Tax expenditures and the tax side of the fiscal contract in Tanzania

Despite improvements since the 1990s, domestic revenue mobilization remains a challenge in sub-Saharan Africa (SSA), and there is a recognized need to increase tax revenue as a share of GDP. Tanzania is no exception; although the tax/GDP ratio increased from 8% in the early 1990s to about 11% by 2020, it remains below the SSA average, and collection efficiency (the amount of potential revenue collected) is low. Tax expenditures (TEs), exceptions or exemptions that reduce the tax paid on certain products or for certain taxpayers, are one reason for low collection efficiency (the revenue foregone on TEs on VAT and imports may be equivalent to 1% of GDP). This paper adds to the literature on TEs in Tanzania by identifying exemptions introduced from 2009/10 to 2019/20 and classifying them according to their objective (equity, incentives for industry, or those related to international agreements). This allows an assessment of how TEs can support the tax side of the fiscal contract, the ability of the state to raise tax revenue by building taxpayer support for compliance. If TEs increase equity or are seen to support development, they can increase support for taxation; if viewed as benefits for specific groups, and if the TEs are not transparent, they may undermine support for taxation.