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Tanzania Tax System Lauded for Reducing Inequality in SADC Region

The finding comes from the latest report by a consortium of organisations that work around inequality.

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Dar es Salaam. A new report has lauded the Tanzanian tax system for its contribution to the reduction of inequality in the East African nation, beating other countries in the fifteen-member Southern African Development Cooperation (SADC) block.

Titled The crisis of extreme inequality in SADC Fighting austerity and the COVID-19 pandemic, the report was conducted by the consortium of Norwegian Church Aid (NCA), Oxfam and Development Finance International (DFI), the report was launched Friday during the monthly Breakfast Debate organized by Policy Forum, a local think tank.

According to the report, only four countries in the SADC region have tax systems that reduce inequality. Among these countries Tanzania was at the top, which reduced its income Gini coefficient by 11 per cent, followed by South Africa (six per cent), Namibia (two per cent) and Lesotho (one per cent).

The remaining eleven members of the region have tax systems that are considered to be regressive, meaning they increase inequality. In countries like DRC and Malawi, the tax system has increased income inequality by between one per cent and in Seychelles, which increased by nine per cent.

The study used country-specific studies of the incidence of taxes on the Gini coefficient in seven nations (Botswana, Eswatini, Lesotho, Namibia, South Africa), or estimates based on tax collection and global average impact coefficient for other eight countries of the SADC region.

Statistical evidence has shown that the tax system in any country has a significant role in inequality.

If the tax system is progressive it plays a significant role in mitigating income inequality compared to a regressive tax system.

“The impact of taxes on equality varies hugely across countries because it depends on both the structures of taxes (rates, exemption, threshold etc) and the scale of the respective collection,” said part of the report.

Although generally, Tanzania has performed well on taxes ranking the fifth in the SADC region and 39th globally, the report shows Tanzania loses about $299.5 million a year to corporate tax abuse and evasion.

This has led the country to be among the lowest-performing countries in tax collection in the SADC region.

For instance, the report shows in 2020, tax collection in the country was just around 22 percent of the the estimated tax collection potential in the country. This is very low compared to the average estimate for the SADC region which was 36.2 per cent.

The report notes that many countries in the region are highly dependent on consumption taxes for their tax revenues while there are still excessive practices of tax exemption and tax holidays to attract investment, widespread tax dodging, unequal tax treaties and weak tax administration.

The report urges more efforts to be taken to increase tax collection by national and international communities, especially by working together in the areas of sharing information and experience on auditing, tax collection and treaty negotiation.

The report mentions Tanzania as the second country in the region with a high value-added tax (VAT) rate amounting to 18 per cent and a regressive tax system that shifts the burden to the poor.

The decision not to exempt VAT on food staff has further exacerbated the burden on the poorest in the country.

The report suggests two policy measures that can make VAT less regressive and have less impact on exaggerating inequality in the countries of the region.

One of these is to exempt VAT on basic foodstuffs that are used by the majority of low-income earners.

The second one is for Tanzania to have a high minimum threshold for big companies to take VAT payments and exclude smaller traders and reduce costs for poor customers.

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