption,Osoro E. Nehemial (1995), “Tax Reforms in Tanzania and Tanzania Revenue Authority (TRA) (various), Revenue Performance Reports, Dar es Salaam: Tanzania Revenue Authority.

3.4 SAMPLING TECHNIQUES The researcher used probability sampling and non probability sampling i.e. judgmental and simple random sampling ware used.
3.4.1 Judgments: This involved selecting any writer from the population and the use of researcher’s own judgments on which writer to include in the unit of experiment.
3.4.2 Simple random sampling: A simple random sample gave each member of the population an equal chance of being selected. It has been done all of the books.
3.5 SAMPLE SIZE: Sample selected are all references used in construction of this report. Those references are Castro, L., C. Kraus, and Manuel de la Rocha (2004), Fjeldstad, Odd-Helge (2002), “Fighting Fiscal Corruption,Osoro E. Nehemial (1995), “Tax Reforms in Tanzania: Motivations, and various, Revenue Performance Reports, from TRA.

3.6 DATA COLLECTION METHODS APPLIED

The method used in collection of data is documentation. This method is applied according to the data needed in fulfillment of this research report. This is done by using different revenue performance reports from Tanzania Revenue Authority and different books.

3.7 SAMPLING METHODS
3.7.1 Judgments: This involved selecting any writer from the population and the use of researcher’s own judgments on which writer to include in the unit of experiment.

3.7.2 Simple random sampling: A simple random sample gave each member of the population an equal chance of being selected. It has been done all of the books.

3.8 TYPES OF DATA COLLECTED

Secondary Data: Secondary data are those which have already been collected by someone else and which have already been passed through the statistical process. C. R. Kothari (1990). In conducting this study researcher used secondary data which is available. Secondary data was gathered from various documents relevant to the problem of tax revenue in Tanzania. These documents include TRA Operation reports and other related journal and books.
3.9 ANALYTICAL METHODS USED
The data was analyzed qualitatively and quantitatively. Qualitative analysis has mainly involved description and explanation, where as quantitative analysis has mainly involved the presentation of data in form of tables, numerical and percentages, where by data were analyzed through;
i. Tabulation form. This was involved arranging the data in concise and logical order i.e. transforming the data into tables and figures. ii. Narrative form. This was done by analyzing the data collected in the form of giving narration. iii. Graphs form. This was used in analyzing the data collected in the form of graphs.

CHAPTER FOUR
4.0 DATA ANALYSIS AND PRESENTATION OF THE FINDINGS
Data gathered has been presented in qualitative form, tabular form, and in form of graphs and they have analyzed in order to arrive at conclusion and recommendation. Through the use of various comment and different documents, the researcher was able to analyze the roles played by tax reforms in increase of revenue.
A primary goal of Tanzania tax reforms was aimed at raising revenue to match with rapidly growing fiscal spending; however, empirical evidence suggests that tax reform has nevertheless failed to raise the revenue productivity.

4.1 PRESENTATION OF FINDINGS IN RELATION TO RESEARCH OBJECTIVES
The research objectives were
i. To determine the contribution of tax reforms to the Revenue productivity in Tanzania.
Findings of this first objective are
A primary goal of Tanzania tax reforms was aimed at raising revenue to match with rapidly growing fiscal spending; however, empirical evidence suggests that tax reform has nevertheless failed to raise the revenue productivity.
The three major taxes: VAT, income taxes, import duty are presented in Table 5.1 and Figure 5.2. VAT (20%) is levied on domestic goods and services and on imports. The largest share of tax revenue originates from VAT. The share of VAT in GDP in 2005 was 5.9 percent. ii. To analyze the productivity performance of the tax System in Tanzania.
Findings for the second objective are
After the reforms different tax revenue was introduced. They introduced

five types of tax revenue. Those tax revenue are sales tax, import duty,Pay as you earn tax (PAYE), income tax, company tax. All of these tax revenue contribute to National income of Tanzania.
Sales tax –this tax brings in the bulk of sales tax revenue. It is levied on locally manufactured goods, imports and few services: At the same time, tax collection shave slightly accelerated in proportion to the growth of the tax base (manufacturing output). Import duties are the charge on all imports. In practice, however, exemptions for some capital goods, raw materials, and even consumer goods are generally granted by the import duty legislation. The elasticity was less than unity (0.55).Base –to-income elasticity (1.59) was higher than tax –to base elasticity (0.43).The elasticity of this tax was less than unity. The high base-to-income elasticity apparently reflects rapid growth in imports, in particularly during the second half of the 1980s arising from the trade liberalization initiated in 1984.
Company tax is the next most important to income tax, contributing over two – thirds of income tax revenue. According to the company legislation, the tax is levied on corporate profits, private and public. In 1989, parastatal accounted for 65.2% of total company taxes. Private corporate profits were excluded from base. PAYE (pay as you earn) show an interesting pattern in that wage bill grew much less slowly than income (with a base-to-income elasticity of 0.42), but the tax-to-base elasticity was considerably higher (1.51).The income elasticity of less than unity (0.66)is a product of a high tax-to-base elasticity and a low base –to-income elasticit.The low base to income elasticity reflect sow growth in the wage bill in relation to GDP; the level of pay has been far below the living wage since the beginning of the last decade. Income taxes –the income elasticity of income taxes was less than unity. This is a product of low base-to-income elasticity (0.87) and tax- base elasticity of around unity. A relatively low base to income elasticity suggest the monetary to GDP has grown less in proportional to GDP.The marginally elastic tax-to-base elasticity reflects net ineffective tax collection arising from weak tax administration.Osoro N.E (1993)

