History of taxation

The major functions of the Authority are to:-

1. Assess, Collect, and Account for All Central Government Revenue: TRA is responsible for ensuring that all taxes and government revenues are collected accurately and efficiently. This includes income taxes, VAT (Value-Added Tax), excise duties, and other forms of taxation.
2. Administer Revenue Laws: The Authority administers all the revenue laws of the Central Government, ensuring compliance and proper enforcement of tax policies.
3. Advise the Government on Fiscal Policy: TRA provides the government with expert advice on fiscal policies, such as tax reforms, budgetary needs, and economic planning to promote sustainable growth.
4. Promote Voluntary Tax Compliance: TRA encourages taxpayers to voluntarily comply with tax laws by educating them on their tax responsibilities, simplifying tax payment processes, and providing incentives for those who consistently comply.
5. Improve the Quality of Services to Taxpayers: TRA works to improve its services to taxpayers by streamlining tax filing and payment processes, ensuring transparency, and addressing taxpayer concerns promptly.
6. Counteract Fraud and Tax Evasion: TRA combats tax fraud and evasion by implementing measures to detect fraudulent activities, conducting investigations, and prosecuting offenders.
7. Produce Trade Statistics and Publications: The Authority produces relevant trade statistics and other publications that inform policy decisions, aid businesses, and assist the general public in understanding trade and tax issues.

Value-Added Tax (VAT) is a consumption-based tax that is widely used across the globe. In Tanzania, VAT has several advantages, both for taxpayers and the economy as a whole:

1. Simple to Collect and Well-Known by Taxpayers: VAT is relatively simple to understand and collect. Businesses charge VAT on sales of goods and services and pass the collected tax to the government. Taxpayers are familiar with the tax structure, and the process is clear and straightforward.
2. Tax is Charged Only When the Consumer Pays for Goods or Services: VAT is only collected at the point of sale to the final consumer. This makes it a consumption-based tax, ensuring that it is only levied when goods or services are actually used or consumed.
3. Transparency: VAT is a transparent tax because taxpayers know exactly how much tax they are paying on goods and services. The tax is added to the price, so the consumer is aware of the amount being charged.
4. Distributes the Tax Burden Widely: Since VAT is applied to various products and services, the tax burden is spread across a large number of consumers and businesses, ensuring that no single entity is overburdened.
5. Encourages International Trade: VAT encourages international trade by zero-rating exports. This means that goods and services sold for export are not taxed, making Tanzanian products more competitive in global markets.
6. Encourages Saving and Investment: VAT helps stimulate savings and investment by lowering the tax burden on income and encouraging people to invest their money into productive sectors of the economy.
7. Economic Stability: VAT helps solve some economic problems faced by businesses, such as the ease of collecting tax at multiple stages of the production process. It also provides a stable source of revenue for the government, which can be used to address national economic needs.

While VAT is widely considered a fair and effective tax system, it does have some drawbacks that can impact both businesses and consumers. Below are the main disadvantages of VAT:

1. Regressive Nature: VAT can be considered regressive, meaning it disproportionately affects low-income individuals. This is because the tax is applied uniformly to all goods and services, regardless of the buyer's income. As a result, lower-income individuals spend a higher percentage of their income on VAT, which can contribute to inequality.
2. Increased Costs for Consumers: Although VAT is ultimately paid by the consumer, businesses often pass on the cost of VAT to their customers by raising prices. This can increase the cost of living for consumers, particularly for essential goods and services.
3. Administrative Burden on Businesses: For businesses, VAT requires meticulous record-keeping and paperwork to track the tax on every transaction. This can be burdensome, especially for small businesses, as they need to file regular returns, calculate VAT, and ensure that they comply with tax regulations. The costs of accounting, compliance, and audits can be significant.
4. Cash Flow Problems for Small Businesses: Small businesses that are required to pay VAT on their purchases before receiving payments from customers can face cash flow issues. For instance, they might pay VAT on goods they purchase but may not immediately collect VAT from customers due to delayed payments, which can strain their finances.
5. Potential for Tax Evasion and Fraud: VAT systems can be prone to evasion and fraud, especially if businesses underreport their sales or overstate their purchases to reduce the amount of tax owed. The complexity of VAT can provide opportunities for dishonest practices, which require stringent enforcement and monitoring to prevent.
6. Difficulty for Consumers to Understand: While VAT is generally transparent, it can be confusing for consumers who may not always fully understand how much tax they are actually paying on various goods and services. This is particularly true for businesses that do not clearly indicate VAT on receipts or invoices.
7. Impact on International Competitiveness: Countries that apply VAT at high rates may face challenges in competing with countries that have lower VAT rates or no VAT at all. This can discourage investment or reduce the competitiveness of certain sectors, especially those that rely heavily on cross-border trade.
8. Administrative Costs for the Government: While VAT is an effective way of collecting taxes, the administration of the system requires significant investment in infrastructure, staffing, and resources to monitor compliance, collect the tax, and ensure proper auditing. The government must spend resources to enforce the system and combat evasion.
9. Exemptions and Complexity: While many essential goods (such as food or medical supplies) may be exempt from VAT or charged at a lower rate, creating and managing exemptions can complicate the tax system. It may lead to confusion among consumers and create loopholes that businesses might exploit.

Corporation taxes are taxes levied on the profit of companies. Corporation tax is paid by incorporated business. Taxes on capital as such are not taxed. Tax is paid when capital is sold or transferred. The most important taxes are capital gain tax and capital transfer tax.

Capital gain tax (CGT) may be paid when assets are sold at a profit. For example, a saver who makes a capital gain of shs 8,000 as a result of buying and selling shares may have to pay capital gain tax on the profit.

Capital transfer tax may have to be paid when assets are transferred from one person to another, for example, a son. Capital transfer tax is also called inheritance tax.

This is the income level at which a person becomes liable to income tax after account has been taken of all allowances to which they are entitled.

This is an amount set aside for payment of tax when due, since taxes on company profits are collected in arrears.

This is the amount of tax a person would pay on each successive unit of the tax base.

The effective rate of tax, or average rate of tax, is the actual tax paid as a proportion of income. We arrive at the effective rate of tax as follows:

$\text{Marginal rate of tax} = \frac{\text{increase in tax paid}}{\text{increase in income}}$

NB: With progressive taxes, it is the case that the marginal rate is higher than the average rate.