CHAPTER ONE INTRODUCTION, OBJECTIVES, AND PROBLEM DEFINITION 1.1 Introduction Taxation forms an important part of fiscal policy of any government. Through taxation the government raises the revenue which is required for recurrent and development expenditure and for implementing various social and economic policies. Citizens of any country have a civic obligation to pay taxes to the government so as to enable it meet the cost of providing the social- economic services which then become their right to demand through their representatives in the Parliament or the House of Representatives. The United Republic of Tanzania came into being in 1964 with the unification of Tanganyika and Zanzibar. However the Union is not comprehensive, the Union Government is responsible for national security, external affairs and monetary management. Zanzibar is an autonomous to the extent of having its own Government, President, Chief Minister, Cabinet, Parliament, Judiciary and its own Flag. Further, Zanzibar is responsible for its development so it manages its own budgets and controls its own foreign exchange reserves. 1
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CHAPTER ONE
INTRODUCTION, OBJECTIVES, AND PROBLEM DEFINITION
1.1 Introduction
Taxation forms an important part of fiscal policy of any government. Through taxation the
government raises the revenue which is required for recurrent and development expenditure
and for implementing various social and economic policies. Citizens of any country have a
civic obligation to pay taxes to the government so as to enable it meet the cost of
providing the social- economic services which then become their right to demand through
their representatives in the Parliament or the House of Representatives.
The United Republic of Tanzania came into being in 1964 with the unification of
Tanganyika and Zanzibar. However the Union is not comprehensive, the Union
Government is responsible for national security, external affairs and monetary
management. Zanzibar is an autonomous to the extent of having its own Government,
President, Chief Minister, Cabinet, Parliament, Judiciary and its own Flag. Further,
Zanzibar is responsible for its development so it manages its own budgets and controls its
own foreign exchange reserves.
According to Zanzibar Fiscal Study of 1997 done by ESRF, the Revolutionary Government
of Zanzibar has been facing growing revenue shortfalls relative to expenditure needs. With
an estimated per capita income in the region of US$ 215, Zanzibar is ranked amongst the
poorest in the world. Historically, Zanzibar was the leading producer of cloves in the
world, but now is far behind Indonesia, Madagascar and Sri Lanka. Like many other small
island economies.
Zanzibar has been traditionally dependent on this single major crop as the mainstay of its
economy and the major determinant of an increase or decrease of its national output.
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Tax administration in Zanzibar is under two main authorities namely:-
Tanzania Revenue Authority (TRA).
Zanzibar Revenue Board (ZRB).
Tanzania Revenue Authority (TRA) was established by Act No. 11 of 1995 and started its
operations in July 1996. Prior to its establishment, tax administration in Tanzania was
directly under the Ministry of Finance operating under loosely related three revenue
departments of Customs and Excise, Income Tax and Sales Tax and Internal Revenue.
TRA in Zanzibar handles only the Union taxes, which are Income tax and Customs duties while
the local taxes are under the jurisdiction of Zanzibar Revenue Board (ZRB).
On the other hand, the Zanzibar Revenue Board (ZRB) was established under the ZRB Act No. 7
of 1996 as the prime agency of the Government of Zanzibar for collection and administration of
all taxes from Inland Revenue sources other than Customs and Excise, and Income taxes which
are administered by the Tanzania Revenue Authority (TRA).
Other tax laws which are administered by ZRB include the Business License Act No. 3 of 1983,
the Petroleum Products Levy Act No. 3 of 1991, the Hotel levy Act No.1 of 1995,the Value
Added Tax (VAT) Act No. 4 of 1998, the Stamp Duty Act No. 6 of 1996, and the Port Service
Charge Act No. 2 of 1999.
Both TRA and ZRB collect taxes in Zanzibar on behalf of the Revolutionary Government of
Zanzibar (SMZ).
The study addressed issues pertaining to customs administration in Zanzibar including laws and
procedures of importation of goods into Zanzibar which is part of Tanzania (Tanzania is among
the present five Partner states in East African Customs Union), as well as the procedures
involved when transferring such goods from Zanzibar to Tanzania Mainland and vice versa.
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1.2.0 Objectives of the Research
1.2.1 General Objective
The main objective of the research was to evaluate the major opportunities and
challenges facing Customs administration in Zanzibar and give recommendations for
improvement.
1.2.2 Specific Objectives
To examine customs procedures per customs guidelines and its application in
Tanzania Mainland and Zanzibar.
To establish the contribution of import duty in revenue collection.
To establish the value of goods transferred from Zanzibar to Tanzania mainland
and to examine processes and procedures applied in re-assessing and re-valuation
of the same goods on Tanzania Mainland.
1.3 Problem Definition
Section 2(1) of the Constitution of Tanzania provides that Zanzibar is part of the United
Republic of Tanzania. And the same Constitution under Section 138(2) gives powers to the
Revolution Council of Zanzibar to charge any tax which is under its jurisdiction.
