What Isaac Newton’s Laws of Motion can teach us about taxes and taxation

 

Summary

• What goes into the Finance Bill will always be closely guarded by the ministry

By Waziri Jumanne

Summary

·         What goes into the Finance Bill will always be closely guarded by the ministry

By Waziri Jumanne

In secondary school physics, we learned a very important principle relating to the

motion of objects by Isaac Newton stating that “To every action, there is an equal and opposite reaction”.

In simple terms, it implies that whenever one object exerts a force on a second object, the second object simultaneously exerts a force of equal magnitude against the first object.

Taxes are not neutral, and I have been wondering if this principle applies in the tax world as to whether the taxpayers would always react in an equal and opposite manner towards the new taxes and tax laws.

In Tanzania, July 1 annually marks the start of a new government financial year which comes with among other economic measures, the imposition of new changes in tax laws following the approval of the Finance Bill by the National Assembly.

These new tax laws will either offer relief to the taxpayers such as a continuance reduction in the Skills and Development Levy (SDL) which we have witnessed in the recent past, or a pinch to the taxpayers such as the 2 percent withholding tax on agricultural inputs which was introduced and repealed in 2021; the reason for repealing being a negative reaction of the targeted group i.e., those engaged in agriculture.

Changes in tax laws normally follow a very detailed analysis involving the collection of opinions and suggestions from businesses and tax communities prior to presenting the finance bill to the national assembly for discussions and approval.

Whilst there is a dialogue and think tank discussions, what goes into the Finance Bill will always be closely guarded by the Ministry until it is presented to the national assembly, normally less than 15 days before the Government’s new financial year.

This time is always insufficient for public dialogue and opinion to allow the parliament to work on the finalisation of the Finance Bill.

With the above background, the new tax laws often come unanticipated by the taxpayers implying low levels of engagement in the process, resulting in mixed reactions from the public.

While it is obvious that the taxpayers most likely would not react positively to a change that implies a new compliance requirement or an additional tax to be paid, the reaction could have been mitigated if they were not “caught off guard”.

This is where Newton’s law kicks in, a new tax on the general public is more likely to result in a reaction in the opposite direction i.e., rejection.

A more vivid example of the reaction to the new tax is the recent strike by the Kariakoo International Market traders rejecting the requirement to register storage facilities and file the returns thereon.

While the law was in place since July 1, 2022, when the TRA showed a desire to start enforcing the law, the community reaction was overwhelmingly negative. What would have happened if the targeted groups had been well prepared and/or engaged prior to the passing of the law? What if they saw what was coming?

In most developing countries, tax is the biggest contributor to the countries’ national budgets, and imposition of new tax laws should be a very thoughtful process backed with impact analyses; not only on the amount to be collected but also the impact on the taxpayers’ businesses both from an administrative and financial impact perspectives.

To reduce the magnitude of the reaction from the taxpayers, the taxation system should be collaborative and inclusive, there should be community engagements, dialogues, and opinion collections prior to passing the bill into law.

We can learn from our East African neighbours, where the finance bill 2023 was published on April 28 and tabled before the National Assembly on May 4, 2023 for Kenya, and Ugandan 2023 Tax amendment bills were tabled before the parliament on March 30, 2023.

Both of these countries have the same fiscal years as ours. It is not too late to learn from them.

Early release of the Finance Bill will prepare the taxpayers for the new change hence the “opposite reaction to the action’’ of imposing new tax will be minimised.

Waziri Jumanne is Manager at Deloitte Consulting Limited. The views expressed are his own and not necessarily those of Deloitte. He can be reached at wjumanne@deloitte.co.tz