FINANCE LAW UPDATE: BREAKTHROUGH ATTORNEYS’ OVERVIEW OF THE TANZANIA’S BUDGET FOR THE FINANCIAL YEAR 2021/2022
- Performance evaluation of the 2020/2021 budget
- The macroeconomic policy targets.
- Government’s Policy and Strategies to increase Revenue in 2021/2022.
- Our comparative highlight with the policy to remedy and cushion the economy from COVID-19 impact
- Priority areas include industrialization and promotion of trade and investment.
- Proposed changes to improve Employees’ welfare.
- The Government proposes amendments of tax laws on tax exemptions.
- Introduction of new levies in the communication sector
The Government of Tanzania through the Minister of Finance and Planning Hon. Dr Mwigulu Nchemba on 10th June 2021 presented the Government’s Revenue and Expenditure Estimates for the financial year 2021/2022 before the National Assembly. This is the first budget for the sixth phase government led by H.E Samia Suluhu Hassan who inherited the presidency after the passing of her predecessor the late Dr. John Pombe Magufuli.
The 2021/2022 budget goes with the theme “Building a Competitive and Industrial Economy for Human Development” which is also the first budget in the implementation of the Third Five-Year National Development Plan. This budget reflects the sixth government’s priorities as they were reiterated by the President in her first address before the national assembly on 22nd April 2021. In the said speech the President indicated that her administration will prioritize which includes harmonization of tax policies especially tax administration policies, development and reforms in the Mining Sector, industrialization, and ensuring the growth of investment among others.
Our Corporate Commercial Department at Breakthrough Attorneys has prepared this general overview of the budget for the financial year 2021/2022 highlighting the estimates of the Government’s revenue and expenditure for 2021/2022.
2. Evaluation of the performance of budget implementation for the financial year 2020/21.
In terms of revenue collections for the 2020/2021 budget, the government recorded a success rate of 86. 1 which reflects the collection of 24.53 trillion shillings out of 34.88 trillion shillings which were projected. The said revenues include collections by the Tanzania Revenue Authority (TRA), Non-tax revenue, Grants and concessional loans received, Borrowings from the domestic market including rollover for matured Government Securities, and External non-concessional loans.
In terms of expenditure, the Government planned to spend 34.88 trillion shillings, of which 22.10 trillion shillings was recurrent expenditure while 12.78 trillion shillings was development expenditure. Between July 2020 to April 2021 a total of 24.74 trillion shillings was released which equals to 86. 8 percent of the planned expenditure. 17. 42 trillion shillings out of the released amount was recurrent which included wages and salaries, government debt service, and other charges.
The total development expenditure was equal to 74.1 percent of estimates which was used to finance priority areas including:
- Construction and rehabilitation of railways, including the Standard Gauge Railway;
- Construction of roads, bridges, and airport projects;
- Construction and rehabilitation of health facilities, procurement of drugs, medical equipment, and reagents;
- Rural and urban water projects
The Minister submitted that Tanzania like other countries has been economically and socially affected by COVID – 19, whereas health, tourism, trade, transportation, arts, and entertainment were the most affected sectors. Thus the Minister reiterated that the Government will continue to take appropriate measures to revive economic growth.
3. Macroeconomic policy targets.
The Government estimates to reach the following targets;
- A real Gross Domestic Product (GDP) of 5.6 percent in 2021 and up to 6.2 percent in the year 2023;
- To contain inflation at a single digit between 3.0 to 5.0 percent in the financial year 2021/2022;
- The Government project a domestic revenue equating to 15.9 percent of GDP in 2021/2022;
- Maintaining budget deficit at 3.0 percent of the GDP and below as agreed between the East African Community macroeconomic convergence criteria;
- To maintain foreign currency reserves sufficient enough to cover at least four months of imports of goods and services
- Ensuring that social wellbeing indicators are strengthened.
4. Policy and Strategies to Increase Revenue.
Same as in the previous budget for the year 2020/21, the Government will continue to emphasize domestic revenue collection. In the said budget the government was determined to ensure collection of revenue in form of taxes, dividends and contributions from public institutions to the Consolidated Fund Services. The 2021/2021 budget is rather focused on setting up a favorable investment atmosphere as a strategy to increase revenue collection. To do so the Government will employ the following measures as highlighted in the Minister’s speech;
- Improving the business environment for taxpayers aiming at attracting investment including nurturing small and medium businesses with the purpose of widening the tax base.
- The Government will continue to implement the plan of improving business and investment by harmonizing, abolishing, and reducing tax rates, levies and fees. This is in fact one of the measures that the President has been advocating for since she was sworn in as president. This will go hand in hand with strengthening the administration of tax laws to address tax evasion and minimize revenue leakages.
- Emphasizing the proper use of ICT systems for purpose of strengthening domestic revenue collection and administration which include collections from the Local Government.
- To improve the Government’s electronic Payment Gateway (GePG) and ensure that all Government institutions use the system.
- The Government intends to prioritize the implementation of strategies and projects to increase revenue collection.
- Strengthening of the monitoring systems in institutions and public entities with a view of ensuring timely submission of dividends and collections to the Government.