As a result, there are two Tax Authorities which are taxing the same individuals and entities in
Zanzibar different from Tanzania Mainland. Apart from having two Tax Authorities which are
working in the same jurisdiction, the Revolutionary Government of Zanzibar has been facing
growing revenue shortfalls relative to expenditure needs. Also there are a lot of complaints
from both sides of the Union which some especially the politicians refer as part of the
“Problems facing the Union”.
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As of today, goods entering the Republic of Tanzania through Zanzibar are subjected to normal
customs processes and procedures. However, the same goods, if transferred to Tanzania
Mainland from Zanzibar are subjected to re-assessment and re-valuation by Customs
Department of the Tanzania Revenue Authority. This has raised much concern and outcry by
Zanzibar businessmen and the politicians.
Therefore, this study was done so as to understand the real problems facing the structure and tax
administration in Zanzibar as part of the Union and propose alternatives or options for problem-
solving.
1.4 Significance of the study
The study evaluated and revealed the challenges which encounter Customs Administration in
Zanzibar and suggested corrective and preventive measures. The study is expected to be of much
value to a number of people as follows:-
It will help the TRA Management and the TRA Board of Directors to formulate policies and
strategies in minimization of tax evasion in Customs and Excise Department particularly in
Zanzibar entry points. Also, It is anticipated that the study will form the basis for the TRA to
handle and manage customs goods which are transferred to Tanzania Mainland from Zanzibar
equitably (Streamline trans-shipment procedures).
(i) It will be useful to stakeholders engaged in international trade such as
Importers, Clearing and Forwarding Agents and shipping operators.
(ii) It will be used as an additional reference to help researchers identify viable
areas for further researches on other taxation aspects.
(iii) The study is done specifically to enable the researcher to fulfill the
requirement for the degree of Masters of Business Administration of Mzumbe
University.
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1.4.1 Scope of the study
The study covered Customs and Excise department in Zanzibar which is under the Tanzania
Revenue Authority. Zanzibar entry points are among customs entry points (Such as borders,
airports and ports) which are under the control of the Commissioner for Customs and Excise
Department under TRA.
The area of study is not the representative of the whole Customs Administration in Tanzania.
This is likely going to affect the generalization of the results but it leaves an open room for
further study in those other customs areas in the whole United Republic of Tanzania.
1.5 Constraints of the study
(i) The researcher had no financial support from any other source except from his
own sources. Therefore it was not possible to cover the large population of
taxpayers and other stakeholders who are engaged in customs operations.
(ii) Some respondents especially in Wete Pemba were reluctant to complete the
questioners. They thought it is a strategy of the Government to introduce new
taxes.
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CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
“There is no art which one government sooner learns of another than that of draining money
from the pockets of the people” by Smith, A. (1776). This signifies that taxation has a very long
history like the life of human being, therefore there are various literatures exist on the field of
taxation. The Researcher consulted some of these literatures for review purposes in undertaking
the study.
2.2 Theories of Taxation
2.2.1 Meaning
The Bible records that the people of Israel asked the prophet Samuel to “make a King to judge us
like all the nations” (1Samuel 8:5), the prophet tried to discourage them by describing what life
will be under a monarchy, as the king will provide things that the people want but only at a cost
which the prophet graphically explains refers to taxes/duties which can be a serious burden to
them (1Samuel 8:15). Even today taxation is considered as a burden to taxpayers thus why some
of them tend to practice tax avoidance or tax evasion.
In a different perspective, “Taxation is part of the price of civilization: for a while it is possible
to have governments without taxation, but it is not possible to have taxation without
government” by Sabine, B.E (1980). Governments derives receipts to finance expenditures,
whether transfers or purchases, or to pay off public debt. These receipts may tax the form of
taxes, charges or borrowing. Musgrave, R.A (1984) defines taxes as “are compulsory imposts
withdrawn from the private sector without leaving the government with a liability to the payee”.
Taxes differ with borrowing due to the fact that borrowing involves a withdrawal made in return
for the government’s promise to repay at a future date (For example, Treasury bills).
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In 1899, The US Supreme Court declared: “The power to tax is the one great power upon which
the whole national fabric is based. It is as necessary to the existence and prosperity of a nation as
is the air he breathes to the natural man. It is not only the power to destroy but also the power to
keep alive [Nical v. Ames, 173 US 509, 515 (1899)].
Many authors define taxation as a “compulsory levy or charge imposed by the state on her
citizens and non – citizens that is usually payable in monetary terms”. Taxes are compulsory
financial contribution made by a person or body of persons towards the expenditure of a public
authority.
In OXFORD Advanced Learner’s Dictionary (1995) the word tax means “money that has to be
paid to government”. This definition is lacking the important legal aspect as the government
cannot enforce any tax without the legal powers under the law.
