Debate surrounding efforts to reduce Tanzania's fiscal deficit

Widening the tax net is an important part of the government’s attempt to reduce its fiscal deficit and balance the books. Its principal tool in this effort is value-added tax (VAT), which accounted for 63% of consumption taxes in 2013/14, according to the Ministry of Finance and Planning. Adjusting the VAT schedule typically has an immediate impact on government revenue streams. However, two amendments to the system have recently shown that such change can bring mixed results.

Tourism Tax

The application of VAT to the tourism sector became effective in July 2016, and has had a significant impact on one of the most vibrant areas of the economy. The deletion of item 21 from the schedule of the VAT Act means there are no longer any exemptions for tourism-related services, including tourism guides, game driving, water safaris, bird and animal watching, park fees and ground transport.

In explaining the rate hike, the Tanzania Revenue Authority (TRA) cited its desire to broaden the tax base as the primary motivation for its decision. It also highlighted tourism’s strong prospects, pointing to the relatively high investment levels the sector currently attracts. However, many industry participants voiced concerns that the introduction of an 18% VAT on tourism offerings threatened the very growth that the TRA was drawing attention to. According to the Tanzania Association of Tour Operators, higher prices following the introduction of the tax resulted in at least 8000 visitor cancellations and $660,000 in lost revenue in July 2016 (see Tourism chapter). Safaribookings.com, an online platform for reserving international safaris, reported to media that it had received a host of emails from concerned clients who had been getting requests from their tour operators for additional payment.

The rollout of VAT resulted in some complications. The short notice given to tour operators meant that they were largely unprepared to implement the revised framework. Confusion about the possible retrospective nature of the tax meant that tourism companies were unsure of which clients to contact to request surcharge payments. Moreover, many national parks were not registered for VAT, and were therefore unable to provide proper VAT receipts.

However, most of these implementation issues have been resolved. The longer-term concern of the industry is its ability to remain competitive in a region where countries with similar leisure offerings, such as Kenya, do not charge an additional tax.

Financial Fees

The extension of VAT to bank transactions in 2016 (excluding interest on loans) was another attempt to broaden the nation’s revenue base. Again, administrative issues made for a challenging implementation, with two government bodies giving differing accounts as to how the 18% tax was to be collected. The TRA’s position was that the cost should be borne by banks and financial institutions, which should designate 18% of their transaction fees to VAT without passing on any additional cost to the consumer. However, the Bank of Tanzania – the central bank – said it was likely that banks would not bear the brunt of the extra cost, and a number of banks had already contacted their account holders to outline the new charges they would be subject to.

In July 2016 Philip Mpango, the minister for finance and planning, ended some weeks of confusion by upholding the TRA’s interpretation, and the government declared that the additional costs should be borne by the banks. As well as the tax itself, banks faced increased operational costs as they altered their systems to accommodate the new fee.

Lessons Learned

The changes to VAT are working their way through balance sheets in 2017, and their effects will shortly become more apparent to industry observers. However, lessons can already be drawn from the experience of implementing them, and issues such as adequate notice periods, industry consultation and clarity of implementing instructions are likely to be prominent in any future revision of the tax framework.