TOPIC 1

GENERAL TAXATION THEORY

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 Starter!!
 How old is taxation?
 Who pays taxes? Why?

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 Some quotes on
Taxation
 People who complain about taxes
can be divided into two classes:
men and women. – Unknown
Author
 Taxes are not good things, but if
you want services, somebody's got
to pay for them so they're a
necessary evil.
-- Michael Bloomberg
 TOPIC 1 COVERAGE:
After studying topic 1, you should be
able to: tax and describe tax
1. Define
Characteristics.
2. Describe general tax classification
and Tanzania tax structure
3. Discuss the role of taxation in an
economy.
4. Explain basic efficiency criteria for
evaluating tax systems.
5. Provide a historical overview of tax
legislation and administration in
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2……………..DEFINING TAX………….2
Tax is a compulsory (not voluntary)
levy (charge) by the state on her
citizens and non-citizens alike
that is usually payable in
monetary form for which
governments need not offer
equivalent direct compensatory
services or render an individual
account on how it has utilized
the revenue.
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 1…………TAX CHARACTERISTICS……
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1. It Is a compulsory charge.
 Not contribution, donation or gift to the state
 Legally imposed, and non-compliance results into
statutory, civil & criminal penalties.
 Therefore not voluntary
2. Only government (sovereign state) has
power to levy taxes.
 Sports clubs, churches, political parties do not charge
taxes.
 Distinguishing factor btn tax & other charges: who
levies/charges?
3. Both citizens and non-citizens may be
liable to pay tax.
 citizen – individual with full rights as member of a country
 Depending on the legal provisions, anyone may be liable
to pay taxes.
 e.g. non-resident – difficulty to escape paying indirect
taxes.

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 2…………TAX CHARACTERISTICS……
3
4. No “quid pro quo” relationship in taxation.
 Not necessary for a tax payer to derive direct equivalent
benefits for tax paid.
 Benefits diffuse through general society or specific
classes/groups in the society.
 Exception – user charges.
 e.g. tax paid 105,000/= & expect 105,000/= medical
services from the government. Not real as you may not
fall sick or be abroad for studies in the year of income.
5. Government does not have an obligation to
provide an individual account of how tax is
utilized.
 Does not mean no public control over how
government expenditure
 e.g. political system provide check & control
mechanism.

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 3…………TAX CHARACTERISTICS……
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6. Usually payable in monetary terms.
 Coins & paper money
 Normally in the currency of the state concerned
7. The power of taxation is mainly to be used
in collecting state revenue.

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 1….…..General Tax
Classification……8
Four categories of classifying
taxes
1. By tax base
2. According tax incidence
shiftability
3. According to unit or ad-
valorem based taxes
4. According to how the tax
burden is distributed among
the taxpaying society.
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 2………General Tax
Classification…..8
1. Tax base.
 classifying a tax according to what
is being taxed.
 income (e.g. corporate tax, PAYE,
etc.)
 capital (capital gain tax, property
tax – assets & liabilities realization
[ITA, 2004 Part III, Div. III], etc.)
 consumption (e.g. value added tax).
 good for economic analysis but
sometimes it is difficult to define the
tax base.
 e.g. capital gain – sale of shares or
sale of buildings - inflation?, time
value of money? 11
 3………General Tax
Classification…..8
2. Shiftability of tax incidence.
a. Direct tax - levied directly on the person
who is intended to pay the tax without the
possibility of shifting the incidence to another
person.
 tax impact and incidence fall on the same point.
 tax impact – legal requirement to pay tax (formal
incidence) & tax incidence – actual effect/burden
for paying tax
 e.g. income tax, estate duty, property tax, capital
gain tax.
b. Indirect tax – incidence can be shifted to fall on a
person other than the one paying the tax (the one with
impact)
 e.g. taxes on consumption of goods/services – VAT,
excise duty.

