Tanzania's traders learn to love taxes

By Daniel Dickinson
BBC News, Mtwara, Tanzania

Shaibu Ng'ombo is happy to pay tax to help Tanzania develop

A strange thing is happening in Mtwara, a sleepy town built on the cashew nut industry on the southern coast of Tanzania.

Small market traders are getting motivated by, some would say excited about, paying taxes.

It is a trend which if it were to continue across the country could drastically boost the development of one of Africa's poorest countries.

In Mtwara's covered central market, 40 kilogramme bags are stacked almost to the ceiling.

Potential buyers inspect open bags of a kaleidoscope of beans, picking them up and letting them drain through their fingers as though to test their quality.

Tax enthusiast

Shaibu Ng'ombo breaks all the stereotypes with his enthusiasm for paying taxes.

He runs a successful small wholesale business, transporting beans, cereals and rice from across Tanzania to sell to shops and individuals in Mtwara and the surrounding region.

Each day he pays just less than half a US dollar (24 pence) in tax to the municipal authorities for his plot, for the market to be cleaned and for security services.

He thinks it is a good deal.

"I am happy to pay this money as it makes it easier to carry out my business, but it has also made me think about tax," he says.

"'Paying taxes is an important thing because it helps in the development of our country. Every citizen is responsible for this as it has a direct link with our development.

"The people who don't pay need to be educated. They need to understand that roads, education, and health services all depend on the taxes we pay. If they understand, they will pay."

Working system

It is a textbook answer which sees the big picture, an answer likely to bring a smile to even the most hard-bitten tax collector.

We need to increase the tax base and this we must do by bringing small traders, farmers and light industry into the formal economy Tony Muganyizi, Tanzania Revenue Authority

The difference in Mtwara is that it is not the local tax officials who are collecting the money, but an association of traders, called Wabisoco, that Shaibu Ng'ombo belongs to.

Some 400 traders pay the tax directly to Wabisoco. They include fruit and vegetable sellers, clothes retailers and bicycle repair shops, which, depending on the size of the business, pay as little as 20 US cents a day.

In an average month about $1,200 (£600) is collected. Wabisoco pays for the market services and its own running costs and then hands about two-thirds of that to the local council.

"It's a system that works well," says Wabisoco's Novartus Kaijage. "Normally, you find that businessmen and tax collectors have an antagonistic relationship. Having an organisation between the council, which needs the taxes, and the business, which needs a service, makes it easier to collect the tax."

Spreading the net

Local and national tax collection in Tanzania are carried out separately, by the local district council and the government respectively, but local successes like the Mtwara traders are being reflected in national collections.

The government hopes to include more traders in the formal economy

The Tanzania Revenue Authority (TRA) has increased tax collection by four times over the last decade thanks to the reform of the tax system and a more user-friendly approach.

Tax reform is seen as a key element of the development of this poor country, one which the government that was elected in 2005 has been prioritising.

More money means more investment in health, education and infrastructure.

The rate of tax collection is about 14.5% of gross domestic product, or GDP - below both the African average of 17% and the psychologically important level of 20%, the point at which Tanzania can begin to be able to sustain its own budget spending without the help of foreign donors.

Tax revenues have increased because big business is now paying up.

Attention is turning increasingly to the burgeoning informal sector, people who are operating outside the formal economy and laws of the country, mainly petty traders, farmers and small businesses.

Taxing or beneficial?

Tony Muganyizi, the TRA's director of research and policy planning, believes it is a massive undertaking.

"We need to increase the tax base and this we must do by bringing small traders, farmers and light industry into the formal economy," he says.

"This is a big challenge because they operate mainly in cash."

It is estimated that 70-80% of businesses in Tanzania are technically partly outside the law.

While the market traders in Mtwara are happy to pay a local tax, few are legally registered as businesses and as a result do not pay an array of other taxes, including business licences, income tax and VAT.

The government has launched a programme called Mkurabita to encourage more people to engage legally with the formal economy and enjoy the benefits, for example access to loans and the securing of land ownership, that working in the formal economy can bring.

Formalisation

Mark Waite, an advisor on formalisation employed by a Norwegian NGO, says there are many reasons why people might want to stay informal.

"It's difficult to pay taxes and in the past there have been too many of them," he says.

"It takes a lot of time and money to register and license a business.

"And after going through all the hassle of becoming formal, there seem to be few tangible benefits."

In Mtwara and across Tanzania, the informal sector continues to thrive, while the government looks on and no doubt tries to calculate the tax revenues it is losing.

The government is hoping that formalisation will catch on, that revenues will increase and that it can then spend more money on developing the country by boosting growth and reducing poverty.