- Tanzania gives six months tax break to domestic start-ups, usually Small and Micro Enterprises (SMEs).
- Foreign companies in Tanzania enjoy a five-year tax holiday as permitted by the investment law.
- At the moment, new Tanzanian businesses are required to full tax payments despite the availability of this six months’ tax break provision
Start-ups in Tanzania are given six months of tax holiday as the government looks to boost the private sector competitiveness but a quick survey on the ground by The Exchange shows the program still lags behind.
The move to extend a tax holiday comes in the wake of persistent outcry by the private sector over the unfair competition by foreign companies that can afford to offer lower prices for their services and/or products.
However, does a reduction in taxes equate to improved productivity, increased efficiency and higher quality of services or products?
There is an overarching argument that cautions against the government’s move citing the quality of locally made products as the main reason the market is trending towards foreign products over the domestic offerings.
The argument, true or false, has sparked conversations in high places the latest being in the August House. Most recently, Tanzania’s Deputy Minister of Finance and Planning, Hamad Hassan Chande announced that the government will in fact consider tax breaks for Tanzanian start-ups in an effort to support domestic companies.
The tax breaks for Tanzanian start-ups do not necessarily favour newly minted local firms, but rather, it only allows them a chance to compete on a level playing field, the Deputy Minister told the House.
According to the government official, foreign companies in Tanzania already enjoy a five-year tax holiday as permitted by the investment law. Tanzania’s Financial Act of 2019, allows the taxman “to issue a six-month tax holiday to start-ups,” and as such, it should extend this law’s provision to the country’s start-ups.
The legislator would, however, like Tanzania to increase the tax break period from six months to one-and-a-half years.
Read: Why Tanzania must curb taxation flaws
“I suggest that the government make amendments to the investment law as well as the financial legislation to extend the tax holiday to new businesses to a period between 12 and 18 months,” he noted.
The law is not clear or rather its implementation is dubious at best because, at the moment, new Tanzanian businesses are required to full tax payments despite the availability of this six months’ tax break provision.
The issue here is that to get the tax clearance, an inspection of the business in question must be conducted, for the business to be set up and hence be legible for inspection, it must first obtain a business license, to get the business license, they must first pay taxes.
“The financial law allows new start-ups to enjoy a tax exemption of at least six months…but tax clearance comes after an assessment is done. Entrepreneurs are however required to pay a substantial amount before the tax clearance is printed out,” the Tanzania National Assembly was informed.
Short of addressing this law discrepancy, many start-ups end up as mere ideas never to be realized because of the high tax charges. Those that do afford the taxes are in turn forced to transfer the extra cost on their final products or services which in turn makes them too expensive to be competitive. In the long run, even those start-ups that do enter the market cannot be profitable and end up closing.
Their foreign counterparts, however, enjoy a five-year tax holiday and can afford to sell their products or services at considerably lower prices compared to the Tanzanian companies. This fact makes them profitable and can easily expand their markets and increase production.
According to the Office of Treasury Registrar, there are more than a million job seekers entering the Tanzania labor market every year, but the country’s capacity to create new jobs is less than 40,000 per annum in the public sector and 300,000 in the private sector, that leaves a huge dent in employment.
It is no wonder that youth unemployment in Tanzania is worsening every year and that is also the very reason why the government is pushing for self-employment among youth. Entrepreneurship and innovation are the solutions to Tanzania’s unemployment crisis.
According to the World Bank 2017 report, the number of new startups in Tanzania grew by 33 percent, and the potential for further growth and survival is immense.
At Tanzania Startup Association (TSA) is the apex body for newly established firms to work with key stakeholders, policy, and decision-makers to create a conducive environment for business.
“I am convinced startups will be game changers in Tanzania in the next ten years. The next generation of Tanzanian millionaires will come from startups,” TSA Chairman says.
However, the Chairman admits that the challenge remains in financing and that encompasses government taxes when registering and operating startups in Tanzania. It remains to be seen if the government will allow startups to enjoy the legally instituted six-month tax clearance when a startup registers.
To this end, incubators, hubs, and accelerator programs are crucial components of any startup ecosystem and must be supported through friendly government policies to allow Tanzanian startups to get the push they need.
Read: Tanzania, Qatar end double taxation inking trade and investment pact
“In Tanzania, these programs are still in their early stages of development, but there are several promising initiatives that are helping to foster a more supportive environment for startups in the country,” notes Jon Lubwama, a Startup and Venture Capital specialist from Uganda.
He underscores the importance of incubation programs and hubs citing the need for office space, internet connectivity, and mentorship programs.
“A good example is Buni Hub in Dar es Salaam which also hosts events and workshops aimed at promoting entrepreneurship and innovation,” Lubwamba points out.
Another example of a startup hub in Dar es Salaam is Kinu, which also provides startups with access to office space, mentorship, and training programs. Such institutions are vital to compensate the employment gap in Tanzania.
If youth are expected to elf-employ, then there should be supportive laws and policies that allow access to funding, incubator programs, and most of all, laws to protect startups against heavy taxation upon registration.