In the OXFORD Dictionary of Business and Management (2006), taxation is defined as “a levy
on individuals or corporate bodies by central or local government in order to finance the
expenditure of that government and also as a means of implementing its fiscal policy”.
2.2.2 Taxation and Income Distribution
In any society always there is debate of whether the tax burden is distributed fairly. In a book of
Harvey & Ted (2008) has demonstrated how taxes affect the distribution of income through the
following example:-
“Suppose the price of a bottle of wine is $10. The government imposes a tax of $1 per bottle, to
be collected every time a bottle is purchased; the tax collector (who is lurking about the store)
takes a dollar out of the wine seller’s hand before the money is put into the cash register. A
casual observer might conclude that the wine seller is paying the tax. However, suppose that a
few weeks after its imposition, the tax induces a price rise to $11 per bottle. Clearly, the
proprietor receives the same amount per bottle as did before the tax. The consumers pay the
entire tax in the form of higher prices.”
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The statutory incidence of tax indicates who is legally responsible for the tax. The above two
scenarios the statutory incidence of tax is on the seller. But the question is who really bears the
burden of tax. Because the prices change as a result of the imposition of tax, is where the
economic incidence of tax is shifted from the seller to the consumer.
The study has also reflected the perception of taxpayers regarding current customs external
tariffs which are applicable in East African Community.
In the book of Messere, K. and Kam, F (2003) explained two conflicting but complementary
principles used to justify taxes:
The ability to pay (Accretion principle) – Those who are able to pay more should pay
more.
The benefit principle - Those who benefit most should contribute most.
Further the same authors explained that practically the above principles may not hold water.
It is the question of how a particular tax meets the criteria of equity, efficiency and simplicity.
This study focused mostly on these criteria by looking into the customs procedures which are in
place in the importation and trans-shipment of goods and how can be improved.
2.2.3 Taxpayers’ Perceptions and Compliance
Tax compliance to a certain extent depends on the perceptions of taxpayers on fiscal policy, and
how the taxes collected are spent by the government. Messere, K and Kam, F (2003)
mentioned “Tax visibility” and “Fiscal Justice and Public Relations” as factors which lead to
positive or negative taxpayers’ perception.
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(i) Tax visibility
The greater the visibility of a tax the more unpopular is likely to be. For example if the taxpayers
are aware that in a certain product the VAT rate is increased it is possible to resist paying. So you
can hide it by writing a tax invoice without showing the tax to pay (you can show a price as
“VAT INCLUSIVE”.
But this is not recommended as it is not per best practice of “Full disclosure and transparency”.
(ii) Fiscal Justice and Public Relations
The countries are required to improve the services provided to taxpayers because modern tax
systems require cooperation from the taxpayers if they want to operate efficiently and also as a
result of changing attitudes towards the role of tax administration in relation to taxpayers.
(iii) Transparency in government spending
Taxation is a “contractual relationship” between the people and the state. The state has the
obligation to collect tax from its people and use the taxes in a transparent manner and for the
benefit of the people (Public good). Taxpayer will not be willing to pay their taxes if they do not
know where their taxes are used.
The study focused on the evaluation of the collection of import duty and not how it is used. But it
is understood that our Governments are making much efforts to communicate with people
through their representatives and through the media on government expenditure in development
projects.
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2.3 Tax Administration
Tax administration is a challenging aspect as there a number of issues to be analyzed. Such as,
who and what to be taxed? When? And how? According to Ashworth, W. J. (2003) tax
administration has been equated to, like the skills of physician of “choosing the proper vein to
Bleed, and knowing what quantity of Blood to draw” from his Patient. This is true, as tax
administrators they must know their taxpayers and group according to their levels of potentiality
(Small, Medium and Large Taxpayers).
2.3.1 Principles of Good Tax Administration
The basic principles of taxation have remained more or less unchanged for the past 220 years.
Smith, A (1776) as founder and followed by other authors like Stiglitz (1980) and Glenn &
Gangadhar (1999) stated the main principles by which a tax system is judged to be good or not
are as follows:-
(i) Benefit Principle of taxation.
People who benefit from the service can be required to pay for it. Foe example
social security taxes will directly benefit those people who later are paid pension.
Indirectly, all taxpayers are benefiting from taxes which the government collects
from them through good infrastructure, social services and security which is
provided by the government.
(ii) Ability to pay Principle
The taxpayer is required to contribute according to his or her ability to pay. The tax
system should be fair in its treatment of different individuals. Horizontal Equity:
Individuals who are the same in all relevant aspects should be treated equally; Vertical
Equity: Individuals who are better able to pay higher taxes should bear a higher share of
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total taxes (except in the case of benefit taxes where individuals are charged taxes in
accordance with the benefit they derive from a public good or service).
