TANZANIA REVENUE AUTHORITY

INSTITUTE OF TAX ADMINISTRATION

Postgraduate Diploma in Taxation

Assessment of the Taxpayer Compliance Strategies Used by Tanzania

Revenue Authority

Tshepo Banda

MARCH, 2012
ASSESSMENT OF THE COMPLIANCE STRATEGIES
USED BY TANZANIA REVENUE AUTHORITY
 By

Tshepo Banda

A Research Project Submitted in Partial Fulfilment of the

Requirements for the Post Graduate Diploma in Taxation of the
Institute of Tax Administration

Dar es Salaam, Tanzania

March, 2012

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 ABSTRACT

Tanzania has made considerable investment in legislative tax reforms, taxpayer education

programs, tax enforcement strategies, and increasingly sophisticated systems of tax

administration using new technologies. However despite all these initiatives, Tanzania

still experience high levels of non compliance, as evidenced by the tax gap. Currently

total revenue collected stands at 15% of GDP. This is low by both regional and

international standards. This paper explores the taxpayer compliance strategies used by

TRA and the challenges and constraints in implementing the said strategies. Inductive

approach was used in explaining the relationship between compliance strategies and

compliance behaviour. Embedded case study of TRA’s compliance function was

undertaken. Primary and secondary data were collected through interview schedule and

content analysis instruments respectively. Judgemental sampling was used to select the

sample for the study.

The results showed that TRA is employing both enforcement and voluntary compliance

strategies; however voluntary compliance strategies were contextualised to TRA only,

impairing the effectiveness of these strategies. The recommendation made is that

taxpayers rights must be adequately entrenched in tax laws, so that taxpayers get the

benefit of enforcing them should the need arise. Undoubtedly there are lessons to be

learnt from studying best practice in developed economies.

CERTIFICATION

3
The undersigned certify that they have read and hereby recommend for acceptance by the
Institute of Tax Administration a Project Report entitled: Assessment of the Compliance
Strategies Used by Tanzania Revenue Authority, in Partial fulfilment of the
requirements for the Postgraduate Diploma in Taxation of the Institute of Tax
Administration.

Supervisor 1 (Ms. Mutayabarwa)

Signature........................................

Date................................................

Supervisor 2 (Mr. Chimilila)

Signature.....................................

Date.............................................

DECLARATION

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I, Tshepo Banda declare that this Project Report is my own original work and that it has
not been presented to any other Institute/ University for a similar or any other reward.

Signature...............................................

Date.......................................................

COPYRIGHT

This thesis is copyright material protected under the Berne Convention, the Copyright
Act 1999 and other international and national enactments, in that behalf, on intellectual

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property. It may not be reproduced by any means, in full or in part, except for short
extracts in fair dealings, for research or private study, critical scholarly review or
discourse with an acknowledgement, without the written permission of author or the
Institute of Tax Administration in that behalf.

ACKNOWLEDGEMENTS

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I would like to acknowledge the help and invaluable contributions I received from people

and organisations.

Firstly I wish to thank Adolf Ndunguru and Mary Maganga from TRA’s Research &

Policy and Planning & Modernisation Programme office respectively for providing me

with the data vital to this study. I would also like to express my gratitude to the Botswana

Unified Revenue Service (BURS) for funding this research.

Special thanks go to my research supervisor Ms. Mutayabarwa for her sincere willingness

to direct, correct and advise me towards the completion of this study. I am also greatly

indebted to Ms. Rweikiza for all the help she extended to me during the absence of my

supervisor.

I thank my mother for all her encouraging words when completion of this work seemed

impossible. I am also grateful for the support I got from my adopted family in Tanzania;

Mr Chilume, Badisang, Siwe, Sponsor, Kealeboga, Phenyo and Sega.

I thank the ITA staff panel that reviewed my work before finalisation of this report. There

are others who may have put in a valuable word, or an idea, to all of them I say thank

you. Last but not least, and certainly most importantly, I thank God for seeing me through

and being the tower of my strength.

DEDICATION

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This work is dedicated to my beloved kids, my two most favourite people; Bosa and

Kaelo Lenyatso, for bearing with mummy’s prolonged absence.

TABLE OF CONTENTS

Contents

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ABSTRACT........................................................................................................................................i
CERTIFICATION................................................................................................................................ii
DECLARATION................................................................................................................................iii
COPYRIGHT....................................................................................................................................iv
ACKNOWLEDGEMENTS...................................................................................................................v
DEDICATION...................................................................................................................................vi
TABLE OF CONTENTS.....................................................................................................................vii
LIST OF TABLES...............................................................................................................................ix
LIST OF FIGURES..............................................................................................................................x
LIST OF ABBREVIATIONS.................................................................................................................xi
CHAPTER ONE.................................................................................................................................1
INTRODUCTION..............................................................................................................................1
1.1 Background...........................................................................................................................1
1.2 Problem statement...............................................................................................................4
1.3 Objectives.............................................................................................................................5
1.31 Main Objective................................................................................................................5
1.3.2 Specific Objectives.........................................................................................................6
1.4 Research Questions..............................................................................................................6
1.5 Scope of the study................................................................................................................6
1.6 Significance of the study.......................................................................................................7
1.7 Limitations............................................................................................................................7
CHAPTER TWO................................................................................................................................9
LITERATURE REVIEW.......................................................................................................................9
2.0 Overview..............................................................................................................................9
2.1 Factors to Compliance Behaviour.........................................................................................9
2.2 Compliance behaviour in Tanzania.....................................................................................10
2.3 Compliance costs in Tanzania.............................................................................................12
2.4 Compliance strategies used by TRA....................................................................................12
2.4.1 Enforcement Strategies...............................................................................................13
2.4.2 Voluntary Compliance Strategies.................................................................................15
2.5 Best practice from around the world..................................................................................19
2.5.1 Australia.......................................................................................................................19

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 2.5.2 United Kingdom...........................................................................................................21
2.5.3 The Dutch Horizontal Monitoring Programme.............................................................22
2.5.4 The United States ‘compliance assurance process’ (CAP)............................................23
CHAPTER THREE............................................................................................................................25
RESEARCH METHODOLOGY..........................................................................................................25
3.1 Overview.............................................................................................................................25
3.1.1 Research design...........................................................................................................25
3.2 Theoretical framework.......................................................................................................26
3.2.1Conceptual framework.................................................................................................26
3.3 The Study Area....................................................................................................................27
3.4 Type and sources of data used...........................................................................................27
3.5 Data analysis techniques used............................................................................................27
3.5.1Qualitative Data............................................................................................................28
3.5.2 Quantitative Data.........................................................................................................28
3.6 Sampling procedure............................................................................................................28
CHAPTER FOUR.............................................................................................................................29
PRESENTATION OF RESULTS, ANALYSIS AND DISCUSSION...........................................................29
4.1 Introduction........................................................................................................................29
4.2 Presentation of findings, analysis and discussion of results................................................29
4.2.1 Identification and Evaluation of Strategies used by TRA..............................................29
4.2.2 Revenue Performance and cost of collection...............................................................43
CHAPTER FIVE...............................................................................................................................45
CONCLUSSION AND RECOMMENDATIONS...................................................................................45
5.1 Conclusion..........................................................................................................................45
5.2 Recommendations..............................................................................................................46
REFERENCES.................................................................................................................................48
APPENDICES..................................................................................................................................50

LIST OF TABLES

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Table 1: Merits and demerits of tax organisational models

Table 2: Summary of Strategies used by TRA

Table 3: Awareness of the Taxpayer Education Programmes Region wise

Table 4: Taxpayers Perception on TRA Core Values

Table 5: Status of EFD Utilisation

Table 6: Taxpayers Registered through BMS

Table 7: Number of Taxpayers in Large Taxpayer Department

Table 8: Summary of Annual Audit Performance

Table 9: Regression Summary Output

Table 10: Tax Investigation Cases

LIST OF FIGURES

Figure 1: ATO Compliance Model

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Figure 2: Returns Lodged Through E-Filing

Figure 3: Returns filed Through E-Filing

Figure 4: Number of Taxpayers Accounting for 80% of Revenue Collections

Figure 5: Regression Analysis between Audited Cases and Assessed Amounts

Figure 6: Planned and Audited Cases

Figure 7: Cost of Collection

Figure 8: TRA Revenue Collection as % of GDP.