In response to the outbreak of COVID 19 in the year 2020 the Monetary Policy Committee of the Bank of Tanzania issued a press statement outlining the policy measures to mitigate the adverse effects of COVID 19 on the economy. For more information see our Article on the measures.
As a result of the pursued measures, level of liquidity in the banking system remained adequate as reflected by general stability of money market interest rates at low levels.
In the 2021/2022 budget, the government will take measures as recommended by a Special Committee of Experts that analysed impacts of the pandemic and submitted its report on 17th May 2021 outlining the effects of the pandemic. As a response, the Ministry of Finance and Planning has initiated negotiations with the IMF to secure a concessional loan worth USD 571 million under Rapid Credit Facility (RCF). The purpose of the loan is to mitigate the economic and social effects of the pandemic.
5. Priority Areas for the 2021/2022 budget.
- Financing strategic projects:
In ensuring that the country attains an inclusive and competitive economy, the Government intends to finance strategic projects. Such projects are to ensure a vibrant society capable of competing both regionally and globally, to promote macroeconomic stability, to improve business and investment environment, to promote innovation and transfer of technology and skills. The projects also include the development of railway infrastructures, construction and rehabilitation of roads that link the country with neighboring countries, ICT and digital infrastructure, and generally transport and communication infrastructure. A total of 7.44 trillion has been allocated out of which 3.13 trillion is for flagship projects.Commenting on the Nyerere Hydropower and Standard Gauge Railway (SGR) Model Projects the Minister said ;
“The late Mwalimu Nyerere carried the vision of these projects, President Magufuli initiated these projects, and President Samia is going to complete these projects. I assure Tanzanians that, we will not abandon a project.
Our take on this is that the government will strengthen its ongoing projects such as:-
a) Standard Gauge Railway (SGR) – Whereas Her Excellency said in her previous speech that he Dar es Salaam – Morogoro stretch of the SGR project is 91% complete. Also, the government approved the spending of US $160.5m as initial budget for the construction of the 341km Standard Gauge Railway (SGR) from Isaka to Mwanza.
b) The Julius Nyerere Hydroelectric Power Project – This project once completed will be able to generate 2,115 Megawatts (MW). Recently the Minister for Energy requested Tshs 1.4 trillion for the project, which is equal to 58.67 percent of the entire amount that the ministry will spend in its budget for the 2021/2022 financial year. This shows serious the government is on this project which is currently 52 percent completed.
c) The East African Crude Oil Pipeline (EACOP) – The Project is projected to result to over 60% Increase in Foreign Direct Investment (FDI) in Uganda and Tanzania during the construction phase. Recently, President Yoweri Museveni of Uganda and President Samia Suluhu witnessed the signing of a Host Government Agreement to finalize the 3.5 billion crude oil pipeline project preparations.
d) Construction of the Liquefied Natural Gas (LNG) Plant – The president has so expressed her determination to revive a long stalled $30 billion project. The project is expected to have the capacity to produce 10 million tonnes of liquefied natural gas per annum. The government is concluding talks with Equinor and Shell to start the construction in 2022.
The Government intends to put more emphasis on value addition industries that will add value to crops, livestock, and fishery products. In her speech on the 22nd April 2021, the President indicated that the government’s plan is to tie agriculture and industries, by emphasizing construction of industries especially those which use agricultural raw materials available in the country. The President emphasized on the importance of designating special areas for Industrial Parks and free trade areas especially along the country’s border regions. (See our Article highlighting the President’s speech)Thus, in line with the speech the Government intends to construct, rehabilitate irrigation and crop storage infrastructure, strengthen research centers, and support value-added services for crops, livestock, and fisheries products. On the other hand, the Government intends to direct efforts in the mining industries where it intends to build industries for mineral value addition. Other areas of focus under this part include financing and promotion tourism, financial services, insurance services, and pharmaceuticals and medical equipment industries. A total of 1.38 trillion has been allocated to finance these projects.
- Promotion of Trade and Investment.
For the purpose of promoting investment and trade in the country, the government has resolved to finance programs to strengthen domestic markets and exploit regional and international market opportunities. The main targets are markets for crops, livestock and forestry, and fishery products. Again this is one of the initiatives that President Samia Suluhu identified as her priorities in the next 4 years of her administration.At Breakthrough Attorneys we believe that promotion of trade and investment translates to an increase in revenue collection and creation of employment, which will result in improved living standards in the long run. Nonetheless, we are yet to see how the above can be achieved given existing restrictive laws, which prohibit or hinder Tanzanians from participating in external markets, especially in securities. For example, the Foreign Exchange Rules still restrict investment on securities outside the EA Regional Block (see our Article on Foreign Exchange Transactions In Tanzania; Inward And Outwards Transfers And Related Portfolio Investment Transactions). On the other hand, in 2018 the parliament passed a law that restricts outward investment of funds which have been secured by domestically situated assets (see section 10 of the Written Laws (Miscellaneous Amendments) Act 2018, Act No. 1 of 2018).
- Human development and improving social services.
