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LGD 2003 (2) - Florens Luoga


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The Viability of Developing Democratic Legal Frameworks for Taxation in Developing Countries: Some Lessons from Tanzanian Tax Reform Experiences

Florens Luoga
Senior Lecturer, Faculty of Law,
University of Dar Es Salaam, Tanzania
Chairman, FK Law Chambers,
Dar Es Salaam, Tanzania

This paper examines the timely issue of taxation in developing countries, and critically assesses the conceptual framework of taxation in these countries, with a focus on taxation reform in Tanzania. Using the premise that resources mobilised through taxation must be done so in a democratic and transparent manner with the fulfilment of developmental needs as a priority, this paper examines the context and modalities of the Tanzanian tax system.

This paper examines the reforms in the Tanzanian tax structure in the context of the conceptual framework for the reforms that stem both from a legacy of patrimonial governance and the prescriptions of the structural adjustment programmes of the World Bank and the International Monetary Fund (IMF).

Keywords: Development, Developing Countries, IMF, Markets, Structural Adjustment, Taxation, Tax Reforms, Tax Law, World Bank

This is a refereed article published on 20 January 2004.

Citation: Luoga, F, 'The Viability of eveloping Democratic Legal Frameworks for Taxation in Developing Countries: Some Lessons from Tanzanian Tax Reform Experiences', Law, Social Justice & Global Development Journal (LGD) 2003 (2), <>. New citation as at 1/1/ 04: <>

1. Introduction

Tax reform challenges facing developing countries are many. Until recently the focuses concerned issues on the remoulding of the tax systems to support the reconstruction of free enterprise and enhanced revenue efficacy. Consequently the subject of taxation has been confined to technical economic and public finance considerations. Deducing from the trends in tax reforms that are implemented under the auspices of the World Bank (WB) and the International Monetary Fund (IMF) in Tanzania there is significant emphasis placed on improving the state's ability to mobilise financial resources internally (FAD-IMF,1995; FAD-IMF,1997; FAD-IMF,1999). Substantial aid packages are availed to the government to refine its extraction capacity through taxation in order to create the necessary public infrastructure for foreign direct investments that are considered to be the most viable handles for market-led development (Silvani and Baer 1997; Barbone, Das-Gupta et al,1999). Ability to reform the tax system and develop efficient extraction capacity is becoming one of the important conditions for developmental aid, financial loans and access to special facilities like the Highly Indebted Poor Countries (HIPC) debt relief facility (GOT, 1991; GOT, 1996; GOT, 1999a).

While it is correct that a developing country needs enhanced ability to mobilise resources through taxation to sustain government and implement programmes for human development, the environment within which this is done, its context and modalities are important considerations that if neglected may impair efforts at democratisation and human development or what Moore and Rakner describes as 'governance bonuses' (Moore and Lise 2002).

One paradoxical problem bedevilling reform endeavours in many developing countries is state patrimonial autocracy. Experiences in countries that are implementing market reforms and political pluralism already indicate that patrimonial autocracy that operates within retained historical non-democratic frameworks has immense capacity to resist institutional changes aimed at limiting predatory government by establishing accountability, transparency and responsiveness to legitimate and democratic demands by the people (Sandbrook, 2000).

Seemingly, it is not despaired that democratisation can spur the desired institutional change to constrain patrimonial autocracy. The WB and IMF (hereafter called 'the Bretton Woods institutions') appear to pursue the strategy aimed at creating a bourgeoisie with resources that can build political clout to anchor a functioning market economy (Sandbrook, 2000). The objective is that such a strengthened class can generate sustained pressure for institutional reform and mobilise the support of the middle class and the poor rural majority to win democratisation and break with the past. This is implicit from the prescriptions on economic liberalisation, privatisation, creation of stock markets, as well as financial sector and legal reforms that have so far been sponsored and supervised by the Brettonwoods Institutions (Mengisteab and Daddieh, 1999; Mengisteab and Daddieh, 1999a; Mengisteab, 1999b; Sandbrook, 2000).

The strategy by the Bretton Woods institutions that seeks to nurture the recurring of the bourgeoisie revolution has been criticised as unrealistic by a number of scholars. The argument is that the strong patrimonial systems in developing countries can still overwhelm any democratic institutions that sprout from the womb nurtured by the patrimonial state because elected governments are impelled to resort to centralisation of power, clientelistic politics, popular rhetoric and cultivation of particularistic loyalties in order to cope with the social costs arising from market reforms and surmount popular resistance (Grosh, 1994; Callaghy, 1995).

Admittedly there are no simple one-perspective answers to the problems generated by the patrimonial state. However, since reforms continue to be proposed and implemented, there is urgency to identify pitfalls and provide alternatives or expound new ideas and solutions to curb an imminent degeneration. One question that appears to have received little or insufficiently balanced examination is 'what makes autocracies recalcitrant against the people and still perpetuate domineering power ?' One of the arguments proffered in this paper is that autocratic governments are able to perpetuate themselves because they are not constrained in extracting resources from the public. The people, however poor they might be, provide the inexhaustible fallback financial extraction base to finance mechanisms that sustain autocracies. The extremes in extracting resources could be unlimited and defeat the important objective of securing state-citizen cooperation in governance and human development. In other words, effective democratisation is not feasible if the institution of taxation is left as a fiscal tool at the disposal and discretion of the patrimonial rulers.

Ongoing scholarship on taxation and democracy (Steinmo, 1993; Ackerman, 1999; Walter and Winer, 1999), taxation and constitutionalism (Brennan and Buchanan, 1980; Head, 1997; Prebble, 1998) and taxpayers' rights (Bentley, 1998) acknowledge that economic considerations that have hitherto informed tax policy and the design of frameworks for taxation do not address the governance context of taxation (Therkildsen, 2000; Therkildsen, 2000a; Fjeldstad, 2001).

The advocacy for tax reform in developing countries suffers a missing link. As pointed out above, the dominant view is that taxation is a techno-bureaucratic device at the disposal of the executive. It is delinked from governance and narrowly considered within economic, administrative and revenue efficiency tests. This approach has led to the neglect by reformers in developing countries of legal frameworks for taxation and their impact on democratic governance. The tendency, for example by the Bretton Woods institutions is to assume the existence of an environment whereby excesses and undesired proclivities by governments are subject to democratic restraint. It is presumed that citizens are well informed of what is needed, have democratic fora to articulate their desires, are well organised to generate pressure to achieve desired reforms and can rely on an informed and effective legislature, an independent judiciary and the ballot box to humble and tether a recalcitrant government. Such assumptions that are based on statism and propriety in rule making and implementation of reforms are not realistic in the patrimonial state. There is a necessity that efficient and democratic legal frameworks are structured to provide institutional safeguards against misuse and abuse of taxation.

In this paper, therefore, three things are attempted. First, to highlight the lessons flowing from contemporary tax reforms in developing countries. Tanzania is used as an example because it is one of the countries, which the Bretton Woods institutions claim has implemented reforms with relative success. Second, to provide a brief explanation of taxation in the context of democratic governance in the developing country setting. That is, the dictates of democratic taxation without the above-mentioned assumptions. The Tanzanian scenario is again used to elucidate the problematic nature of relying on such assumptions. Third, to make an appraisal of the viability of democratising legal frameworks for taxation in those countries.

2. Lessons from Contemprorary Tax Reforms in Tanzania

2.1 An Ideal Understanding of Tax Reform

Tax reform transcends tax measures that aim at correcting faults in a tax system that impede interests as identified through the politico-bureaucracy-business liaison. Such tax measures are dubbed the 'efficiency-oriented tax reforms' (Head, 1997). They characterise most tax reform projects that are implemented in developing countries by the Bretton Woods institutions (Barbone, Das-Gupta et al, 1999). They tend towards interest serving use of taxation that is responsible for the distortions of tax systems experienced in most industrialised countries and is a major cause of the difficulty of achieving meaningful and durable reforms of tax systems (Head, 1997).

Lessons from studies of major tax reforms around the world indicate that the processes for tax reform must engender the building of public trust and confidence in the government and tax institutions. The idea is that when it becomes imperative that tax reforms be carried out, the circumstances point to the existence of public discord. Often the failure of the previous system is brought about by fundamental changes in governance relations because of a shift from one system to another, for example from monarchical rule to parliamentary democracy or from a centralised economy to free market. It becomes necessary that the reform processes entail negotiating anew the principles and aspirations of citizens (Beetham, 1999; Sen, 1999; Klug, 2000). The processes of tax reform must be transparent in that they are publicly known, participatory and accessible. What is done should not be in pursuit of special group interests (Birnbaum and Osnos, 1987; Gatheru and Shaw, 1998).

2.2 The Conceptual Frame of Ongoing Tax Reforms in Tanzania

The conceptual frame for the contemporary reforms in Tanzania, including tax reform is made up by the needs of the patrimonial regime (Hyden 1999) and prescriptions of the structural adjustment programmes (SAPs) implemented under the supervision of the Bretton Woods institutions (Goode, 1990; Ehtisham and Stem, 1991; Chipeta, 1995; Osoro, 1995). These have dictated the focus, content and strategies for reform.

Tax reforms have been implemented in two waves. The first wave is what can be called the first generation reforms that focused on aligning the tax system to the requisites of free market. The objective was to provide a predictable environment necessary for market-led initiatives (Ghai, 1993).

The second wave was ushered in by the demands by the Bretton Woods institutions and private sector investors to strengthen governance. Their concern is that unaccountable and undemocratic governments result in poor policy and inefficient administration that impedes growth and attraction of foreign direct investments (FDI). This according to Ghai passes under the name of 'good governance' (Ghai, 1993).

2.2.1 First Generation Tax Reforms

1) The Presidential Commission on Taxation

Tax reform commenced in 1989 with the appointment of the Presidential Commission of Enquiry into Public Revenues, Taxation and Expenditure (hereafter called 'the Mtei Commission') (GOT, 1991). According to the Commission, its appointment was compelled by the 'serious economic and financial problems' (sic) that the government faced at the time. It is however notable that the government was not poised immediately to undertake such reforms because the problematic tax system and the rampant corruption it had engendered through the 'ruksa'1politics of the former President Ali Hassan Mwinyi were beneficial to business interests that supported the ruling political cadre. 'Ruksa' politics had eroded respect for law and order and accelerated corruption and the incursion of business interests into the decision-making machinery for public affairs (GOT, 1996a; Hyden, 1999). A point was reached when the tax system had reached astounding fiscal irresponsibility2. International donors and aid institutions took serious exception to the problem and after the Danish study on the fiscal system in 19903, donor countries agreed to suspend further aid and assistance to the economic recovery programmes unless sound measures are taken to revive the tax system and restore its respectability. This is the background to the Commission's appointment.

The Commission focused on finding ways to rescue the government both in terms of its credibility internationally and in allaying heightened public disdain. Annex I reproduces the Terms of Reference of the Commission that disclose its nature and focus. However, it is only by examining how the Commission carried out its assignment that its true nature and role emerges. It was both state-centric and responsive to the importation of external perceptions on how the tax system should respond to FDI needs.

2) The Commission's Approach in Identifying Tax Reform Needs

a) Its Need-Based Functional Organisation

In carrying out the enquiry the Commission organised itself into five specialised Committees: The Income Tax Committee, Customs Duties Committee, Sales Tax and Excise Duties Committee, Other Central Government Taxes and Revenues Committee and Local Government Finances Committee. All were technical committees suited for technical study of selected taxes. What is glaring is the omission to have a specialised committee on the legal framework for taxation. The functional Organisation discloses that five major reform areas were conceived, to which effort would be directed to establish problems and needs and recommend corrective measures. Legal framework for taxation was from the very beginning not considered problematic. Its omission meant that state-society tax relations would not be examined and by necessary implication that taxpayers' concerns and rights would not find an appropriate context in the reform study. The latter observation is substantiated in the analysis of the Commission's approaches below.

b) Approaches to Reform Study

The Commission adopted four major approaches to conduct the enquiry as follows.

i) General Invitation For Expression of Public Opinion

The Commission published its terms of reference (TOR) in papers and used the state radio to invite views and suggestions from the public. It assumed that the general public is sufficiently aware of the role of public participation in policy processes. It also assumed that the publication would effectively reach all members of the general public. Both assumptions were inordinate in the patrimonial environment.