LIST OF ABBREVIATIONS

ATO: Australian Taxation Office

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BMS: Block Management System

CAP: Compliance Assurance Program

DTSC: Dar es Salaam Tax Service Centres

ERMS: Enterprise Wide Risk Management System

IMF: International Monetary Fund

IRS: Internal Revenue Service

NAO: National Audit Office

OECD: Organisation for Economic Cooperation and Development

TCA: Tax and Customs Administration

TID: Tax Investigation Department

TRA: Tanzania Revenue Authority

CHAPTER ONE

INTRODUCTION

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1.1 Background
Paying taxes is a civic duty that allows Government to provide public amenities to her

people and to distribute wealth. However taxpayers take their taxpaying responsibility

with a pinch of salt and voluntary payment of tax remains elusive. Low tax compliance is

a matter of serious concern in many developing countries, limiting the capacity of their

governments to raise revenues for developmental purposes ( Das-Gupta, et.al., 2004). A

considerable body of literature has dwelled on the most efficient ways of improving

taxpayer compliance.

This trend can be explained by the fact that non compliance has become such a

significant problem in both developed and developing countries. Thus tax administrations

the world over are coming up with tax compliance strategies to counter the non

compliance. These strategies can either be enforcement strategies or strategies that are

geared at promoting voluntary compliance. The conventional approach adopted by most

tax administrations in developing countries is emphasis on voluntary compliance through

self assessment, enforced by random but stringent auditing and penalties (Torgler,2008).

However, looking at the tax modernisation programmes undertaken by Kenya, Zambia,

Rwanda and Uganda, all the statutes setting up the tax administration have included, as a

core function, the need to promote optimum compliance with taxes. Ironically for the said

countries, while the laws establishing these administrations charge the authority with the

duty to promote tax compliance through enforcement as well as voluntary compliance,

the tax authorities have devoted themselves almost entirely to having in place effective

tax enforcement measures. The promotion of voluntary taxpayer compliance has

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received, at best, token mention in the form of taxpayer charters, as is the case in Zambia,

or in the form of adoption of customer service standards, as is the case in Uganda.

(Ongwamuhana, 2011).

In Tanzania, the revenue authority has undertaken many reforms and

reengineering of its processes in order to increase efficiency and achieve revenue

collection targets. The compliance strategies used to achieve this goal include enhancing

the Block Management System (BMS), enhancing audit capacity in specialized sectors

through hands on training and bringing taxpayer services closer to taxpayers by

establishing Taxpayer Centres.

According to report on review of Tanzania Revenue Authority strategic plan, TRA

(2011), the objectives of this initiative is to promote compliance by registering all eligible

small and medium taxpayers within geographical locations and gather relevant tax

information on the level of economic activities carried out for ease of follow up for

enforcement purposes; to enhance tax knowledge to taxpayers through a closer and well

focused relationship with taxpayers located far from tax regional offices and eventually

increase voluntary compliance.

TRA has also launched a system of electronic payment of taxes through mobile phones

with effect from 13th June, 2011.Through the system the taxpayers under presumptive

assessment will be able to pay Personal Income Tax of amount less than Shs 500,000

using the system. For large taxpayers payment of taxes through bank transfers has been

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put in place. In addition to that, the authority has implemented the e-filing system, to

enhance convenience to the taxpayer and promote voluntary compliance.

Despite all these taxpayer friendly initiatives, Tanzania still experience high levels of non

compliance, as evidenced by the tax gap. According to Maps of World Finance (2011),

Tanzania has witnessed an average annual increase in Central Government tax revenues

of 12% for the year 2003/04. This increase has been attributed to improvements in the tax

administration. A dissenting opinion is however presented by Maliyamkono et. al (2010).

According to his book, tax performance in Tanzania has recorded only marginal

improvements.

Currently total revenue collected stands at 15% of GDP (TRA,2012). This is low by both

regional and international standards. It also falls short to finance basic public service

demands; hence TRA still has a mammoth task of adopting strategies that closes this tax

gap in an efficient way.

The purpose of this paper is to identify the tax compliance strategies used by TRA and to

also identify the most appropriate and effective strategies to improve taxpayer

compliance in Tanzania. This is an ambitious task as taxpayer compliance in itself is a

complex phenomenon that takes place in a dynamic environment with many factors at

play. It uses the example of TRA to illustrate its central points, but considers that the

principles have broader application to other tax administrations in developing economies.

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1.2 Problem statement
Although Tanzania has been through tax reforms and several compliance strategies, there

is still high level of non compliance. The problem to be examined by this paper is why

tax compliance level remains poor in Tanzania, despite the compliance strategies in

place. The proposition put forward is that complimentary relationship which must exist

between enforcement and voluntary compliance strategies is not adequately recognised

by TRA.

The factors that show that Tanzania has not succeeded in the important task of securing

high level compliance are the narrow tax base, the prevalence of dissatisfaction with

taxation, and a perception that TRA is high-handed......(Ongwamuhana, 2011). TRA is

adequately aware of the problem of non compliance and has sought to address this

problem by formulation and implementation of corporate plans. In the meantime

however, faced with the general dissatisfaction with taxation and low levels of

compliance, TRA is relying heavily on detection and punishment of non compliant

taxpayers. With this strategy, audits have become a regular rather than random feature of

tax law administration.

According to a number or researches, this situation is not peculiar to TRA only, but a

feature common in tax administration throughout developing countries.

As documented by Brautigam (2008), developing economies have both limited

administrative resources and expertise. Further, taxpayers tend to have low levels of

literacy, low tax morale and negative attitude towards payment of taxes.

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This paper seeks to argue that enforcement measures alone are costly in monetary and

psychological terms. Enforcement strategies are heavily reliant on a large team of tax

auditors and investigators who must all be equipped to do their job. It also needs to have

court bailiffs and property auctioneers. Additionally it has to involve the Police for

protection, or to give police powers to tax administrators. All this efforts increase the cost

of tax collection and erodes the tax revenues. Furthermore enforcement strategies are

limited by the country’s capacity to allocate enforcement resources to the tax

administration.

On the other hand enforcement measures as compared to voluntary compliance strategies

are intrusive in nature and can be counterproductive. Fear and punishment can only work

up to a level, thereafter they elicit feelings of resentment towards tax compliance and tax

authority which subsequently leads to non compliance (Torgler, 2008).

1.3 Objectives

1.31 Main Objective

The primary objective of this research is to assess the nature and impact of compliance

strategies used by TRA on the overall taxpayer compliance. The other objectives are

based on the proposition that TRA has not struck a complimentary relationship which

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needs to exist between enforcement and voluntary compliance strategies. The other

proposition is that the undue emphasis placed on tax enforcement undermines voluntary

compliance and further alienates the taxpayer.

