Administration of local taxes and fees by local governments are limiting Small and Medium Enterprises (SMEs) from formalising their business, affecting their growth and development, according to Rwanda Revenue Authority (RRA).
The different taxes and fees that are decentralised to local governments include business license fees, rental income tax, property tax, administrative and service fees.
RRA says that the problems associated with the decentralisation of taxes is the inconsistency in tax rates between the different local authorities and limited skilled labour for collecting the taxes.
The taxing body also said that the taxation system in the local government is not progressive, giving an example of trading lincense which are not paid according to the capacity of the taxpayer.
“Powers given to local governments to fix some fees has also caused problems of districts putting up unreasonable fees by increasing rates to get more taxes, hence hindering small business enterprise development,” Celestin Bumbakare, RRA’s Commissioner for Domestic Taxes told the International Tax Dialogue (ITD) Conference in Kigali recently.
He was making a presentation on Rwanda’s experience in the decentralisation of taxes at the local government level.
He also noted that the taxable base devolved to the local communities is narrow such that tax revenues are essentially collected from fixed rates and fees imposed on small-scale economic activities.
“There is need to develop a clear and comprehensive local tax policy that is progressive but allows for sufficient revenue generation by local authorities,” he said.
Bumbakare said that providing incentives to business people, who have managed to move from the informal economy to the formal economy, can encourage SMEs to formalise their businesses.
According to the Private Sector Foundation business census, over 90 percent of businesses in Rwanda are Small and Medium Enterprises.
“It is not just a “tax” issue but the complex web of local taxes and fees. Local fees and regulations proliferate and hamper business and investment. From a business standpoint differences between taxes and fees is blurred,” said Laurent Corthay, a Private Sector Development (PSD) specialist with the World Bank Group.
He said that this happens as fiscal decentralization requires local authorities asked to deliver services and source their revenues, yet they have weak revenue bases from standard taxes- most productive taxes that are kept at central levels.
“As a result, local authorities largely depend on regulatory fees to fill their treasury”.
The total package of tax and fees levied by local government is blamed for high compliance costs related to multiple instruments and requirements.
It is also said to affect the business environment because a perception of heavy tax burden is created due to the multiple tax inspectors with the local government.
“SMEs are affected disproportionally more because their fees are often fixed amount and weighs heavier on low turnover.
They have no dedicated finance/accounting staff and less leverage or protection against abuses, for instance during inspections. Yet by contrast larger firms can handle heavier compliance costs,” Corthay said.
He added that as a result of high “cost” of formalization, SMEs stay out of the formal economy and can get a “free-ride”.
“However staying informal poses more risks, less opportunities especially access to finance and serious limitations to business growth. This also affects government as it does not reach its revenue potential and it can also spur a vicious cycle of “squeezing” the few compliers.”
To bring the costs down at local level, he said that local fees and taxes must be simplified and also focus on administrative or regulatory fees to encourage SMEs to formalize their businesses.
In Rwanda the fiscal and financial decentralization policy started in 2001. The policy allows the transfer of the financial resources and decision-making powers to local governments to implement their programmes.