The public had not yet sufficiently resurfaced from the demobilisation of the civil society under the one-party rule, which was still in force. At the time there were only two mass media routes, namely the government owned Radio Tanzania Dar es Salaam (RTD) and two dailies, the Daily News and Uhuru newspapers owned by the government and the ruling CCM party respectively. Both media were of limited reach to the majority in the rural areas. Publication of TOR was not by itself sufficient to elicit public reaction and responses. No credible and independent campaigns were undertaken to raise public awareness on the exercise particularly because taxation remained an arcane and novel subject for public debate after about three decades of its confinement within the dark corridors of the Treasury. The setting was not democratic and could not foster democratic participation. In any case the state-centric approach meant that its report and recommendations would still have to pass techno-bureaucratic scrutiny before being considered for policy implementation. The latter reality encouraged scepticism among the informed sectors of the civil society demonstrated by the short list of independent and voluntary respondents to the Commission's invitation (Annexes VIII and IX; GOT, 1991).

ii) Use of Technical Consultants

Technical Consultants were commissioned to carryout in-depth studies and report on some specific aspects of the tax system. These are shown in Annex II. There were a total of eight substantive studies and two consultancies related to the structure and design of the Commission's report. Only two studies (Nos 6 & 7) were funded by the Government of Tanzania (herein referred to as 'GOT') and only three, (Nos 6, 7 & 8) were carried out by local consultants. The selection of the subjects to be studied is demonstrably technical. They focused on efficiency of the system according to revenue parameters and bureaucratic assessment of the inter-relationship of the tax system and functioning of the economy.

The selection of the specific studies was not purely the choice of the Mtei Commission. The identified reform areas were placed in a shopping basket for sponsors and donors. The latter picked and defined the specific studies they were prepared to fund. One uniform condition for funding was the floating of an international tender to identify and contract consultants for each donor-chosen study. This explains why foreign consultants undertook most studies. It is questionable that they were necessarily the best and fully conversant with the tax environment they studied, but they probably are recognised experts on the needs of the integral functioning of domestic tax systems on the international arena.

iii) Public Consultation

The Commission conducted extensive upcountry tours and received written memoranda from institutions; but an analysis of the lists of interviewees shows a predominance of representatives of government policy implementation and enforcement organs (GOT, 1991). Ordinarily these would tend to highlight more the technical deficiencies of the system as experienced by those concerned with tax administration than the fundamentals in the design and structure of the system. In this respect the report itself tells the tale.

iv) Study Tours Abroad

The Commission sought to be comparatively informed by experiences elsewhere and evaluate the efficacy of solutions devised in other jurisdictions to deal with problems similar to those in Tanzania. Study visits to a number of developing and developed countries were made (GOT 1991). According to the list of people met in those countries all were those concerned with tax administration. There was no interaction with taxpayers' organisations or associations. As in the case of the interviews carried out domestically, the foreign study visits focused on eliciting information that addressed technical aspects in running tax systems. The Commission thus missed important input from taxpayers, for example their views on the balances required between enhancement of the system's revenue efficiency and safeguards against violations of taxpayers' rights.

3) An Evaluation of the Commission's Findings and Recommendations

The tax enquiry was a positive move. The tax system was in dire need of re-examination to inform any meaningful and effective reform. However, from the outset it took off with serious faults in scope, methods and context.

In respect of scope it was overly state-centric. In practice, TOR was confined to issues that the techno-bureaucracy considered inimical to economic concerns and tax administration. There was an apparent design not to extend debates on tax reform to more fundamental issues relating to the role of taxation in governance and rights of citizens. The government desired to retain the mantle over the fiscal within its discretion without exposure to public scrutiny and accountability. This is reflected in the absence from the Commission's report of problems associated with the lopsided legal framework for taxation as will be briefly highlighted later. The deficiencies in that respect were causing uneasy tax relations between the state and the citizenry at the time of the study. It is inconceivable that these did not come to the notice of the Commission.

In respect of method employed, as shown above it was technical and involved restricted consultation with the public. The majority of taxpayers were not reached. As will be seen, the narrow technical emphasis of the study led to the production of recommendations that addressed the technical problems afflicting specific taxes and the capacity of tax authorities to collect and enforce taxes. The recommendations are exclusively informed by economic, administrative and revenue efficiency concerns.

The context within which the study was developed and carried out is not amenable to a holistic re-examination of the system. The government did not envisage a tax enquiry at the time it was compelled by circumstances to appoint the Commission. That is evident from the fact that no funds were prepared for the exercise. It would be suicidal for the government to embark upon a democratic reexamination of the tax system while politically the system remained under patrimonial autocracy. The Mwinyi government was not poised to unravel its strong and politically beneficial alliance with business interests through tax reform measures that were likely to erode business profitability that depended on the porous tax system.

Two things were established in relation to the Commission's work during a research carried out by the author at Dar es Salaam in 2000. One, the Commission's report was not translated into a tax reform programme. Two, the government left the report for selective use and implementation through budgetary measures. Interviewees at the Treasury argued that adequate time was needed to study the recommendations in the light of other government policies and national priorities. It was pointed out that recommendations that were less linked or disruptive to other factors within the system were implemented immediately, for example the revocation of tax exemptions under the Miscellaneous Tax Exemptions and Remissions Revocation Act 1992, repeal of residence tax4 and foreign travel levy5 and reduction of tax rates6. The inertia to implement the recommendations by the Commission further illustrates that the Government was not poised immediately to undertake tax reforms.

It is notable that soon after the publication of the Report tax measures were implemented that brought about highly inequitable taxes and other forms of tax privileging, which cast a strong doubt on the commitment of the government to correct the system. Examples of the inequitable taxes include the car benefit tax, specified buildings tax, vocational education levy and the motor vehicle surtax. The trend indicated that the omission to reexamine the legal framework and provide institutional safeguards meant that any gains that could be obtained from implementing the Commission's recommendations were not secure. As Head argues, gains from tax reforms quickly unravel under pressures from interest groups (Head, 1997).

2.2.2 Second Generation Tax Reforms and the Good Governance Approach

The second generation tax reforms are associated with the change to pluralist politics that took place in 1995 with the election of President Benjamin Mkapa. Between 1991 and 1995 no further studies were carried out to review the performance of the system and assess the impact of the piece-meal budgetary implementation of bits of the Mtei Commission recommendations. President Mkapa took over the reigns at the time when respect for law and order had almost collapsed (Hyden and Bratton, 1992; Ghai, 1993; Mushi and Mukandala, 1997; Hyden, 1999).

The challenge after the first multiparty elections in 1995 was to restore confidence and respect for law and order. The focus of the Bretton Woods institutions had attuned to the ability of the government to efficiently manage national affairs in order to create a more stable environment that would attract investment and propel market-led development. This is the good governance dimension of the reforms. Tshuma correctly argues that the good governance dimension is an acknowledgement by the Bretton Woods institutions of the limitations of market fundamentalism and the role of institutions of good governance in economic regulation (Tshuma, 2000a).

The Deputy Permanent Secretary (DPS) in charge of tax policy affirmed in an interview that GOT's approach to tax reform was based on good governance. He argued that the use of strict principles that may sound more democratic to the public would constrain government efforts to guide national focus on development and may not necessarily improve accountability. What is important is to develop and inculcate good governance values and practices in managing national affairs including the use of taxation. His response is well supported by the declared government commitment to use good governance as its moral code in managing public affairs (UNDP, 1998; Hyden, 1999).

1) Meaning of Good Governance

The term 'governance' refers to the systems and institutions that determine the exercise of authority in a state. It is defined as:

The processes by which authority is exercised in the management of a country's economic and social resources and the capacity of governments to design, formulate and implement policies, and in general to discharge government functions (IBRD, 1992; Faundez, 1997).

Paliwala explains that the key features of good governance are an insistence on accountability, transparency and sound legal framework (Paliwala, 2000). He captures the kernel of the problems facing governments in patrimonial systems in translating good governance. The government seeks to proclaim good governance while asserting power to exercise discretion over decision-making in a manner that cannot guarantee accountability and transparency. Such a version of good governance is necessarily averse to the effective redesign of legal frameworks.

In line with Paliwala's key features, the basics of good governance are fundamentals that need to be addressed, agreed upon and resolved as part of the reconstituting process of the state. Ghai posits that, central to the securing of good governance is the constitutional order (Ghai, 1993). Understood in this context it means that good governance cannot be achieved through pledges by politico-bureaucracy to adhere to a moral code. It must be secured constitutionally through democratic consensus.

2) Application of Good Governance Precepts to Tax Reform

Precepts of good governance are fundamentals that must be secured as part of the basic principles of governance. The centrality of taxation in governance demands that its principles are laid down as part of the fundamentals of constitutional governance. It is important that the legal framework is democratically appropriate and enables the institutionalisation of accountability and transparency.

Gauging from the government position as explained by the DPS it is assumed that after implementation of political pluralism the foundations for good governance are in place and what may be lacking is altruism and morally acceptable conduct of leaders. In other words, if the leader of the day is diligent and able to provide good rule, it is an affront to seek to secure his or her conduct in the discharge of public affairs by rigid procedural and accountability rules.

This attitude is reflected in the approaches taken to tax reform in Tanzania. First, is the path taken to avoid the reexamination of the legal framework. Although the recommendations in Table One pointed to the need to examine the legal framework, this was not done. Second, is the confinement of tax reform within techno-bureaucratic processes, which excluded the effective participation of the citizens. Third, is the delinking of taxation from the other important contexts of governance and citizens' rights. Fourth, is the emphasis on developing governmental extraction capacities by strengthening tax administration.

3) Second Generation Tax Reform Measures (1995 - 2002)

Hyden points out that political stability and the capacity to implement SAPs without civic turmoil led to Tanzania being highly rated and in 1999, it was declared by the Bretton Woods institutions to be the best macroeconomic performer in Africa (Hyden, 1999). It stood out as a possible model for implementation of the good governance dimension to correct what Tshuma describes as the limitations of market fundamentalism (Tshuma, 2000; Tshuma, 2000a).

The Tanzanian government was exhorted to prove its ability on good management of national affairs and the new leadership strove to rebuild donor confidence and the country's standing and accessibility to international financial facilities that had collapsed under President Mwinyi. This meant pledging new undertakings on the economic front. In respect of tax reform the new government embarked upon a series of reform studies. Table One lists the studies and recommendations submitted for the purpose.

Several facts are disclosed by the Table:

First, as pointed out above, the process is state-centric. It is exclusively informed by technical consultancy reports. The summary of recommendations from these reports (Table One) dwells on economic, administrative and revenue efficiency concerns. Invariably the recommendations are on base broadening, simplification of tax mechanisms, rationalisation of tax rates, and removal of tax barriers to international trade, support to domestic enterprise to boost savings and product competitiveness, correction of multiplicity of taxes and increasing efficiency and effectiveness of tax administration.

However technically sound such recommendations could be, they do not address more fundamental issues in governance. As will be shown in the assessment of the current performance of the system, while implementation of the recommendations has raised revenue performance, there has not been a commensurate expansion of the taxpayer base or enhancement of taxpayer cooperation. To the contrary the tax authorities are conferred with more unregulated administration powers.

