If you are an employee and are to pull out your latest payslip, chances are, you would see two important lines among the list of deductions taken out of your salary – the pension contribution and the PAYE. In most cases, it is the PAYE that makes the biggest chunk of the statutory deductions. And for those who have outstanding higher education loans, the statutory loan deduction can also be significant.
In aggregate, employees in Tanzania pay more income tax than all businesses combined (corporations and sole proprietors). The average PAYE contribution (to the total tax collections) for the past ten years stands at around 16 per cent while the average for businesses is around 12 per cent. The average PAYE collections are even higher than the average for domestic VAT (i.e. excluding VAT on imports), with the latter being around 15 per cent. Looking at these statistics, there is still a room to relieve employees of the income tax burden.
PAYE stands for Pay-As-You-Earn. It is a tax on employment income payable to the government by way of a withholding system. Under this system, an employer is required by law to deduct income tax from employee’s taxable income at various rates from 9 to 30 per cent and remit to the government. If, for example, your monthly gross salary is 1,000,000 shillings, your employer deducts and remits 100,000 shillings to your pension fund and 152,100 shillings as income tax to TRA. If there are no other deductions (like higher education loan and medical insurance) that your employer is obliged to deduct, only 747,900 shillings may reach your wallet! The more your employer deducts other repayments and contributions, the lesser the amount going into your wallet.
The remaining amount (after deductions by employer) needs to foot the bills for your other obligations - including food, rent, school fees (if you have kids), electricity bills, water bills, transport to and from work, cooking gas, and not to forget airtime. In addition, consumption of some these attracts further taxes such as VAT and excise duty. To many employees, this makes savings almost impossible. Savings (the amount you remain with after all your expenditure) are important to individuals and to the economy. Savings, basically, are the source of borrowings by the businesses to increase their production of goods and services. With the financial sector (banks, stock market) playing a facilitator role. So, when an employee cannot save, it tends to affect the capital formation in the economy and hence growth.
In recent years, the focus appears to have been only on the tax rate of the second band of the taxable income. Over the past ten years, the rate for this band has gone down from 15 per cent (the year 2008) to the current 9 per cent. However, most of the employees may not have felt any relief because the rates for the other bands remained unchanged. As an example, when the rate for the second band changed from 11 per cent to the current 9 per cent, the amount of relief to employee brought by the change was only 3,800 shillings per month! Also, the bands have not been significantly restructured since 2008 despite the changes in inflation rates and the depreciation of our currency (shilling). For example, the highest taxable band (taxed 30 per cent) starts at the monthly taxable income of 720,000. This has been the case for over ten years or so. In 2008, the amount 720,000 shillings was equivalent to around USD 600. But today, USD 600 is close to 1,400,000 shillings. The current band structure is clearly outdated and needs some reforms to provide some relief to employees.
By Shabu Maurus, Tax Partner, Auditax International.