(iii) Economic efficiency
A tax increases the price of a good by adding the percentage or fixed amount to the
original price. This creates a gap between the value that consumers pay for the good and
economic resource cost of production, such market distortions caused by taxation create
a loss economic efficiency. The economic efficiency of a tax is an important
consideration when designing a tax system.
(iv) Economic growth.
The tax system should not create a disincentive to work but it should encourage
competition across various sectors of the economy.
(v) Revenue adequacy
The taxes introduced should be appropriate and sufficient to finance the
government need over a time.
(vi) Stability
Constant changes in the rates and rules of taxation make difficult for the private
sector to make long term plans. When the tax system is structurally unstable it
become a source of risk and impose element of economic inefficiency.
The uncertainty of taxation encourages the insolence and favors the corruption of
an order of men who are naturally unpopular, even where they are neither insolent
nor corrupt. The certainty of what each individual ought to pay is, in taxation, a
matter of so great importance that a very considerable degree of inequality, it
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appears, I believe, from the experience of all nations, is not near so great an evil as
a very small degree of uncertainty.
(vii) Simplicity
A tax system should be simple so that it is easy to comply with by taxpayers.
The more complex the rules of taxation are, the more they can be subverted and
evaded. As the tax law becomes difficult that can only be understood by
specialists, then those who can afford to pay the specialists can take advantage of
the loopholes which are available in that law.
(viii) Low administration and compliance cost
The higher the cost of collection of tax reduces the net tax available to the
government. If great resources must be devoted to the collection of taxes, they
are simply wasted! Indirect taxes (such as Value Added Tax and import duty) are
imposed on traders and importers at lower administrative cost. Through advanced
technology the compliance cost is also reduced, for example the traders and
importers can lodge their returns and documents electronically. The systems like
ASYCUDA++ and ASYSCAN which TRA has introduced at Customs have
made customs operations to be modern and increased the speed of clearing goods
and the ports.
(ix) Neutrality
The tax system should not create major distortion in consumption and production
behavior. A tax should not change the investment decisions by favoring one set
of investments over others
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Musgrave, R. (1984) in the book Public Finance in Theory and Practice
summarized the canons of taxation from Adam Smith and other economists and
social philosophers as follows:-
(a) The distribution of the tax burden should be equitable.
Everyone should be made to pay his or her “fair share”.
(b) Taxes should be chosen so as to minimize interference with
economic decisions in otherwise efficient markets. Such
interferences impose “excess burden” which should be
minimized.
(c) Where tax policy is used to achieve other objectives such as to
grant investment incentives, this should be done so as to
minimize interference with the equity of the system.
(d) The tax structure should facilitate the use of fiscal policy for
stabilization and growth objectives.
(e) The tax system should permit fair and no arbitrary
administration and it should be understandable to the taxpayer.
(f) Administration and compliance costs should be as low as is
compatible with other objectives.
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2.3.2 Tax Administration and Politics
The question to be asked is does there exist a connection between the politicians and the tax
administration? According to Alejandro Estelle ([email protected]) in his paper tilled “The
Politics of Tax Administration: Evidence from Spain” concluded that there is connection
between the two. On one hand the tax administration reacts to the budgetary situation of the
government on the other hand the politicians who are in power takes advantage of the tax
administration in order to gain electoral popularity.
“In addition, as part of the recovery plan I signed into law yesterday, we are going to award
$2 billion in competitive grants to communities that are bringing together stakeholders and
testing new and innovative ways to prevent foreclosures. Communities have shown a lot of
initiative, taking responsibility for this crisis when many others have not. Supporting these
neighborhood efforts is exactly what we should be doing.” Obama, B (2009): (The Speech of
President of United States at Phoenix, Arizona in February 18, 2009).
Every politician in power depends on the efficiency and effectiveness of tax administration to
accomplish their political objectives. Obama will never dish out $2 billion in his recovery
plan if IRS (Internal Revenue Service) has nothing to be collected.
Similarly, in our case Tanzania (Zanzibar is inclusive) there is an election manifesto of CCM
(Chama Cha Mapinduzi) which came up with its motto of “good livelihood to all
Tanzanians”.
This motto of CCM cannot be accomplished without efficient and effective tax
administration which can be able to generate more revenue to finance various programs
which will lead to achieve those objectives. Another new slogan of politicians is “Agriculture
First” this will never be realized without tax collection.
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2.4 Empirical Literature in Taxation
The world of taxes today is very different from that of 1900s. As a result of globalization and
other economic, social and technological developments taxation has become complex to
define and administer.
The first question is what constitutes a “tax”. According to the interpretation guide of a Paris-
based Organization for Economic Co-operation and Development (OECD) confine the term
as “compulsory unrequited payments to general government”. The payment of tax is
unrequited because the benefit of it provided by the state to taxpayers is not proportion to that
payment.