Secondly, reform is carried out under the supervision of the Bretton Woods institutions to which the government periodically reports as detailed in Table Two. The government is more accountable to the latter than to the electorate7. As Kofele explains, to most African countries good governance has become a political conditionality (Kofele-Kale, 2000). As a result it remains rhetorical. Like other countries the Tanzanian government was presented with a set of conditions to be met on the good governance front before certain aid packages or financial facilities are accessible (Tshuma, 2000). Recently, the Bretton Woods institutions prescribed measures on good governance as pre-condition to admit Tanzania to the facilities created under the Highly Indebted Poor Countries (HIPC) initiative. These include undertakings by the government to open up its processes, particularly transparency in handling government contracts, accountability on public revenues, measures to curb corruption and the like. The IMF Fiscal Affairs Department (FAD-IMF) is continually overseeing compliance through technical assistance staff that is perennially assigned to the Treasury. Most of the measures implemented as shown in Table Two are in conformity to technical support provided by the Bretton Woods institutions. The latter provide funds for implementation of approved measures and demand periodic reports for evaluation. The government has remained captive.

Thirdly, the reform process manifestly assumes that the legal framework for taxation8 is not of primary concern9. Almost all recommendations seek to satisfy economic, administrative and revenue efficiency tests. The Tax Administration Program Report (Item Ten, Table One) identified the need to improve the legal framework and reforming tax laws but this item has remained on paper and no study has been carried out. In Table Two it is shown that reform of the legal framework was not even listed among the measures for implementation.

Currently the IMF has taken an interest in tax laws and fiscal systems in order to complement other reform measures. In the context of good governance it is realised that the omission to restructure legal frameworks impedes the smooth functioning of the new free market economies. Two major studies have been produced in this respect, the Manual on Fiscal Transparency (FAD-IMF, 1999) that attempts to provide guidelines on restructuring tax systems in the context of good governance, and two volumes on the design and drafting of tax laws (Thuronyi, 1996; Thuronyi, 1998).

In respect of Tanzania the Commissioner General (CG) of Tanzania Revenue Authority (TRA) has indicated that effort is underway to develop a project for the redrafting of tax laws that might also re-examine the legal framework. The experience so far is that the redrafting that has already been embarked upon, for example the proposed Income Tax Bill 2003 indicate that the redrafting is confined to technical legalism that focuses on empowerment of tax authorities and making tax laws more effective against evasion and avoidance schemes. This is the experience suffered even in developed countries like the UK (IFS, 1993; Wilde, 1993; IFS, 1996; Gammie, 1997) and that appears to flow from the two studies mentioned above.

Fourthly, the reform is not undertaken as an interdisciplinary exercise. The techno-bureaucratic identification of reform needs and designing of implementation strategies as disclosed in Table Two necessarily lead to reliance being placed on the expertise of economists. The approach would be different if a holistic view on tax reform had been adopted whereby reform needs develop from the context of democratic governance.

Fifthly, consultation with members of the public is a selective process within the Treasury's Tax Reform Task Force and is largely limited to select business entities and organisations10. This tendency is apparently an outcome of the conception that the Task Force's major role is to identify discordant issues in tax administration and negotiate solutions. It is an approach that is akin to what Jayasuriya describes as the administrative guidance model.

That is:

A series of operations by which administrative organs, in those matters which fall within their specific duties, exercise influence over specific individuals, public and private juristic persons and associations through non-authoritative and voluntary means, and guide parties by means of their own agreement and cooperation toward the formulation of a definite system, the goal of which the administrative organs seek. Some of the operations of this nature which are carried on have clear statutory authority, others do not (Jayasuriya, 1999).

What is achieved by using this approach is to attract the confidence of the large taxpayer entities by submerging the formal legal system to the administrative guidance system. Monbiot correctly points out that such approaches are very attractive to business groups (Monbiot, 2000). The formal legal system put business demands on queue just like other demands from the electorate. The reality is that demands of businesses and those of the electorate are frequently in conflict. By bypassing the formal legal system and communicating directly with Ministers and officials it is possible to pre-empt tax measures, which might be popular, but could restrict their ability to make money. One interviewee from the Dar es Salaam branch of the Tanzania Chamber of Commerce Industries and Agriculture (TCCIA) confirmed this by strongly arguing that it is not in the interest of the business community to have rigid principles on taxation. The preference is to have negotiated solutions to problems. The formation of the task force was itself an implementation of the president's promise to the business community11.

Table 1: Summary of Recommendations for Tax Reform in Official Studies

1 May 1995 Fiscal Affairs Department, IMF Tanzania: Proposals for Tax Reform 1995/96 and Beyond Reform objective are fiscal self-reliance, efficiency, equity and simplicity and strategies are base broadening, strengthen, administration, eliminate nuisance taxes and consolidate minor taxes
2 April 1997 Ministry of Finance, GOT Final Report of the Review the Tanzania Tax Structure Development coherent and stable tax policy, review rates, strengthen anti-evasion mechanisms and protect local industries
3 May 1997 Fiscal Affairs Department, IMF Tanzania: Strengthening the Tax System Modernise indirect taxes by introducing VAT, review investment incentive(cost-effectiveness) and improve tax administration
4 May 1998 Tanzania Revenue Authority A Proposal for the Simplification of the Tanzania Tax structure (Phase One) Broadening tax base and simplify mechanisms
5 June 1998 Ministry of Finance, GOT Final Report of the Task Force on Tax Policy Proposals for 1980/99 Budget Simplification, rationalization, protection of local industries, harmonization
6 March 1999 Ministry of Finance, GOT Report of the Task, Force on Rationalisation of Central and Local Government Taxes Agree on mechanisms for revenue sharing because same tax based relied upon
7 December 1999 RSRF study commissioned by Tanzania Revenue Authority The study of Non-Tax Revenue of Tanzania Institutional restructuring of system required for revenue efficacy of non-tax sources
8 March 2000 Tanzania Revenue Authority Proposals for the Review of the Tax Structure in 2002/2001 Rate reviews, review of collection strategies, eliminate exemptions, curbevasion and avoidance and revive appeals mechanisms
9 February 2001 Tanzania Revenue Authority Proposals for the Review of the Tax Structure in 2001/2002 Strengthening of tax administration and combat evasion and avoidance
10 1999 World Bank/Ministry of Finance/ Tanzania Tax Administration Program
  • Strengthen revenue collection
  • Improving the legal framework/reforming tax laws
  • Broadening tax base
  • Increase efficiency and effectiveness of tax administration
  • Improving administrative capacity building for TRA
11 1999 IMF/Ministry of Finance Tanzania Enhanced Structural Adjustment Facility: Policy Framework Paper for 1998/99 - 2000/01
  • Broadening tax base
  • Reduce reliance on foreign trade taxes
  • Improving transparency and efficiency of tax system
  • Reduce number of taxes and their complexity
  • Reduce statutory exemptions

Source: Compiled from Reports

Table 2: Summary of Reform Implementation Performance per GOT Evaluation

1 Preliminary study of further reform of customs tariff structure March 1998 Completed
2 Establishment of Tanzania Revenue Authority July 1996 Completed
3 Revision of Investment Act to eliminate tax holidays 1996/7 Completed
4 Harmonisation of duties between Zanzibar and Mainland Tanzania on five major commodities December 1996 Completed
5 Implementation of new pre-shipment inspection contract, with sealing of containers January 1998 Completed
6 Completion of preparations for introduction of value added tax by July 1998 1997/98 Completed
7 Narrowing the definition of capital goods for customs purposes June 1998 Completed
8 Devising effective and transparent monitoring system for bonded warehouses June 1998 Completed
9 Introduce VAT and make complementary changes to the tax system July 1998 Completed
10 Limiting exemptions on capital goods under the Investment Act using harmonised tariff system July 1998 Completed
11 Introduce VAT in Zanzibar at the same rate as Mainland Tanzania January 1999 Completed
12 Introduce pre-shipment inspection of imports in Zanzibar January 1999 Completed
13 Establish a harmonised tax appeals mechanism 1998/99 Incomplete
14 Reduce customs administration July 1999 Incomplete
15 Further simplification and rationalism of the tax system July 1999 Incomplete
16 Strengthen customs administration Continous Continuing
17 Ensure viability of local government finances by revising legal framework for grants, revenue and negotiation mechanism for sharing of revenue and sources of revenue between central and local governments. February 1999 Incomplete
18 Ensuring agricultural taxation consistence by reviewing local taxes and levies on the agricultural sector June 1999 Incomplete

Source: Extracted from Table 1, Tanzania Recent Policy Performance (GOT 1999a)12

2.2.3 Overview of the Performance of the Tax System

Table Two shows tax reform accomplishments and what remains to be done. According to the letter by the Minister of Finance to the Managing Director of IMF , reform of the central government's tax system is largely complete, They include the introduction of VAT to replace manufacturers' sales tax to broaden the tax base and shift reliance to consumption taxes. In reality this measure is more beneficial to businesses. The shift to consumption based taxes transfer tax burdens to the middle class and the poor rural consumers through the price lever. The other measure is the introduction of cost sharing, which require that citizens have to pay for education of children, public and private health services and public utilities. The measure entails the restriction of the wealth redistribution function of taxes that previously justified higher taxation of the affluent. Cost sharing made it possible for the government to reduce drastically tax rates on business profits. While the less able pay more in taxes through high consumption taxes they in turn get very little in the enjoyment of public services and goods in order to support increased saving capacity of businesses.

Other measures include the establishment of TRA to improve and strengthen tax administration, rationalisation of international trade taxes, sealing loopholes for tax evasion and avoidance, alleviating inter-jurisdictional tax competition especially between the central and local governments and the repeal of taxes considered as a nuisance to smooth business operations. Budgetary tax measures are annual and continuous. The important issue in this brief appraisal is to contextualise what has been achieved.

The brief analysis of the impact of the few selected tax measures as listed in Table Two shows how the government has responded to the needs of the market. On its part the government envisaged increased tax revenue yield. Revenue reports by TRA indicate that there have been increases in revenue collection. On several occasions monthly revenue collection targets have been surpassed. According to the latest available annual report, the 1998- 99 report (TRA, 2000) TRA collected TSH 628.1 billion against a target of TSH 638.1 in the Mainland thus achieving a performance level of 98 percent. Revenue collection performance in Zanzibar stood at 89 percent by collecting TSH 26 billion against a target of 29.3 billion. The 1998-99 collections exceeded those in 1997-98 by TSH 62.7 billion or 11 percent in the Mainland and TSH 5.1 billion or 24 percent in Zanzibar. Departmental performance recorded increased revenue collection. The Income Tax Department (ITD) collected TSH 170.2 billion representing 100 precent of its target for that year, while the Value Added Tax Department (VATD) collected TSH 234.5 billion that is equivalent to 93 percent of its target. The Customs and Excise Department (CED) collected TSH 223.4 billion that was four percent above the target for that year. In respect of the local government, although no consolidated figures are available many also boasted of excellent performance in tax collection. These include those in Dar es Salaam, Arusha, Mbeya, Mwanza, Tanga and Kilimanjaro.

The increase in tax collection is, nonetheless, not on account of expansion of the taxpayer base in the sense that there is increased co-operation by taxpayers resulting in more of them registering for tax payments. Tables Three to Six below are TRA data covering only two years, 1997-98 and 1998-99. They show the latest recorded patterns in revenue performance. Tables Three and Four disclose interesting trends. In the case of income tax, while showing that limited companies have taken over from parastatals as important tax handles, it was discovered during research that the collection is not commensurate with the growth and proliferation of private sector activities. Rather it is because of the increased intensity in back duty investigations and tax recovery measures. It is reported that in 1998-99 alone a total of 1,434 cases were investigated and tax revenue amounting to TSH 7,128.7 million was uncovered and TSH 2, 764.6 million of which was collected (TRA, 2000). It is noteworthy that increase in enforcement activity was done in an environment where taxpayers had no effective avenues to pursue remedies14. It is highly likely that the figures also include tax revenue arising from arbitrary assessments, denial of relief and other incongruent practices15.

The Tables also disclose that individuals contribute comparatively very little. The individuals in the Tables refer to the sole business operators. These are among the country's estimated 13 million potential labour force. The non-corporate division at ITD Headquarters revealed that it is still difficult to reach taxpayers in the informal sector and those in the rural areas. Income tax according to Tables Three and Four rely heavily on collections from employees through PAYE and on turnover withholding taxes such as withholding tax on goods and services whose legality is questionable16.

