Informal Sector Policies Identified as Critical in Enhancing Revenue Base in MEFMI Region

Capacity building in revenue policy and administration is key in the MEFMI region.  The region currently faces many challenges in revenue collection particularly the narrow tax base, high dependency on trade taxes, large and expanding untaxed informal sector.  The region also experiences ineffective tax exemptions which are not directly proportional to Foreign Direct Investment (FDI), inadequate infrastructure on information technology, transfer pricing, inadequate staff capacity and limited operational and strategic interaction of tax administration agencies.

In this regard, MEFMI conducted a regional workshop aimed at providing middle and senior level economists in revenue policy and administration as well as tax policy units at the ministry of finance and other related institutions involved in revenue issues with training on tax policy and administration.  The workshop which was held from 3 to 7 November 2014 in Rwanda also addressed the challenges of taxing the characteristically large informal sector without discouraging growth. On revenue forecasting, the course addressed institutional frameworks for effective forecasting, the techniques and approaches to forecasting revenue, country specific experiences, challenges faced and way forward. Furthermore, the course covered emerging issues in revenue policy and administration, namely, the role of technology trends in shaping tax administration in the medium to the long term; and taxation of natural resources.

The course which used case studies to demonstrate the challenges encountered by other developing countries, intended to help the group develop frameworks of addressing similar challenges affecting their institutions. Participants prepared and made presentations on country case studies covering status, challenges and lessons learnt on revenue policy and administration in their countries. The presentations were based on MEFMI guided outlines to ensure that enough information is channelled out by participants to facilitate learning by sharing of experiences and lessons. The ensuing discussions addressed country specific issues on how to handle unique cases affecting member states such as those that are double land-locked countries.

The following were identified as the most common challenges facing countries in revenue policy and administration:

1. Narrow tax base;
2. High dependency on trade taxes;
3. Large untaxed informal sector;
4. Limited public engagement i.e., there is limited participation of stakeholders in tax policy formulation and      administration thus affecting ownership;
5. Ineffective tax exemptions/incentives as  the opportunity cost of giving the incentives is not directly proportional to the FDI;
6. Inadequate political commitment, for instance, policies that have been agreed at regional level are not being applied while those that are legislated are being applied selectively;
7. Inadequate ICT;
8. Inadequate skills among staff; and
9. Different tax regimes within the countries and region which are not harmonized.

Based on the case presentations and discussions, it was noted that MEFMI countries have undergone a series of reforms in the area of revenue policy and administration and are at different levels of reform implementation, with Namibia being the only country that has not set up an independent revenue agency.

It was further noted that countries that are members of regional economic blocks such as the East Africa Community (EAC), SACU, COMESA and SADC have harmonized their tax laws and regulations to a large extent in order to smoothen the integration in the context of; introduction of VAT which replaced sales tax which was narrowly based; harmonized tax incentives and tackled the issue of double taxation within the region so as to attract domestic and foreign investments, and to avoid economic distortions; lowered marginal tax rates in the region for the purpose of broadening tax base (to about 30% for PAYE, 16% for VAT and 25% for import duty). Even then, countries are still at different levels of implementation.

The following are some of the lessons learnt during the workshop as well as some emerging issues:

i. There was a steady movement to technology enabled business in tax collection and administration including electronic enabled payments and mobile units in some countries such as Kenya;

ii. Introduction of one border posts across  the MEFMI region (Malawi and Mozambique, Zimbabwe and neighbours, EAC countries and SACU members);

iii. On the issue of double taxation, it was noted that the EAC countries have signed a double taxation agreement; 

iv.  Increasing share of the informal sector in the economy and subsequent narrowing of tax base. It was noted that informal sector policies have been identified as critical in enhancing the revenue base;

v. Evolution of policy structures with a clear division of labour within government agencies. For instance, revenue policy and determination of revenue targets responsibility is domiciled in the Ministry of Finance – scenarios where a joint position is developed by the stakeholders in addition to clear segregation of key roles to the independent Boards while revenue collection is left to the agencies.

vi. It was noted that weak policy units at the Ministry of Finance dragged revenue agencies into policy issues in      addition to the core agency business of collecting revenue;

vii. Multiple rates of various taxes such as VAT is a challenge to revenue administration in some countries such as Lesotho;

viii. Need for comprehensive change management programmes institutionalized in the strategic plans of the institutions.    It was observed that in EAC, Uganda has an effective change programme  which can be emulated by other countries;

ix. Need for further harmonization of national and regional policies to facilitate tax policy and administration.

x. Tax payers’ education was identified as an important instrument to improve compliance but it should be tied up with improvement in service provision. It should also follow a bottom up approach. This is opposed to the high handedness.

The course brought together 22 participants five (5) or 22% of whom were female from ten (10) MEFMI member countries. The participants were drawn from revenue authorities, which accounted for 15 officials or 68% of participants. The other seven (7) or 32% were from revenue policy makers from Ministries of Finance and central banks. Their participation was deliberately meant to promote interaction tax administrators and policy makers in revenue policy and administration.

There were three resource persons namely; Mr. Joseline Ogai, Ag. Commissioner, support services, Kenya Revenue Authority; Mr. John Chakasikwa, Economist, Zimbabwe Revenue Authority and IMF regional tax policy expert and the task manager, Mr. Amos Cheptoo. Dr. Jean Pierre Nyemazi from Rwanda Bio-Medical Centre presided over the HIV AIDS awareness session