 This classification is sometimes misleading as the

incidence of some direct taxes, for example
corporate tax, can easily be shifted.
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 4………General Tax
Classification…..8
 Factors that determine the shiftability of
tax incidence.
A. Market structures
• Imperfect – monopoly, product
differentiation, imperfect communication –
easy to shift incidence
• Perfect – many buyers/sellers, full
knowledge, no restrictions – difficulty to
shift.
B. Industry cost condition/structure
• Increasing – difficulty to shift
• Constant – possible
• Decreasing – easier to shift

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 5………General Tax
Classification…..8
 Factors that determine the shiftability of tax
incidence.
C. Price elasticity of product
demand
Elastic – small change in price leads to
great change in demand – less possibility
of shifting
Inelastic – change in price leads very little
change in demand – very high possibility
of shifting
D. Type of tax.
Indirect – more possibility of shifting
Direct – not easy to shift (tax
authority identify and charge tax
direct to the tax payer 14
 6………General Tax
Classification…..8
3. Unit (specific) v/s ad-valorem
based taxes.
A unit or specific tax - levied on the
physical measures of what is being
taxed (e.g. volume, weight, etc.). Many
excise duties are specific taxes, for
example tobacco tax is charged by
weight of tobacco.
ad-valorem tax is levied on the value of
the tax base, for example income tax is
charged on the level of income, VAT on
consumer expenditure, import duty.

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 7………General Tax
Classification…..8
4. Distribution of tax burden.
i. Progressive taxes - take an
increasing proportion as the value of
the tax base rises and depends on the
marginal rate of tax (MRT*) being
greater than the average rate of tax
(ART**).
*MRT = Change in tax paid
Change in income
**ART = Total tax paid
Total income

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 8………General Tax
Classification…..8
4. Distribution of tax burden.
ii.Proportional taxes - take a
constant proportion as the value of the
tax base and depend on the MRT and
ART being equal.
 e.g. all tax payers paying 10% of their
income.

iii.Regressive taxes - take a

declining proportion as the value of the
tax base rises and depends on the MRT
being less than the ART.
 e.g. flat rate taxes on consumption –
excise duty & VAT for essential goods.

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 1………TAX STRUCTURE IN TANZANIA….5

 Basically made up of direct taxes

and indirect taxes.
 Ministry of Finance determines tax
structure and classification in
Tanzania.
 Direct taxes are mainly taxes on
income and property while indirect
taxes are on consumption and
international trade.

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 2……..TAX STRUCTURE IN TANZANIA……
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DIRECT TAXES – ON INCOME AND PROPERTY
Corporate Tax - 30% for all companies
(whether resident or non-resident) carrying on
a business in Tanzania. Some exceptions exist
for newly DSE listed companies and
corporations with unrelieved losses for more
than 2 consecutive years – FIND THESE OUT
BEFORE NEXT LECTURE
Individual Income Tax - Non-corporate
resident taxpayers who include sole traders
and salaried employees are taxed at
progressive individual income tax rates, which
vary from the lowest marginal rate of 9% to
the highest marginal tax rate of 30%. For a
non-resident individual, the rate is 30 percent
(flat rate).
Skills Development Levy - a tax based on
the gross monthly emoluments paid by an
employer to employees.
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 3………TAX STRUCTURE IN
TANZANIA……5
DIRECT TAXES – ON INCOME AND PROPERTY
Game of Chance and Gambling Tax -
charged to Casinos, private Lotteries and Slot
Machines.

Withholding Taxes - a scheme (basically,

not a tax source in itself) that is operated on a
number of payments made by persons in the
course of doing business/investments [e.g.
investment income, etc.]

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 4……..TAX STRUCTURE IN
TANZANIA…….5
INDIRECT TAXES – ON CONSUMPTION AND
INTERNATIONAL TRADE
Excise Duty on Locally Manufactured
Goods - levied on a few locally manufactured
goods, which include, beer, wines, whiskies,
spirits, soft drinks, smoking tobacco,
cigarettes and petroleum products.
Stamp Duty - Certain legal instruments
attract payment of stamp duty for the purpose
of authenticating them.
Value Added Tax (VAT) - a consumption tax
charged through VAT registered traders for
goods and services at a standard rate of 18%.
Other Internal Taxes - fees, levies and user
charges, which are collected from various
sources. e.g. taxes and charges on motor
vehicles, port and airport departure services.