In respect of VATD Tables Three and Four disclose reliance on a restricted number of items for excise duty. There is a significant contribution from road toll but this is because the toll operates as an extra tax on petroleum. VAT's substantial contribution arises from less than 15, 000 taxpayers, more than 80 percent of who are based at Dar es Salaam as exemplified by Table Six. Contribution of stamp duty was supposed to diminish as more taxpayers register for VAT. According to findings from a research carried out at Dar es Salaam in 2000 to 2001 much of the collections from stamp duty arose from arbitrary collection and enforcement measures that could not be redressed due to absence of dispute settlement mechanisms.

The contribution of import duties in Tables Three and Four is not reflective of the growth in imports after trade liberalisation. Tanzania had grown as a dump for substandard goods particularly from the Arab states and Far East Asia. Bank of Tanzania (BOT) statistics during the period show increased importation activity. According to the findings of the Presidential Commission of Enquiry into Corruption (hereafter called 'the Warioba Commission') (GOT, 1996a) private businesses heavily abused ministerial tax exemption powers. Table Five show that in 1998-99 alone customs and excise duty exemptions amounted to 73 percent of the collections in the Mainland. This is inconsistent with improvements envisaged under the reform programme.

Table Six reveals some astounding facts on how the system is performing. The data disclosed in the Table need to be analysed with an understanding of the estimated population statistics of Tanzania. The overall population is estimated at 32.7 million with about 52 percent or 17 million people aged between 15 and 64 years17. Approximately 12 - 13 million people are within the income earning range18. More than a third of the population inhabit Mwanza and Shinyanga regions that are considered to be relatively wealthy because of their high output of cotton and pastoralism. Kilimanjaro is estimated to have the highest population density with relatively high-income levels because of coffee production, cross border trading and industrial and commercial activities. Other economically well off regions include the coffee growing regions of Kagera and Mbeya. Dar es Salaam is the hub of commercial and industrial activities that has attracted a population estimated at three million. Other major commercial and industrial regions include Arusha, Tanga, Morogoro, Tabora, Iringa, Mwanza, Coast and recently Dodoma. Singida, Lindi, Mtwara, Rukwa and Ruvuma are relatively less endowed although Rukwa, Ruvuma, Iringa and Mbeya are considered the country's granary.

According to Table Six there is a huge disparity in the contributions by regions to tax revenue. Approximately 76 percent of all tax revenue is collected in Dar es Salaam. The other 19 regions in the Mainland contribute an average of 1.26 percent each to the total tax revenue. Statistically therefore the tax system is capable of reaching hardly I million taxpayers. The figure is very low because most of the tax revenue raised in Dar es Salaam is collected from not more than 800,000 employees (private sector, surviving parastatals and civil servants) and about 100 corporations19 particularly those engaged in the production of beer, cigarettes, soft drinks, spirits, dealers in petroleum and petroleum products, sugar and other mass consumables and importers.

The Table also indicates that with the exception of the Shinyanga, Tanga and Mbeya regions the other relatively high ten contributor regions are the lowest in achieving collection targets. TRA officials explained that this phenomenon results from the high revenue collection targets that are set by the Treasury and TRA on the basis of each region's tax handles and estimates of taxpayer activities and productivity. This further proves the techno-bureaucratic approach to tax reform. Most important, however, Table Six reveals that the tax system is not designed to reach the majority of taxpayers who reside in the rural areas. Notwithstanding, these are subject to high stealth imposts such as the statutory crop fund contributions and other taxes on produce and development levy that are not accounted for in the above data. For example, Lindi is the last contributor region according to Table Six but according to recent research the rural population is one of the heavily 'taxed' through crop levies and compulsory contributions (Chachage and Nyoni 2001).

Giving the example of cashewnuts prodcers in Lindi Region Chachage and Nyoni provide the following breakdown of imposts on a kilogram of cashewnuts sold.

The tax burden magnifies as a plethora of taxes on dealers in cashewnuts cascade to the peasant producers through lower purchase prices offered by the dealers after meeting the cumulative tax obligations. According to Chachage and Nyoni-

In each district where the cashewnuts were sourced 20 percent of the buying price was remitted to the district council and a further five percent to the cooperative union. Each buyer or company representative paid TSH 300,000 as a general tax to the CBT in order to trade and a further TSH 60,000 per district where the cashewnuts are sourced to the region as a regional trade licence. TSH 200,000 were paid as district licence to each district council where cashewnuts are grown. Nominal village licences were also paid and advocates were certifying all documents as further expenditure.
Once ready for export, one percent of the cashewnuts board fixed price was being remitted to the town council (Mtwara-which is the custodian of the port of exit) as port tax. The Mtwara town council was receiving TSH 1,000 per ton or roughly one tenth of the figure the buyer was paying. District councils were collecting an average of TSH 100 per kilogram from the buyers as crop levy against the money to be paid to the peasants. It is reported that Tandahimba district council, for example, collected up toTSH one billion from cashewnuts only' in 1999-2000. Middlemen were collecting commissions to the tune of TSH two million or above, while those issuing licences, it is said, were being paid almost the same amounts of money in the form of palmgreasing or buying the goodwill of officials (Chachage and Nyoni 2001).

Similar complaints of over taxation of peasant producers were recorded from tobacco producers in Morogoro, Tabora and Iringa, as well as cotton producers in Shinyanga and Mwanza. Coffee producers in Kilimanjaro, Kagera and Mbeya regions used their grievances to equip opposition political parties with discrediting campaigns against the ruling party during both the 1995 and 2000 general elections.

It is erroneous to posit that rural peasants are not easily taxable. In a patrimonial system where socioeconomic activity is highly regulated a wide net is thrown to capture peasant production into the tax bases. Under the previous centrally planned economy state-controlled cooperatives were used to administer the taxation of peasants. Currently, licensing of crop dealers is used to extract revenue from peasants. Each cash crop is regulated. In order to be licensed, dealers in cash crops are required to conclude crop production agreements in every assigned production area. The agreements bond the peasant producers to purchase seeds and other inputs from the licensed dealers, and to sell the whole produce to them. It is thus possible for all levels of government to impose levies and other imposts that are made collectable from or by the dealers. The latter are required by law to place all purchased crops for auction by statutory crop boards before export and therefore meet incidence of other taxes and imposts at that level. The cumulative tax burden translates into very low prices to peasant producers. The heavy taxation of the peasant population therefore escapes the statistics provided by TRA and is not shown as part of tax revenue in government budget (ESRF 1999). Concomitantly tax reform measures have not extended to redress the real plight of rural taxpayers.

The broad assessment that can be made is that tax reforms carried out during the period under review have achieved the correction of distortions as disclosed by market needs and equipped the government with enhanced extractive capacity. What also has been done is to change the tax mix in ten-ns of shifting reliance from direct taxes to indirect taxes and making tax authorities more powerful. The tax system has substantially remained unchanged and operating under the same legal framework inherited from the colonial government and consolidated by the one-party post-independence government.

Table 3: Performance by Tax Item in Mainland (1998 - 99) (TSH Billions)

Limited Companies
W/Tax (Goods & Services)
W/Tax (Bank Interest)
W/Tax (IRMD)
PAYEHousing/Payroll Levy
Other Taxes



Excise Duty-Beer
Excise Duty-Cigarettes
Excise Duty-Others
Stamp Duty
Road Toll
Other Taxes
Imports Duty
Excise Duty-Imports
Excise Duty-Petroleum
Other Import Duties
Non-Tax Revenue



Source: Compiled from Table 5, 7, and 9 (TRA 2000)

Table 4: Collection Contribution by Tax Item in Mainland (1997 - 98 & 1998 - 99)


Limited Companies
Wfrax (Goods & Services)
W/Tax (Bank Interest)
W/Tax (IRMD)
Housing/Payroll Levy
Other Taxes

Excise Duty-Beer
Excise Duty-Cigarettes
Excise Duty-Others
Stamp Duty
Road Toll
Other Taxes
Imports Duty
Excise Duty-Imports
Excise Duty-Petroleum
Other Import Duties
Export Duty
Non-Tax Revenue

Source: Compiled from Tables 5, 7 and 9 (TRA, 200)

Table 5: Tax Exemptions in Mainland 1998 - 99 (TSH Billions)

Customs & Excise



Customs & Excise

Source: Table II (TRA, 2000) [Note: The exemption figure do not include income tax exemptions]

Table 6: Contributions by Mainland Regions and Ranking by Collection and Target Achievement as at 31 August 2001

Dar es salaam


Source: Compiled from (TRA, 2001c)

Table 7: Breakdown of Levy deducted from Farmers in Newala District - 2000

Development levy
Input Purchasing Fund
Water Fund
Newala Development Fund
Primary Society
Regional ceremonies fund
District ceremonies fund
Village levy
Self-Reliance Fund
Health fund
TSH 30
TSH 20
TSH 12
TSH 13
TSH 100

Source: Table Four (Chachage and Nyoni, 2001)

3. Taxation in the Context of Democratic Governance

3.1 Public Dissatisfaction with Contemporaray Legal Framework for Taxation

The contemporary legal framework for taxation in Tanzania was structured to allow the government to decide on matters of taxation without conformity to any principles, rules or standards. In research carried out in Dar es Salaam by the author as mentioned earlier, taxpayers remonstrated that this state of affairs negates public willingness to cooperate with their government in financing the state. Several arguments may be raised to demonstrate the discord between taxation and democratic governance.

The first is that the current system operates on wrongful assumptions as to basis of taxation. It is argued that constitutional provisions on taxation are undemocratic and insufficient. The Constitution assumes that taxation is an automatic obligation20. The existence of the state embodies the mandate to levy imposts, the only prerequisite being the enactment of tax laws. Interviews revealed discontent with this approach to taxation. It was opined that if payment of taxes is expressly agreed as a constitutional duty, it means citizens agree on the principles of sharing the costs of governance. Where there is a duty there must be principles guiding the discharge of obligations and the rights and remedies associated with disabilities in performance or inability to discharge the duties, as well as sanctions against deliberate flouting of responsibilities. Leaving taxation as an expedient available to the state in a system that lacks democratic safeguards against misrule is negating the struggles to democratise governance.

The main deficiency in constitutional provisions on taxation is the practice of the quasi-prerogative use of taxation through parliamentary plenary powers. In a patrimonial system where executive powers have grown beyond effective parliamentary supervision, such a constitutional shortcoming opens taxation to wide ranging abuses and misuse. Governments tend to assume that people are born in bondage to taxes, which they have to pay unquestioningly. A survey of constitutions of developing countries reveals that in recent constitutional drafting there is a departure from the old practice of not stating the basis of taxation because of abuses of taxing powers through the blanket use of parliamentary plenary powers. Most constitutions promulgated during the 1990s have adopted the use of specific provisions that state the basis of taxation. For example Article 64 of the Constitution of Algeria (Algeria, 2001), Article 4 of that of Argentina (Argentina, 2001) and Article 95 of that of Colombia (Colombia, 2001). Many others have followed suit.

The point raised is that citizens should freely agree to contribute to costs of governance and their development according to principles that they determine. Fiscal needs of the government are not purely a techno-bureaucratic concern. Means of financing the state can easily erode people's right to self-determination.