1.3.2 Specific Objectives

i. To identify the current taxpayer compliance strategies used by TRA.

ii. To evaluate the existing strategies in relation to taxpayer compliance.

iii. To demonstrate that heavy reliance on enforcement is counter- productive and

may undermine tax compliance.

1.4 Research Questions

i. What are the taxpayer compliance strategies currently used by TRA?

ii. Do the taxpayer compliance strategies have any impact on taxpayer

compliance behaviour?

iii. What effect does predominant use of enforcement have on taxpayer

compliance behaviour?

1.5 Scope of the study

The geographical focal point of the investigation is Tanzania. Due to time limitations

the study will focus on compliance with Internal Revenue laws. The specific laws are.

i. Income tax for both individuals and Corporations

ii. Value Added Tax

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The choice of these domestic taxes is influenced by the fact that the need to mobilise

domestic revenue for development has become even more acute in the wake of the global

economic crisis which has resulted in near stagnation of development aid from developed

countries.

The study is aiming at critically assessing the nature and impact of the compliance

strategies used by TRA. It also looks at the existing tax laws, which are more tilted

towards enforcement, with audits and sanctions standing out as predominant elements.

This coupled with negative perceptions of the tax system; create tax resistance, which

ultimately results in tax avoidance and evasion.

1.6 Significance of the study

The findings of this research are expected to be helpful to the tax administration, in

coming up with effective compliance strategies; to the policymakers in formulating

growth enhancing tax reforms; and also to the taxpayers in understanding their taxpaying

role towards building of their nation.

This study is significant because it is expected to name the underlying challenges and

constraints faced by TRA in developing the most suitable strategies for improving both

personal and corporate taxpayer compliance. Finally it is hoped that the findings of this

research will stimulate considerable scope for further research.

1.7 Limitations
The study is expected to eventually encounter the following constraints

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i. The confidentiality and privacy policy may limit some of the

employees of the Revenue Authority in relevant departments to

share important and confidential internal reports crucial to this

study.

ii. Time limitation, as the Institution will not set time aside for the

study to be carried out.

CHAPTER TWO

LITERATURE REVIEW

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2.0 Overview
This chapter examines the various factors to taxpayer compliance behaviour and also

looks at compliance behaviour in Tanzania. Furthermore it determines the compliance

costs to both the taxpayer and the tax administration, and examines the taxpayer

compliance strategies used by TRA. Finally it observes some best practices from around

the world.

2.1 Factors to Compliance Behaviour

The basic goal of any revenue authority is to collect taxes and duties payable according to

the law. However, taxpayers are not always compliant. A compliant taxpayer is one who

fulfills every aspect of their tax obligations including:

registering with the revenue authority as required;

filing the required returns on time;

accurately reporting tax liability (in the required returns) in

accordance with the prevailing legislation, rulings, return

instructions and court decisions;

paying any outstanding taxes as they fall due; and

maintaining all records as required

A non-compliant taxpayer is one who fails to satisfy any one or more of these aspects and

poses a risk to revenue collection. Research has shown that non-compliance may be as a

result of a deliberate decision by the taxpayer, or it may be unintentional. Further, there

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is a range of possible compliance outcomes driven by a variety of factors including

demographic (including age, gender and level of education), personal (including

attitudes, experiences, morale and financial circumstances) and aspects of the tax system

itself (including tax rates, penalties, audit probabilities, enforcement strategies,

complexity and costs of compliance). As many of these factors are not constant, it is to be

expected that compliance behaviour can change over time and a compliant taxpayer one

year may be non-compliant the next (McKerchar, 2010).

Despite a great deal of research emanating from a wide variety of disciplines, there is not

a great deal of consensus about why people do, or do not, pay their taxes or otherwise

comply with their tax obligations. Literature shows that there are many models of tax

compliance, however this paper will not dwell on compliance models. Nonetheless,

strategies to improve compliance need to be embedded in sound theory, so an

understanding of the compliance literature is an important starting point for the revenue

authority seeking to improve the efficiency of its collections.

2.2 Compliance behaviour in Tanzania

Both the Value Added Tax (VAT) and Income tax system in Tanzania operate on a self

assessment basis. That is the Government expects taxpayers to determine their own tax

obligation and to pay voluntarily whatever is due both regularly and at year. This also

includes the expectation that one will register for VAT and Income tax when he becomes

liable.

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However one cost of relying on the voluntary compliance of taxpayer is that not all tax is

voluntarily paid. Example, in the USA, for tax year 1996, the Internal Revenue Service

estimated that the gross individual tax gap (the difference between what a revenue

authority theoretically should collect and what it actually does collect) was $94 billion,

about 20% of total individual income tax receipts and over half the size of the budget

deficit (Evans, 2007).

TRA estimates that taxpayers who have been reached are less than half of the potential

taxpayers. Reports abound that the Government is losing much revenue through non

payment of tax, and that this non payment is difficult to combat because the vice is

widespread. Types of deviant taxpayer behaviour that the tax administration has to

combat include;

failure to report taxable activities

Omission of taxable items from tax returns

Tax evasion or fraud

Tax avoidance

These forms of non compliance are multi faceted and the causes for their prevalence are

also varied.

One of the major challenges that TRA is currently facing is the high level of non

compliance, particularly in the informal sector. In Tanzania the informal sector is quite

significant. According to TRA publication (2006, p87), a few studies indicate that the

underground economy in Tanzania constitutes two thirds of the official GDP. Needless to

24
say, most of the underground economy’s activities are not brought into the tax net and

thus substantial potential revenue loss to Government. The Authority has not yet had any

breakthrough in bringing this sector into the tax net, despite the use of BMS and other

compliance strategies in place. This gap calls for TRA to devise strategies that will

address the issue.

2.3 Compliance costs in Tanzania

The challenges presented by high costs of collection are also significant. According to

TRA, there is no major empirical work that has directly measured operating costs of the

Tanzania tax system; that is the compliance costs for taxpayers and administrative costs

for the revenue authority. But sketchy evidence and other evidence from other African

developing nations suggests that the costs of collection will be high and represent a major

challenge for the system. For example, Evans (2007) suggests that compliance costs in

developing nations are typically four or five times higher than in developed countries.

2.4 Compliance strategies used by TRA

In its endeavour to enhance compliance and to be efficient, TRA moved from tax-type

revenue administration to functional type. This saw the organising of employees in

functional groupings (i.e. registering, processing returns and payments, accounting,

auditing, and collecting arrears and handling disputes). As per TRA report (2006), this

amalgamation better placed TRA to exploit the benefits of integrated administration

including improved taxpayer compliance (e.g. the ability to conduct joint audits for all

taxes)

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2.4.1 Enforcement Strategies

Enforcement is an integral part of the role of TRA. As per the authority’s policy (TRA,

2006), where encouragement and assistance to comply are not effective, the compliance

model promotes an escalating regime of enforcement actions culminating in forceful and

direct measures (such as audit and prosecution), for those who have chosen not to

comply. For these enforcement strategies to work, TRA has

Enhanced the Block Management System (BMS).

The objective of this initiative is to promote compliance by registering all eligible

small and medium taxpayers within geographical locations and gather relevant tax

information on the level of economic activities carried out for ease of follow up

for enforcement purposes and eventually increase voluntary compliance. The

BMS has simplified the registration of traders and brought non-filers and non-

taxpayers into the tax net through closer monitoring and in collaboration with the

Local Authorities.

