The rate at which individuals and business entities pay their taxes reflects the capacities of a state and the health and vibrancy of an economy. The fairness and efficiency of a tax system can have significant impact on whether entrepreneurs (particularly smaller and micro enterprises) and individual citizens choose to join the formal sector. If they believe that the tax system is fair and that the state will use their tax revenues wisely, they are more likely to participate.
A state with a larger tax base can typically pursue more growth-oriented priorities, including expenditures on public goods such as education, health, and infrastructure. Moreover, when more individuals and businesses participate in the tax system, the state can reduce the amount of the payments it seeks from each taxpayer. By contrast, if a country’s tax system is perceived as excessively burdensome or unfair, or if the citizenry perceives the state as being a poor steward of its revenues, informality may persist with fewer enterprises participating in tax system and fewer economic benefits will result.
This chapter examines Rwanda’s tax collection laws and processes, along with how the government uses the taxes it collects – a critical part of sound fiscal management. This chapter also assesses the extent to which Rwanda’s tax collection system is in compliance with international best practice in tax collection. The results of this inquiry contribute to an understanding of a business entity’s incentives for and against joining Rwanda’s formal economy and also outline reforms that will likely increase business formalization and tax compliance.
This chapter is grounded in the World Bank’s Doing Business survey and indicators – in this case its “Paying Taxes” section. The World Bank's indicators assess the number of steps and the time it takes for an enterprise to comply with its tax obligations as well as countries’ rates of taxation. Rwanda fares well in the Doing Business 2008 survey; it is ranked as the 50th (out of 178 economies) for paying taxes, improving from 52nd in the previous year. One reason for its higher ranking is that the overall total tax rate has declined from 37.2 percent to 33.38 percent. Rwanda surpasses its neighbors, with only Uganda coming close at 55th.
Factors that influence whether a tax regime is perceived as popular and whether would-be taxpayers will comply include the following:
- Rates of taxation
- The complexity of the tax system
- Perceived corruption in tax administration
- The perception that revenues collected are used to provide important public services.
In 1998, the Rwanda Revenue Authority (RRA) was launched and since then it has continued to improve Rwanda’s system of tax collection and to generate more revenues for the country. It collected £60 million in its first year and £240 million as of 2006. As a result of increased revenues, the national budget has grown, with more being spent on vital areas such as health, education, and sanitation.
According to the Index of Economic Freedom, Rwanda rates quite well with respect to fiscal freedom, at 82.6 percent. Although the country has moderately high tax rates (the top income and corporate tax rates are 35 percent), the overall tax revenue as a percentage of GDP amounted to 12.8 percent in 2007.