The second relates to provisions on taxing powers. Two complaints are associated with this concern. The first relates to non-delimitation of tax jurisdictions and the second to lack of clarity of what the taxes are. In respect of the first complaint the query is over the legitimacy of taxation without clear assignment of tax bases to delimit the respective jurisdiction of different levels of government. In the case of Tanzania the query involves the respective mandates between the Union government, Mainland Tanzania, Tanzania Zanzibar and local governments. The argument is that people cannot be assumed to consent to contribute to the defrayment of government expenditure that is not associated with their own governance. Hence people in one side of the Union should not be taxed to finance expenditure in the other part, or be taxed to finance Union expenditure without similarly taxing those in the other part. As well, the Union government cannot legitimately claim taxing powers over bases that legitimately belong to the other levels of government because it denies the people in their respective constituents ability to meet those responsibilities that by constitutional agreement are left to them. The point emphasised is that once there are clear identities and separation of expenditure responsibilities by levels of governments there must also be clear delimitations on tax revenue sources. Omission to delimit domestic tax jurisdictions to reflect how the society is organised for governance can imperil several rights, for example, the right to pay only valid taxes, right to consent, right to certainty and the right against confiscatory taxation.

While many constitutions around the world remain without effective provisions on protection of citizens against the effects of unregulated jurisdictional competition in taxation, there is a significant move to recognise this problem as one that exacerbates the discord between citizens and the state. Brazil has perhaps been the most explicit in this respect. Articles 153 to 156 of her Constitution (Brazil, 2001) elaborately provide for delimitation of taxing powers between the federal government, states, federal districts and counties. Article 154 prohibits the enactment of taxes other than those listed in the constitution if they have a cumulative effect on those already in existence or the taxable event or basis of assessment is the same as those specified in the constitution21. Recently the Constitutions of Ethiopia22 and the Sudan23 adopted the Brazilian approach.

In respect of the second complaint the argument is that taxes must be correctly and clearly described in order to enable citizens to understand their scope. In the case of Tanzania the complaint is that Union taxes are not clearly defined such that the government has taken advantage of the lack of clarity to broaden their meaning and introduce stealth imposts. For example, income tax has been extended to include non-income receipts24and excise duty extended to cover imports contrary to the Constitution25.

The third relates to the exercise of taxing powers. Lack of principles facilitates arbitrary and at times illegal tax practices. In Tanzania this can be elucidated by four examples.

1) Ex-Post Facto Validation of Invalid Taxes

In the financial year 1991- 92 the Minister of Finance raised stamp duty rate on a range of sale instruments without enactment. These remained in force until 17 July 2000 when at last the legislature enacted the Stamp Duty (Validation) Act 2000 to validate the duty ex post facto. Section 3 of the Act proclaims that:

(2) All actions of the Government in levying and collecting the rates validated under subsection (1) are hereby validated and declared to have been lawfully done.
(3) All moneys received by the Government in respect of the payment of stamp duties at the rates so validated are hereby declared to have been lawfwly paid and received by the Government.
(4) Such part of the rates so validated and which have not been paid to the Government shall be lawfully payable to the Government.

Taxpayers were compelled to pay the new rate on the ground that the immediate enforcement of the rate was valid under the Provisional Collection of Taxes and Duties Act 1963. That legislation authorises the President to permit the collection of taxes and duties declared in the budget speech pending the passing of the Finance Bill. The rate was not included in the relevant Bill and when late in 1999 taxpayers queried the validity of the rate the Government responded by rushing the validation Bill to the National Assembly to validate the illegal rate and enforce outstanding liabilities. This case provides further evidence of the dangers of relying on plenary powers of a legislature that is not fully autonomous.

Different approaches have been adopted in other jurisdictions to safeguard against invalid taxation. Article 46 of the Constitution of Denmark specifically prohibits the levying of taxes before the Finance Act or a Provisional Appropriation Act has been passed. In Mozambique Article 1, section 19 of her Constitution (Mozambique 2001) prohibits ex postfacto laws. In Panama, Article 48 of her Constitution (Panama 200 1) clearly states that:

No person is obliged to pay a tax or impost which has not been legally established and its manner of collection prescribed by law26.

It is against the rule of law to exact taxes that are not legally valid. The validation of the illegal rates indicates that without having clear principles it is possible for the government to do anything that violates rights.

2) Retroactive Taxation

The Tanzanian Constitution contains no provision that permits or prohibits retroactive taxes. The practices around the world vary. Some countries permit retroactive taxation. In US, the US Supreme Court held in United States versus Carlton27that as long as the retroactive application of a statute 'is rationally related to a legitimate purpose', the retroactivity is permitted by the Constitution. In Germany retroactivity of taxes is restricted. The German Constitutional Court has based the principle of non-retroactivity on the concept of rule of law, which includes the concepts of legal security and public trust.

The German Constitutional Court distinguishes between retroactive tax laws and retrospective tax laws. A tax law is considered to have retroactive effect when it affects transactions that have been closed in the past, that is, before the law was approved and/or promulgated by the legislator. The law has a merely retrospective effect when it affects the future transactions or legal positions that have not yet been closed. The Court requires a higher standard for retroactive laws, which with a few exceptions are prohibited in principle, while merely retrospective laws are permitted (Vanistendael 1996).

The UK permits retroactive tax laws. In the case of A, B, C and D v The United Kingdom28 the European Commission on Human Rights dismissed a challenge to a retroactive tax law of the UK, holding that it did not violate the right of property under the European Convention of Human Rights29. A number of countries prohibit retroactive taxation in their respective, constitutions30.

It is correctly argued that under certain circumstances retroactive taxes can be used to counteract schemes that undermine the uniform and equitable application of taxes. However, under any circumstance it is necessary that the rule of law must be adhered to, and the retroactive tax laws should provide effective safeguards against abuse. The case of retroactivity of taxes raises a fundamental question of principle, namely, whether unregulated discretionary retroactive application of taxes conforms to the rule of law? (Schultz 1994)31. The answer to this question is obviously in the negative. Otherwise the rights to fair treatment and to property are adversely affected and public trust in taxation is eroded.

3) Unregulated Delegation of Tax Law Making Powers

Delegation of tax law making powers is attracting increasing criticism from many scholars on taxation and remains controversial. Ideally it is accepted that delegation of such powers is permissible if it is restricted to matters of implementation of the law, for example regulations detailing models of tax forms to be filed and annexes to be attached because such details may not be efficiently provided for in the principal legislation. Any delegation that empowers the executive to determine the basic aspects of taxes is excessive and constitutionally defective (Vanistendael 1996). Such delegation does not meet the requirements of consent to taxation and is likely to offend the rules of equality, uniformity, non-discrimination and due process.

Different approaches have been adopted to deal with the subject of delegation of tax law making powers. Constitutions in various countries contain provisions limiting the Parliament's powers of delegation. In Iceland the constitution specifically provides that the determination as to the imposition, change or abolition of a tax may not be surrendered to the executive (Article 77). Article 78 of the Greece Constitution and Article 114 (2) of that of Zambia 1991 (Zambia 2001) also prohibit the delegation of taxing powers. In a number of other countries the constitutions require the enactment of organic laws that sufficiently regulate the use of delegated tax law making powers . Vanistendael notes that in Continental Europe the power to establish rules for the implementation or administration of tax laws by way of regulation is recognised if the statute approved by parliament contains sufficient specific rules defining the essential elements of the tax (Vanistendael 1996).

The Tanzanian Constitution contains no provision that regulates delegation of tax law making powers. The practice is for parliament to delegate such powers without providing guidance on their exercise. The following are cases of abusive use of such powers encountered during the author's research.

a) Abuses Under Ministerial Delegation

The practice in nearly all the surveyed tax statutes is to delegate powers to make regulations to the Minister for Finance, The relevant provisions neither delimit the scope of the delegated powers nor provide guidance on their exercise. The typical language used for delegation is reflected in Section 137 of the Income Tax Act 1973 that provides that:

The Minister may make regulations prescribing anything which is to be prescribed under this Act and generally for the better carrying out of the provisions of this Act.

That provision is reproduced in other tax laws33. The breadth of these powers have made it possible to make regulations that violate rights. Perhaps the most pernicious of the ministerial delegations is the power delegated to create imposts that are taxes but designated as compulsory contributions. These have been used to extend the scope of various taxes. Importers and dealers in petroleum and petroleum products complained that the Minister has unduly raised the effective tax burden by introducing three imposts. Using powers under the petroleum laws, namely the Petroleum (Conservation) Act 1981 and the Petroleum (Exploration and Production) Act 1980, the Minister created the Energy Fund, Price Stabilisation Fund and Petrol Sector Rehabilitation Fund. Each relies on statutory contributions exacted in the process of determining the retail price for fuel. It was revealed that each contribution is given a separate computable value in the process of determining the price.

In the case of Dar es Salaam the process passes through 22 stages as shown in Table Seven below. The three above-mentioned funds significantly increase the taxable value of fuel for purposes of the road toll, sales tax/VAT and excise duty.

Another example is the Production Development Fund (Establishment and Management) Act 1974 -(PDFA) which was enacted to empower the minister to establish all sorts of funds. These include the rural productivity fund, coffee industry fund and other crop funds whose rates of contributions are amended periodically as revenue needs arise. Since 1977, Section 6A of the Finance Act 1977 amended PDFA to empower the Minister to reallocate moneys in funds in the event of financial exigencies or public interest. By so empowering the minister the funds have been stealthily turned into tax revenue sources and used to finance general governmental expenditure.

As pointed out earlier, citizens have a right to know what they consent to in allowing governments to use taxation as a revenue source. In Luxembourg in order to avoid doubts as to what constitutes taxes and safeguard against stealth taxation Article 102 of her constitution prohibits demanding from citizens any form of payment other than taxes.

Table 7: List of Items Included in Computation of Retail price for Fuel at Dar Es Salaam

Stages Computable Items
Tanzania Petroleum Development Corporation (TPDC) computed price
Tanzania Italian Petroleum Refinery (TIPER) processing fees
TPDC overhead costs
TPDC margins
Ex-TPDC price
Gross product subsidy
Gross product subsidy price
TPDC selling price
Oil company margins
Oil company overheads
FOB price differential
Bonded wholesale price
Wholesale price
Delivery charges
Dealers margins
Proposed Dar es salaam retail price

Source: Extracted from records submitted in the case of Aldax Tanzania Ltd vs AG, CIT & Ors34

b) Abusive Use of Tertiary Delegation

Tertiary delegation refers to delegation of tax law making powers to tax authorities. This is abusively done by conferring unregulated powers to make rules that at times extend to the determination of the subjects of the tax, its timing and liability. Complaints made by taxpayers35 concerned the abuse of these powers and the absence of mechanisms for their control.

4) Inconsistent Use of Hypothecated Taxes

Citizens are wary of the practice of reallocating revenue from hypothecated taxes to general governmental expenditure. The argument is that taxpayers have the legitimate expectation that earmarked tax revenues are fully committed to the purposes for which they are enacted. Taxpayers argue that the use of hypothecated taxes lacks honesty and transparency. The government misrepresents to the people the motive behind enactment of certain taxes in order to extract popular acceptability but ultimately it is realised that the true motive is revenue. The consent that is purportedly obtained is therefore vitiated. The continued inconsistent use of these taxes is illegitimate and forces citizens to suspect government motives and withhold cooperation. In Tanzania, reluctance to cooperate with the government in raising earmarked taxes came to light very strongly during discussions on government proposals to establish an education levy to support the recently established education fund under the Education Fund Act 2001. The levy was successfully resisted and the original draft Bill that contained elaborate provisions on the levy had to be changed by deleting the levy provisions (Galabawa, Mbelle et al, 1999).