iii. To assess the impact of exemptions and tax evasion on revenue mobilization process in Tanzania.
Findings for third objectives are as follows;
Exemption seems to be is mostly applied to indirect taxes (excise duties, import duties and sales tax).Nevertheless exemptions also extend to direct taxes. Zero-rating is one form of exemption in Tanzania. Exemptions and tax evasion has reduced the effective base of income taxes, PAYE and VAT. Failure of tax reform to improve the revenue productivity of the tax system seems to have been caused by granting generous exemptions, tax evasion and poor tax administration. Generous exemption often tends to erode the tax base which in turn, affects income elasticity of a tax through tax-to-base elasticity. 4.2 DATA ANALYSIS AND PRESENTATION OF THE FINDINGS
Data gathered has been presented in qualitative form, tabular form, and in form of graphs and they have analyzed in order to arrive at conclusion and recommendation. Through the use of various comment and different documents, the researcher was able to analyze the roles played by tax reforms in increase of revenue.
A primary goal of Tanzania tax reforms was aimed at raising revenue to match with rapidly growing fiscal spending; however, empirical evidence suggests that tax reform has nevertheless failed to raise the revenue productivity.
The three major taxes: VAT, income taxes, import duty are presented in Table 5.1 and Figure 5.2. VAT (20%) is levied on domestic goods and services and on imports. The largest share of tax revenue originates from VAT. The share of VAT in GDP in 2005 was 5.9 percent.

TABLE 5.1
Various Tax Revenues as % of GDP, 1980/81-1992/93
Fiscal Year Total Tax Import Tax Sale/VAT Income Other Taxes % of GDP % of GDP % of GDP % of GDP % of GDP
1980-81 17.5 1.9 9.4 5.9 1.3
1981-82 16.1 1.2 9.0 5.5 1.8
1982-83 18.3 1.2 10.2 6.0 0.9
1983-84 18.3 3.3 8.6 5.5 1.0
1984-85 17.4 2.8 8.9 4.8 0.9
1985-86 12.5 1.8 5.9 3.9 0.7
1986-87 13.5 3.5 5.8 3.2 0.9
1987-88 13.2 3.4 5.4 3.4 1.5
1988-89 15.2 4.0 6.1 4.0 1.8
1989-90 14.5 4.1 3.6 3.6 2.3
1990-91 16.2 4.4 3.9 4.4 2.6
1991-92 16.4 4.1 3.3 4.3 2.2
1992-93 12.4 2.7 2.4 3.9 1.5
1993-94 13.7 3.6 3.9 3.6 2.6
1994-95 14.1 3.9 3.9 4.1 2.3
1995-96 13.7 4.7 3.0 3.7 2.3
1996-97 14.6 5.1 3.3 3.6 2.5
1997-98 13.7 4.4 3.4 3.7 2.3
1998-99 12.0 3.4 4.1 3.2 1.4
1999-00 11.5 3.0 3.7 3.5 1.3
2000-01 12.3 3.7 4.5 2.9 1.2
2001-02 12.3 3.5 4.6 2.9 1.3
2002-03 12.8 3.4 4.9 3.2 1.3
2003-04 13.7 3.6 5.6 3.7 1.3
2004-05 13.9 3.5 5.9 4.0 1.0 average 14.3 3.2 5.2 4.0 1.7

Source: Tanzania Revenue Authority, Bank of Tanzania (Various issues

Figure 5.1 shows that GDP has tremendously increased in recent years, however, tax effort remained low (Figure 5.2). This means that the tax structure in Tanzania is elastic. All the major taxes i.e VAT, import duty, and income taxes indicate a low share in GDP (Figure 5.3)

FIGURE 5.1 GDP Growth (Million Tshs), 1982-2005 Source: Economic Survey, (2005), Bank of Tanzania (various issues)

FIGURE 5.1 Tax Effort in Tanzania, 1981-2005 Source: Table 5.1

FIGURE 5.2 Various Tax Revenues (% GDP) in Tanzania, 1981-2005 Source: Table 5.1

Table 5.2 shows that in the fiscal year 2000/01 28.2 percent of exemption was granted to private companies and individuals, 17.3 percent was granted to government institutions, and 17 percent was granted to investment promotion related activities. In 1995, the office of the Controller and Auditor General reported that, of the total amount of Tshs 70 billion that could not be accounted for, Tshs 20 billion could be put down to tax evasion by importers, while Tshs 50 billion was due to tax exemptions Fjeldstad, (2002).