2.4.1 Classification of Taxes
According to OECD taxes are classified in order to the weight of taxation both between
countries and in the same country over time. The measure used is the total tax receipts to
Gross Domestic Product (GDP) at market prices. The OECD classification of taxes is
reproduced below:-
Table 1: Organization for Economic Co-operation and Development (OECD) Model of
Classification of taxes
Code Number Type of taxes
1000 Income taxes
1100 Personal
1200 Corporate
2000 Social Security contribution
2100 Employees
2200 Employers
2300 Self – Employed
3000 Payroll taxes
4000 Property taxes
4100 Immovable property
4200 Net Wealth
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4300 Death and gift
4400 Financial and capital transactions
5000 Goods and Services
5100 Consumption
5110 General (Mostly Value Added Tax)
5120 Selective (mostly excises)
5200 Permission and use
6000 Other taxes
Source: Journal of Economic Psychology, No. 13 (1992)
In this study it has singled out on tax under consumption taxes which is the import duty. The
import duty is one of the oldest major forms of taxation while the Value Added Tax is the
newest.
Basically, there are two types of taxes. Each type is classified according to the legal and effective
incidence to the final payer. These two types are direct and indirect taxes.
(i) Direct taxes
These are taxes levied directly on people’s income from employment, business or ownership of
property and an investment. The impact and incidence of the tax falls on the same person. That
is, incidence cannot be shifted to another person, for example the Corporation Tax, Pay As You
Earn (PAYE) and Withholding Taxes.
(ii) Indirect taxes
These are taxes, which are based on consumption. Examples of such taxes are like Import Duty,
Excise Duty, and Value Added Tax (VAT) etc. By definition the legal incidence of the tax falls
on the trader who acts as a collection agent of the Government while the effective incidence falls
on the final consumer of goods or service that eventually pays the tax.
2.4.2 Tax Evasion
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Tax evasion involves intentional concealment or misrepresentation of financial facts with a view
to escape liability to tax. Evasion therefore constitutes an illegal act which calls for criminal
sanctions.
On the other hand, there is tax avoidance. The main feature of tax avoidance is that it occurs
where a taxpayer takes advantage of the apparent ambiguity in the provisions of tax laws.
Avoidance offers a tax free exit through an elaborate expert planning arrangement. It
entails manipulation of tax laws to obtain tax advantages through artificial schemes.
This advantage may be taken in relation to any tax in the form of relief or increased relief
from the tax, the avoidance or reduction of a charge to tax or the deferral or shifting of
taxable incomes outside the reach of national tax authorities.
On tax evasion Lord Tomlin (1936) said, “Every man is entitled, if he can, to order his affairs so
that the tax attaching under the appropriate Acts is less than it otherwise would be.”
There are a number of reasons as to why people evade tax, some of them are: -
(i) Fairness of the Tax System
The perceived fairness of the tax system is important both to its acceptability and smooth
functioning of the system. A tax can be seen as unfair in a number of ways, one if those of
similar incomes are taxed differently, for instance if the government is seen to have little back in
return. Cowell (1992) has shown that a person’s perception on his own role in influencing the
perceived inequality is of central importance and taxpayer may withdraw by evading taxes if he
sees that the system is not fair to him. A work by Adams (1996) perceived inequality in the tax
system as one of the most important variables, which led to tax evasion.
Again dissatisfaction with the tax authorities in other ways has also been suggested by a number
of investigators as a motivation to evade tax. It is believed that the ineffective of the authorities
correlates positively with a propensity to evade tax.
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(ii) Egoism
Some individuals may be characterized by egoistic tendencies, whilst others may exhibit a strong
identification with community responsibilities, and such be less motivated to avoid taxes owed as
stated by Weigel, Hessing and Elffers, (1998). In other words, the more the egoism an individual,
the less likely he or she will comply with rules and laws since compliance conflicts with their
interests. There is a great deal of evidence that egoism predicts rule – breaking in a number of
areas including income tax evasion, social security fraud and the like.
(iii) Mental Accounting
How business people think about the tax they withhold such as VAT or PAYE which is money
they collect on behalf of the tax Authority, may influence their behavior towards it, the notional
of mental accounting (Shefrin and Thaler, 1998, cited by Webley & other, 2002) mental
accounting is described as a psychological mechanism whereby income is framed (Winnett &
Lewis, 1995, cited by Webley & other, 2002). It is proposed, in respect of personal finance, that
people have a number of mental accounts that operate independently of one another. What is
interesting in the current context is whether businessmen and women psychologically separates
monies owned to VAT or PAYE into separate mental account from the business turnover. If they
do not, they may be more likely to try to evade VAT as a result of seeing it as their money.
The more the taxpayers know that tax evaders who are not caught or punished, the more likely
they will join the bandwagon of tax evaders.
