Tanzania’s private sector has raised alarms over proposed fiscal measures in the 2025/26 budget, warning they could hinder economic growth and investment. Concerns focus on a 10% withholding tax on retained earnings and a three percent VAT withholding requirement, which they argue undermine business expansion. Private sector leaders stress the importance of refined tax policies that promote reinvestment and protect local businesses, highlighting a need for more favorable guidelines.
In Tanzania, concerns are mounting as the private sector reacts to the government’s proposed Sh56.49 trillion budget for the 2025/26 financial year. Business leaders convened over the weekend during a session with the Parliamentary Budget Committee to discuss potential fiscal measures that they argue could stifle investment and economic growth. They are particularly worried about the Finance Bill’s clauses that might shake investors’ confidence and lead to unpredictable policies.
Mr. Raphael Maganga, CEO of the Tanzania Private Sector Foundation (TPSF), was vocal during the session, urging the government to consider tax measures that would foster economic growth instead of hindering business expansion. He highlighted that a proposed 10 percent withholding tax on retained earnings could adversely impact companies across the board.
Maganga stated, “It is difficult to see how informally operating businesses will be encouraged to formalise if doing so results in an additional tax burden. Let us tax for growth, not just for revenue.” Noting that Tanzanian firms are generally smaller compared to their regional counterparts, he emphasized the need for support in building capital through reinvestment, warning that six months is too short for businesses to adapt to such a measure.
Despite the projected Sh130 billion revenue from the new tax, Maganga warned the economic fallout could outweigh any financial gains. He described this tax move as akin to double taxation, contending that retained earnings had already been taxed as corporate income. Finance Minister Dr. Mwigulu Nchemba, who presented the budget to the National Assembly earlier, defended the proposal, stating it addresses exploitable loopholes that some companies have abused under the premise of reinvestment.
In his remarks, Dr. Nchemba mentioned, “The measure is expected to increase government revenues by Sh130.62 billion.” He took to social media to clarify, asserting that the withholding tax on retained earnings is not double taxation; rather, it aims to maintain equitable taxation principles, given that dividends are already taxed.
Further discussing the proposed legislation, Special Seats MP Neema Lugangira supported the tax conceptually but suggested adjustments for its implementation. She called on the Tanzania Revenue Authority (TRA) to improve clarity on what constitutes legitimate reinvestment and strongly recommended extending the compliance window from six months to a full year.
Meanwhile, Mr. Abdulmajid Nsekela from the Tanzania Bankers Association warned that such a tax could particularly jeopardize the banking sector as it heavily relies on retained earnings to meet the capital adequacy standards established by the Bank of Tanzania. He indicated that, “The proposed tax contradicts existing regulations, which restrict the distribution of retained earnings as dividends. It could negatively affect core capital levels and, by extension, long-term financing capacity.”
In light of the budget measures, Deloitte’s tax partner, Mr. Samwel Ndandala, argued for strengthening profit-reporting systems over introducing new taxes. He proposed exemptions for start-ups and banks and called for clear timelines regarding the tax’s initiation.
Controversial aspects of the Finance Bill also include a three percent VAT withholding requirement, with TPSF warning this could hamper cash flow for suppliers and delay credit availability. Maganga advocated for aligning VAT withholding deadlines with income tax cycles and utilizing e-filing systems for efficiency.
On the topic of excise duties, Maganga critiqued proposed hikes on alcohol, reminding the government of its commitment to halt such increases until 2026. He suggested that any new excise duties should apply to imports instead. He also pointed out the possible drawbacks of a suggested mandatory $44 travel insurance fee for tourists, which could duplicate existing coverage and deter budget travelers.
While acknowledging the importance of broadening revenue avenues, Maganga warned against the potentially detrimental effects of these fiscal proposals, stating, “Without thoughtful adjustments, these proposals risk undermining reinvestment, overburdening SMEs, and eroding policy credibility.” He concluded, “By refining the proposals, the government can still expand the tax base while preserving local investment, ensuring fiscal fairness, and cultivating a transparent economic environment.”
The TPSF’s position reflects a larger coalition of industry stakeholders, including the Tanzania Bankers Association and the Confederation of Tanzania Industries, collectively representing over five million businesses across the nation. Their unified intervention sheds light on the pressing need for fiscal policies that prioritize sustainable economic growth.
As Tanzania prepares for a contentious budget approval, the private sector voices significant objections to proposed fiscal measures that could hinder economic growth and investor confidence. The call for a more favorable taxation environment, particularly regarding retained earnings, underscores a broader need for balanced fiscal policies. Stakeholders emphasize the importance of careful consideration to ensure that the proposals support growth without undermining local investment. It appears that the government faces a critical balancing act between revenue generation and fostering a conducive business environment.
Original Source: www.thecitizen.co.tz
