The recent introduction of levies on mobile money transactions and payment of
property tax through prepaid electricity (Luku) purchases has not gone down well with the public in Tanzania. For many, this is proof that the government is desperate, and has resorted to extortionist means.There are two valid, but conflicting positions. On the one hand, you have the government that needs more money to carry out its business, and sees these as lawful ways of doing that. On the other hand, you have taxpayers who feel that the government is overplaying its hand, and that they are being arm-twisted into paying excessive charges. I think both positions are true.
It is generally known that Tanzanians aren’t very good at paying taxes. Statistics show that the country’s tax-to-GDP is only 12 percent, ranking it among the bottom 20 countries in the world. In comparison, in the EU and the US the ratios are 41.4 percent and 24.5 percent, respectively. The World Bank considers 15 percent as the recommended threshold for tax collection for countries to develop sustainably. There is a strong correlation between that threshold and above, and better poverty reduction capacities. In short, Tanzanians need to pay more, not less, taxes.
However, it is informative to observe how taxes are collected in Tanzania. For example, close to 90 percent of all tax collections are made in Dar es Salaam, a city that doesn’t contribute even 20 percent of national GDP. Moreover, a few sectors tend to bear most of the burden. For example, almost half of all VAT on domestic transactions come from taxing telecoms, beverages, and cigarettes only. This means that the tax base is too narrow, and the burden is shouldered by only a small percentage of the population. Therefore, taxpayers are right to complain about increasing taxes.
This is the background to the introduction of the much-maligned mobile transactions levy and property tax paid through Luku.
Speaking during a Wanazuoni Club event on Clubhouse, which I hosted, the Minister for Industry and Trade, Prof Kitila Mkumbo, explained, firstly, that this is a levy not a tax. It is a special payment that is made for a specified purpose. Secondly, he said both the levy and amounts charged aren’t permanent – they are subject to review, especially at the end of the financial year.
The minister was brilliant in his defence of the government’s position, but what he didn’t say was material. For example, the levy has been introduced in a telecoms sector that is already taxed at least twice its proportional contribution to Tanzania’s GDP. A report by Ernst and Young highlighted this problem: “...taxes on the usage of mobile services represented a higher share of prices than any other country in the sub-Saharan region, at 35 percent”. Imposing more charges is likely to discourage more investments in the sector, leading to stagnation. Moreover, 80 percent of all mobile transactions originate in Dar es Salaam, that is, the very people who already carry most of the burden in paying taxes. And, finally, the government risks destroying one of the few good things it has got going in the economy – a sector that employs 400,000 people, and which has contributed a lot in increasing financial inclusion in the past decade.
The government wants people to focus on the projects the money will finance, and has tried to be unusually open about that. But this is a hard sale. People are aware of many other questionable projects which the government has prioritised over health and education, and wonder why they should pay the price. In my opinion, this levy is a very bad idea. It ignores best practices, and it is neither affordable nor fair. And, yes, it feels like extortion – the fact that you see money somewhere doesn’t mean that it is yours to take.
As for property tax, this is where I disagree with many people. I think the mobile money levy debacle isn’t helping in highlighting the true genius of collecting property tax through Luku. Let me explain.
A few years ago, paying motor vehicle licence fees was quite cumbersome. People were required to pay even if their vehicles had been parked for years. But when the government started collecting the fees through fuel purchases, the system became fair, efficient, and equitable.
These are the new trends in taxation – to make tax collection as non-intrusive as possible. And this is what charging property tax through Luku achieves.
Consider inclusivity. While property tax contributes only 0.1 percent of Tanzania’s GDP, in other nations the ratios can be up to 40 times that figure. Experts consider property tax as a good tax – an ideal source of government income that introduces many advantages. For example, charging property tax through Luku widens its base across the country. Granted, only 34 percent of people use Luku, but isn’t that a good place to start?
Tanzanians should avoid the fallacy of conflating the two taxes. The first one depicts a government that stinks of financial desperation to an extent of making people wonder what’s going on. But the property tax through Luku is a good thing, as it manifests innovation in tax collection, a move that ought to be applauded, not derided.
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