Industrialization remains one of the key agenda of Tanzania’s fifth phase government. In the period 2020 to 2025, inter alia, the government will seek to promote a modern, integrated, inclusive and competitive economy based on industrial, economic services and enabling infrastructure. Also stimulate the use of research, science, technology, and innovation as a tool for rapid socio-economic development.
Industrialization and socio-economic development are closely intertwined with innovation. Innovation starts with invention followed by diffusion and application. The invention is the development of new technologies (products and production processes) and knowledge. Diffusion is the acceptance and adoption of the inventions. 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 early-stage SMEs which is innovative and has the potential to scale up. At least this is the current operational definition as per the stakeholders of the Tanzania Startup Association (TSA). A conducive legal and regulatory business environment is key for the growth and nurturing of Startups established by entrepreneurs. 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. Appropriate tax policies can also encourage those willing to support Startups (and SMEs generally) such as lenders and equity investors.
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 currently, the Taskforce on Tax Reforms (under the Ministry of Finance) is collecting tax reform proposals from stakeholders. Last week I attended a tax discussion event organised by TSA and it was a good opportunity to listen directly from the entrepreneurs about the tax challenges they are facing. In this and the next few articles, I will highlight areas that pose some challenges to the Startups and propose some possible reforms.
One general area is complexity. I know some reforms made recently to simplify the tax system. The presumptive income tax threshold (annual turnover) was raised from 20 million to 100 million. And the mandatory preparation of audited financial statements was removed. But still most entrepreneurs you talk to would often cite the complexity of the tax laws and tax system as among their key issues. There are several factors.
One is the multiplicity of taxes and levies that one must comply. This has both the tax burden (tax liability itself) and compliance cost (the time, effort and expenses incurred to comply with tax). And due to the human resource constraints for most SMEs, the risk of penalties for non-compliance is high. The answer is crafting a simple tax system for the Startups and SMEs generally. The Machinga ID system could be a good model, with improvements to carter for small companies and monitoring the incentives. With an appropriate regulatory regime for the Startups, tax exemption or tax holiday (say five to ten years) could also work.
The multiplicity of taxing authorities is also a problem for Startups. There are taxes to be paid to TRA plus other obligations. Add ZRB if you operate in Zanzibar. There are social security funds – the NSSF and Workers Compensation Fund (WCF). And a host of licensing bodies depending on the sector or sectors you operate. “Fire” and “OSHA” would also be mentioned. Then the municipal or local government taxes and fees – and if you operate in multiple locations you will have to deal with several local government authorities!
Mr Shabu Maurus, Tax Partner, Auditax International.