Tax Collections, Exemptions, and Reform Thomas Baunsgaard Presentation to the DPG Main January 15, 2013

Part I. Tax revenue improvement: Providing fiscal space Source: Tanzania Revenue Authority and IMF estimates

Part II. Increase in exemptions outpaced revenue …signs of a turnaround? Source: Tanzania Revenue Authority and IMF estimates

Exemption creep in domestic VAT Source: Tanzania Revenue Authority and IMF estimates

Two-thirds of exemptions from VAT on imports and domestic transactions Source: Tanzania Revenue Authority

Other tax exemption ratios Source: Tanzania Revenue Authority and IMF estimates

Part III. VAT Reform The Government target of a gradual reduction in tax exemptions to 1 percent of GDP (GBS PAF)… …can only be achieved by reducing VAT exemptions Minister Mgimwa announced a review of the VAT “to conform to international best practice” (Budget speech, June 2012) IMF missions on VAT policy in 2011 and 2012; legal expert is working with the government on a draft VAT bill

Goal for VAT redrafting To reform the VAT into a more equal and equitable tax that is: ¶ more revenue productive ¶ easier to comply with and to administer, and ¶ provides a more business and investment friendly climate A modern broad-based VAT: Single rate; broad tax base; destination based  General tax on consumption by taxing value added with credits/refunds of input tax 8

Aim: Rationalization of exemptions Goal: Replace extensive zero-rating and exemption schedules with simpler regime. Limit zero-rating to exports Why exempt? On equity grounds – Basic needs (some food items) – Health & education – Land, residential property (except sales of new residential property) – Non-commercial supplies by approved non-profits – Non-commercial activities of government entities On technical, practical grounds – Financial services, except if provided for an explicit fee 9

Aim: Rationalization of exemptions (cont’d) Import exemptions – Goods for which the supply would be exempt – Goods in transshipment, containers – Donations, disaster relief goods – Imports under international agreements (treaties, financing agreements); refunds for VAT incurred domestically To counter exemption creep, need improved VAT refund mechanism Exemptions only through legislation – reduce discretion 10