It is hardly one finds as vocal and authoritative voice as Vera Songwe when it comes to domestic resource mobilisation in Africa. An economist by training and once a senior director at the World Bank (WB), she braved the pivotal issue of weak internal resource mobilisation in the continent in the presence of Prime Minister Hailemariam Desalegn and Moussa Faki Mahamat, chairperson of the African Union Commission, who was expected to attend.
The two gentlemen, amongst others, were present at the African Economic Conference, themed “Governance for Structural Transformation”, held last week by the African Development Bank (AfDB), inside the UNECA. Now elevated to the position of Executive Secretary of the ECA, Songwe affirmed that the continent, with an average of 19pc of tax revenues to a gross domestic product (GDP), was the weakest performer in utilising and enhancing its riches. For Latin America & the Caribbean (LAC), the average is 22pc, while for members of the Organisation for Economic Co-operation & Development (OECD), it is 34pc. Africa, true to form, lags behind.
The reasons for this were the informal sector, tax evasion and illicit financial flows out of countries, according to Vera. And had Moges Balcha, director general of the Ethiopian Revenues & Customs Authority (ERCA), been there, he would have agreed at least on one front. Taxpayers in Ethiopia do tend to renege on their civic duties, declare loses and ask for refunds, and hoodwink the government of its responsibilities to realise the social and economic well being of the populace. Or that is the lesson to be taken from Moges’ assertion that more tax revenues could be mobilised by strengthening the audit regime.
Evidence does suggest that there is a legitimate reason for the authorities’ frustration over the performance in tax revenues, even if their conclusion rankles. Four months into the current fiscal year, the Authority collected about 63 billion Br in revenues, which is over 87pc of its target. And as far as target setting goes, this would have been relatively good if it was not for the fact that the aim itself was flawed.
Back in July, when Abraham Tekeste (PhD), minister of Finance & Economic Cooperation (MoFEC), presented this year’s budget before parliament, which stood at 320.1 billion Br, the Ministry hoped tax revenues would shoulder 61pc of the expenditure.
In numerical terms, 199.1 billion Br in tax was the target to be collected, which the ERCA, the body responsible for executing this, beefed up to 230 billion Br. But, in a country whose GDP stood at around 72 billion dollars, in 2016, according to the WB, the target would only make up close to 14pc of the GDP, even lower since the current fiscal year’s GDP will likely be higher.
If this does not show an unduly low ambition for what traditionally has been an overconfident administration, it at least betrays that the economy is failing to generate as much in domestic revenues as it otherwise should.
And for the authorities at ERCA, one of the culprits for the shortage are businesses, specifically 16,000 of them that have declared their annual incomes in the past four months. While only 63pc contributed to the public coffer, another 28pc claimed they made loses. Revenues from value-added tax (VAT) were just as disappointing, as high as 45pc of the 17,500 VAT registered businesses asked for a refund.
The taxman believes this is an example of a weak taxpaying culture that has given way to noncompliance with the tax law. The number of VAT refunds and declaration of loses, and 49pc of the businesses could be bothered to make their way to the tax offices, has compelled the Authority to consider cracking down harder on alleged tax evaders.
But the outlook is foolhardy on at least two fronts. ERCA has various administrative problems in its internal workings that hamper a smooth and congenial taxpaying culture. The other is that the policies in place to guarantee taxes are duly paid are unfair and fail to inspire tax compliance.
Reforms could begin at ERCA, which primarily needs to upgrade the manual means of tax compliance into an electronic one. Although it is possible to declare taxes online, business owners have to make their way to the offices of ERCA to make their payments. But, time and energy could be saved if the service was available online. And it should be.
Doing as such is especially critical since the centralisation of the system, where corporate, payroll and value-added taxes can all be paid at the same place – while a pragmatic concept that provides taxpayers with a one-stop-shop service – has made the tax administration burdensome to the Authorities’ officers.
Another such headache is business licenses, which have to be renewed every year even without any significant changes to the ownership, objectives or structure of the business. These are inimical to those that fail to merit a tax clearance, perhaps for legal reasons, and subsequently, use backhanded methods to stay afloat or avoid penalty fees. At the very least, there has to be an online system in place where businesses can renew their licenses. If not, business licenses must be made mandatory only in times of, for instance, a change of company addresses, names or objectives.
Solving such bottlenecks could reduce the current 306 hours that have to be spent paying taxes every year, according to the recent World Bank Group’s Doing Business report, to one that at least matches the sub-Sharan average of 280.8 hours.
Of course, all of this is just the tip of the iceberg. What haunts resource mobilisation in Ethiopia most is the informal sector, which the International Monetary Fund (IMF), four years ago, estimated is worth 38.6pc of the GDP. Similarly, the share of the labour force employed in this sector stood at almost 32pc.
Formalising the informal sector, thus, could be one way of boosting revenues by growing the tax base, but this could only happen if there are sufficient incentives for informal businesses to join the tax bracket. And in a country where the private sector is credit-starved and cash strapped, this would be tricky unless policymakers are willing to smoothen the path.
One way of achieving this is by adjusting the flat corporate tax rate, which currently stands at 30pc. It could be changed into one that is progressive, where the rate grows as the taxable amount increases. Such a system would make the formal sector friendlier to businesses, not to mention that it rewards start-up companies.
In the short term, doing so may reduce the tax revenues but will have long-term benefits by formalising more of the informal sector and leaving more cash for businesses to allow them to invest and grow further afield. If nothing else, implementing these structural reforms, along with streamlining the administrative challenges taxpayers face each tax season would mend the social contract between the state and its citizens and the relationship that authorities have with businesses. It will promote compliance for those already within the tax bracket, if not encourage those out of it to join.
It is like Robert Half, founder of the employment agency Robert Half International, said, “people try to live within their income so they can afford to pay taxes to a government that can’t live within its income.”
Of course, voluntary compliance in a nation where the government perpetually mismanages funds can be challenging. Just last May, the Auditor General had presented before parliament a 20 billion Br off-balance sheet transaction by 158 public institutions. In the face of such gross waste of taxpayer’s money, it is hard to tell businesses that a share of their incomes is used to better the social and economic circumstances of the populace.
Authorities and policymakers would be better off understanding that tax noncompliance and weak domestic revenues are inherent problems that a growing GDP – which for the state is an indicator that businesses are growing, thus should contribute more – could not solve because the shortcoming lies elsewhere. It lies precisely in the policies and the instruments through which the government exercises them. More critically, it lies in how the government has chosen to manage the economic development of the nation.
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