How plausible is Frank Habineza's proposed Value Added Tax reforms?

Democratic Green Party of Rwanda presidential candidate Frank Habineza’s campaign manifesto has reduction of Value Added Tax (VAT) as one of its pledges. This proposal, Habineza says, seeks to increase trade as well as lower the prices on the market.
A trader transacts business using a billing machine at Mateos.TKisambira
A trader transacts business using a billing machine at Mateos.TKisambira

Democratic Green Party of Rwanda presidential candidate Frank Habineza’s campaign manifesto has reduction of Value Added Tax (VAT) as one of its pledges.

This proposal, Habineza says, seeks to increase trade as well as lower the prices on the market. His reform, he said at a campaign rally in Nyamasheke, would also attract more business people who had been previously put off by VAT.

 

Value Added Tax is levied on the domestic consumption of goods and services, exempting those that are zero-rated (such as certain foods and essential drugs).

 

The tax is levied at the sale’s stage whereby sellers charge VAT on the buyer’s invoice and are expected to collect the tax and then pay it to the government.

 

Currently, VAT stands at 18 per cent with Habineza promising to bring it down to 15 per cent.

It is through VAT and other taxes that the government is aiming to collect Rwf1,200.3 billion in revenues during the 2017/18 fiscal year up from the previous fiscal year’s Rwf1,081.4 billion.

Tax experts, economists and traders, however, say the Green Party’s proposal, though well intended, cannot have the intended impact.

Some say that his argument that it would attract more traders does not hold water as VAT is not paid by traders but final consumers of the products.

Reducing the VAT, would therefore not have any impact in incentivising more traders to open up enterprises.

Other experts argue that it would see the government lose revenues which would risk undoing gains towards making the country self-reliant and aid-free.

In the Financial Year 2017/18, the Government expects to finance 66 per cent of the budget domestically through tax and non-tax revenues, while it expects 17 per cent of the Budget to come from both domestically and externally generated loans.

The 66 per cent domestic financing is an improvement from the previous fiscal year’s 62 per cent.

This has over time seen the country free itself from conditional loans and grants often in the interest of the development partner.

Teddy Kaberuka, an economist, told The New Times that despite the candidate’s good intentions in the proposed tax reforms, the move would not be realistic.

“He is talking about investments in defence, satellites, among others, which require heavy investments and yet he is cutting government revenue. It is not realistic,” he said.

The move would see the government starved of much-needed revenue and probably resulting in over-borrowing or begging for grants.

Paul Mugambwa, a senior tax manager at PriceWaterHouseCoopers, told The New Times that reducing VAT would also not have much impact on consumption of basic goods since the current tax regime exempts crucial goods and services.

The move would also risk contradicting the East African Community’s integration spirit whereby experts have been mulling setting up a harmonised tax regime.

“Within the East African region, Kenya is at 16 per cent, while Uganda, Tanzania and Rwanda are at 18 per cent. There has been a debate on having a harmonised rate. We need to consider the regional perspective to avoid a toxic tax policy that is not compatible with the tax regime,” he said.

He commended the current tax administration system, which aims at widening the tax base and increasing revenue without overburdening tax payers.

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TRADERS SPEAK OUT

A section of traders and product consumers who spoke to The New Times said that the current tax regime is forward looking as it seeks to achieve self-reliance and less dependence on donations.

John Mugiraneza, a Kigali-based household goods retailer, said the trends of nationalistic interests across the world ought to serve as a lesson to Rwanda and other countries to try to become less dependent on donors.

“The country has been built on the sacrifice of Rwandans and we have since seen the fruits of depending on ourselves,” he said.

Other members of the business community say that the proposed tax reforms are not only short-term-oriented, but would barely have an impact on the lives of ordinary Rwandans who Habineza claims to be looking out for. 

They argue that with most of the basic items already VAT exempt, reducing VAT would only benefit the middle class and not the ordinary citizens who the candidate says he wants to serve. 

editorial@newtimes.co.rw

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