Establishment of the Large Taxpayers Department (LTD)

The formation of this department is to augment audit programs, to improve

collection and management of tax debts and to secure revenue. It was established

26
to serve as One-stop shop for large corporate taxpayers, who have complex

business activities and consequently more complex tax affairs.

Introduction of Enterprise-Wide Risk Management System (ERMS)

This initiative was launched in July 2011 for effective risk management and to

augment other enforcement strategies. Under this strategy, audit cases are selected

basing on risk assessment and the automated risk profiling.

Tax Investigation Department (TID)

This department was created to directly support the revenue departments in

enforcing the various tax laws through regular investigation of tax cases in which

substantial amounts of revenue are at risk. It is charged with identifying cases of

tax fraud and tax evasion through investigations and recommending criminal

prosecution. Additionally it gathers data and information which is analyzed and

utilized for field audits.

Introduction of Taxpayer Identification Number (TIN)

The existence of a TIN “forms the basic building block for revenue administration

IT systems, as it allows connecting taxpayers to their returns, payments and major

taxable transactions with third parties”. Field surveys to detect unregistered

taxpayers, as well as extensive publicity campaigns, have often accompanied the

introduction of TINs

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From the enforcement strategies discussed, it is clear that the major enforcement

strategies used by TRA are audit and investigation. The other strategies in place are there

to support these two functions. It appears, as Ongwamuhana (2011,pp. 186-187) notes,

that TRA’s attraction to enforcement methods is that they are readily measurable and

said to have direct deterrence effect which increases tax compliance.

However the effectiveness of tax audits and investigation in combating non compliance is

relative, as it depends on the resources available to the tax administration. Additionally

tax investigation goes hand in hand with prosecution and punishment. If the discovered

fraud is not effectively prosecuted and sufficiently punished, it leaves the offender feeling

immune to sanctions.

2.4.2 Voluntary Compliance Strategies

According to literature, voluntary compliance is likely to occur where fiscal ignorance is

tackled and reduced, where taxpayers feel that they are getting a fair deal from the

exchange relationship with the state, where the environment is cooperative and where

positive attitudes towards taxation are nourished. Taxpayers, and potential taxpayers,

need to be aware of the general concept of taxation and why they should pay taxes.

Based upon this analysis, revenue authorities in many countries have undertaken

community awareness campaigns. TRA has also joined the bandwagon and introduced

some strategies geared at enhancing voluntary compliance. Contrary to Ongwamuhana

(2011, p110) views that voluntary tax compliance has only received, at best, a token

28
mention in the form of a taxpayers charter, TRA (2011) reports that it prefers to use

strategies of support and encouragement. This is evidenced by adoption of initiatives,

including;

Implementation of e-Filing

In the report on implementation of strategic plan, TRA ( 2011), the aim of

implementing the e-filing module in the ITAX is to improve integrity of

taxpayer’s returns by capturing data at source and submit the same to TRA

electronically. The system also eases documentation, reduces transaction

processing time and enables taxpayers to conduct business without their physical

presence at TRA offices.

Electronic Tax Payment through Mobile Phones

TRA has launched a system of electronic payment of taxes through mobile phones

with effect from 13th June, 2011.Through the system the taxpayers under

presumptive assessment and owners of buildings will be able to pay Personal

Income Tax and Property Tax of amount less than Shs 500,000 using the system.

Establishment of Dar-es-Salaam Tax Service Centres (DTSC)

The objective of establishing the tax centres is to promote voluntary tax

compliance and enhance tax knowledge to taxpayers through a closer and well

29
focused relationship with taxpayers located far from tax regional offices. The

establishment of DSTC in July 2010 covered the operations of Dar-es-Salaam

tax regions of Ilala, Kinondoni and Temeke. The activities covered in these

centres include taxpayer registration, tax assessments, tax collection and desk

audits. Currently there are eight tax centres. This strategy is still being piloted,

and if successful, the authority intends to apply it to other regions.

Electronic Fiscal Devices (EFDs)

EFDs have been introduced with the objective of enhancing compliance

management, reducing the risk of tax evasion and ensuring proper reporting of

business turnover by VAT registered traders.

Stakeholders Forum

This platform has been created for both the administration and taxpayer

representatives to “iron out” the difficulties and differences they encounter. It is

also intended to also give TRA feedback on issues from the taxpayers. The forum

is conducted quarterly.

Taxpayers Charter

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 TRA has also developed a taxpayer charter, a policy document that charts out

taxpayer’s rights and obligations, as well as the responsibility and quality of

services that the authority must provide to taxpayers.

Taxpayers’ Perception Survey

TRA undertakes surveys every other year in order to get taxpayers’ feedback so

as to enable the Authority improve services provided to taxpayers.

Outreach Taxpayer Programme

Under this programme, TRA officials move the taxpayer services from the offices

to taxpayers by visiting taxpayers in their business sites and attend to their tax

problems. Additionally there are open public- opinion receiving systems, toll free

hotlines and bonus arrangement to suppliers of anti-evasion information.

Review of literature shows that the TRA, in carrying out its mandate has attempted to

forge some form of partnership with taxpayers. This however has not resulted in

widening of the tax base nor has it enhanced the compliance level. This paper attempts to

investigate why all these strategies have not yet yielded the relative increase in tax

compliance levels.

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2.5 Best practice from around the world

2.5.1 Australia

The Australian Taxation Office (ATO) has developed a positive reputation internationally

as a best-practice tax and superannuation administration (OECD, 2009). ATO attributes

its success to their strategic approach to administering tax in their business intent: ‘to

optimise voluntary compliance and make payments under the law in a way that builds

community confidence’.

ATO’s general approach is to encourage taxpayers and businesses to comply willingly

with their taxation obligations. The administration has come up with a compliance model

that provides a structure to better understand what motivates people to comply or not

comply. It recognizes that taxpayers are not homogenous and that their circumstances can

change over time. It provides insight into factors influencing different compliance

behaviours, and assists to decide what interventions to make, ensuring they are

proportionate and appropriate to address the underlying cause.

Figure 1: ATO Compliance model

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Other initiatives by ATO include,

Taxpayer education, record keeping advice and lodgement (filing) assistance.

Provide assistance to those new to the tax system, or to Australia, to understand

their obligations by providing information in many languages; through portals, e-

tax, use of SMS, online tools e.t.c to make it easy for taxpayer to comply.

Through pre-filling ATO provide upfront access to the information held in the

administration’s systems for those who choose to deal with ATO electronically.

This allows taxpayers and tax practitioners to address any discrepancies in the

data before lodging and helps reduce post-lodgment compliance activity.

Clarify the law and communicate ATO’s views through public and private

rulings, checklists, fact sheets, practice statements, taxpayer alerts and strategic

litigation. ATO also consults with industry bodies on issues of concern to them.

Enforcement measures are only introduced where a taxpayer chooses not to

comply. These may include compliance reviews and audits, final notices,

penalties and legal action.

In a nutshell ATO’s strategies are tailored to suit the taxpayers’ attitude towards

compliance. Australia has come up with the following compliance model to influence as

many taxpayers as possible to comply voluntarily.

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In contrast with TRA’s strategies that are tailored according to size of business, i.e.

Large, medium and Small business, the model reflects the different taxpayer attitudes

towards compliance and the corresponding strategy that best responds to each particular

attitude.

2.5.2 United Kingdom

According to Organisation for Economic Cooperation and Development (OECD,2010),

the UK leads the world in tax risk assessment strategy. The strategy advocates for the

development of enhanced relationships so taxpayers behaving transparently could expect

greater certainty and earlier resolution of tax issues, with fewer audits and lower

compliance costs.