(v) High Tax Rates
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Generally tax rates are presumed to reflect a reasonable compromise between several competing
considerations namely revenue adequacy, economic efficiency, political aspiration and fairness.
As regard the revenue adequacy the rates selected should guarantee mobilization of adequate
revenue. It is hypothesized that overly high tax rates induce taxpayers to resort to tax evasion and
thereby afford from moderate taxes. With high tax rates the taxpayers will not be willing to
disclose all their income or the actual value of their imports or production costs.
(vi) Complexity of Tax Laws
Complex legislations are susceptible to tax evasion. There is a need to have a legislation, which
takes into account of the various segments of the population including having the law in popular
language instead of a single complex to comprehend language.
Tax Administrations have an important mandate to collect taxes at minimum costs to
Government, while at the same time encouraging business activities through implementation of
prudent fiscal policy. The practice of tax evasion and tax avoidance has been a challenge of
many tax authorities including TRA and ZRB.
Tax evasion is a deliberate attempt to understate the tax exposure of person by illegal means.
This may be done through various methods depending on the type of tax under consideration.
2.4.3 Indicators of the Effectiveness and Efficiency of a Tax Authority
It is important to know how effectively and efficiently any Tax Authority is currently performing
its functions and what are the areas where performance problems are acute. The following are
quantitative and qualitative indicators in measuring the effectiveness and efficiency as provided
by Dr. Kasilo from his Abridged Versions (2009)
(a) Quantitative Indicators are such as:-
(i) Type of taxes and duties administered by the Tax Authority
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(ii) Number of registered taxpayers
(iii) Number of large taxpayers who account for 80% of tax revenues.
(iv) Number and frequency of declarations (i.e. tax returns and customs declarations)
processed annually.
(v) Amount of taxes collected annually by tax type
(vi) Amount of taxes in arrears.
(vii) Amount of taxes refunded annually.
(viii) Number of employees of the Tax Authority –Managers, Technical staff and
Support staff.
(ix) Total revenue collected/ Annual revenue collection target.
(x) Total revenue collected/GDP.
(xi) Tax Gap = 1 - Total revenue collected
Potential revenue
(b) Qualitative Indicators are such as:-
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(i) Mode of organization of the Tax Authority: whether based
.
(ii) Overall organizational structure of the Tax Authority
- Number of offices at the Regional and Local levels.
(iii) Perception of taxpayers regarding:
Risk of detection of non-compliance and severity of consequences.
Quality of assistance provided by the RA to enable taxpayers to comply
with their legal obligations.
(iv) Effectiveness of the Tax Authority in resolving taxpayer problems.
(v) Public perception regarding the degree of corruption in the Tax Authority.
(vi) Tax Authority morale and its image to the public.
2.5 Tax Administration in Tanzania
2.5.1 Establishment and Functions of Tanzania TRA
According to TRA Handbook (2007) tilled “Tax Administration and Structure in Tanzania: The
Tanzania Revenue Authority (TRA) was established by Act No. 11 of 1995 and commenced
operations in 1996. The Authority is a semi-autonomous agency of the government vested with
the responsibility for the administration of the Central Government taxes as well as several non –
tax revenues.
The following are the main functions of TRA: -
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(i) To assess, collect and account for all Central Government Revenue.
(ii) To administer efficiently and effectively all the revenue Laws of the central Government.
(iii) To advise the Government on all matters relating to fiscal Policy.
(iv) To promote voluntary tax compliance
(v) To improve the quality of services provided to taxpayers.
(vi) To counteract fraud and other forms of tax and fiscal Evasion.
2.5.2 Organization Structure of TRA
TRA has a Board of Directors which plays a supervisory role of all operations of the
Organization. The key officers of TRA are as follows:-
Commissioner General (CG)
Apart from Board there is a Commissioner General who is the Chief Executive Officer
of the Authority.
Deputy Commissioner General (DCG)
The Deputy Commissioner General assists the Commissioner General of The
Authority.
Commissioners and Deputy Commissioners
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There are four Commissioners who are assisted by Deputy Commissioners. Each
Commissioner is responsible for one revenue department as follows:
(i) Domestic Revenue Department
This Department administers the following taxes and fees: - Income tax for
individuals and corporations, Value added tax (VAT), Excise duty on locally
manufactured goods, Motor vehicle registration and transfer fees, Skills and
Development levy which is charged to employers, Driving license fees and Port
and Airport service charges.
(ii) Customs and Excise Department
The Customs and Excise Department administers all taxes on international trade,
which are import duty, Excise duty on imported goods and VAT on imports.
Other responsibilities of this Department are controlling prohibited and restricted
goods or items imported into the country through borders, seaports and Airports
and the function of compiling Trade Statistics and facilitation of international
trade.
