TANZANIA REVENUE AUTHORITY TRA Tanzania Revenue Authority The Study of Informal Sector and Presumptive Taxation in Tanzania, 2010/11 1 Presented by Tonedeus

TANZANIA REVENUE AUTHORITYTRA

Tanzania Revenue Authority

The Study of Informal Sector and Presumptive Taxation in Tanzania,

2010/11

1

Presented by

Tonedeus K. MuganyiziDirector for Research and Policy

To DPG PSD/Trade Secretariat, Embassy of the Netherlands,

28th March, 2012

TANZANIA REVENUE AUTHORITYTRA 2

Coverage• 1. Introductory Background• 2. Main Study findings• 3. Performance & Review of Presumptive Income

Taxation• 4. Informal Sector Firms outside the tax system• 5. General problems affecting business operations in the

Informal Sector • 6. Conclusion• 7. Recommendations


1. Introduction The Study Background Informal sector in Tanzania is one of the most buoyant

sectors, yet contributes marginally to revenue generation. However, it is significant in terms of job creation, income

generation potential and stimulation of social economic growth in both urban and rural areas.

Integrated Labour Force Survey, 2006 (ILFS) indicated that, the sector was the second main employing sector after agriculture by employing 10.1% of the employed persons, followed by other private sectors with 8.6%, where agriculture employed 75.1%.

The informal sector in Tanzania is among the most buoyant sectors yet contributes marginally to tax revenue generation (contributing on average of 0.3% to TRA revenue).

The effective taxable workforce is usually quite small. 3


1. Introduction (cont’d) Objective of the Study TRA conducted an internal investigative research (in

Aug.-Dec., 2010) seeking to estimate the size, the dynamics and assess the tax revenue generation potential of the sector.

The research aimed at promoting an enabling and supportive environment to the development and taxation of the informal sector in the country.

Propose and recommends the appropriate taxation regime for the informal sector

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1. Introduction (cont’d) Study Approach and Methodology Four independent but complementary methodologies

were used: These includes [1] desk study reviews, [2] internal TRA

field research survey, [3] data & policy analysis, [4] consultant research reviews, and report writing.

Study Limitationsa) Operational Problems• The study covered only urban operators.b) Methodological problems• Many informal sector operators were interviewed at

their work sites.

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2. Main Study Findings Size and magnitude of informal sector by workforce The ILFS 2006 indicated that, 40% of all households in Tanzania

Mainland were in informal sector activities as compared to 35% in 2001 (suggests ↑). The sector employed about 66% of the people for whom informal sector work

was the main activity and only 16%, informal sector was the secondary activity.

The GDP contribution dropped from 62.5% in 1991 to about 39.5% in year 2010 (using Jacques Charmes, (2006) method).

The TRA study, suggests the potentiality of this sector for survival and economic development in the country, since slightly over 70% of the operators have been in operation for the last five years. Study shows to employs about 67% of female workers. About 55% of operators were engaged in Trade Employment was dominated by primary education holders, 51%, followed by

secondary education (about 32%). However about 7.6% of operators hold a university degree.

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2.Main Study Findings (Cont’d) Positive profitability index and output performances Using business turnover as output index, the study found that there is

a positive correlation between profitability index and output performances.

The study indicates that the output band value between Tshs 1-1.62 million has a profitability index of 62.49%, where else the output band value between Tshs 30-35 million has profitability index of 92.9% on average showing a parallel increase of output and profitability index in the informal sector.

Since the turnover is the principle determinant of amount of ‘’presumptive income tax’’ to be paid, the findings imply that there is unequal treatment of tax payers within the informal sector as individuals lying btn two or groups may share similar tax band despite their differences in profitability index.

The implication of such inequality give incentives to taxpayers to underestimate sales, not keeping records, and thus evade tax payment.

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2.Main Study Findings (Cont’d) Informal sector do not adhere to good corporate

governance standards and norms About 22.4% of informal operators do not keep any written business

records while 74.7% keep general informal records for personal use. The records are kept in form of rough pieces of papers, text book and personal diaries. Results suggest that most of operators do not adhere to accounting standards.

This indicates that, most of informal sector operators in Tanzania lack business management education and skills such as proper record keeping, product management, product pricing and marketing of their products or services.