Citizens have bitter experiences of past abuses of earmarked tax revenue. For example, road toll revenue was prior to recent amendment inconsistently used for other purposes. The establishment of the Tanzania Roads Authority (TANROADS) under the Road Tolls (Amendment) No 2 Act 1998 finally restrained the government from further misuse. In another instance, housing levy was first introduced in 1974 by the Workers and Farmers' Housing Development Fund (Financing and Management) Act 1974 (WFDFA) to fund the workers' and farmers' housing development fund administered by the Tanzania Housing Bank (THB). The fund was to provide loans for construction of low cost houses. The levy was restrictively imposed on any employer other than the government and local authorities who employed four or more employees at the rate of four percentof the gross emoluments payable (section 3). The bank and the project collapsed in early 1980s. The government had no further plans to re-establish the bank and revive the project, but in 1985 instead of abolishing the levy the Payroll Levy Act 1985 (PLA) was enacted to repeal WFDFA and re-introduce the levy under the name of payroll levy on purely revenue grounds. The previous levy was an added cost on labour that was tolerated because of its laudable objective. The new levy had no such acceptability. Public outcry compelled the government to establish a housing development fund through the amendment of PLA by the Finance Act 1991 (section 26) and renamed the levy a 'housing levy' again. Over the past decade the fund has not provided any of the intended services to the public36. Similarly, a vocational education levy was enacted in 1994 under Vocational Education Training Act 1994 (VETA). It is imposed on the same tax base and alongside the housing levy37. Its revenue is reniitted directly to the Vocational Education and Training Authority. The basis of the complaint is that in its framework the tax has assumed a feature of being permanent. The authority is not structured to achieve self-sustenance. The criticism is that such use of hypothecated tax revenue ties down the ability of the people to efficiently finance other emerging needs like the urgent need for an education fund. The emphasis is that hypothecated taxes must have a definable period and their continuation be subject to yearly evaluation and consent. In the Philippines Section 29 (3) of Article VI of the Constitution specifically requires that hypothecated taxes must be abandoned after fulfilment of objectives. The government is therefore restrained from inconsistent application thereof.

The fourth example relates to the application of taxes. The function of any legal framework for taxation is to delimit the exercise of taxing powers. It sets down the principles and rules that guide taxation, ranging from the broad description of taxes that may be imposed, allocation of taxing powers, basic principles for the valid exercise of such powers to mechanisms of control over taxation. Hence, while most constitutions make the legislative initiation of tax Bills the preserve of the government, it does not mean that the government is free to choose any form of tax or the manner of its application. Where the legal framework does not provide delimitation governments are left with a free hand to propose taxes according to their own criteria and objectives. Taxes may thus be discriminatory, confiscatory, used for political ends or to service special interests and many other forms of malpractice. Consequently several principles of the rule of law are considered fundamental to taxation even where the legal framework is silent. This is because derogation from those principles entails breaches of a variety of rights and erodes democratic governance.

3.2 New Thinking on Tax Systems

The challenge to rethink taxation is attracting international attention. In 1998 the IMF adopted a Code of Good Practices on Fiscal Transparency - Declaration of Principles (FAD-IMF, 1999) to provide basic guidelines for countries in reforming fiscal systems to accord with good governance. The Code exhorts the importance of legal and administrative frameworks that are comprehensive and that fully provide for explicit legal basis for all taxes, accessibility and clarity, clear criteria for administrative application, taxpayers' rights and openness of administrative decisions to independent review and ethical standards of behaviour.

The new thinking on the design of tax systems is that it is necessary that taxation be designed to achieve effective state-society cooperation. This cannot be achieved if taxation is not brought within governance tenets by having in place clear principles on taxation and institutional safeguards on taxing powers.

The new thinking is not an accidental development. It can best be explained as a product of market fundamentalism. Historically taxation has been the most preferable way to pay for costs of wars (Dowell, 1884; Holtfrerich, 1987). It remained central to war effort and thus subject to rigours of state security and exigencies perceived by the government. During the cold war that ensued after which impelled the maintenance of huge professional armies and triggered the arms race taxation continued to be heavily relied upon to fund national security.

Post-Second World War, tax policies were also driven by demands of reconstruction of war ravaged economies. Economic theories dominated state thinking and pursuits. Braithwaite and Drahos point out that the preoccupation with economic recovery and the influence of Keynesian monetarism predominated thinking such that in the post-war era tax, as an object of regulation at the international level, was absent (Buchanan and Wagner, 1998; Braithwaite and Drahos, 2000). Tax policy was left as a purely nation state affair without standards.

The strengthening of the corporate entity and its incursion into politics captured policy decision-making to service the needs of free market capitalism. Western states relied on capitalism as the engine of wealth creation and economic prosperity. The corporation, as the primary vehicle of capitalism organised to capture rule-making powers to ensure that profitability is guaranteed (Korten, 1999). In taxation it entailed institutionalisation of partiality and distortion of the democratic functions of taxation. State power also relied on the corporation to service its expanded military undertakings and the provision of public goods. Good tax policies gradually translated to mean policies that are friendly to the growth and prosperity of the corporation. By the 1960s most tax systems in the Western countries were on the verge of collapse because corporations had succeeded to perforating them and shift tax burdens to the poor and captive individuals (Hartle, 1968; Thoming, 1996; Korten, 1999).

In developing countries economic stabilisation programmes implemented by the Bretton Woods institutions entailed the creation of an unregulated private sector that fast reproduced the experiences of the powerful corporation in the west. The might of the corporation impelled the rethinking aimed at developing principles and rules that would provide institutional safeguards to harness the fiscal Leviathan (Brennan and Buchanan, 1977; Steinmo, 1993; Head, 1997; Joseph, 1999).

The new thinking therefore argues for the redesign of the legal frameworks for taxation. The search for principles to secure democratic taxation is building up. In USA the necessity of laying down clear principles to guide the exercise of taxation was acknowledged by the Foundation of State Legislatures and National Conference of State Legislatures (FSL & NCSL) in 1992. An attempt was made to enunciate principles of a high quality state revenue system (FSL & NCSL, 1992) although these were not translated into constitutional principles. The focus was to guide good taxation.

In UK the Institute for Fiscal Studies (IFS) is active in the search for principles. In 1995 they commissioned a study on how tax laws should be written in an attempt to ensure that taxation conforms to clear principles (IFS, 1996). The recent undertaking by the Institute of Chartered Accountants in England and Wales (ICAEW) to search for better principles complements the IFS efforts. ICAEW considers that the British tax system has spun out of democratic control and become detached from the principles of good revenue raising. It is run increasingly on lines that suit the convenience of the Treasury rather than those of the taxpayers (ICAEW, 1999).

The subject of principles has attracted continuing debate (Prebble, 1994; Lehmann, 1995; Avery Jones, 1996; Goldberg, 1996; Thuronyi, 1996; Prebble, 1998; Deak, 2000). Ideally principles to guide and regulate taxation should arise as part of the organic development in the course of governance interactions. The strong patrimonial regimes do not avail an opportunity for such a process to take place. The search for principles in the changing patrimonial states thus rests with the informed and analytical scholars who have to furnish the theories and justification for enshrining the identified principles within the legal framework.

3.3 Suggested Principles for the Legal Framework

1) Principle of Legitimacy

Legitimacy is a basic democratic principle. Citizens must know the exigency and basis of taxation and democratically undertake its payment as one of their constitutional duties. Under the Tanzanian Constitution the duty to pay taxes is presumed in Article 26 (1) that obligates every person to observe and abide by the constitution and the laws. The provision obfuscates the nature and exigency of taxation. Recent developments have shifted to the practice of having an express provision on the duty of citizens to pay taxes in order to secure the democratic basis of taxation.

2) Principle of Legality

In the context of democratic governance legality requires several things. It is not confined to the common requirement that taxes must be by law. It entails proscribing of taxing powers. First, taxes should only be levied by parliament according to democratically agreed principles. There should not be parliamentary plenary powers on taxation.

Secondly, only those taxes provided by the Constitution in respect of each level of government shall be enacted in respect thereto. This aims at delimiting taxing powers of domestic jurisdictions. Thirdly, tertiary tax legislation is prohibited. Fourthly, secondary tax legislation is prohibited save where it is restricted to the mechanics of administration and in accordance with specified rules on tax administration38.

3) Principle of Legal Security

Legal security protects taxpayers against erratic tax measures. Taxpayers must be able to rely on the constitutionally described powers and limits on taxation. Two guarantees are crucial. First the prohibition of all imposts other than taxes. It should not be permissible for the executive to levy imposts outside the tax system. Otherwise there will be uncertainty as to the scope of the citizen's duty to pay taxes.

Secondly, the prohibition of retroactive taxation except where retrospective application of taxes is specially resorted to in countervailing tax evasion or avoidance. The underlying principle is that there cannot be liability before a tax is enacted. According to the ICAEW, if the government wants to use the tax system to encourage or discourage activity this should be done without changing the core elements of the tax law (ICAEW 1999).

4) Principle of Annuality

Tax legislation must be subject to democratic scrutiny regularly in order to determine its continuing relevance. If a tax is no longer viable or its purpose is fulfilled or abandoned, then it should be repealed. Thus hypothecated taxes should not continue beyond their prescribed time or after achievement or abandonment of their objectives. Other taxes should be subject to public consent every financial year in which they are proposed to finance government. Annual approval of taxes inculcates government accountability.

5) Principle of Territoriality/Uniformity

Taxes must be uniform throughout the national territory and must not imply any distinction or preference in relation to a constituent state or local government to the detriment of another. Territoriality also implies that the constituent states or local governments must not establish tax differentials between goods and services because of origin. In the Tanzanian circumstances, because of a long-standing imbalance in allocation of resources local government taxation differs on account of disparity in public investments. Territoriality would require uniformity in rates and description of taxpayer base in order to prevent placing heavier burdens in regions that are less endowed comparative to those endowed with most public investments. Territoriality is also important to ensure equality in taxation. In patrimonial systems where policy decisions are at times made to reward political power bases and punish localities that demonstrate support to opposition parties provide the opportunity to concentrate development projects in a few parts in the territory and neglect others. Non-uniform taxation thus operates to produce discriminatory effects.

6) Principle of Division of Taxing Powers

Governmental functions can be divided into different levels. Where such is the case then division of taxing powers should be made. Vanistendael cautions that this is a complex problem but one that must be addressed (Vanistendael, 1996). He suggests a number of ways in dividing taxing powers. These include allocating and reserving specific taxes for one level of government. For example, income taxes, wealth taxes, turnover taxes, excise and consumption taxes can be reserved for the central government while other forms are assigned to local governments. Another is the sharing of the tax bases in a manner whereby while legislative power is reserved for ,one level of government, administrative implementation is reserved for another. Levels of spending responsibilities also assist to determine the division of powers. There are several other guiding considerations in determining the distribution. What is important is to study the governance framework and the mandates it creates and agree on the distribution. This means that the Constitution must specifically provide for the taxing powers of each level of government.

7) Principle of Equality

Equality requires that taxes must not discriminate between citizens. The taxpayer base must be all-inclusive. If the taxable activity is ownership of a motor vehicle then all owners of motor vehicles must be within the taxpayer base without exception. Different rates may apply depending on the objective of the tax, for example, if the objective is to control pollution then those vehicles determined to be high pollutants would suffer higher rates than those that are low pollutants. Equality means that it cannot be left to executive discretion to exclude categories of people or activity from the tax base. For example the discretion of the Minister of Finance to alter schedules of charge to include or exclude taxpayers or taxable items offends the principle. Any form of discretionary privileging should be prohibited.

8) Principle of Transparency and Accountability

Transparency is a basic essential for public participation in tax policy decision-making, while accountability ensures democratic control over policy and legislative processes. The principle of transparency illegitimates the use of budget secrecy practices and requires the publication of tax policy proposals. All those likely to be adversely affected by proposed tax measures should be accorded opportunity to make representations. The underlying assumption is that techno-bureaucratic policy considerations are not all embracing and may overlook other equally important considerations or alternatives before making specific choices. This principle has invariably leads to the adoption of special legislative procedures for financial Bills to ensure that the public and members of parliament are given adequate time for considering proposed measures and are availed sufficient information to be able to effectively check executive propositions.

4. Feasibility of the Proposed Legal Framework

In the past, constitutional debates and tax reform in developing countries like Tanzania did not entail any discussion on the status, functions and principles of taxation in the governance perspective. The principles suggested above are merely basic. However, they serve to prompt more focused analyses of the conditions subsisting in developing countries and how to harness them for sustaining democratic taxation. For example, the principles may not serve democratic purposes if disagreements over structures of governance are not resolved. In Tanzania the problems relating to the structure of the Union should be resolved. Consensus on the levels of government entails the allocation of democratic mandates and the respective duties and responsibilities in a manner that makes it possible to determine revenue needs of each government, identify viable sources of revenue and decide how these can be allocated or shared through the principle of division of taxing powers.