Her Majesty’s Revenue in Customs (HMRC) closely studies how businesses manage

their tax compliance risks, by forging enhanced relationships with taxpayers and

intermediaries to obtain tax risk information sooner. The Governments is also

increasingly co-operating and exchanging information about industry sectors and

multinational companies. Under this system taxpayers who shun transparency have fewer

places to hide.

Typically a low risk relationship is open and transparent, with the taxpayer drawing

HMRC's attention (mainly in real time) to difficult issues or those where a high level of

judgment is required to determine the tax treatment. In such cases, HMRC will not

34
generally initiate further risk assessment activity for two or three years, and will

minimize other verification work. On eventually revisiting the risk review, only the most

recent year will generally be examined.

By contrast, taxpayers classed 'not low risk' can expect annual or continuing risk

assessment processes to monitor overall risk status. They may enjoy low risk status for

certain taxes and duties; identified risks are scored by reference to value, probability and

impact, and the most significant will attract appropriate attention from HMRC. Some

businesses rated 'not low risk' because of inherent factors such as complexity and change

may still try to minimize compliance risks within their control to smooth their

relationship with HMRC. This approach is somehow related to ATO’s approach as it

focuses on the non compliant taxpayer and leaves the compliant taxpayer in peace.

2.5.3 The Dutch Horizontal Monitoring Programme

In 2005, the Netherlands Tax and Customs Administration (TCA) initiated a pilot

‘horizontal monitoring’ programme involving 20 of the country’s largest corporate

taxpayers. At the core of the programme is a concerted effort by the TCA to build greater

trust with this taxpayer constituency as a means of encouraging greater disclosure of tax

uncertainties and risks.

The TCA and all participating taxpayers enter into a non-binding but written ‘agreement’,

by which the taxpayer undertakes principally to “actively notify the Tax Administration

of any issues with a possible and significant tax risk.” In turn, TCA promises, having

35
received such disclosure, to “state its views concerning any legal consequences” of the

matters disclosed, and to “take into account real commercial deadlines” when doing so.

Importantly, the agreement covers both uncertain tax positions taken by the taxpayer in

the past, and those which it is contemplating taking in the future. Responses to the

programme have been generally positive, with the majority of participating taxpayers and

of relevant tax collectors agreeing that it has resulted in more effective and efficient

working relationships. This programme has been expanded to include the small and

medium enterprises (NAO, 2007).

2.5.4 The United States ‘compliance assurance process’ (CAP)

In 2005, the United States initiated a Compliance Assurance Process (CAP),

fundamentally a real-time, year-by-year audit for large companies that starts at the

beginning of the company’s financial year and then concludes shortly after the tax return

is filed. The idea is for the taxpayer to disclose fully on a current-time basis all

transactions and issues that are likely to be of interest or concern to the Internal Revenue

Service (IRS) and then, if there are disputes, attempt to resolve them on a current basis

before the tax return is filed so they are properly reflected.

If all goes well, the issues are resolved when the return is filed and the taxpayer then gets

ready for the next year’s examination. The companies that accepted the IRS’s original

invitation to join have agreed to continue, thus beginning the fundamental process of

establishing a lasting relationship of trust with the IRS (NAO, 2007).

36
The programme was made permanent in March 2011. According to IRS (2011), the CAP

program would expand to include two additional components: A new pre-CAP program

that provides interested taxpayers with a clear roadmap of the steps required for gaining

entry into CAP; and a new CAP maintenance program intended for taxpayers who have

been in CAP, have fewer complex issues, and have established a track record of working

cooperatively and transparently with the IRS.

37
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Overview
This chapter explains the research methodology employed in this study. It addresses

issues like the research design used, type of data collected, methods of data analysis and

theoretical framework for the study.

3.1.1 Research design

This is an embedded case study that sought to critically evaluate taxpayer compliance

strategies used by TRA. It is an embedded case study because the study was concerned

with only one aspect of the tax administration, being taxpayer compliance. The study was

explanatory, as it sought to explain the relationship between compliance strategies and

tax compliance level. It was both qualitative and quantitative in nature. It relied heavily

on document analysis. This method entailed identification and critical examination of

literature available on the subject so as to establish the knowledge gap in relation to

taxpayer compliance.

It also included collection and review of TRA reports, available research reports and

policy documents. An interview was also conducted on TRA Planning and Modernisation

Programme Officer as it is the office tasked with coordinating all efforts towards

modernising and reengineering the tax administration. Additionally further clarification

on how the strategies work and the challenges faced in implementing the strategies was

38
sought orally from employees at Taxpayer Services and Education Department and Tax

Audit Division

3.2 Theoretical framework

The approach used for this study is inductive in nature as data collected was generalised

basing on the theory that taxpayer compliance is central to the success of any tax system.

The very existence of tax administration is to ensure compliance with tax laws and to

collect taxes in order to finance the Government’s budget. It then follows that non

compliance will lead to failure to secure revenue for government which will adversely

affect the country’s development, and ultimately a failure in the tax system. With this

assumption as a guide, compliance with taxes has become the most important aspect of

tax administration.

3.2.1Conceptual framework

Demographic Personal

Failure to secure revenue No

Non compliance
for development development

Aspects of tax system

Failure in tax
system

Demographic Factors: Age, Gender, Level of education, e.t.c

Personal Factors: Attitudes, experiences, morale and financial circumstances
Aspects of Tax System: Tax rates, Penalties, Audit probabilities, enforcement strategies,
complexity and costs of compliance.

39
3.3 The Study Area
The geographical focal point of study is Tanzania, TRA being the subject of study. TRA

was chosen as it is currently re engineering its processes and has recognised the need to

engage in tax reform and to develop a set of guiding principles built on stability,

accountability, equity and centralised authority. Given Tanzania’s reform agenda, the

identification of appropriate and effective strategies to improve taxpayer compliance is

timely.

3.4 Type and sources of data used

Secondary data (in the form of annual reports, strategic objectives for compliance and

risk management, taxpayer education programs, and tax reforms) was used. Data was

obtained from reports from TRA, the Ministry of Finance and the Organisation for

Economic Cooperation and Development (OECD) and other publications. Research

findings from independent sources were also used to cross validate the information and

ensure its reliability. To avoid repetition of what has already been done regarding the

issue of compliance in Tanzania, taxpayers were not contacted directly, but results from

TRA’s latest Perception Surveys were used. Primary data was collected in the form of

semi structured interview with the Planning and Modernisation Office.

3.5 Data analysis techniques used

Both qualitative and quantitative data analysis methods were employed. Data was turned

into information by use of tables, graphs and other presentations suitable for giving a

meaningful interpretation of the results. MS Excel has been used and exported to MS

Word.

40
3.5.1Qualitative Data

For qualitative data, the content analysis method was used. This involved reading of

previous publications with information that may help to address the objectives of the

research. Results of the content analysis have been summarised in the findings, as well as

recommendation and on the building up of the literature review. Data from the interview

schedule was also summarised in the findings.

3.5.2 Quantitative Data

For quantitative data, simple descriptive statistics like tabulation of totals, % changes as

well as graphical presentations using MS Excel were employed. Regression and

correlation analysis were performed to test relationships between number of audits and

assessed amounts using MS Excel. Also graphs were used to reflect the relationships.