Business registration and licensing The study found that about 58.3% businesses to have been registered

in multiple registration authorities while the remaining was not registered.

About 53.5% of manufacturing businesses were not registered. These operate as typical informal manufacturing firms.

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2. Main Study Findings (Contd) Block Management System (BMS) operationalization

and effectiveness The basic objective of BMS was to promote compliance

and register all eligible small and medium scale enterprises within a particular business, sectoral or geographical area, capturing their correct level of economic activities and gathering valuable tax information.

According to TRA Block Management Report 2010 Kariako-Ilala-Kigogo model (KIK) manning level was a big problem that hindered smooth implementation of Block Management system for taxation purposes.

The study found serious shortage of staff whereby out of 10 staff required to work in KIK Block only 2 or only 20% of staff were allocated.

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3. Performance & Review of the Scheme Presumptive Income Taxpayers Behaviour and Trend The study found that both presumptive traders were

increasing during the sample period. Figure 1.3: Number of TRA Taxpayers Trend

Fig. above suggests the scheme outcomes have been significant in pulling the informal operators into formal and hence, bringing them in the formal TRA tax net (needs to be applauded and enhanced.)

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2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 -

100,000

200,000

300,000

400,000

500,000

600,000

700,000

0%

10%

20%

30%

40%

50%

60%

70%

80%

0%

46%52%

69%75% 73%

66%61%

Presumptive taxpayers Total number of TRA taxpayers

% of presumptive taxpayers to total TRA taxpayers

No

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3. Performance & Review of the Scheme (Cont’d)

Net effect of presumptive income tax operationalization

The presumptive income tax is considered in order to decrease administrative and compliance costs, but its benefits are potentially larger as information gathering instruments in a dynamic environment.

The study found that the desired presumptive income tax is more likely to be able to improve on the outcome of two system tiers on desired direct domestic tax revenue where formalization of the sector is done jointly with all core government and public institutions.

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Table 1.4: The Current Presumptive Tax Structure

Source: TRA- Domestic Revenue Department, Income Tax Act, (R.E 2009)

Figure 1.4A: Taxes paid by Presumptive Taxpayers (With/No records)

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ANNUAL TURNOVER TAX PAYABLE WHERE SECTION 80 IS NOT COMPLIED WITH

TAX PAYABLE WHERE SECTION 80 IS COMPLIED WITH

Where turnover does not exceed TAS. 3,000,000. TAS.35,000/=

1.1% of the annual turnover

Where turnover is between TAS. 3, 000,000 and TAS.7, 000,000. TAS.95,000/=

TAS.33, 000/= plus 1.3% of the turnover in excess of TAS. 3,000,000/=.


TAS.85, 000/= plus 2.5% of the turnover in excess of TAS. 7,000,000.


TAS.260, 000/= plus 3.3% of the turnover in excess of TAS. 14, 000,000/=.

3. Performance & Review of the Scheme (Contd)


However, the study established that the current system is regressive within bands, that made traders to object graduation from upper end to the next lower band for fear to pay more tax.

Figure 1.4B: Effective tax paid by Non-Account Cases (Regressive within bands)

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100,000

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Assessed Turnover

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Introduction of Exempt Turnover Thresholds For the purpose of harmonising the concept of equal

treatment and reduce poverty, we have considered the use of the current PAYE nil threshold of Tshs. 135,000/= as the basis for designing the nil threshold for the turnover.

Contrary to PIT scheme, presumptive income taxpayers, like any other companies/entities have to net out their operating costs.

Thus we have computed the operating cost basing on study profitability index of 63.6%. As a result, the total computed monthly threshold of Tshs. 212,197.4/= were converted to annual turnover of Tshs. 2,546,369.1/= approximated to Tshs. 2,500,000/=, this study therefore suggests the use of the nil threshold of Tshs. 2,500,000/= per annum.

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3. Performance & Review of the Scheme (Cont’d)


Simulations of Proposed Tax Structures While simulating scenarios for the needed tax structures,

the following were the assumptions applied; Assumed the use of the existing tax base to continue with gradual

improvement of macroeconomic indicators Existing tax machinery to prevail (manpower and other inputs) Assumed the same existing compliance rate

Scenario 1: Introductions of Single Flat Rate for All Taxpayers with Possible Nile thresholds

Using single flat rate of 4.0% shows that with the tested nil thresholds revenue implication is +ve and significant. (Kenya and Rwanda uses 3% and 4% respectively).

