Industrialization remains one of the key agenda of Tanzania’s fifth phase government. Industrialization and socio-economic development are closely intertwined with innovation. And as the world is moving towards the fourth industrial revolution, innovation is even more crucial to Tanzania. With the right policy mix, including the tax policy, the SMEs (Small and Medium Enterprises) and particularly the startups can be made to be immensely helpful in innovation.
A startup can be defined as an early-stage (less than 5 years) SME which is innovative and has the potential to scale up fast. The conducive legal and regulatory business environment is key for the growth and nurturing of startups established by entrepreneurs and innovators. Tax policy is one of many factors that can influence prospective innovators in deciding whether to enter and remain in an innovative occupation. Taxes influence the risks entrepreneurs take, the incomes they earn, and their fixed costs.
There are several areas of the tax system that can be improved to support startups. Some are general and others are specific. This is crucial. As the Taskforce on Tax Reforms (under the Ministry of Finance) is collecting tax reform proposals from stakeholders.
My previous article pointed out tax complexity as one of the areas that are challenging to startups. Both the multiplicity of taxes as well as the multiplicity of taxing agencies make the tax system overly complex for the startups in Tanzania. In this article, I continue the discussion by highlighting more tax areas that can be reformed to help the startups.
Alternative Minimum Tax (AMT): This is essentially an income tax charged on turnover loss-making entities. Companies conducting agricultural business, provision of health and provision of education are exempted from AMT. Currently, the rate is 0.5% of turnover in the third year of consecutive loss-making. Whilst this policy, in some ways, may serve to curb tax avoidance, it can be burdensome for a bona fide startup company that has not managed to make a taxable profit by their third year. In practice, most starting businesses, may not make a profit within three years. For startups, a grace period of five years before the AMT kicks in would be helpful.
Skills and Development Levy (SDL): This is a tax payable by employers on the remuneration paid to their employees monthly. SDL kicks in when an employer has four or more employees. It is charged a percentage of the gross emoluments – 4% for employers in Tanzania Mainland and 5% for employers in Zanzibar. The gross emoluments include wages, salary, leave or sick pay, fees commission, gratuity, bonuses, and other allowances. The total employment expense. Coupled with other taxes, SDL can be burdensome to startups. SDL also tends to hinder growth as startups try to keep the number of employees lower as part of their cost management. Again, for startups, a grace period of five years before the SDL kicks in would be helpful. This will free up startups from the SDL cost as well as compliance obligations.
Of course, some controls would be necessary for the tax policies specifically geared to help startups to work well. Startups need to be recognizable and monitored. Probably a scheme akin to the Export Processing Zone (EPZ) and Special Economic Zone (SEZ).
By Shabu Maurus, Tax Partner, Auditax International.