3.6 Sampling procedure

Non probability sampling method was used, specifically judgement sampling, to select

person to be interviewed. Sample selection was based on personal judgement with regard

to some appropriate characteristics of the sample member (i.e. TRA Officers interviewed

all possessed knowledge regarding taxpayer compliance and the strategies used by TRA).

The choice for judgement sampling emanates from the need to have sample members

who are conversant with the mechanisms of compliance (Sauders, M. et.al, 2007)

41
 CHAPTER FOUR

PRESENTATION OF RESULTS, ANALYSIS AND DISCUSSION

4.1 Introduction
This section presents the major findings as well as the discussion of the results. The

findings based on the research objectives have been presented as they were analysed from

the collected data to produce the results. The data was collected from various sources

such as TRA, OECD, IMF reports and publications, other publications and research

papers from independent sources.

The primary objective of the research was to study why the level of compliance remains

low in Tanzania despite the strategies in place.

4.2 Presentation of findings, analysis and discussion of results

4.2.1 Identification and Evaluation of Strategies used by TRA

Among the objectives of this research was to first identify, and then evaluate strategies

used by TRA. Data to perform this task was sourced from TRA review reports for

Implementation of the Corporate Plans, annual reports for various departments and

independent publications. Evaluation of the voluntary compliance strategies was done

with reference to results from Taxpayers Perception surveys conducted by TRA. This is a

tool that the administration uses to measure the impact of the voluntary compliance

strategies.

42
The following are strategies used by TRA to enhance compliance and curb non

compliance.

Function-type Organisation

In its endeavour to increase compliance and the overall performance of the

administration, TRA overhauled and re-engineered its processes towards a

function based organisation. At inception in 1996, TRA was organised along the

tax-type structure and changed into function type in July 2005 . Table 1 below

presents the merits and demerits of using this approach, in comparison with other

organisational approaches.

43
 Table 1: Merits and demerits of tax organisational models

Criterion Organisational model

(Advantage) Product-based/ Functional Client-based/
type of tax Type of
taxpayer
Establishes clear
accountability within Yes Yes Yes
organisation and control
for each tax
Improves opportunity for
compliance by taxpayers Neutral Yes Neutral
Enhances quality of
taxpayer service Yes No Yes
Permits different
administrative procedures Yes No No
for different taxes
Produces lower
administrative costs and No Yes No
high staff productivity
(less duplication)
Imposes lower compliance
costs on taxpayers No No Yes
Reduces opportunities for
collusion and corruption No Yes No

*Source: OECD, 2009

As it can be noted from the table, TRA is best placed to improve opportunity for

compliance by taxpayers, and incur lower administration costs. From the review of

literature TRA has a large taxpayer department and the Block Management system to

cater for small and medium taxpayers.

This results in a hybrid of some sort, between function and client-based models and in

this way TRA has been able to secure the advantages of improved accountability and

control, enhanced compliance, better administrative efficiency, reduced corruption and

44
more customised taxpayer service. Other countries that have successfully implemented

this approach are France, Italy and Spain.

Table 2: Summary of Strategies used by TRA

Departmentalisation i.e. Large Taxpayer

department.
Tax Investigation Department
Tax Audit
Enterprise Wide Risk Management System
Block Management Service (BMS)
Enforcement Taxpayer Identification Number (TIN)
Mobile Phone Payment System
Banking Payment System
Voluntary Stakeholders Forum
Taxpayer’s Charter
Electronic Fiscal Devices (EFD)
E-Filing
Outreach taxpayer programme
Tax Service Centres
Taxpayer Services and Education Department

Taxpayer Services and Education

Table 3 below shows that more than half (53.7%) of respondents indicated that they are

not aware of Taxpayer Education Programmes. However Mwanza reflects encouraging

results. The implication of these results is that more effort is needed to educate taxpayers

in order to increase awareness of tax matters. This also has a significant implication as

the Taxpayer Service and Education Department is charged with all the other strategies

aimed at encouraging voluntary compliance. These are the Taxpayers’ Charter,

Stakeholders’ Forum meetings, Taxpayers’ Appreciation Day and development of

taxpayer education capacity.

45
Table 3: Awareness on the Taxpayer Education Programmes Regionwise.

Region Awareness of Taxpayer Education TOTAL

Programmes
YES NO
Number % Number Number %
Dodoma 114 56.8 88 43.3 200 100
Arusha 121 60.5 79 39.5 200 100
Dar es Salaam 360 37.6 600 62.4 960 100
Ruvuma 133 66.5 67 33.5 200 100
Mbeya 102 50.5 98 49.5 200 100
Kigoma 49 24.5 151 75.5 200 100
Mwanza 147 73.5 53 26.5 200 100
Urban West 66 33.2 134 66.8 200 100

TOTAL 1092 46.3 1268 53.7 2360 100

*Source: TRA

Taxpayers Charter
The charter embodies the core values of TRA and its employees who are expected to be

business oriented, to be fair and accountable for decisions they make in their areas of

responsibility, to be prompt in the delivery of services and to be honest and have

integrity.

In evaluating the charter, the study conducted by TRA measured the taxpayers perception

on the core values of the Authority. According to the results adopted from TRA’s latest

perception survey, an average of 68% of taxpayers were positive on all aspects of TRA’s

staff attitude and behaviour. However, the results showed that only 56% of taxpayers

perceived TRA staff to be largely corrupt free. Furthermore only 60% of taxpayers feel

that TRA staff takes full responsibility of their mistakes. This also poses a great challenge

to TRA as these factors have a direct bearing on compliance behaviour of taxpayers.

46
Table 4: Taxpayers’ Perception on TRA Core Values
Perception Indicator %

TRA staff are courteous in their approach to customers 71.19

TRA staff are fair in their decisions which relate to our business 69.87
TRA take full responsibility for their mistakes 59.79
TRA staff are prompt in the delivery of services 66.40
TRA staff are easily accessible 73.18
TRA Staff have a high level of integrity and honesty while dealing 68.44
with clients
TRA staff are competent in the delivery of high quality services 68.81
TRA staff are consistent in their application of tax laws 65.66
TRA staff are largely corruption free 56.31
*Source: TRA Perception Survey, March 2011

Taxpayers rights proclaimed in the charter include;

i) The right to receive tax forms, returns and information written in plain

language, so as to assist taxpayer to comply with tax laws administered by

TRA. This proclamation is problematic as common law principle (enforceable

in Tanzania) states that every person is presumed to know the law, including

tax laws.

In other words ignorance of law is no defence to liability for an offence.

Additionally there is no statutory basis on which the right to receive

information on tax laws can be enforced; it is not recognised under statutes or

constitution of Tanzania. It therefore remains a mere service standard.

ii) The other right provided for by the charter is the right to privacy and

confidentiality. This right is also undermined by wide powers1 given to TRA

for information gathering, inspections, audits and investigations.

1
Section 37, 38 and 39 of VAT Act (1997), Section 138 of Income Tax Act(2004)

47
 Electronic Fiscal Devices

Table 5: Status of EFD Utilisation as at 31st June 2011

EFDs were introduced in July 2010, as a way of enhancing compliance by enabling

efficient control in areas of sales analysis and stock control. The system is currently

applicable to traders registered for VAT, but the Authority hopes to extend to other tax

types. Table 5 above shows that only 72% of registered traders are using the system. This

is a disappointing figure as the target was 100% of all the registered and active traders.

The underperformance of this strategy has been attributed to supply shortages of devices

by vendors, compatibility problems of EFDs with taxpayer IT systems and other issues

that are related to the compliance costs of businesses.