(iii) Large Taxpayers Department
The Department is headed by the Commissioner, who is assisted by the Deputy
Commissioner (Operations), Managers and Assistant Managers. . There are no offices
of this Department at the regions other than Dar es Salaam.
The Department has registered 370 taxpayers who are considered to have large and
more complex business activities and consequently more complex tax affairs, The
Number of Taxpayers may increase depending on the taxpayers whether they meet the
criteria of selection.
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Taxpayers for this department include all financial institutions, all insurance
companies including mining. Others include multinational companies big oil
marketing companies and big manufacturing companies whose aggregate payments of
VAT Income Tax and Excise Duty is at least Sh. 400 million and above per annum.
(iv) Tax Investigation Department
The Tax Investigations Department supports directly the Revenue Departments in
enforcing the various tax laws through regular investigation of tax cases with
substantial amounts of revenue at risk.
In collaboration with the Legal Services Department, it is responsible for prosecution
of the established cases of tax evasion.
It has the Commissioner, two Deputy Commissioners, one is responsible for Cases
Development, Processes and Procedures and another deals with daily operations.
2.5.3 Local Government Taxes
Tanzania has a two-tier system of Government, that is the central Government and the Local
Government, which is at the District, Town, City or Municipal level. The source of revenue
for each local Government is from a number of local taxes and fees collected within its
jurisdiction
The Local Government Act, 1982 and Urban Authority Act of 1983 empowers any Local
Authority to pass by-laws that allow the Authority to charge local taxes and collect levies and
fees within its jurisdiction. These by-laws are supposed to be published in the Government
Gazette after the minister of state responsible for Regional Administration and Local
Government has approved.
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The type and number of taxes, fees and levies, which are collected, differ from one Local
Authority to another because of differences in the economic base of the areas, which affects
the tax base. However, most of the Local Authorities collect Property Tax, Service Levy,
Hotel Levy or Guest House Levy, Slaughtering Fees, Bill boards and Sign Fees, Market Fees,
Trading License Fees, Liquor License Fees
In addition to the above, there are other user fees such as burial fees, refuse collection etc
which are collected by Local Authority
2.6 Tax Administration in Zanzibar
Administration of the Union Government taxes in Zanzibar is under TRA. These taxes
are Customs Duties, Excise Duty on imports and Income Tax. TRA collects the taxes
and remits them to the Zanzibar Government.
The Deputy Commissioner is the in charge of TRA in Zanzibar assisted by three
managers these are:
Manager – Domestic Revenue Zanzibar.
Manager – Domestic Revenue Pemba.
Manager – Customs and Excise Zanzibar.
The Zanzibar Revenue Board (ZRB), which is a semi autonomous tax collection agency
of the Government of Zanzibar, administers other internal (local) taxes and levies. VAT
is the main local tax collected by the ZRB. Other local taxes under the administration of
ZRB are the Stamp Duty, Hotel Levy, Entertainment Tax, Excise Duty on locally
manufactured goods and fees from various business licenses.
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The Commissioner is the chief Executive Officer of ZRB under the supervision of the
Board of Directors. The Commissioner is assisted by Managers.
2.7 Customs Administration in Zanzibar
2.7.1 Importance of Customs
Wulf, L.D. and Sokol, J.B. (2004) said “The responsibilities of customs continue to evolve,
Customs administration are now regarded as the key border agencies responsible for all
transactions related to issues arising from the border crossings of goods and people” This
indicate clearly the importance of customs in facilitating international trade and collection of tax
revenue. Customs is also the nation’s guard against external threats to health, safety and
environment and protecting (for better or for worse) domestic industry.
Import duty is an international trade tax which has been popular in Less Developing Countries
like Tanzania and particularly Zanzibar. The import duty has the following characteristics:-
Easy to levy and collect at points of entry.
Import tariff can be used as a policy instrument for inducing economic development.
Taxes on international trade are an important source of revenue for the Zanzibar Government,
According to Research conducted by TRA (2001) it is accounting for 60% of all Government
revenue in 1999/2000.
Although custom duties are a Union matter, the revenue sharing arrangement of all major
Union taxes is based on the “derivation principle”, that is, the Union Government retains the
proceeds from all Union taxes collected in Tanzania Mainland and the Zanzibar Government
retains those collected in Zanzibar.
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The Customs and Excise Department in Zanzibar is headed by the Deputy Commissioner who is
required to report to the Commissioner of customs and Excise duty who is based in Dar es
Salaam.
2.7.2 Customs Procedures
According to the paper presented by TRA in a Workshop on compilation of International
Merchandise Trade Statistics in Addis Ababa (November 2004) as from 1st July 2004 Tanzania
(customs department) abolished the Pre-shipment Inspection (PI) and started to implement the
Destination Inspection System (DIS).
Under the DIS unless otherwise determined by TRA, all commercial imports are inspected upon
arrival at destination in Tanzania. The Inspection process may be done either manually or
through X- ray scanning for full loaded containers or through Fast Track Release without any
inspection this is mostly done to compliant importers.