Similarly, it is not viable to allocate taxing powers without having in place the necessary infrastructure to support the operation of the taxes. The major pillar of any tax is the identifiability and accessibility of its taxpayer base. The major problem that obfuscates the importance of creating supportive tax infrastructure is the techno-bureaucratic approach to taxation whereby the Treasury assumes omni-competence and operates taxation as a distinct and self-sufficing system that is not linked to other mechanisms that hold the society together. For example, it is not possible for a tax authority like the Tanzania Revenue Authority (TRA) to identify all individual taxpayers and keep efficient records. Records on citizens, residents and others domiciled within the polity need to be maintained and made available to designers of taxes. These include records on births and deaths, electoral registers that show people attaining the age of majority and exercising voting rights, of national insurance systems and citizen identification documents, of land ownership and other property, of business entities, transactions and the like.

Implementation of the proposed principles may enjoy public support or face resistance depending on how people assess the credibility and respectability of the tax system. For example recommendations on registration of citizens and issuance of identification documents can easily provoke public outcry if its context and objectives are not properly communicated and considered by the people. In 1986 the Registration and Identification of Persons Act 1986 met strong public resistance and was recommended for repeal by the Nyalali Commission (GOT, 1992) because it was initiated under the spirit of enforcement of vagrancy laws akin to the apartheid South African pass laws (GOT, 1996c). The one-party structure and the excesses of the previous party supremacy doctrine were still vivid and people were wary of enactment of more coercive powers. Notwithstanding this, the Act in reality provides the broad framework for the registration of citizens that could enable the preparation of electoral registers and citizen identification documents and hence taxpayer identification.

Interviews with members of the Legal Aid Committee at the Faculty of Law at the University of Dar es Salaam39 who led public criticism of the legislation in 1986 intimated that currently people would be receptive to the idea of registration if it were brought for public debate as part of the constitutional tenets. The objective is to secure every person in the exercise of civil rights such as the right to participate in national affairs and access to public goods and services. With proper guarantees against violation of individual liberties and personal security the idea is not objectionable.

In the context of taxation the argument is that before people repose trust in the government and the proposed changes to the legal framework for taxation they need to be satisfied that acceptable rules for tax administration are in force. People tend to visualise their positions at the receiving end after condoning the passage of any law, particularly tax laws. During author's research many taxpayers were apprehensive about disclosing personal identities because they feared the inconsistent use of such information by tax officers. This fear is magnified by any proposals for registration of citizens, mandatory survey and registration of land and other properties, requirements for Taxpayers' Identification Numbers (TINS) and obligations to file tax returns. As pointed earlier coercion by government is more visible in taxation.

At the outset, therefore, it would appear that tenets for democratic taxation do not have a supportive infrastructure in the country. However, this does not mean that it is not viable to establish a legal framework for democratic taxation. The important question to any proposition is whether it is viable. In the Tanzanian situation the search for principles to sustain democratic taxation is in response to ongoing efforts to reform the tax system. The reform process is manifestly facing pitfalls that threaten to regenerate the previous undemocratic tax system. The framework that should be designed on the basis of the proposed principles entails changing the existing system. This is not an overnight event but a process. Characteristic of all processes, conditions or factors must exist to support and sustain changes. Examining how factors that are favourable to proposed changes weigh against those likely to obstruct the process can thus assess viability.

4.1 Factors Against Proposed Changes

1) Fear of Loss of Power

Techno-bureaucrats find it difficult to embrace changes particularly if they entail exposure to increased public scrutiny (Rose, 1987). In a patrimonial system changes that demand establishment of principles evoke fears of loss of power. The government favours having wide latitude of discretion in tax matters. According to the Deputy Permanent Secretary in charge of tax policy at the Treasury, having rigid principles might put the government in a straightjacket and make policy making cumbersome. However, such fears are based on apprehensions rather than considered findings. Policymakers were found by the author to be very lacking in their understanding of taxation in the context of democratic governance. Policy thinking is confined to economic and public finance theories.

2) Fear of Loss of Revenue

The views of policy-makers and TRA officials is that adoption of principles and rules that secure and enforce taxpayers rights might lead to loss of revenue. Creating enforceable rights could open up a floodgate for tax litigation and possibly huge compensation awards that might be onerous to the government. It means that wrongful use of taxing powers and injustice in taxation should be sheltered to protect government coffers. Such thinking can only be explained within the patrimonial virtues that seek to retain prerogative powers over taxation. It is undemocratic and manifestly unjust.

3) Fear of Resistance From Business Sector

Policymakers interviewed by the author, who favour the administrative guidance approach mentioned earlier, raised the argument that stringent principles and rules might disturb the goodwill and cooperation that the government has cultivated with the business sector. This is a genuine fear in a system that is dependent on a narrow taxpayer base. The state-business partnership fosters partiality in policy-making and leads to the disenfranchisement of other sectors of the society. It is demonstrative of the penchant by corporate interests to sideline democratic processes for interest protection (Korten, 1999; Monbiot, 2000). The impact of market fundamentalism in implementing the first generation reforms caution against the trend to institutionalise partiality in policymaking.

4) Fear of Invalidation of Existing Taxes and Costs of Implementation

One question raised by the Head of the recently established Legal Services Department at the Treasury was in respect of the impact of institutional safeguards that confer rights on the taxpayer-citizens upon the existing taxes. Obviously if implementation of the changes is carried out without efficient transitional arrangements then many of the current taxes may lose their validity and will be open to invalidation proceedings. However the process of change should provide the procedure and time for the government to modify current tax laws into conformity with the new legal framework. Democratic consensus should resolve the fear of invoking the new principles and rights retroactively to challenge previous tax liabilities.

In respect of costs of implementation the concern focused on the expenses that may be necessary to mount public awareness campaigns, organise public hearings, redrafting and publication of tax laws and implementing other requisites such as the establishment of taxpayer and other complementing registers. The full scope of the costs likely to be incurred could not readily be established. However, this does not mean the reform programme cannot be planned and provided for through the budgetary process. Probably the most important consideration is whether the proposed reforms are worth the effort and promise greater returns and benefits.

4.2 Factors Supporting Proposed Changes

The proposed changes enjoy facilitating factors as discussed below.

1) Impetus

Increasing awareness of the impact of unregulated taxation during first generation reforms is producing mounting pressure to restructure the tax system. Substantial tax burdens were shifted to the less capable employees and peasants in order to protect the profitability of enterprises and attract FDI. Perhaps the last straw that awakened the general public to the insensitivity of the government to the plight imposed by market reforms was the now infamous statement by the then Minister of Finance, Mr Cleopa Msuya in one of his budget speeches during the transition that 'kila mtu atabeba mzigo wake mwenyewe' meaning that every person shall carry his or her own burden of life. That taxation shall no longer be used to support families. Citizens would henceforth pay taxes and find other means to fend for themselves including the education of children and medical needs. The statement heralded the introduction of cost-sharing measures amidst increased taxation (Kavishe, 1999; Makawia, 2000).

Public reaction has ever since increasingly focused on the balances in taxation and benefits from the socialised financing of public goods and services. Intensifying criticism has ultimately led to the reversal of the extremes in the cost-sharing policies, for example the restoration of the right to state paid primary education to all children, revision of cost-sharing rules in medical services to support mothers, children and the indigent, facilitation of state educational loans for higher education, to mention a few. The force for change is therefore created but remains less effective because it is not sufficiently equipped with theoretical explanations of the alternatives and other non-technical considerations needed to bring about democratic taxation.

The establishment of TATA in 2000 (Goima, 2000) is a step towards the creation of a broad based taxpayers' forum to advocate their concerns and demand changes. The increased interest to explore the subject of taxpayers' rights is providing taxpayers' pressure groups with invaluable explanations on tax relations and what changes should be sought. The increase in tax litigation40evidences the changing attitude of taxpayers. This can also be gauged from public opinion expressed in the media (Gumbo, 2000; Ng'wanakilata, 2000; PST Correspondent, 2000; Ng'wanakilala, 2000a).

In response to the increased pressure from taxpayers TRA is considering the introduction of what it provisionally calls a Taxpayers' Charter and its Corporate objectives41. Some of the taxpayers' rights proposed in the charter reflect the principles proposed above42. However, according to clause 2 of the proposed charter, the rights are not litigable. Notwithstanding this, what is important at this stage is the fact that the agenda for the protection of taxpayers is in place.

2. Timing

The ongoing debates on constitutional changes (Mwambande, 1999; Mwainbande, 1999a) also provide opportunity to examine taxation in the context of governance. The timing coincides with government endeavours on good governance that already reveal the pitfalls. Although the current good governance approaches to reform do not provide institutional safeguards, they nevertheless provide good practical experiences that were previously fearsome to the executive and perceived to be bad to government business and its image. For example, previously government officials and ministers had discretion not to provide information to the public by refusing to answer queries and cooperate with the media. Increasingly that phobia is overcome and proving that openness and transparency does not fetter the discharge of governmental functions. The experiences flowing from the various good governance measures are also increasing public awareness of the effectiveness of their participation in governance processes. For example, public debate on the exercise of privatization powers that recently restrained the Government from selling the National Microfinance Bank (NMB) or the public outcry that compelled the Government into more openness in addressing constitutional reform. They are gradually eliminating the public apathy that was inculcated under one-party rule.

Previously techno-bureaucrats were reluctant to consult members of the general public in deciding on policies. The experimental selective consultations in tax policy processes indicate that public participation is beneficial and promotes good understanding of the likely impact of proposed measures and foster cooperation.

The argument is that although the good governance practices are not based on firm principles they have increased public awareness that it is possible to have transparent and principled discharge of public functions without paralysing government business. The experiences help to allay fears that the proposed principles may impede government efficiency.

International advocacy for both good governance and taxpayers''rights is gradually getting the government to concede to pressures for transparency and accountability. As foreign governments and international institutions include conditions for good governance and taxpayers' rights in bilateral agreements, the government is impelled to invite public views (Bentley, 1998b). The ensuing interaction is an important leverage for advocating proposed changes.

Currently, international concerns on underdevelopment are also focused on the efficiency of the mechanisms for democratic financing of the state and development. Studies have been initiated to examine how atrophied tax systems contribute to the inability by governments to mobilise public cooperation to finance development, eradicate poverty and secure democracy (Tomasevski, 1990; Moore, 1998; Therkildsen, 2000a; Olsen, 2001). These developments in rethinking taxation43 are supportive to the above propositions.

3) Supportive Infrastructure

The reforms implemented to enable the transition to free market economy and multiparty politics have created an environment that perhaps was not contemplated by the architects. They have brought into operation the law of unintended consequences as discussed below.

a) Increased Parliamentary Activism

The introduction of multiparty politics opened up the government to more scrutiny by both the public and parliament. The presence of opposition Members of Parliament in parliamentary standing committees44 has invigorated critical scrutiny of government affairs. Currently members of cabinet annually appear before the committees for examination. For the first time in the country's history, ministers have been compelled to resign as a result of parliamentary probes45. The opposition MPs make it difficult for the government to secure easy complicity of the ruling party MPs in passing laws. The quality of parliamentary debates has significantly changed and more MPs are forced to consult their constituencies and carry out independent inquiries to enrich their parliamentary representations with substantiating facts and data. It means therefore the parliament is becoming more accessible to the public and increasingly receptive to ideas from constituencies in legislating.

b) Established Bases for Change

Free market reforms created bases that also facilitate implementation of the proposed changes. For example, the public resisted the Registration and Identification of Persons Act 1986 because one of its main objectives was the enforcement of vagrancy laws. This law was not repeated. The Tanzania Law Reform Commission (TLRC) recommended its retention subject to amendments to correct identified anomalies (GOT, 1996c). The legislation provides the framework for registration of citizens and foreigners and issuance of identity cards. If it is democratically revised to provide for the establishment of electoral registers46and identification of citizens and residents for purposes of planning and provision of public services, it may create the necessary infrastructure for taxpayers' identification.

