The government says it is banking on netting in more revenues in the 2025-2026 financial year after a cabinet meeting approved new tax policy reforms, in a bid to expand the country’s tax base and increase revenue mobilisation. According to the Ministry of Finance and Economic Planning, the changes, which will take effect in the current fiscal year and beyond, aim to broaden the tax base, enhance revenue mobilisation, and streamline tax administration. ALSO READ: What you need to know about Rwanda’s new tax reforms The reforms include a 15 percent excise duty on imported cosmetic and beauty products (with exemptions for critical pharmaceutical beauty products), increased vehicle registration fees (including electric vehicles), and a shift in the fuel levy from a fixed fee to 15 percent of cost-insurance freight. Value-added tax (VAT), previously exempted, will be reintroduced on mobile phones and select information and communication technology (ICT) equipment. The tax on gross gambling revenue will rise significantly, from 13 percent to 40 percent, with a corresponding hike in withholding tax on winnings. For Paul Frobisher Mugambwa, the Head of Tax and Fiscal Policy at PwC Rwanda, the new reforms are estimated to increase the current tax-to-GDP ratio by 1.2 percent. Currently, the tax-to-GDP ratio stands at 14.6 percent, falling short of the global benchmark of 16 percent. ALSO READ: Government aims to raise tax-to-GDP ratio to 19% by 2029 “By introducing new taxes and adjusting existing ones, the government aims to capture a wider range of economic activities. This helps in reducing dependency on a narrow set of revenue sources, thereby stabilising government finances,” Mugambwa said in an exclusive interview with The New Times. He maintained that by diversifying revenue sources and improving tax collection efficiency, the government can better withstand economic shocks and global geopolitical issues. ALSO READ: Rwanda reintroduces VAT on hybrid vehicles to spur e-mobility However, Mugambwa stressed that some of the reforms may also increase the cost of living and the inequality of the tax system, especially for low-income and vulnerable groups. “Therefore, the government needs to ensure that the reforms are well-designed, well-communicated, and well-implemented and that they are accompanied by adequate measures to mitigate the negative impacts and enhance the positive ones.” For example, he pointed out, the government could consider providing targeted subsidies, exemptions, or incentives for some sectors or groups, or investing in social safety nets and public services to cushion the effects of the reforms. Jean Bosco Kalisa, an economist based in Kigali echoed similar sentiments. “These reforms are necessary to ignite economic growth and ensure sustainable development through domestic resource mobilisation.” “However, I am not in favor of the digital tax as this will stifle the government's vision to be a knowledge hub driven by digitally enabled services including ICT-related services and other communication tools.” “Rwanda is the next frontier for innovation and creativity and this is anchored on digitization. We should be a hub for continental digital transformation. So all digital-related services should be exempted and be tax-free.” To encourage the importation of newer hybrid cars with longer battery life, the new measures introduce an excise duty proportionate to the age of the vehicle -- 5 percent for those below three years old; 10 percent for four to seven years old; and 15 percent for eight years and older. VAT and a 5 percent withholding tax will be reintroduced for all hybrid vehicles, but electric vehicles will remain fully exempt to promote green transportation. Excise taxes are also being adjusted for cigarettes, from 130 Rwandan francs to 230 Rwandan francs per pack; for alcoholic beer, from 60 percent to 65 percent of factory price; and for phone airtime, from 10 percent to 12 percent, with a planned increase to 15 percent. The burden Experts argue that the new tax policy reforms will affect different taxpayers in different ways, depending on their income, consumption, and production patterns. Some taxpayers may benefit from the reforms, while others may face a higher tax burden. “While the reforms aim to strengthen the economy, there are valid concerns about the potential burden on taxpayers, particularly businesses,” Mugambwa pointed out. He added; “For example, the introduction of a tourism levy of 3 percent of the cost of rooms will increase the cost of accommodation for tourists and may reduce the demand for tourism services - in the short run, which could hurt the tourism and hospitality sector. Similarly, the re-introduction of VAT on mobile phones and ICT equipment will increase the cost of these goods and may reduce their affordability and accessibility, especially for low-income and rural households.” “Therefore, the impact of the reforms on the tax burden of taxpayers will depend on the balance between the costs and benefits of the reforms, as well as the availability and effectiveness of compensatory or complementary measures.” “But, there is a risk that excessive taxation could weaken the sector's growth potential and lead to job losses. Therefore, the government needs to balance the health and fiscal objectives of the excise duty with the economic and social objectives of the beverages sector and to provide adequate support and incentives for the sector to adapt and diversify.” While the reforms have the potential to drive economic growth, it is essential to carefully monitor their impact on businesses and consumers to ensure that the benefits outweigh the costs. Kalisa argued that the excise tax is a regressive tax and the burden tends to fall on poor people and this will deter the consumption of such products. Small businesses affected According to Kalisa, the majority of local small businesses and enterprises are nascent and still growing. He argued that an increment in tax has a ripple effect on their revenues and profitability hence a careful analysis should have been done. “Several SMEs rely heavily on digital marketing to reach and serve a wider customer base so any tax on digital-related services may stifle innovation and impact substantially the revenue base of SMEs and in the end the anticipated tax revenues will not be generated.” “The regressive nature of these taxes needs to be carefully studied and analyzed before full implementation.” According to the Rwanda Revenue Authority (RRA), the government collected Rwf2,619 billion in tax revenue during the fiscal year 2023/2024. Projections from the Ministry of Finance indicate that total tax revenue for the national treasury is expected to exceed Rwf2,970 billion in the 2024/2025 fiscal year.