Unfortunately, the X – ray scanner is only available at the port of Dar es salaam, Zanzibar has no
X-ray scanner facility.
2.7.3 Customs Administration in Tanzania Mainland visas Zanzibar
Customs operation takes place on designated customs stations in Tanzania Mainland and
Zanzibar by the TRA. In an endeavor to fulfill its functions the Customs Department is set to
administer customs operations in both Tanzania Mainland and Zanzibar. Valuation process in
customs administration is guided by the EAC Customs Management Act, 2004, EAC Customs
Regulations, 2006, EAC/SADC Common Internal Tariff, Customs Procedure
Manual/Departmental Instructions which are issued to facilitate administration and
operationalization of customs operations effectively.
For administrative purposes the competent authority (The Commissioner of Customs and
Excise Department) issues and publishes decisions and administrative rulings of general
application giving effect to the interpretation of Customs Laws and tariffs. Customs operations in
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Zanzibar are required to adhere to the same procedures and instructions as provided in the
respective laws, guidelines and administrative decisions.
2.7.4 Customs Valuation
According to the EACCMA, 2004 customs value of imported goods means the value of
goods for the purposes of levying ad valorem duties of customs on imported goods. For
economics reasons goods are allocated values to ascertain economic gains or loses and determine
value addition in a given geographical location at a particular period of time. However, for
customs purposes goods entering or leaving a particular country are allocated value objectively to
ascertain an amount of duty to be levied on the imported goods.
Customs administration involves determination of customs value for tax purposes. It is therefore
important to note that determination of customs value of imported goods liable to ad valorem
import duty features is the key function of Customs administration.
Methods of valuation
The Fourth Schedule to the EACCMA, 2004 prescribes six methods of valuation of imported
goods as follows:
(a) Transaction Value
(b) Transaction Value of Identical Goods
(c) Transaction Value of Similar Goods
(d) Deductive Value
(e) Computed Value
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(f) Fall Back Value
The transaction value is the first criteria used by Customs to determine value of imported goods.
This is the actual price paid or payable by the importer/exporter when goods are imported or
exported at the international market. The price so paid can only be accepted as the true value
subject to fulfillment of certain tests. In such case the circumstances surrounding the transaction
are examine critically, and if, in light of information provided by the importer or otherwise
proved beyond doubt of the legitimate transaction methods the price declared is accepted as the
true value for customs of the goods imported.
Where the customs value of the imported goods cannot be established using the transaction
value then Customs Department is required to apply the transaction value of identical goods
imported at or within same time as the goods being valued at the moment. The test though
involves comparison of the specifications and quantities of the goods in the database and the
goods so valued to determine their identity for valuation purposes. If the imported goods are
identical with imported goods existing in the database then the valuation for identical goods is
done in line with imported goods in a short period. The application of this method requires the
use of more than one transaction value of identical goods.
Where goods cannot be valued basing on the transaction value or criteria of identical goods the
option is to use the transaction value of similar goods. Unlike the identical goods the similar
good criteria requires comparison of similarity features of the imported goods and similar goods
to be valued. Transaction value of similar goods method ignores differences in qualities and
quantities but allows adjustment for commercial level basing on evidences to justify accuracy to
an increase or decrease in value. Like the identical goods method the application of this method
also requires the use/comparison of more than one transaction value of similar goods. However,
in both situations the lowest values are used to determine the customs value of the goods to be
valued.
The determination of customs value of imported goods can also be established basing on the
computed value which consists of the sum of the costs of the value added to the imported goods.
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In this case the proper officer should be in position to ascertain the cost or value involved in
producing that particular good, related profit as well as any related expenses.
The last optional method to determine customs value of imported goods is the fall back value.
This is applicable where all the above methods have proved failure. Under this method the
customs value is determined using reasonable means consistent with the principles and general
provisions provided in the Fourth Schedule basing on the data available in the database.
2.8 Research Questions
The research question was used to serve as guidance for collecting the data that had been used to
complement the objectives of this study.
Referring the above discussed taxation literature review some of the key questions were:-
(i) What is the practice when dealing with movement of goods between Zanzibar and
Tanzania mainland? What are the problems experienced by both TRA and business
community?
(ii) Is any consistency in customs valuation of goods between both sides of United Republic
of Tanzania?
(iii) What is the performance of TRA Zanzibar in terms of revenue collection?
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CHAPTER THREE
THE ANALYTICAL FRAMEWORK OF THE STUDY
3.1 Developing the Framework
(i) Principles of Taxation
The Principles or Canons of taxation are considered as primary variables in evaluating the
customs administration in Zanzibar. These principles are such as Equality or Equity
Principle, Certainty Principle, and Convenience Principle, Economy Principle, Productivity