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Proposed Annual Turnover Nil Threshold/Band to be Exempted

Single Flat Rate

1,620,000.0 2,000,000.0 2,200,000.0 2,500,000.0

3.0% (1,095,450,971) (1,753,259,901) (2,097,156,548) (2,604,473,260)

3.5% 833,007,221 65,563,469 (335,649,286) (927,518,783)

4.0% 2,761,465,413 1,884,386,839 1,425,857,977 749,435,693

4.5% 4,689,923,604 3,703,210,209 3,187,365,239 2,426,390,170

5.0% 6,618,381,796 5,522,033,579 4,948,872,501 4,103,344,647



Simulations of Proposed Tax Structures (Contd) Figure 1.4A: Simulation of the Outlook of the Proposed single flat rate of 4.0%

Source: TRA Informal Sector Study Data, 2010 Using this scenario 1, in aggregate taxpayers who are in

band 1 will gain by almost 48% whereas traders who are in band 4 will lose by about 8%. The structure is revenue enhancing by about Tshs. 974.7 million in the year 2011/12.

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Scenario 2: Introduction of the Dual System using the revised Increasing Single Rates for Non-Account Cases and Progressively for Account cases

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Bands Annual Turnover Annual Proposed single rate (those not keeping records)

Annual Proposed rate (those keeping records)

Band 1 Below 2.5 million 0.0% 0.0%Band 2 Above 2.5 to 7.0 million 3.5% 2.5% of the amount in excess of 2.5 million

Band 3 Above 7.0 to 14.0 million 4.0% Sh. 112,500/= plus 3.0% of the amount in excess of 7.0 million

Band 4 Above 14.0 to 20.0 million 4.5% Sh. 322,500/= plus 3.5% of the amount in excess of 14.0 million



Scenario 2: (Contd) Scenario 2 creates both vertical and horizontal equity

between bands. Using this scenario in aggregate taxpayers who are in

band 1 will gain by almost 48% whereas traders who are in band 4 will end up losing about 15%, but the Government revenue will be increased by 9.2%.

The proposal will benefit the current taxpayers gaining in aggregate by 10%, but revenue will also be enhanced by TShs. 1,522,7 million in the year 2011/12.

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Scenario 3: Introduction of the Dual System using Reduced Turnovers Bands

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Bands Annual Turnover Annual Proposed single rate (those not keeping records)

Annual Proposed rate (those keeping records)

Band 1 Below 2.5 million 0.0% 0.0%

Band 2 Above 2.5 million to 10.0 million

3.5% 2.5% of the amount in excess of 2.5 million

Band 3 Above 10.0 million to 20.0 million

4.0% Sh. 187.500/= plus 3.0% of the amount in excess of 10.0 million



Scenario 3 (Contd) Using this scenario, in aggregate taxpayers who were in

band 1 will gain by almost 48% whereas traders who are in band 4 will end up losing about 8%, but the Government revenue will be increased by 0.8 percent.

The scenario will benefit current presumptive taxpayers by 13% on one hand and the Government revenue will be enhanced by TShs. 131.5 million in the year 2011/12.

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Net Effects of the Proposed Presumptive Income Tax Structures Scenarios

All the new proposed structures in aggregate are revenue enhancing measure in relation to the current tax regime (other factors remain constant).

The proposed nil threshold is going to reduce around 40% of the current presumptive traders basing on their threshold being below Tshs. 2.5mill.. This will have to be encountered by enhancing registration of the established potential of the unregistered traders which turns out to be about 330,000 by year 2011/12.

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Net Effects of the Proposed Presumptive Income Tax Structures (Contd)

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Scenario 1 (Single Flat

rate)

Scenario 2 (Revised Current

Structure)

Scenario 3 (Reduced

Tax Bands)

Band 1 (below 3.0 mil) 48% 48% 48%

Band 2 (3.0 to 7.0 mil) 4% 9% 9%

Band 3 (7.0 to 14.0 mil) -1% -1% 2%

Band 4 (14.0 to 20.0 mil) -8% -15% -8%

Impact to All Presumptive Taxpayers (in relation to the current regime)

+11% +10% +13%

Gain to Government +5.9% +9.2% +0.8%



Net Effects of the Proposed Presumptive Income Tax Structures (Contd)

It is therefore recommended to adopt the scenario 1 that revise the current turnover bands for taxpayers where records and introduce fixed single rate for those not keeping records and improved progressive tax structure for those who keeps recordsas shown below.