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 5……..TAX STRUCTURE IN
TANZANIA…..5
INDIRECT TAXES – ON CONSUMPTION AND
INTERNATIONAL TRADE
 Taxes on Motor Vehicles
 Motor Vehicle Registration Tax
 Transfer Tax - On transferring the ownership of a
motor vehicle the new owner pays a transfer tax.
 Tax for motor vehicle Road license
 Port and Airport Departure Service Charge
 Import Duty-Generally known as customs
duties. These are tariffs, which are imposed on
goods coming into the country.
 Excise Duty on imports - Excise duty is
charged either on specific or ad-valorem tax rate
on certain consumer goods on importation into
the country.

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 1………THE ROLE OF TAXATION……4
 Paying taxes is inevitable for the
provision of social welfare.

 The rationale for imposing taxes stems

from the government responsibility
towards its citizens

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 2………THE ROLE OF TAXATION……4
1. Raise revenue - a primary objective of a modern
taxation system to help finance public expenditure.
 To provide “public goods” - displays the following
characteristics
 zero marginal cost, i.e. no extra cost is incurred
in supplying the good to more than one person.
 Individuals cannot be excluded from
consuming the good, even if they have no desire
for it.
 All members of society must consume the same
amount, it cannot be rejected, e.g. law and order.
 e.g. national defense - the provision of national
defense protects all members of society from
hostilities at zero marginal cost, no individual can
be excluded and those who disagree in principal
cannot reject it.
 free market would be inefficient.

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 3………THE ROLE OF TAXATION……4
1. Raise revenue - a primary objective of a modern
taxation system to help finance public expenditure.
 To provide “merit goods” in order to
promote social and economic welfare.
 Paternalistic role of providing merit goods,
e.g. health and education.
 Can be provided privately, but if left
completely to market forces, merit goods
may be under-consumed.

2. Redistribution of income and wealth.

 reduce poverty and promote social equality.

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4………THE ROLE OF TAXATION……4
3. Economic regulator - promoting economic
welfare and creating a sound infrastructure for
businesses.
 Maintenance of economic stability
 To avoiding high levels of inflation and unemployment
 Taxation is used as an instrument of economic policy –
by manipulating changes in the tax system, a desired
policy objective may be achieved.
 Protection of consumers, employees
and general public.
 Legislation and regulatory controls made on producers
in order to protect consumers, employees and the
general public is the responsibility of any socially
aware government.
 e.g. protect the infant local industries from foreign
competitors.
 Correction of regional economic
imbalances.
 incentives to industries being established in
economically less developed areas.
 Therefore, taxation can be a powerful tool in the
hands of any government as a means of ensuring26
THE ECONOMIC EFFECT OF TAXATION
 Reduces disposable income.
 Controls inflation.
 Transfer wealth from persons to the
state.
 May lead to tax avoidance or tax
evasion.
 It reduces consumption especially
on elastic goods, for inelastic
goods consumption may be
affected for a short time only.
 May lead to incentive/disincentive
to work.

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Major Areas Of Taxation
Like in other tax systems, taxation in Tanzania is divided
into three major areas namely – Tax Policy, Tax law,
and Tax Administration
1. Tax Policy.
The government decides on a tax policy. A tax policy is a
general statement (plan) or understanding which
guide or channel thinking of the government on how
tax matters are going to be decided.
2. Tax Law.
The policy is then put into law by the government’s
legislative body (the parliament) by enacting Acts,
e.g. the Income Tax Act, 2004.
3. Tax Administration:
Tax law is passed over to a revenue authority,
e.g. TRA in Tanzania. TRA is the main
authority to administer taxes & supposed to
transform tax policy and tax law into
compliance.

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 1….…..Tax System Efficiency
Criteria…….6
 Rationale for imposing taxes -
Government responsibility towards its
citizens
 Provision of “public goods”
 Provision of “merit goods”
 Redistribution of income & wealth
 Economy regulation
 Maintenance of economic stability
 Protection of consumers, employees &
general public.
 Correction of regional economic
imbalances
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 2………..Tax System Efficiency
Criteria…….6
 Tax system adopted must be acceptable to the
general public to avoid dissension.