The government has allocated a total of 4.43 trillion shillings for human development and the improvement of social services. The government intends to manage and develop water resources for both rural and urban areas, to implement environmental protection and climate change adaption programs. The focus will also be directed to improving health and social wellbeing and education/training. Thus the Government will finance programs that develop knowledge and skills at all levels of education, including enabling environment for self-employment among the youth. The government will also continue to improve the livelihood of poor households through the implementation of the Productive Social Safety Nets Program through the Tanzania Social Action Fund (TASAF).
- Improvement of infrastructures.
The Government plans to implement infrastructure improvement projects through concessional from the World Bank. Such projects will include: The Dar es Salaam Metropolitan Development Project Phase II (DMDP II) for the flood response in the Msimbazi River Basin at a cost of USD 120 million, which will involve the construction of Msimbazi river banks and a bridge at Jangwani area. Further, the government expects financing from the World Bank through the International Development association amounting to USD 500 for the construction of infrastructure to improve the business and investment environment to enhance the economic growth of 45 towns and cities.
- Improving Employees’ Welfare
Recognizing the contribution of employees to the economy, the Minister expressed the determination of the government to promote and improve employees’ welfare. Therefore the following measures will be taken;
- To reduce the minimum tax rate levied on employment income (PAYE) from 9 to 8 This measure is a continued effort by the Government to reduce the tax burden to employees whereby, the rate has been reduced from 11 percent in 2015/16 to 8 percent in 2021/22;
- To abolish the 6 percent value retention fee on higher education loans. Loan beneficiaries have been complaining for years on increased interests and the retention fee. The scrapping off of the retention fee will relieve employees from the burden of paying extra amounts in addition to principal and interest.
- To allocate 449 billion shillings for the promotion of 92,619 public sector employees. This spells hope to employees especially those employed from 2014/2015 and later who have never tasted grade promotions nor salary increments since 2015. This is relieving to a large number of people since the Government employs a large number of people than any other employer.
6. Proposed tax law changes.
To achieve the targeted objects and address the key priorities above, the government has thus proposed to amend various laws. Below is a brief summary of some of the key proposed amendments;
- Amendment of the Income Tax Act CAP 332 R.E 2019 grants exemption of income tax on interest income derived from Government bonds. This measure is intended to promote investment in treasury bonds and in turn increase government financing.
- Introduction of taxation of individuals engaged in small mining operations whose annual turnover does not exceed Tanzania shillings 100 million per annum at the rate of 3 percent. ( The Income Tax Act, CAP 332 R.E 2019)
- Introduction of a non-final withholding tax of 2% on payments to suppliers of agro-products, livestock, and fisheries. (The Income Tax Act CAP 332 R.E 2019)
- To increase the minimum threshold for the number of employees required for paying Skills Development Levy (SDL) from 4 to 10 employees. (The Vocational Education Training Act CAP 82 R.E 2019)
- To exempt Religious health institutions from paying SDL. (The Vocational Education Training Act CAP 82 R.E 2019)
- To exempt Value Added Tax (VAT) on imported or Local Purchases of Goods and Services by a Non- Governmental Organizations (NGO’s) for implementation of project through an agreement with the Government that provides Value Added Tax exemption on the project. (The Value Added Tax Act, Cap 148 R.E 2019)
- To exempt VAT on smartphones, Tablets, and Modems aiming at promoting the usage of data services in the country in order to attain the target of 80 percent of users of internet services by 2025. (The Value Added Tax Act, Cap 148 R.E 2019)
- Removal of the requirement for VAT exemptions to receive approval from Minister of Finance. Thus VAT exemptions will be processed and managed directly by TRA through its offices throughout the country. (The Value Added Tax Act, Cap 148 R.E 2019)
- Imposition of a Levy of between 10 shillings to 10,000 shillings in each mobile money transaction of sending and withdrawing. (The Electronic and Postal Communication Act, CAP 306, 2008)
- Imposition of a levy of between 10 shillings to 200 shillings per day per SIM card depending on the ability of the user to recharge the balance. (The Electronic and Postal Communication Act, CAP 306, 2008)
The above-proposed amendments and other amendments not mentioned above are tabled down in the Finance Bill, 2021. Thus our Tax and Investment Department at Breakthrough Attorneys has prepared an in-depth analysis of the Finance Bill to be shared soon. Please stay abreast our forthcoming articles discussing the same as well as the would be Finance Act upon approval by the Parliament.
Our general overview of the budget is that it has really reflected the sixth phase of the government priorities as the president addressed the same before the National Assembly two months back. The proposed amendment of laws especially tax laws on exemption and exemption procedures are positive towards implementing the priority areas highlighted in the budget.
However, proposed amendments such as the introduction of the SIM card levies will increase a tax burden upon consumers considering that the fact that communication is a very essential service. Although it is a measure to increase revenue, the government could come with better options which would not directly put a burden to the public. Also as our proposal for future budgets, the government should consider the possibility of flexing taxes for startups in form of reductions and exemptions. Also to support the development of ICT in the country, the government should consider coming up with seeding programs and strategies to ensure that Tanzanian ICT startups and innovation can compete not only technically but also financially.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.