Are Tanzania's tax exemptions too generous?

Tanzania grants high levels of tax exemptions relative to what it collects in revenue. This raises concerns about whether the practice is justified for a country that can barely raise enough to finance its budget. Analysis by Uwazi at Twaweza shows that tax exemptions have increased sharply during the second part of this decade (2006-2010) compared to what was granted in the earlier half of this decade (2001-2005).

The analysis, presented in this policy brief suggests that Tanzania could make significant savings in revenues if it granted tax exemptions less liberally. In 2008/09 and 2009/10, for example, the Government missed its revenue target by TZS 453 billion on average. In the same period, tax exemptions granted averaged TZS 724 billion per year. If Tanzania had brought tax exemptions in line with the level of exemptions granted in its neighbouring Kenya, TZS 484 billion would have been saved in 2008/9 and TZS 302 billion in 2009/10. This way the shortfall in revenue collection would have been largely offset.

Tanzania relies heavily on foreign aid, because it fails to raise sufficient revenue. But when exemptions are compared with grants received to fill the gap in the budget, it is evident that dependence on aid could be reduced significantly if exemptions were granted more prudently.

In 2009/10, for example, tax exemptions were estimated at 33 percent of the budgetary grants. By reducing the exemptions by 50 percent, the Government of Tanzania could reduce its dependence on foreign grants by roughly 16 percent. In terms of public finances, such a reduction would be an impressive accomplishment.

As opposed to the normal budget, tax exemptions, are not scrutinised by the Parliament. This makes them effectively hidden expenditures. And as long as information on who (individuals, companies) receives what in exemptions is not fully publicly available, it is difficult to assess the way such high amounts of exemptions benefit Tanzania.

The brief notes that proposals to reverse laws granting exemptions, as recent attempts have shown, typically meet strong resistance from the would-be losers. The brief suggests a way out exists if Tanzania focuses its efforts on three key areas:

  • Reviewing various existing laws granting exemptions to minimise loopholes;
  • Introducing new exemptions less liberally and making them time bound. And, by
  • Improving enforcement.

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