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Bands Annual Turnover Annual Proposed single rate (for those not keeping records)

Annual Proposed rate (for those keeping records)

Band 1 Where turnover does not exceed Sh. 2,500,000/- Exempt Exempt

Band 2 Where turnover is between Sh. 2,500,001/- and Sh. 8,500,000/-

4.0%1.5% of the turnover in excess of TShs. 2,500,000/=

Band 3 Where turnover is between Sh. 8,500,001/- and Sh. 14,500,000/-

4.0%TShs. 90,000/= plus 2.5% of turnover in excess of TShs. 8,500,000/=

Band 4 Where turnover is between Sh. 14,500,001/- and Sh. 20,000,000/- 4.0%

TShs. 240,000/= plus 3.5% of turnover in excess of TShs. 14,500,000/=



Taxpayers with Turnover of 20m to 40m It has been observed from survey that since these

taxpayers have already been preparing books of accounts. It is recommended to continue with their usual status

of maintaining books of accounts and be charged as individual taxpayers as per personal income tax rate.

Incorporating them with the small presumptive taxpayers will weaken efficacy, gains and relevance of the TRA taxation system and government revenues.

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4. Informal Sector Operators outside the Tax System Reasons for Informal Sector to Escape Registration

in Tanzania The study found three major reasons for informal sector

to escape registration in Tanzania. These included [1] lack of knowledge and education (taxpayer, registration,

business management practices) {about 36.2%}, [2] lack of proper business premises (unrestricted

premises) about {28.4%}, and [3] cumbersome procedure, bureaucracy and corruption,

{about 16.4%}. The study found that tax payment, high taxes, levies,

running from government are not the major reasons for informal sector not registering their business operations.

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4 Informal Sector Operators outside the Tax System (cont’d) Informal sector perception on the tax system Different firms have different perceptions on the

Tanzanian tax system. Few that is about 22% perceived Tanzania tax system as normal,

acceptable and therefore is good for civilized society. The majority of the interviewed stakeholders had negative

perception on the Tanzanian tax system. About 30.4% of the interviewed operators are either not aware or

are not concerned with taxation system. About 28.1% perceived that tax rates are high and about 4.1% perceived that the tax system is poor.

This confirms that the informal sector is still operating in a dark, complex, unfriendly and bureaucratic environment.

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Reason for not paying Taxes (Tax avoidance and evasion)

Tanzania is facing different forms of taxation problems related with tax avoidance and evasion.

The study found that about 60.4% argue that they do not pay tax because of small sizes of capital, turnover and profit generated from their operations.

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4 Informal Sector Operators outside the Tax System (cont’d)


5. General problems affecting business operations The following were general problems affecting business

operations

a) Lack of effective market demand Small and medium scale operators perceived that

problems related to unfaithful and unreliable customers, as the first and foremost constraints affecting their business performances in the year 2010. About 36% of operators outside the tax net complained on

behaviour of their customers. In economics terms, this problem can be interpreted as lack of effective market demand which is a complex function of continued poverty and economic crisis.

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5 General problems affecting business operations (Cont’d) The following were general problems affecting business

operations

b) Lack of finance capital, inflation and high interest rates

This related to lack of finances. Many have very limited access to formal long-term credits due to weak and non-competitive financial system.

An average of 14.4% of business entities argued that lack of capital and about 6.3% accounted for inflation, high interest on loans.

c) Poor Economic Infrastructure The third most constraints related to unreliable power supplies and

poor infrastructure. About 8.5% of the entities identified economic infrastructure as

bottlenecks in trade facilitation services. 29


6. Conclusion1. There is still a big magnitude of traders who are running

their businesses without registering anywhere. Study revealed that about 40% of entities were trading without registering anywhere, and out of those, 79% are from two economic sectors manufacturing and trade (Wholesale and retail trade; repair of motor vehicles and motorcycles).

2. The current presumptive tax structure punishes severely (regressive) taxpayers with lower turnovers within bands and taxes less those with higher turnover within bands.

