INTERNATIONAL TAX DIALOGUE CONFERENCE ON SME TAXATION

17 19 OCTOBER 2007
BUENOS AIRES, ARGENTINA

H.KIMUNGU & E.L KILEVA TANZANIA, EAST AFRICA

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CHALLENGES OF ADMINISTERING SMALL AND MEDIUM TAXPAYERS TANZANIA EXPERIENCE

COVERAGE:
INTRODUCTION SEGMENTATION SMALL & MEDIUM ENTERPRISES OPERATING ENVIRONMENT IN TANZANIA TAXATION OF SMEs IN TANZANIA (PRESUMPTIVE APPROACH) CONCLUSION
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1. INTRODUCTION
SME refers to Small and Medium Enterprises which also form small and medium taxpayers. The small and medium taxpayers mainly cover manufacturing, mining, commerce and services. In Tanzanian context micro enterprises refer to those engaging up to four people. -In most cases family members employing a capital of up to Tshs.5m (3846.15 USD)
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Cont.
Tanzanian economy is characterised by small firms and very large micro enterprises. SMEs employ up to 99 people with investment ranging from over Tshs.5m to 200m i.e about USD 3846.15 to 153,846.15

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2.

SEGMENTATION

Most of the micro taxpayers fall under informal sector. Small and medium taxpayers are categorized on the basis of turnover i.e. -The medium taxpayers are those with turnover range between Tshs.40 9999 million (about 30,769.23 -7691538.46USD)

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Small taxpayers are those with the turnover range between Tshs. 0 39 million. (about 30,000 USD

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2.1 SEGMENTATION
SN BUSINESS NO. OF EMPLOYEES BUSINESS CAPITAL

Minor Enterprise

1 to 4

Under TZS 5,000,000 /= (USD 3846.1) From TZS 5,000,000 /=(USD 3846.1) To TZS 200,000,000 /= (USD 153846.1) From TZS 200,000,000 /= (USD 153846.1) To TZS 800,000,000 /= (USD 615384.6) OVER TZS 800,000,000 /= (USD 615384.6)

Small Enterprise

5 to 49

Medium Enterprise

50 to 99

Large enterprise

Over 100

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Cont
TAXPAYERS/ REVENUE DISTRIBUTION
No of taxpayers Revenue collection Large

Large
<10%

70+% 10-25%

medium

medium

5.25% 0-10%

Small

70..95%

Small

2.2 ADVANTAGES OF GROUPING TAXPAYERS

Easy to administer. Easy to identify. Easy to educate or advice on taxation issues. Risk minimization. Higher compliance.
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3.0 OPERATING ENVIRONMENT FOR TANZANIA SMEs. The challenges facing Tanzania with respect to taxation of SMEs are in particular to those in the informal sector; i.e
identification, registration Non compliance Poor or non record keeping and Non return filling
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Cont.
The challenges may be due to: Traders not having permanent business premises. Displaying their businesses on the streets where they keep on shifting The record keeping problem is mainly due to illiteracy on the part of the taxpayers

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3.1

NON-TAX BARRIERS

High cost of hiring book keeping services. Maintenance of scanty purchase/sales records. Lack of Internal controls In summary dealing with small and medium taxpayers is indeed dealing with:-

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Taxpayers who have understated taxable income and therefore need different treatment to make them pay taxes.

Taxpayers who do not file tax returns or have failed to submit tax returns.

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4.0 TAXATION OF SMEs IN TANZANIA

In order to tax SMEs the Tanzania Revenue Authority has engaged in various programmes with the objective to: To promote and enhance voluntary compliance Detect and bring to net taxpayers who are not paying taxes or correct amount of tax.

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The programs include:Taxpayer education and sensitisation Block management system-door to door survey Presumptive approach of taxation Assessment procedures Collection formalities and procedures.

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4.1 TAXPAYER SENSITIZATION PROGRAMMES

Tanzania Revenue Authority decided to conduct these programmes to educate SMEs aiming at; Promoting voluntary compliance Enhancing knowledge on taxation laws and procedures

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Cont. The following are some of the approaches used;

Seminars Radio and television programmes Outreach to business places/ trading centres Operating help desks and customer service Conducting secondary schools & colleges tax educational programmes. Installation of educational & sensitization Billboards Use of drama group to sensitize taxpayers. etc.
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4.2 BLOCK MANAGEMENT SYSTEM

Aims at; Putting in place sustainable methods and strategies of monitoring business Monitoring activities of small and medium taxpayers (SMTs) with the view of making them pay tax in a cost effective way Each block is allocated to a specific group of staff Performance are measured against set targets
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Cont.

Set up
On the basis of geographical set up or streets
Each Block does all the tax function of registering assessing, collection and accounting for revenue. The allocated staff update taxpayers information (both personal and business).

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4.3 PRESUMPTIVE TAXATION (APPROACH)

Presumptive Taxation involves the use of indirect means to ascertain tax liability, which differ from the usual rules based on a taxpayers earned income. Presumptive approach is based on turnover

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Taxpayers with turnover, less than Tshs.20- million per annum may file return without accounts. Those who maintain complete accounts are encouraged to do so by paying tax at lower rate (as a motivation).

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Cont.
Requires some scanty records. If turnover is unavailable other alternatives such as assets may be used as determinants to income The graduation of taxpayers categories/groups is through a band system as shown in the next slides

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Therefore the main idea against Presumptive Taxation is: To reduce informality To reduce tax evasion To simplify the system so as to reduce administration and compliance costs To collect realistic revenue

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Cont.
BAND 1st 2nd TURNOVER Less than 3m Tshs. (About 2,307.69 USD) TAX

3rd
4th

35,000/= About (26.92 USD) Between 3-7m Tshs. 95,000/= (26.92 5,384.61 USD) About(73.07 USD) Between 7-14m Tshs. 291,000/= (5,384.61USD) About (223.84 USD) Between 14-20m Tshs. 520,000/= (10,769.23 About (400 USD) 15,384.61USD)
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5. 0 PAYMENT OF TAXES
Mode of payments is through banks and The taxpayer has the right to pay tax by instalments

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6. CONCLUSION
As said earlier, Tax Administration for SMEs is very challenging due to challenges and characteristics discussed above. Revenue potential from SMEs and in particular small taxpayers is limited however, there is clear future revenue growth.

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Cont.
Building a system of compliance and fairness through various programmes is vital to make this group compliant. Presumptive taxation if made simple and well administered can be the best option for revenue maximization

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THANK YOU FOR YOUR ATTENTION!

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