BizCLIR

The rate at which individuals and enterprises pay their taxes reflects both the capacities of a state and the health of an economy. The fairness and efficiency of a tax system can have significant bearing on whether entrepreneurs choose to join the formal sector in the first place – namely, if they believe that the tax system is fair and the state will use their money wisely, they are more likely to participate. If the tax system is perceived as excessively burdensome and unfair, however, and the citizenry further perceives the state as a poor steward of its monies, then informality persists, with few enterprises paying into the system and few benefits emerging. Of course, a larger tax base means that the state can pursue more growth-oriented priorities, such as education, public health, and infrastructure. Also, when more individuals and enterprises participate in the system, the government can reduce the payments it seeks from each.

In addition, the stability of tax policy is equally important. Tax laws should not change continuously, and tax changes should be permanent and not temporary. Instability in the tax system makes long-term planning difficult, and increases uncertainty in the economy, which could drive away potential investors in the country.

This chapter examines Tanzania’s regimes for tax collection, along with the critical issue of how the government uses those taxes – that is, the critical issue of sound fiscal management. This chapter specifically examines Tanzania’s compliance with international best practice in tax collection and further considers the relative strengths of its auditing and accounting professions. The results of this inquiry contribute to an understanding of a company’s incentives for and against joining Tanzania’s formal economy and will point to reforms that will increase business formalization and tax compliance.

As with the other sections of this report, it is grounded in the World Bank’s annual Doing Business survey, in this case its Paying Taxes section. The World Bank’s indicators focus on the number of steps and time it takes for an enterprise to comply with its tax obligations, as well as countries’ specific rates of taxation. Tanzania does not rank particularly well in this regard – 113th out of 175 of the countries most recently surveyed.

As pointed out in Doing Business 2007: How to Reform, “No one likes paying taxes, but some like it less than others.” Factors that influence the overall popularity of a tax regime, and compliance by would-be taxpayers, include not only relatively high or low rates, but also complexity of the tax system, perceived corruption in tax administration, and the perception that the revenues collected are actually used to provide and improve public services (especially education/training and business infrastructure).