3. The study finds that, Policies formulated to address the problem in informal sector have not fully addressed the constraints affecting the sector.

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6 Conclusion (Cont’d)4. Block Management System (BMS) and Presumptive

Taxpayers. Looking on the maps BMS, TRA opted to develop their own

blocks/maps. Developing new maps invite complications in identifying working boundaries and limit accessibility to other free available facilities such as information on population, list of establishments in the areas and other support from the government on information sharing on established maps/blocks (i.e. LGAs GIS blocks).

The study further revealed that BMS lacks manpower support and other resources.

5. Charging different effective tax rates to traders in the same band is another problem revealed by the study.

This problem is a source for most traders to object graduating to the next band for fearing of paying more tax.

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7. RecommendationsThe study proposes the need to put in place a simpler and revised presumptive income tax structure in Tanzania that treat each taxpayer fairly and promote an enabling and supportive environment to the development and taxation of the informal sector.Short –Term Policy Recommendations1. Recommended Tax Structure:

For the purpose of attaining optimal and fair taxation to both taxpayers, and for the purpose of enhancing taxpayer’s subsistence income in the fight of poverty reduction, the study recommends revising the current tax structure categorised into tax bands/turnover, into progressively single rates with the introduction of nil threshold of Tshs. 2.5mil. for all traders with turnover below Tshs. 20.0mil per annum.

The study further recommends that traders with turnover between 20 to 40 million to continue charged at the current PIT progressive rate structure.

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7 Recommendations (Contd)Short-term Administrative Recommendations

2. Introduce Time Limit for being Presumptive Trader: The time to stay in the presumptive structure be limited to a certain period of which, those traders must graduate to formal.

3. Improve ITAX Records Management for taxpayers income, turnover and or taxes paid

4. Enhance Taxpayers Education Services: TRA needs to conduct specific sensitization and concentration to

traders who are operating in Manufacturing and Trade-merchandise, since most of traders from this sector were trading without registering, and therefore the intensity of their program will yield positive results.

In order to improve the record keeping culture within presumptive taxpayers, taxpayer are required to be sensitized the advantage of record keeping as opposed to not keeping records 33


7 Recommendations (Contd)Long-term Administrative Recommendations

5. Enhance Block Management System (BMS) The study recommends abolition of Blocks boundaries

already established by TRA and adopt new boundaries similar to those of Government executive ward. It is further recommended that staffs dealing with Block management be stationed at the executive ward office.

BMS needs to be strengthened with optimal manning level and technology to enable them perform their duties efficiently.

BMS be strengthened to capture all economic activities available in the block.

TRA to work in close collaboration with the local authorities and other Government bodies in the earmarked blocks through sharing information with an agreed set up.

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7. Recommendations (Cont’d)6. Coordinating with other Government Players in

Locating and Identify Traders: There is a need for the presumptive scheme to be supported by other Governments players who are dealing with the informal traders in day to day operations. For easy of locating and registering them for taxation, it is recommended that Local Government Authority staffs like Wards Executive Officers should be brought in and be part and parcel in identifying them. Realization of their contribution towards revenue collection can be envisaged by offering those offices a commission of what have been collected from their efforts.

7. Common Taxpayer’s Identification: The Government to speed up the establishment and use of National Identity Cards for the easy of common identification.

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7 Recommendations (Cont’d)8. Enhancing voluntary registration of taxpayers and

tax base The National Micro Finance Policy which covers the provision of

financial services to small and micro enterprises has not done enough to solve the problem of granting cheap loans to small traders. It is recommended that, Government to negotiate with financial sector and agree on the reasonable interest lending rate for start-up businesses.

Form Trade/Business Associations: It is recommended that small traders needs to form trade associations such as cooperatives union, SACCOS and loans self grantee schemes and register for easy acquisition of loans from the Banks. The bottom line is to assist businesses in the informal sector to grow and operates in the formal sector

Institutional sharing of Information: TRA to share information and collaborate with BRELA, Central and Local Government Authorities and Other Regulating Authorities in simplifications of business registration and licensing procedures and simplification of tax system and introduce tax incentives to nurse SMEs.

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TANZANIA REVENUE AUTHORITY TRA Tanzania Revenue Authority The Study of Informal Sector and Presumptive Taxation in Tanzania, 2010/11 1 Presented by Tonedeus