 Unfair or seemingly unfair taxation systems

have been at the heart of many social conflicts,
examples:
 social unrest caused by the introduction of
community charges in the UK in 1990.
 14thc. peasant revolt in UK due to introduction of poll
tax.

 Adam Smith (1776) - The wealth of Nations,

proposed & later extended by others – good tax
system:
 reflect a persons ability to pay,
 It should be certain, convenient, and administratively
efficient and
 Do not cause economic distortion. 30
 3……….Tax System Efficiency
Criteria…….6
1. Simple, Certain and Convenient.
• Simple – tax payer self assessment is possible and being
aware of sanctions (penalties) for non-compliance.
• Certain – yield expected revenue for implementing
government plans, e.g. profit tax (relative uncertain) v/s
PAYE or tax on necessities (more certain).
• Convenient – timing and method of payment/collection, e.g.
PAYE & withholding taxes are more convenient.
2. Elasticity of Tax To Changes In The Tax
Base (Flexibility) – measures sensitivity of tax system
to economic changes. Elastic when the amount of revenue it
yields increases as fast as or faster than the growth of income or
the economic activities. e.g. most direct taxes are elastic.
3. Administratively Efficient (Economy).
 Cost to TRA – admn. cost (manpower & other material
resources)
 Cost to Taxpayer – compliance cost (professional tax advice
etc.)
 Costs can be monetary (wages, salaries, equipments, etc.)
or non-monetary (reduction in income, consumption & any
other inconveniencies.
 Increased compliance costs may results into increased
evasion practices & increased costs to enforce compliance.
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 4………..Tax System Efficiency
Criteria….6
4. Neutrality – does not distort economic choices.
Distortion caused by excessive burden of taxation,
causing substitution effects resulting in economic
inefficiency.
• cost of working = loss of leisure time, and the benefit
is the income received in wages
• Economic welfare = material income + psychic benefit
received from leisure.
• A tax wedge is the difference between the marginal
cost of the activity and the marginal benefits
received. The degree of distortion depends on the size
of the tax wedge.
• When taxation enters the equation,
distortions may occur due to Income &
substitution effects of tax on work effort.
 Income effect: reduce disposable income –
encourages to work harder
 Substitution effect: choice btn work & leisure
 IE & SE work on opposite direction & when IE is
greater than SE – work harder (otherwise,
results into leisure than working harder)

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 5………Tax System Efficiency
Criteria……..6
5. Equitable (Horizontal & Vertical).
• To be acceptable taxes must be fair & seen
to be fair.
• Tax systems perceived not to be equitable
results into greater tendency towards tax
evasion.
a. Horizontal equity – requires that people in
similar situations be treated in a similar
manner.
b. Vertical equity – requires that people in an
unequal situations be treated with the
‘necessary degree’ of inequality. Require the
rich to pay more than the poor = progressive
system of taxation.
• Traditional approaches:
a. Benefit theory – levied in proportion to benefit
received (limitation - difficulty to measure
benefit)
b. Ability to pay theory – equality of sacrifice
among TPs (limitation – what is the best
indicator of ability to pay?)
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 6………….Tax System Efficiency
Criteria…..6
CONCLUDING REMARKS
• Not possible for any one tax system to
conform to all principles of an ‘ideal’ tax.
 e.g. in the pursuit of simplicity equity is often
reduced, provisions for taxpayers in different
situations can only be achieved by increased
legislation, thereby making the system more
complex.
 Also equity may only be achieved at the
expense of efficiency.
• Which principle is to be the most
important is a matter of judgement and
policy/politics.
• Be careful not to evaluate a tax system on
these criteria in absolute terms but in
relative terms.
• Most important is the degree to which
efficiency criteria are achieved and how
important a certain factor is in the system
as a whole.
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 READING ASSIGNEMNT
I. HISTORICAL OVERVIEW OF TAXATION
IN TANZANIA

