Leveraging electronic fiscal devices in Tanzania

Collecting tax revenues remains a major challenge in Tanzania and many other low-income countries.

Some of the key reasons for Tanzania’s low tax revenue are its large informal sector (which shrinks the available tax base), low compliance among formal firms, and limited state capacity to enforce its tax laws. Tanzania’s tax-to-GDP ratio of 11.8% in 2022-23 remains lower than the sub-Saharan average of 16%. 

To remedy this, the Tanzania Revenue Authority (TRA) has implemented several major reforms since the 1990s. These reforms include the establishment of the TRA as a semi-autonomous government agency and the introduction of VAT in 1997 replacing the inefficient sales tax. 

In 2010, the government adopted electronic fiscal devices (EFD) – digital devices that generate tax invoices and share the data with the TRA in real-time. These devices have since become central to the TRA’s efforts to increase its fiscal capacity. However, the enormous amount of data these devices collect is of limited use in its raw form.

In principle, digital tax records should make it easier for revenue authorities to cross-check tax returns for discrepancies. However, empirical evidence shows that revenue authorities in low-income countries hardly cross-check their tax records (see Kangave et al., 2017, Mascagni et al., 2021). 

One of the reasons for this is that most revenue authorities can only access EFD data in raw format, hindering the utilisation of this data because of difficulties in processing, compiling, and analysing large volumes of information. With IGC’s EFD research and work on TRA’s existing dashboard, major modifications improved the utility of the EFDs and the extensive data they gathered. 

Monitoring and recording taxpayers’ sales and receipts 

Within the dashboard, filters to analyse the total sales and total receipts issued were developed for aggregate-, taxpayer-, and machine-levels. The data was further refined so it could be categorised by location, frequency, and other taxpayer characteristics like taxpayer registration status. 

In this format, the TRA can have a holistic real-time understanding of revenue collection, which can identify and troubleshoot outliers. These types of dashboards can help transform the auditing of firms with a data-driven approach.

Integrating taxpayer information, EFD, and VAT data for comprehensive profiles

Since taxpayer information is housed separately from the EFD database, after analysis for TRA, IGC researchers suggested integrating these two systems. This will help the TRA raise any concern with the user directly and immediately. 

Likewise, these two systems (taxpayer information and the EFD database) could be integrated with the VAT system to aid in VAT reconciliation. VAT is a convenient system of taxation because it enables the regulator to cross-check the itemised receipts of the customer with those of the seller for tax reconciliation. 

A study in India, found that enhancement in VAT reconciliation efforts improved revenue collection significantly, especially amongst wholesalers. With the integration of these three systems (taxpayer information, EFD, and VAT databases), TRA will have a comprehensive taxpayer profile right in the dashboard, aiding massively with enforcement activities and audits. 

Reconciling customs, excise, and VAT payments through EFDs

The TRA’s inbuilt custom information system and the excise tax management system could also benefit from leveraging EFD data.  While minor in proportion to other revenue sources, the excise tax is a significant expense to the companies bearing them. 

This is true for import duties as well. With the EFD database, TRA can reconcile customs, excise, and VAT systems to verify that the volume of goods subject to these taxes in the market is equivalent to what was declared. 

Given Tanzania’s role as a transit hub for landlocked countries and VAT exemptions on exports, the EFD database provides a convenient way to reconcile these payments.

The future and advantages of EFDs – improved data quality and tax collection

The enhanced dashboard can help address data quality problems by reflagging abnormal data points in real-time. It can also provide more granular location information that is accurate for the exact location of the taxpayer. This capability would be further enhanced if the EFDs were equipped with GPS technology since most of them are not used where they were registered. 

While quite revolutionary in revenue collection, EFDs on their own do not cover the full spectrum of revenue collection, compliance, and enforcement. Only once the data generated by EFDs is utilised to its full potential, their benefits of covering the last mile of tax collection in low- and middle-income countries will be realised.