Improving tax administration in Tanzania: Lessons from Uganda’s tax reform
Reforms to revenue administration offer a low cost option for cities to dramatically and sustainably expand revenues. Cities in Tanzania can learn from the successful reforms implemented in Kampala – but successful reform requires sufficient political will and funding to drive these.
On the 2nd – 4th October 2017, the International Growth Centre (IGC) was invited to participate in the 33rd Annual General meeting of the Association of Local Authorities in Tanzania (ALAT) in Dar es Salaam, Tanzania. As part of this, representatives from the IGC’s Cities that Work initiative presented research findings and best practice for ‘taxpayer-friendly’ sources of revenue collection, drawing on the successes of revenue collection in Kampala, Uganda.
Financing growth in developing cities
In rapidly developing cities, large public investments are needed to improve the quality of life of citizens and provide the conditions for long term economic growth. The challenge for many cities is that municipal revenues are insufficient to meet the large and growing needs for public spending. Whilst own source revenues suffer from low collection rates, transfers from central governments are often insufficient to fund necessary long-term investments.
The situation of local government authorities (LGAs) in Tanzania is no different. Whilst LGAs rely heavily on central government grants, which form approximately 80 – 90% of their finances, the unpredictable nature of these fiscal transfers negatively affects the ability of local governments to plan long term spending on service delivery. At the same time, own source revenues in many LGAs currently fall well below projected collection, further limiting LGA revenue . Consequently, many LGAs in Tanzania are asking: how can they enhance own source funding?
Small but mighty: the promise of administrative reforms
In this context, administrative reforms may be able to offer quick and sustainable gains to local revenues. Experiences from several cities reveal that administrative reforms to improve identification, assessment, and collection of tax liabilities, can be as important as tax policy to raise revenues. In Kampala, for example, reforms to enhance revenue collection capacity between 2011 and 2015 have allowed the Kampala Capital City Authority (KCCA) to increase its own-source revenue by over 100% (Kopanyi, 2015).
Administrative capacity was boosted by:
- increasing staff capacitythrough recruitment and training,
- digitising databasesto reduce the potential for human error, and
- bringing revenue collectionin house.
At the same time, tax compliance was encouraged by improving tax services and through communication campaigns that illustrated what citizens’ tax payments were being used to finance. Underlying these reforms was an understanding of taxpayers as clients who would be willing to pay their taxes voluntarily in exchange for valuable public goods and services.
Underlying reforms in Kampala was the idea that taxpayers should be seen as clients, who will voluntarily pay taxes in exchange for valuable public goods and services.
There is significant potential for revenue gains from similar administrative reform by Tanzanian local government authorities.
- Going digital
Manual recording of revenue data by many local authorities, for example, results in substantial losses from human error and inconsistency between databases. Reforms to digitise tax collection at the national level, through the Tanzanian Revenue Authority’s ‘iTAX’ system, have been associated with ten-fold increases in revenues between 1996 and 2007 (International Tax Compact, 2011); similar reforms at the local level are likely to yield sizable gains.
- Tax collection: outsourcing or in house?
At the same time, careful assessment of the value of outsourced tax collection is extremely important. The impact of private collection of local government revenues since 1996 in Tanzania has been mixed – whilst in some councils, revenues from tax collection increased and became more predictable, in others, outsourcing collection has been accompanied by high levels of corruption and large profit margins for private collectors at the cost of government revenues (Fjeldstad, Katera, and Ngalewa, 2008). In many cases, it may be the case that capacity development to facilitate internal tax collection by local government departments is the most cost-effective option in the long run.
- Building citizens’ trust
As in many developing countries, limited voluntary compliance of taxpayers in Tanzania is closely related to a lack of trust in the local government revenue systems and the benefits they provide. Survey data from six councils suggests that the perceived lack of spending on public services is the main reason citizens say they are not willing to comply with local taxation (Fjelstad et al., 2004).
As such, tax compliance in Tanzanian LGAs requires significant investment in improving citizen’s trust, both in the functioning and fairness of the tax system, and in the spending of tax revenues on public services. By linking taxation closely to public investment, increased revenue collection does not have to be an inherently unpopular policy.
Underlying conditions for success
But reforms like those implemented in Kampala have been attempted in many local governments in Tanzania (and elsewhere), with varying degrees of success. Crucially, the effective implementation of these reforms in Kampala required an effective enabling environment for reform. This meant having both the political support and the necessary resources to overhaul administrative of revenues.
- Knowledge and political will
Jennifer Musisi’s unique position as Executive Director of the KCCA (a position appointed directly by the President), with additional experience working as part of the senior management of the Ugandan Revenue Authority, meant that she had both an understanding of the importance of revenue administration reform, and the necessary political backing to achieve reform. This support was needed to make the substantial initial investments associated with bringing collection in-house and investing in new systems.
- Funding costs
In total, the costs of operation of the KCCA’s Directorate of Revenue Collection increased from 1.1% in 2011 to 11.21% of collection by 2014 (Kopanyi, 2015). Though reforms are still needed to reduce the costs of collection, the resultant improvements in revenue collection mean that the KCCA has now moved from a low cost but unsustainable revenue collection to a higher cost sustainable system.
Implications for Tanzania
Without these conditions, administrative reforms are unlikely to gain much traction in Tanzania. Strong political will for administrative reform from local governments, alongside adequate financial and administrative support for reform from central governments, are needed to unlock a process of self-sustaining revenue generation.
There is clear potential for how this can be achieved. Special task forces co-established by central and local governments, for example, can play an important role in monitoring the effective use of new revenue systems and institutionalising central government support for these reforms.
Collaboration between local governments in Tanzania can also allow for scale economies in system development, to lower costs associated with reforms, with a key role for organisations such as ALAT in coordinating these collective investments. Careful cost-benefit analysis of reforms to administration may go a long way in securing central government support for these reforms.
In the longer run, significantly expanding revenues for local governments in Tanzania will involve a more complex and lengthy process of national legislative change to empower local authorities with authority to collect greater revenues. Providing services with locally generated revenues can enhance local accountability based on a ‘social contract’ between local governments and their citizens, building a culture of tax compliance as the price paid for a well-functioning local government. But in the short run, relatively simple improvements in revenue administration can offer a starting point for sustained improvements to services for citizens, and a springboard for better central and local government coordination in revenue collection.