II. CURRENT TAX ADMINISTRATION

IN TANZANIA
 TRA establishment (when and why?).
 TRA functions
 Overview of current TRA organization
structure, its departments and their
respective functions.
 Local Government Taxes.
 Tax Administration in Zanzibar

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 HISTORICAL OVERVIEW OF TAXATION IN
TANZANIA
 Most of Tanzanian laws including tax law
were inherited from Tanganyika colonial
masters (The United Kingdom).
 After First World War (1914-1918) Tanzania
was put under the British Government. By
the time Kenya and Uganda were already
under the British rule.
 1937 – Income Tax Law was introduced in
Kenya as a war measure
 1940 – IT law was introduced in Tanganyika,
Uganda and Zanzibar by way of territorial
ordinance.
 1948 – the four ordinances were
consolidated after the formulation of the
East African High Commission (EAHC).

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 HISTORICAL OVERVIEW OF TAXATION IN
TANZANIA
 1952 – the consolidation resulted into the
East African Income Tax Management Act,
1952 (EAITM Act, 1952). With retrospective
effect from January 1st 1951. Each territory
retained its own powers under the EAHC to
enact its own ordinance, fixing the rates of
tax and personal allowances.
 1958 – another Act was enacted to replace
the EAITM Act, 1952 - East African Income
Tax Management Act, 1958 (EAITM Act,
1958).
The EAITM Act, 1958 continued to form the base
of taxation for sometime even after the
following events:
 The East African Common Services
(EACS) replaced the EAHC,
 Tanganyika became politically
independent in 1961, and
 The 1964 Zanzibar Revolution.
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 HISTORICAL OVERVIEW OF TAXATION IN
TANZANIA
 1970 – following the signing, and start of
the East African Community (EAC) in 1967,
the EAITM Act 1958 was revised on the
authority of the EAC Act No. 3 of 1968. The
result was the East African Income Tax
Management Act, 1970 (EAITM Act, 1970 –
revised edition).
 The consolidation of income tax legislation
in East Africa had clear advantages derived
from: -
i. Economy of scale, and
ii. Uniformity of procedures, training, and tax
policy formulation.
 December 1973 – the East African Income
Tax Department was split up.
 each country assumed responsibility for the
running of its own independent Tax Department.
 The Income Tax Act No. 33 of 1973 (ITA, 1973)
received President’s Assent on 30th December
1973 and it became effective law on January 38
 HISTORICAL OVERVIEW OF TAXATION IN
TANZANIA
 Prior to 1996 – tax administration in
Tanzania was under three departments
namely the Income Tax department,
Customs and Excise Department and Sales
Tax and Inland Revenue Department.
 1996 - The Tanzania Revenue Authority
[TRA] was established as a measure to
reform the tax system in the country. This
is the main administrative organ in our tax
system, responsible for administering
central government taxes.

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 HISTORICAL OVERVIEW OF TAXATION IN
TANZANIA

 Since 1996 – Tanzania has continuously

been reviewing the tax structure.
 to look at the number of taxes in the tax
system and reduce them where necessary.
 Review the rate structure of the various
taxes and the tax base in general.
 The ITA, 1973 was replaced (w.e.f. 1st July
2004) by the Income Tax Act, 2004.
 Other tax legislation included Sales Tax Act,
1969 which was repealed and re-enacted to
Sales Tax Act, 1976 and later replaced by
Value Added Tax, 1997 (VAT, 1997), Estate
Duty Act, 1963 (already abolished),
Customs Tariff Act, 1976, etc.

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 RECENT
DEVELOPMENTS
READ ABOUT
1. Introduction of EFDs in Tanzania and the relevant
laws/ regulations for each of the two phases i.e.
Read Value Added Tax (Electronic Fiscal Devices)
Regulations (2010) and Income Tax (Electronic
Fiscal Devices) Regulations (2012). Identify in
the two laws your obligation as a customer and
assess whether you comply to such obligations.
2. Tax amnesty granted in 2018
We will have an assignment on these later during
the course.

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 The End!

Thank you

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 …NEXT???NEXT…

TOPIC 2:
Introduction to Income Taxation
(ITA, 2004)
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