Electronic Payment through Mobile Phones

TRA launched a system of electronic payment of taxes through mobile phones in June,

2011. No evaluation was done on the impact of this strategy as it is fairly new and the

data is still insufficient to make any conclusion.

E-filing of Returns

Figure 2: Returns filed through E-Filing System July 2010 – April 2011

48
*Source: Domestic Revenue Department

Figure 3: Returns filed through E-Filing System July 2010 – April 2011

Returns
1600
1400
1200
1000
800
600 Returns
400
200
0
ly st r r r r y y h il
Ju ugu mbe tobe mbe mbe uar ruar arc Apr
A pte Oc e e Jan eb M
e Nov Dec F
S

E-filing has also been introduced recently and the two figures above show the trend on

how taxpayers have been using this facility since implementation. The almost flat line in

figure 3 could mean that the facility is used by the same taxpayers since introduction. The

results also present a challenge to TRA to inform taxpayers about this facility.

Block Management System (BMS)

49
The objective of this initiative is to promote compliance by registering all eligible small

and medium taxpayers within geographical locations and gather relevant tax information

on the level of economic activities carried out for ease of follow up for enforcement

purposes and eventually increase voluntary compliance.

Table 6 : Taxpayers registered through the BMS

Year
2010 2011 Increase (%)
Presumptive taxpayer 249,308 300,710 20.62
%% 2%% %
TIN 617,877 845,737 36.88
Total 867,185 1,146,447 32.20

Through BMS system taxpayers education seminars have been implemented according to

the block needs. Table 6 above shows that through this strategy, there was an overall

increase of 32.20% in new registrations from 2010 to 2011. However the impact of BMS

was comparatively lower with regard to registration under the presumptive tax regime.

Enterprise Wide Risk Management System (ERMS)

Development of Risk registers in line with TRA Enterprise Wide Risk Management

System was finalized in March 2011. Enterprise-Wide Risk Management Policy and

Framework was launched on 1st July, 2011. No evaluation on contribution of this

strategy to taxpayer compliance as it is still new. TRA chose this approach upon

recommendations by OECD. ERMS is hailed as the best practice standard for effective

results on risk management.

Establishment of Dar-es-Salaam Tax Service Centers (DTSC)

50
DSTC were established in July 2010 and covers the operations of Dar-es-Salaam tax

regions of Ilala, Kinondoni and Temeke. The activities covered in these centers include

taxpayer registration, tax assessments, tax collection and desk audits. Currently there are

eight tax centers namely Upanga, Kariakoo and Buguruni in Ilala Tax Region; Mbagala

and Kigamboni in Temeke Tax Region; Manzese, Kimara and Tegeta in Kinondoni

Tax Region. The DTSC are expected to promote voluntary tax compliance and

enhance tax knowledge to taxpayers. No sufficient data is available to enable assessment

of this approach to taxpayer behaviour.

Large Taxpayers Department

This department was introduced in 2001, the objective being to secure revenue, to

provide consistent and quality service to large taxpayers, to improve audit programs,

collections and management of tax debts. According to TRA’s latest report (2011), this

department account for 70% of all revenue collected by the Domestic Revenue

Department. However figure 4 below (adapted from Appendix 3) shows that new

registrations to this department has been stagnant through 2010 and 2011.

Table 7: Number of taxpayers in LTD

No. of taxpayers accounting for

Year No. of taxpayers 80% of revenue %
Jun-08 370 39 10.54
Jun-09 371 39 10.51
Jun-10 400 46 11.50
Jun-11 400 38 9.50

51
 Figure 4 :No. of taxpayers accounting for 80% of revenue collections in the
LTD
50

no. of T/Payers accounting for 80% of collection

45
40
35
30
25
20
15
10
5
0
2008 2009 2010 2011

Table 7 and Figure 4 above also shows that only small percentages (around 10%) of the

large taxpayers account for 80 % of revenue collected from LTD. These findings mean

that effectively 90% of the large taxpayers contribute little to revenue collection, and this

is very disturbing. It also leaves room for further research as to why this is the case.

The LTD comprises of taxpayers considered to have complex business activities and

consequently more complex tax affairs.

The main criteria for selection into LTD is for a taxpayer to have an aggregate payment

of VAT, Income Tax and Excise Duty of at least Tsh. 400 million per annum or an

annual business turnover of Tsh.12 billion per annum. The findings could imply that

TRA only taxes those that are easy to tax and might be having no capabilities to tax those

with complex tax affairs.

52
 Tax Audit Division

Table 8: Summary of the Annual Audit Performance Report

YEAR Planned Audited Performance Assessed % %

Audits (%) Tax increase in increase
(Millions) audited in tax
cases assessed
2006 4329 3353 77.45 28121.6    
2007 5787 5486 89.49 62339.40 38.88 121.68
2008 5400 5491 102.05 93487.00 0.09 49.96
2009 5250 5351 101.92 112531.00 -2.62 20.37
2010 5466 5578 101.69 132393.40 4.07 17.65
2011 6631 5934 94.80 163205.56 6.00 23.27
*Source: Tax Audit
Division

Table 8 above shows that there was a phenomenal increase in the number of audited

cases that also corresponded with a phenomenal increase in revenue assessed of 121.68%.

However there is no consistency in increase of the audited cases. A correlation analysis

between the number of audited cases and the assessed amount shows a positive

relationship. The correlation determination shows that 64% of the variation in assessed

amount is due to increase in audited cases while the remaining 36% is due to other factors

not captured in the linear regression model. Refer to table 9 and figure 5 below.

Figure 5: Regression analysis between audited cases and assessed amount

Assessed tax (million)

200000
150000
100000
50000 AssessedTax (Millions)
0 Linear (AssessedTax
(Millions))
3000 3500 4000 4500 5000 5500 6000 6500
Audited Cases

53
 Table 9: Summary
regression

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.802856
R Square 0.644578
Adjusted R
Square 0.555722
Standard
Error 32405.29
Observations 6

ANOVA
Significanc
  df SS MS F eF
761767522 7.62E+0 7.2542
Regression 1 2 9 2 0.05447
420041047 1.05E+0
Residual 4 9 9
Total 5 1.1818E+10      

Coefficient Standard
  s Error t Stat P-value Lower 95%
- 0.2175
Intercept -120590 82478.7421 1.462068 4 -349587
0.0544
X Variable 1 42.17662 15.6594452 2.693366 7 -1.301

From table 8 above and figure 6 below, the audit division also is struggling with meeting

the set target for audit cases to be completed per annum. This could imply that the

staffing levels could be low, the expertise level of auditors could be low and they take

long to complete a case or that the proportion of desk to field audits or complex to simple

makes the target unattainable. This is a challenge to TRA to revise its audit coverage and

provide further training for audit staff and recruitment into the division.

54
Figure 6: Planned and Audited cases

7000

6000

5000

4000
Planned Audits
3000
Audited
2000

1000

0
2006 2007 2008 2009 2010 2011

Tax Investigation Department (TID)

TID was set up in 2001 and carried out operations as a fully fledged function in 2002/03.