Similarly, land laws have been changed and a new land tenure system introduced. The new land legislation47 seeks to systemise land tenure albeit it carries objectionable provisions that provide avenues for undesired alienations and state appropriations of land rights from indigenous people to service FDI needs. Apart from amendments that would safeguard interests of citizens the legislation can also be amended to compel the government to survey and register all lands and their uses in a manner that would assist the design of appropriate taxes, for instance to tax land hoarding or neglect to put it to productive use, or impose environment tax where land use practices are harmful.

c) Opportunity Costs

In order to fully appreciate the summum bonum, that is, the chief good of the proposed principles it is essential to comprehend the cost(s) of foregoing the opportunity to change.

i) Growing Taxpayers' Ability to Resist Taxes and Threats to Peace

The first cost relates to the established fact that the reforms undertaken so far have failed to expand the taxpayer base. The tax system continues to rely on a narrow taxpayer base; limited tax handles and burdensome consumption taxes.

The combination of growing discontent by taxpayers and increased ability to organise and resist enforcement by the few taxpayers upon whom the system hinges is potentially harmful to peace and democratic governance. Currently it is possible for hardly 1000 corporate taxpayers to cause the declaration of a state of emergency by refusing to collect taxes. A tax collection strike by corporate taxpayers will paralyse the collection of excise duty, VAT, payroll levy, vocational education and training levy, social security taxes, PAYE, income tax on corporation profits, car benefit tax, petroleum bases taxes, statutory contributions and a number of other withholding taxes collectable through these entities. The taxes likely to be affected contribute close to 90 percent of annual tax revenues.

The narrowness of the taxpayer base and the limited handles for designing taxes is putting the government to ransom to negotiate with businesses in administering taxes and thus eroding equal and democratic participation in governance. The possibility of such organised action by the strongly organised businesses is real and has been used with near disastrous results in Kenya, Zambia, Uganda and Ghana during the introduction of VAT. As social disparities widen under the free market system it becomes easier for businesses to forge the alliance of the disgruntled public in compelling the government to concede to business demands as experienced recently in respect of taxation of capital goods (The Guardian, 1999), the demands to curtail TRA powers (Ng'wanakilala, 1999b; Kavishe, 2000a), which led the Minister of Industries and Trade to assert that the conflict between business taxpayers and the government is a national crisis (Ng'wanakilala, 1999c).

ii) Negation of Citizens' Cooperation and Trust in Government

Negation of citizens' cooperation is another cost. One of the major consequences of arbitrary taxation is the destruction of public trust and confidence in government and tax administration. This has led to resort to coercive tax practices. The more people feel alienated from decision-making the more democratic taxation becomes impossible. As the adage goes, de gustibus non est disputandum, meaning there is no sense in challenging people's preferences. By resisting institutionalising the proposed principles the government is challenging people's preferences for just taxation and hence compelled to use strong-arm policies in raising public revenues. Democracy and respect for human rights cannot be achieved while taxation is operated inconsistently.

iii) Loss of International Credibility

Countries do not exist in isolation. There is inextricable interdependence between states that is dependent on the respectability and credibility of governments. A respectable government fosters stability and peace and attracts the confidence of other states and international organisations. The use of conditionalities and sanctions against countries has in recent years frequently been invoked to compel undemocratic and despotic governments to conform to human rights. While at the moment taxation is yet to be considered for standardised minimum norms, the trend is already apparent that soon it will assume an important status for consideration in bilateral and international agreements. The above examination of the new thinking on tax systems points to that eventuality.

4.3 Summary on Balance of Factors

The factors against the proposed changes are basically apprehensive in nature. They are based on the fear of change. This paper points to the existence of serious faults in the legal framework for taxation that if not corrected may continue causing serious problems and perpetuate injustices. In the absence of justifiable reasons it is not legitimate to resist democratic changes. However, it is not practical to ignore those factors however unsupportable they are because implementation of the desired reforms in the current patrimonial system depends on the political will and cooperation of the ruling party elite. What needs to be done is to pursue intensive education of the techno-bureaucracy and the ruling party elite while intensifying the abilities of civic societies to influence change. Support from the international communities in various forms may help the government concede democratic changes in taxation.

The factors supportive of proposed changes are based on imperatives for securing democratic governance. They are in conformity with measures already implemented but not completed or that have been improperly executed. The imperative nature of the supportive factors is reflected in the dire consequences likely to occur if implementation of the proposed changes is neglected. The choice is therefore between resisting democracy, or implementing what the current patrimonial regime has publicly pledged, namely, democratisation and respect for human rights. The former option is politically suicidal. On balance therefore the proposed changes are viable and necessary.

Annex 1

‘The Commission shall be required to carry out a comprehensive evaluation of the Tax system, determine what changes are necessary to meet the needs of additional revenue through broadening the tax base and strengthening the collection machinery in both Central and Local Government. The Commission shall carry out its enquiry and make recommendations in the following areas of the tax system:-

A: Central Government

a) Review and study the whole system with focus on:-

(i) Adequacy of the existing structure;

(ii) How the existing structure can be further improved to achieve better revenue yield and other overall tax objectives;

(iii) How the existing potential tax base can be used more effectively;

(iv) Possibility of greater diversification of tax sources, including additional taxes;

(v) Reform of land rent system of the rural, agricultural and pastoral lands and improve urban land rent and urban rating system;

(vi) Reduction of dictionary effects of the tax structure that may hamper equity and general economic growth; and

(vii) Review of adequacy of the general tax incentive system for ensuring that economic activities are provided with adequate incentives.

b) Review and study the organization of the tax administration machinery of both central government and local authorities with focus on:-

(i) Effectiveness of the existing organizational arrangements of the tax administration machinery and recommend any change for improvement.

(ii) Legal and administrative implements to high level compliance

c) Review division of fiscal responsibilities between the Central Government and Local Governments, especially in the provision of public services such as

education, health, local roads, water supply and other social and economic services.

B: Local Government Finances

a) Local Government Revenue

(i) Review the existing situation regarding the various sources of revenue including the development levy, produce cesses (in rural areas), property

taxes (in urban centers), property taxes), fees, licences, service charges, taxes ets., assigned revenue as stipulated in the Local Government

Finances Act, 1982 and indicate how best these sources can be exploited and/or the tax base be broadened;

(ii) Advise on further transfer of revenue sources from Central Government to Local Authorities where this is considered to be more efficient and

in the national interest to do so;

(iii) Examine and review the existing system of Central Government subventions to Urban Councils and District Councils under the Local

Government Finances Act 1982, taking into consideration the differing potentials of Local Authorities and the economic and social factors

prevailing in each Urban/District Council;

(iv) Advise on how the system of Central Government transfer of revenue to Local Authorities can be improved and rationalizes.

b) Local Government Expenditure

(i) Review the existing system of financing recurrent and development expenditure of Local Authorities in relation to the present set up of

Regional Directorates and recommend rationalization where this is necessary.

(ii) Examine the possibility of establishing a Local Government Equalization Fund to Finance expenditure deficits among Local Authorities.

C: General

(i) The Commission may need to make comparative studies of a few countries with experiences which may be relevant to Tanzania’s national

goals, tax policy, income structure and administration

(ii) The Commission is empowered to call for information and data which will facilitate the execution of its terms of reference.

(iii) The Commission shall define and establish its own method of work.

(iv) The President of the United republic of Tanzania may vary, add or request the Commission to study and advise on other issues relevant to the

terms of reference of the Commission as he considers necessary

D: Duration of the Enquiry

The Commission is required to complete its work and submit its report within nine to twelve months from the date of appointment."

Source: GOT 1991

Annex 2







John King

Foreign Consultant

Corporate Taxation and Investment Incentives

Commonwealth Fund for Technical Co-operation (CFTC)


A. N. Misra

Foreign Consultant

Organization of the Income Tax Department and the Customs and Sales Tax Department

Commonwealth Fund for Technical Co-operation (CFTC)


Patrick O’Ruorke

Foreign Consultant

Individual Income Tax, PAYE System and Taxation of Informal Sector

Commonwealth Fund for Technical Co-operation (CFTC)


H. Peter Stehmer and Robert W. Goebel

Foreign Consultants

Tax Administration Survey

United States Agency for International development (USAID)


M/S KPMG Peat Marwick Policy Economic Group

Foreign Consultants

Indirect Taxation reform Study for Tanzania

The World Bank


Dr. Z. S. Gondwe

Local Consultant

Tanzania Estate Duty

Government of Tanzania


Dr. A. V. Y. Mbelle and I Karamagi

Local Consultants

Full Implementation of PTA Tariff Arrangements and its Implications on Tanzania

Government of Tanzania


Dr. J. J. Semboja, Dr. A.E. Chaligha, I. Karamagi & A. Mkenda

Local Consultants

Import Duty Tariff Study

The World Bank


Prof. Brian Van Arkadie

Foreign Consultant

Assistance in Report Writing

Dutch Government


A. Dalton

Foreign Consultant

Assistance in Report Writing

British Government

Source: Appendix V, GOT, 1991


[1] Refers to the laissez faire politics adopted by the former President that permitted unregulated activity by businesses.

[2] The tax system was loophole-ridden and subject to ministerial discretionary exemption powers that made it porous and incapable to yield adequate revenue for the Government

[3] The government has been reluctant to publish the contents of the study and despite much effort no copy could be obtained. So far only accounts of its content is accessible through interviews with Treasury officials.

[4] Section 34 of the Finance Act 1992

[5] Section 19, ibid.

[6] Section 28, ibid.,

[7] See the letter by the Minister of Finance Hon Daniel Yona to Mr Michael Camdessus the Managing Director of IMF written on 13 July, 1999 describing the policies that Tanzania intends to implement in the context of its request for financial support from the IMF in which the minister also asserts in paragraph 31 that the reform of the central govemment's tax system is largely complete. The letter is available at (29 January, 2000.

[8] Legal framework for taxation requires that the basis of taxation is clearly provided for under the country’s Constitution, the conditions for imposing taxes are spelt out, jurisdictions to levy taxes are provided for (for example the assignment of tax bases between different levels of government), the rules on tax administration are fully outlined to regulate the relations between taxpayers and tax authorities as well as safeguard taxpayers’ rights (which have to be clearly are defined).

[9] In Tanzania the Constitution is silent on the basis of taxation, on assignment of tax jurisdictions, on the conditions to be met in designing and promulgating taxes, on the rights of taxpayers, and on the rules for tax administration. The recommendations in Table One have not been defined to include the reform of the legal framework for taxation to address these specific shortcomings.

[10] These are considered to be the principal contributors of tax. However, the reality show that employments taxes contribute substantially to government revenue and therefore trade unions are very important in the consultation processes. Similarly, the peasants suffer heavy taxation of inputs and other imposts on agricultural products but are not consulted.

[11] On 12 April 1996 Ministers for Planning, Agriculture, Industries and Trade and Energy and Minerals met with members of TCCLA and promised to involve the business community in policy making processes, particularly on matters like taxation that affect their interests most. Later in the evening at a special dinner hosted by the President, he reaffirmed his Ministers' pledge.

[12] Prepared by Tanzanian Authorities in collaboration with the Staffs of IMF and IBRD

[13] Footnote 7, supra.

[14] Tax Appeals Boards and Tribunals required to be established under the different tax statutes had not been established or were not functioning because the Minister for Finance had not provided funds for their operationalization.

[15] See Luoga (2002) ‘Taxation in the Advent of Democratisation and Transition to Free Market Economy in Tanzania and the Concerns on the Rule of Law and Human Rights’, Law, Social Justice & Global Development Journal (LGD), 2002 (1) <