Last week, the Minister of Finance unveiled Tanzania’s 34.9tr shillings budget for the fiscal year 2020/21. Through the budget speech, several tax reforms were announced by the Minister. Tax revenue will fund almost 60 per cent of the budget. This is going to be uphill for both the tax administration and the taxpayers in Tanzania. Especially if one considers the negative economic impacts of the pandemic, COVID-19. Nevertheless, this time around, employees will see a big relief as the PAYE tax bands are reformed.
For most employees, PAYE that makes the biggest chunk of the statutory deductions. In aggregate, employees in Tanzania pay more income tax than all businesses combined (corporations and sole proprietors). The average PAYE contribution (to the total tax collections) for the past ten years or so stands at around 16 per cent while the average for businesses is around 12 per cent. The average PAYE collections are even higher than the average for domestic VAT (i.e. excluding VAT on imports), with the latter being around 15 per cent. Looking at these statistics, it is indeed logical to relieve employees of the income tax burden. Hence reforms to reduce PAYE timely and welcome.
PAYE stands for Pay-As-You-Earn. It is a tax on employment income payable to the government by way of a withholding system. Under this system, an employer is required by law to deduct income tax progressively from employee’s taxable income at various rates from 9 to 30 per cent depending on the prescribed ranges of income (i.e. bands). In recent years, the focus appears to have been only on the tax rates and not bands. Especially the tax rates for the lower bands. Over the past 12 years, the tax rate for the second-lowest band has gone down from 15 per cent (in the year 2008) to the current 9 per cent. However, most of the employees may not have felt any relief because the rates for the other bands remained unchanged and also the bands themselves remained unchanged. The bands have not been significantly restructured since 2008 despite the changes in inflation rates and the depreciation of our currency (shilling). For example, the highest taxable band (taxed 30 per cent) started at the monthly taxable income of 720,000. In 2008, the amount 720,000 shillings was equivalent to around USD 600. But today, USD 600 is close to 1,400,000 shillings. So, the band structure was outdated and needed some reforms to provide some relief to employees. If you have followed this column for the last three years, you may recall this as one of the areas I have repeatedly written on.
With the current tax reforms, the five bands structure is changing. For example, from 1st July 2020, the first 270,000 shillings of employee monthly income will not be taxed at all. Before the reforms, only 170,000 was not taxed. The second band, taxed at 9 per cent, will now range from 270,001 to 520,000 shillings. The third band will start from 520,0001 shillings to 760,000, taxed at 20 per cent. Taxed at 25 per cent, the fourth band will now start from 760,001 to 1,000,000 shillings. The fifth band, with the highest tax rate of 30 per cent, now starts from 1,000,001. Previously, the upper band started from 720,000 shillings.
Although cumulatively, with these changes the monthly tax savings for individuals is around 50,000 shillings (about 600,000 shillings annually), in aggregate this is a significant reduction from the government coffers. Think of all the employees in Tanzania, both in the public and private sectors. It is indeed a very bold move and laudable.
By Shabu Maurus, Tax Partner, Auditax International.