Tax Isn’t Taxıng

On June 3, 2016, Tanzanian Minister of Finance and Planning Dr. Philip Mpango submitted the National Budget for the Fiscal Year July 2016-June 2017 to the Members of Parliament for discussion. The Finance Act 2016 included the government’s intention to start imposing an 18% value-added tax (VAT) on many previously exempt tourism services. Two weeks later the debate was concluded and, despite outcry expressed by private players and associations from the tourism industry, the Assembly approved the introduction of VAT on tourist services with effect from July 1. According to the bill, the services affected by the new tax include tourist guiding, game driving, water safaris, wildlife-viewing packages, park fees, and ground transportation. This controversial measure predictably triggered discontent within the industry. Some businesses have questioned the too-short notice given by the Tanzanian government. Since safaris are generally paid in advance, the short notice did not give tour operators the opportunity to add the VAT to their usual rates, while other operators did not have the time to get VAT-registered and were therefore unable to issue VAT receipts to their clients.

The Tanzania Association of Tour Operators (TATO) announced that after the new rule entered into force, as many as 8,000 tourists canceled their holidays in Tanzania, denying the country of roughly USD660,000. ECTAA, an organization that represents some 70,000 European travel agents and tour operators, said tourists from the European continent account for 50% of all the visitors to Tanzania and that planned trips could be canceled due to the additional cost. ECTAA argues that if that were to happen, the loss for Tanzania would reach an estimated TZS2 trillion (USD1 billion). In addition to TATO, the Hotel Association of Tanzania (HAT), the African Airline Association (AFRAA), travel agencies, and other affected parties have strongly condemned the government’s plan, arguing that adding VAT would overprice the destination, making it less competitive within the region. They claimed the country is already struggling with a weaker-than-expected world economy and the new tax would further reduce the number of visitors from key markets, channeling them towards neighboring countries where similar taxes have just been lifted. Last November, the President of Uganda, Yoweri Museveni, promised to scrap several taxes that were adversely affecting the tourism sector, including the VAT, which had earlier in the year increased accommodation costs by 18%. Kenya, Tanzania’s major tourism rival, had introduced a 16% VAT on tourism services in 2013. However, in light of the dramatic downturn in business and in a bid to boost the tourism sector, its 2016 Finance Bill established that national park entry fees and commissions earned by tour operators would be exempted from VAT.

Tanzanian Minister of Natural Resources and Tourism Prof. Jumanne Maghembe explained that the government had already granted tourism services companies a conducive environment to thrive by enacting the Tourism Act in 2009. The bill allowed them to operate in a tax-free environment and as a result tourism had become a major contributor to the country’s GDP as well as a significant generator of foreign currency in the following six years. At that point, he reasoned, the tourism sector was ready to start contributing and pay its share of taxes to the government. He also mentioned that the downturn experienced by the tourism sector was due to safety concerns and not associated with the introduction of the VAT. Backing the minister’s position, President Magufuli himself added that he would rather have 500,000 tourists who paid taxes than a million who did not.

Tourism is one of the main revenue sources for Tanzania and creates some half a million jobs directly, along with many more indirectly, and the introduction of the VAT could potentially damage an industry that the Tanzanian economy relies so heavily on. However, if Tanzania is to cut itself loose from international aid, the government has to widen the country’s tax base and increase its revenue. In this light, Tanzania’s ambition to become a self-sustainable economy fully justifies the government’s attempt to capitalize on the country’s unique tourism attractions.