Table below summarizes how TID performed at inception

Table 10: Tax Investigation cases for 2002/03(In billion TSH)

Arrears
& Tax Tax
Investi Potential Doubtful Recoverab Recover Outstandi Recover
TID gations Revenue claims le arrears ed ng y rate%
VAT 79 4928.00 12.10 4915.90 1942.20 2973.70 39.51
Inco
me
tax 103 2265.60 0.00 2265.60 1328.50 937.10 58.64
total 182 7193.60 12.10 7181.50 3270.70 3910.80 45.54

*Source: TRA Investigation Annual Report 2002/03

55
From above table, only 45.54 % of Income tax and VAT were recovered through this

compliance strategy during the early years. However the Investigation Department

Annual report for 2006/07 showed that there was recovery rate of 55.3% for the said

taxes. Data on the subsequent years was not available, however the department reports

that its performance is impaired by inadequacy of resources like personnel, two way

radios, cell phones and the overall inefficiencies in the court system, which cause delays

in the completion of cases taken to court for prosecution. As discussed in the review of

literature this strategy depends entirely on the states allocation of resources and such

allocation increase the cost of tax collection and erodes the tax revenues, thus being

counterproductive.

4.2.2 Revenue Performance and cost of collection

Figure 7: Cost of collection

*Source: 3Years Corporate Plan Implementation Report, 2012

Figure 7 above shows an encouraging cut in costs of collection from 2008 to 2011. Data

for the previous years was not available. TRA attributes this improvement to its

educational programmes and other voluntary compliance strategies. However the claims

56
could not be substantiated as data pertaining to cost of collection corresponding to the

period before introduction of most of the programmes geared at voluntary compliance is

not available. The very absence of this data could imply that TRA was not cost

conscious.

Figure 8: TRA Collections as % of GDP

% of GDP
16
12
8 % of GDP
4
0

*Source: TRA Revenue Reports

Despite all compliance strategies in place, Tanzania still experience low levels of revenue

collections, as depicted by Figure 8 above. This is low by regional and by international

standards. As of 2008, other countries in Sub Saharan Africa collected- Kenya 19%,

Zambia 17.6%, Botswana 25.8%, South Africa 26.3% and Malawi 18.8 % of GDP

(IMF,2010). Currently (i.e. 2011) Tanzania has made collections of 15.3% of GDP from

14.6 % collected in 2010. However, looking at the slope of the line in Figure 8, in

aggregate the performance is improving. This is also a challenge to TRA as the

Government needs at least 30% of GDP to finance basic public services.

57
 CHAPTER FIVE

CONCLUSSION AND RECOMMENDATIONS

5.1 Conclusion
Tax compliance is a broad and complex issue. Since non compliance has multiple causes

and spans, different taxes and different taxpayers, an effective reaction must be equally

multifaceted. Given these complexities, voluntary compliance is even more difficult to

attain.

The question to be asked is whether tax enforcement alone can provide an effective

answer to the compliance concept. Apart from the cost element, which is a significant

limitation to enforcement, there are psychological factors to be considered. However, for

developing economies like Tanzania, the more immediate problem is the limited capacity

to undertake wide ranging enforcement that is effective.

Due to constraints outlined above, it is all the more important to focus on voluntary

taxpayer compliance. TRA has to be applauded for all the efforts made towards this

direction. However, it seems that these efforts have not been as successful because

voluntary compliance is not properly contextualised. Voluntary tax compliance is a tax

administration issue yes, but it is improper to confine it exclusively to tax administration

issues.

58
Such a narrow approach leads to emphasis being placed upon the behaviour of taxpayers,

rather than the manner of governance which underpins the tax administration and to a

large extent determines the taxpayers’ attitude to government and to taxation. With this

observation, the following specific recommendations are made

5.2 Recommendations
a) The tax laws must be aligned to give effect to what is said in the taxpayer charter

and to the protection of taxpayers’ rights. It is the force of the law which can

make service commitments an effective instrument that gives the taxpayer the

ability to realise them in court, instead of being mere pronouncements.

b) TRA should re-examine its overall communication strategy with taxpayers. This

means that the Authority should improve tax education and sensitisation

programmes. It also means that taxpayers should be made aware of the new

initiatives aimed at improving service delivery like e-filing and the mobile phone

facility.

c) It is recommended that TRA evolve strategies towards moulding a competent

workforce that can handle complex tax matters.

d) Further research is recommended with regard to contribution of large taxpayers

to revenue collection. This is in light of the findings that effectively only 10% of

large taxpayers contribute 80% of revenue collections from this department.

59
e) It is also recommended that the Government of the day help the tax

administration by being transparent on the spending of the revenue collected.

This boosts voluntary compliance.

60
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Salaam: NPC Kiuta

17. TRA, 2011. Tax Administration in Tanzania 1961-2011. Dar es Salaam

18. TRA, 2012. 3Year Corporate Plan Implementation Report. Dar es Salaam

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 APPENDICES

Appendix 1: Research Protocol

(A guide on what documents and categories of data to look for)

BROAD QUESTION(S)

Why is Tanzania experiencing high levels of non compliance?

What are the strategies that TRA is employing to improve compliance

levels.

(Period under review 2008-2011)

INFORMATION NEEDED

1. Strategies used by TRA

Categories of the strategies, i.e. coercion and persuasion

2. To what extent is each strategy used?

3. What results are expected from each strategy, i.e. to augment audit

programme, to improve convenience to the taxpayer, e.t.c?

4. What is the performance measurement for each strategy?

5. How did each strategy perform?

Identified Source(s) of Information:

TRA Publications, Implementation report of TRA’s third corporate plan.

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Possible Source(s) of information: International Monetary Fund (IMF), Organisation

for Economic Development and Cooperation (OECD), United Kingdom Department for

International Development (UK-DFID) and the World Bank Group

6. What is the situation of non compliance in other developing countries, globally

and regionally?

7. Costs of Compliance?

8. What are the strategies used by Tax Administrations in those countries?

9. Look out for success stories of improved compliance and the strategies that were

employed?

10. What are the best practices recommended for effective compliance strategies?

Source(s) of Information: Published Books, Research Papers, Newspaper Articles,

Reports from OECD, IMF and the World Bank.

Other Issues

Ensuring Consistency of data- Provide abbreviation table with full names

for acronyms used.

Coding of data according to themes and establish patterns or relationships

Interviews

Data is to be categorised in Question-by question format, i.e. each question is to be asked

in a manner that captures a particular theme.

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Appendix 2: INTERVIEW SCHEDULE

(to Planning & Modernisation Program Office)

RESEARCH TITLE: ASSESSMENT OF TAXPAYER COMPLIANCE STRATEGIES
USED BY TANZANIA REVENUE AUTHORITY (TRA)

PART A: Preliminaries

1. Introduction and Purpose

My name is Tshepo Banda, a student at Institute of Tax Administration and I am

doing a research whose main objective is to assess compliance strategies used by

TRA with a view to establishing the strategies impact on taxpayer compliance

behaviour. The choice for selecting your office to participate in this study is

because your office has the mandate to coordinate and monitor the

implementation of compliance strategies put in place by the administration, and

thus I believe your input will provide an understanding on the issue.

The interview is expected to last not more than 45 minutes.

2. Name.....................................................

Title......................................................

Department’s Portofolio

.........................................................................................................

.........................................................................................................

PART B: Guide Questions

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1. What strategies is TRA using to curb non compliance with tax laws?

...........................................................................................................

............................................................................................................

2. How do you measure performance of each strategy?

...............................................................................................................

...............................................................................................................

3. How has each strategy performed, for the past 3 years?

..............................................................................................................

...............................................................................................................

4. What current problems are you experiencing in implementing these strategies?

.......................................................................................................................

.......................................................................................................................

5. How has these strategies changed over the last 3 years?

........................................................................................................................

........................................................................................................................

6. Is there anything else you would like to add

Thank you very much for your time and participation

Appendix 3:

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