TABLE 5.2
Customs and VAT Exemptions in Tanzania (1996/97-2000/01)
Exemptions 1996/97 1997/98 1998/99 1999/00 2000/01
Customs Dept Government Institutions 12.6 12.1 10.8 14.0 17.3 Parastatal Organizations 17.1 14.4 1.3 2.5 1.4 Religious Organizations 7.0 5.3 3.6 4.5 6.9 NGOs 9.2 10.2 15.6 16.9 13.1 Private Co. and Individuals 34.2 32.4 21.7 35.2 28.2 TIC Holders 5.2 8.9 7.3 13.7 17.0 Sub-total Customs 85.3 83.3 60.3 86.8 83.8
VAT Dept VAT Exemption 10.1 Excise Duty Exemption 3.2 7.4 39.7 13.2 16.2 Sales tax rebates 1.5 5.8 Sub-total VAT 14.8 16.7 39.7 13.2 16.2
Total (Tsh. Million) 108.8 207.2 269.1 212.1 196.6
Source: Castro et al. (2004)

VAT exemptions in Tanzania apply to: food crops and livestock supplies (unprocessed), pesticides and fertilizers, health supplies and hospital equipments, educational services/equipments, books and newspapers, public transports services, housing and land, finance and insurance services, water except bottled or canned, funeral services, petroleum products, tourist services, postal supplies, fishing gear, air craft, computers, printers and accessories, locally manufactured yarn, game of chance, companies with turnover of less than Tshs 40 million per year are exempted from registration requirements for VAT purposes.
Official statistics on reported revenue from customs duties also indicate substantial leakages. While the most commonly applicable import duty rate was 25 percent during 1998-2001, the reported duties as a percentage of official import value were less than 9 percent (Table5.3). TABLE 5.3
Effective Import Duties in Tanzania (1995/96-2000/01) 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01
A. Value of Import c.i.f (Tshs. Mill) 885,953 807,303 808,168 1043,097 1164841 1227752
B. Revenue from Import Duties (Tshs Mill) 61,272 78,374 82,047 88,052 88,769 96,356
C. Effective Import Duties (%) 6.9 9.7 10.2 8.4 7.6 7.8
Source: Fjeldstad (2002)

There are indications that widespread smuggling, falsification, under-clearing, of goods and income, tax fraud etc. in the tax system has undermined growth in revenue. Corruption has persisted despite several anticorruption measures undertaken by the government and the use of automated system and special services of revenue protection/anti-smuggling unit.

CHAPTER FIVE
5.0 CONCLUSION AND POLICY RECOMMENDATION
5.1 CONCLUSION
Tanzania initiated tax reforms to address the fiscal challenges facing the country. This study focused on the link between tax reforms and revenue mobilization in Tanzania. For the tax system to be revenue enhancing, the yield of individual taxes should be responsive to changes in National income (GDP), and the predominant taxes in the revenue should be those with a highly elastic yield with respect to National income or proxy bases. Empirical evidence suggests that tax reform has, nevertheless, failed to raise the revenue productivity. This is reflected in elasticity less than unity for the major taxes and total tax system.
The failure reform to improve the revenue productivity of the tax system seems to have been caused by granting generous exemptions, tax evasion and poor tax administration. Exemptions have particularly reduced the effective base of income taxes, PAYE, and VAT. An elastic tax structure is appropriate in developing economy because it implies that tax collections will grow automatically with growing income without the need to resort to any political sensitive increase in tax rates. Authority is needed to be able to identify taxes which are elastic and which are not elastic. To raise the overall elasticity of the tax system requires focusing on those axes which are most income elastic. Income taxes, PAYE, and VAT.

5.2 POLICY RECOMMENDATION
Therefore the authorities should direct tax reforms towards improving administration and reducing, or totally eliminating, tax exemptions, which often erode the effective tax base. In case of those taxes with a base –to-income elasticity coefficient lower than unity (income taxes, sales tax and PAYE) there is very little leeway for the authorities to improve this coefficient since the growth of the tax base is outside their control. Also is better if government may utilize to broaden the tax base by reduce or eliminate tax exemptions on income taxes and sales taxes.
Finally, should the authorities in Tanzania wish to design income-elastic taxes, apart from improving the level of administration and reducing or eliminating exemptions, the predicted response of tax base to income must be seriously considered.
In order to improve revenue administration, numerous exemptions should be reduced. Corruption could also be reduced by building tax compliance and winning public confidence through improved services delivery and government payment and procurement system. Making the tax procedure simple and transparent, and educating taxpayers on tax laws and collection systems will enable taxpayers to know what their obligations are towards revenue collections. Effective use of automated systems especially in the clearing systems and monitoring refund claims will reduce frauds associated with VAT refunds and customs operations.

REFERENCE

Castro, L., C. Kraus, and Manuel de la Rocha (2004), “Regional Trade Integration in East Africa: Trade and Revenue Impact of the Planned East African Community Customs Union,” Africa Region Working Paper Series No.72.

Fjeldstad, Odd-Helge (2002), “Fighting Fiscal Corruption: The Case of the Tanzania Revenue Authority,” Chr. Michelsen Institute Development Studies and Human Rights.

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