COVID-19 had serious impacts on the world economy. The United Nations (UN) reported that 71 million people were pushed back into poverty, and while the issue is worldwide, sub-Saharan Africa is more affected, as it has a higher percentage of poor people compared to other developing countries.
Various countries took different steps to contain the effects of COVID-19. Three Sub-Saharan African countries – Nigeria, Kenya, and Tanzania – used Solidarity Tax as one of their remedies to the effects of COVID-19. Nigeria and Kenya applied the solidarity tax in 2020, but they lifted the tax after a public outcry.
The story is different in Tanzania, which introduced the solidarity tax in 2021. Airtime and mobile money transactions started to be taxed on top of the 18 per cent that the government takes as Value Added Tax (VAT).
The introduced levy was reduced a bit after a public outcry, and the remaining levy charged on transactions has increased the costs of mobile transactions by 40 per cent on average.
Widely used service
Mobile money is the widely used service in East Africa, and eminent economists like Benno Ndulu have recommended friendly tax regimes to increase its use and take more people out of poverty by giving them access to financial instruments.
Regardless of the outcries, the government made the issue even worse by introducing a levy on bank transactions, including Automatic Teller Machines (ATMs), in 2022, which, fortunately, were removed on September 20, 2022, after the public outcry.
Solidarity tax is applied to solve an emergency, and it is removed when the emergency is gone. Ideally, the tax follows the “Robin Hood theory” – taking from the rich to distribute it to the poor.
This is what has happened in developed countries like Czechoslovakia, which applied the Solidarity Tax to finance recovery from the effects of World War I.
In the case of Tanzania, COVID-19 was an emergency; however, the application of the solidarity tax is inappropriate, as it does not follow the Robin Hood Theory.
Most of the countries that applied the Solidarity Tax aimed at reducing inequality, such as Chile, France, and Portugal. In Tanzania, the story is different in this regard, because mobile money transactions are used mostly by people who lack access to financial services from commercial banks.
That is, taxing mobile transactions increases the gap between the haves and the have-nots, as it is the have-nots who enjoy the service more.
Solidarity Tax is used for a specified time frame, and when the problem is over, it is removed. Do we know when the Tanzanian solidarity tax will no longer be charged? This question can be invalid at this point because the reason for introducing the solidarity tax was not an emergency.
President Samia Suluhu Hassan and the then Minister of State in the President’s Office – Regional Authorities and Local Government (PO-RALG), Ummy Mwalimu, at different times in 2021, justified that the solidarity tax was introduced to improve social services, such as constructing 10,000 classrooms, 4,500 dispensaries, and 570 health centres.
However, the country received funds from the International Monetary Fund (IMF) that were used for the same purpose. Nonetheless, the classrooms and dispensaries can be planned, not an emergency, to justify the introduction of the solidarity tax.
No sign of coming to an end
We are now in 2023, years after the introduction, and there is no sign of the solidarity tax coming to an end. Tanzanians have been hit by various uncertainties, including the Eastern Europe crisis between Russia and Ukraine.
The cost of living has gone up, and the increase in salaries for civil servants does not correspond to the increase in the cost of living.
Recent data from the National Bureau of Statistics (NBS) shows that the average monthly income is Sh410,147, and the income is different depending on the group and sex. For example, females in agriculture earn less than other groups; earning Sh124,479.
COVID-19 caused an increase in prices for agricultural inputs, and fuel prices have increased as a result of the Eastern Europe crisis, increasing the costs of transactions and adding to the burden of this group, which employs 64.9 per cent of Tanzanians.
Just as the government took initiatives to stabilize fuel prices by subsidizing them, the same should be applied to transactions to increase financial inclusion.
It should be noted that when mobile transactions are discouraged in any way, the use of cash will be more favourable for people. The use of cash is not good for the country, as it limits the power of the Central Bank to pass the effects of monetary policy.
The use of cash was mentioned as a challenge to the monetary policy by the then Governor of the Bank of Tanzania (BoT), Prof Florens Luoga, when opening the BoT’s branch in Mwanza on July 13, 2021.
There is another challenge that has been projected by the International Monetary Fund: that 2023 will be hit by a recession, and life will be tougher than in the previous 12 months.
It is then important to see that we can survive the hard economic times by letting those in the primary sector enjoy financial services by lowering the prices and costs of transactions.
This will be achieved by marking an end to the solidarity tax that was introduced with no clear economic grounds.
Francis Nyonzo is an economist interested in social justice and digital rights. He is available at email@example.com. These are the writer’s own opinions and do not necessarily reflect the viewpoints of The Chanzo Initiative. Do you want to publish in this space? Contact our editors at firstname.lastname@example.org for further clarification.