Tanzania’s Private Sector Says Fiscal Proposals in 2025/26 Budget Undermine Reinvestment

Tanzania’s private sector expresses concerns about the 2025/26 budget’s proposed fiscal measures, particularly a 10 percent tax on retained earnings, which they claim may undermine investment and economic growth. Business leaders urge the government to reconsider its tax strategies, citing potential harm to capital accumulation and investor confidence. The debate showcases a need for balanced fiscal policies to support local businesses.

Tanzanian private sector representatives have voiced serious concerns regarding the fiscal proposals in the proposed Sh56.49 trillion budget for the 2025/26 financial year. As Parliament gears up to approve the budget tomorrow, business leaders argue that certain clauses in the Finance Bill could significantly undermine investment, economic growth, and social protections, especially the proposed 10 percent withholding tax on retained earnings.

During a recent consultative session hosted by the Parliamentary Budget Committee, Tanzania Private Sector Foundation (TPSF) CEO, Mr. Raphael Maganga, emphasized that this new tax will adversely impact companies of all sizes and is at odds with the government’s goal of formalizing more businesses. He remarked, “It is difficult to see how informally operating businesses will be encouraged to formalise if doing so results in an additional tax burden. Let us tax for growth, not just for revenue.” His point? The fiscal measures could drive informally-run businesses further away from legitimacy.

Mr. Maganga added that Tanzanian companies tend to be smaller than their regional and global counterparts and need support to build capital through reinvestment. He lamented that six months is insufficient for businesses to be able to reinvest retained earnings effectively. Although the government estimates that this tax would generate Sh130 billion, he cautioned that the potential long-term damage to the economy could outweigh those immediate gains, referring to it as a form of double taxation since retained earnings have already undergone corporate income tax.

Finance Minister Dr. Mwigulu Nchemba responded to these concerns in his budget address earlier this month, noting that the new tax aims to close loopholes exploited by some firms under the reinvestment pretext. He claims it will bolster government revenues by Sh130.62 billion. He further clarified in a social media post that this withholding tax is not double taxation but rather an anti-avoidance rule intended to maintain equity in the taxation principle.

Support for this tax measure came from Special Seats MP Neema Lugangira, who expressed initial approval but called for clearer regulations from the Tanzania Revenue Authority (TRA) regarding what qualifies as legitimate reinvestment. She urged extending the compliance period from six months to a year to allow businesses adequate time to adapt.

The banking sector is particularly apprehensive. Mr. Abdulmajid Nsekela from the Tanzania Bankers Association cautioned that the tax could harm banks that rely on retained earnings to meet capital adequacy requirements mandated by the Bank of Tanzania. He warned that it contradicts existing regulations and could potentially undermine core capital levels, impacting long-term financing capabilities.

Moreover, Deloitte tax partner Mr. Samwel Ndandala suggested that the government should prioritize tightening profit-reporting systems over introducing new taxes, also advocating for tax exemptions for start-ups and clear guidelines on the tax’s initiation date. Other contentious issues from the Finance Bill include a proposed three percent VAT withholding requirement, which TPSF warns could hamper suppliers’ cash flow and lead to payment delays.

Mr. Maganga also raised concerns regarding an excise duty increase on beer and alcohol, noting it contradicts the government’s promise to keep excise duties unchanged until 2026. He suggested that any new burdens on excise duties should be applied only to imported goods. Furthermore, he critiqued a proposed mandatory $44 travel insurance charge for tourists, arguing it could raise costs for budget travelers and deter travel within Tanzania.

While Mr. Maganga acknowledged the critical need for the government to widen its revenue sources, he urged caution in its approach. “Without thoughtful adjustments, these proposals risk undermining reinvestment…” he cautioned, emphasizing that a refined tax strategy could still allow growth, protect local investment, and ensure fairness in the fiscal landscape.

The TPSF’s stance has garnered support from a range of industry bodies, including the Tanzania Bankers Association and the Confederation of Tanzania Industries, representing over 250 business associations across the nation. Their collective voice highlights a strong request for informed, growth-focused fiscal policies that promote a stable economic environment.

The proposed fiscal measures in Tanzania’s upcoming budget have raised significant red flags among private sector leaders, especially concerning the withholding tax on retained earnings. Business representatives fear this could deter investment and threaten economic stability. Finance Minister Dr. Mwigulu Nchemba asserts that these measures address long-standing issues, but concerns about their impact linger. As various stakeholders call for reforms and clearer regulations, the push for balanced fiscal policies is more urgent than ever.

Original Source: www.thecitizen.co.tz