SPEECH BY THE MINISTER FOR FINANCE HON. BASIL P.  MRAMBA (MP), INTRODUCING TO THE NATIONAL ASSEMBLY THE ESTIMATES OF  GOVERNMENT REVENUE AND EXPENDITURE FOR THE FINANCIAL YEAR 2001/2002 ON 14TH JUNE, 2001.

  INTRODUCTION:

  1.         Mr. Speaker, I beg to move that this esteemed House now resolves to debate and approve Government proposals for Revenue and Expenditure estimates for the financial year 2001/2002.  The Government budget has been consolidated in four volumes which provide details of budget estimates.  Volume one presents Government revenue estimates; volumes two and three contain recurrent expenditure for ministries, government departments, regions, town and district councils, while estimates of development expenditure are in volume four.  In addition, there is the 2001/2002 Finance Bill.

  2.         Mr. Speaker,            before I table the 2001/2002 budget, allow me to express my appreciation to all those who participated in one way or another in the preparation of this budget. I would like to thank the Finance and Economic Committee of this Parliament for scrutinising the budget proposal in detail and for valuable advice which assisted in improving this budget proposal.  

3.         Mr. Speaker, the preparation of this budget involved a wide range of stakeholders and institutions.  Let me take this opportunity to thank the staff of President’s Office Planning and Privatization, all other Ministries, Government Departments, Regions and Councils, and other National Institutions for their valuable contribution to the preparation of this budget.  I would like to thank the Ministry of Justice and Constitutional Affairs for preparing the bills and notices for this budget.  I would also like to express my gratitude to my colleagues in the Ministry of Finance, in particular, the Deputy Minister for Finance Hon. Abdisalaam I. Khatib (MP), the Permanent Secretary Mr. Peter J. Ngumbullu, Deputy Permanent Secretaries Mr. Peniel M. Lyimo and Mr. Gray S. Mgonja, and all heads of department and staff of the Ministry of Finance.  Last but not least, I would like to thank the Government Printer for the timely publication of this budget speech, other books and  bills related to this budget.  

4.         Mr. Speaker, as we are winding up the 2000/2001 fiscal year, we note with sorrow that we have lost five members of Parliament, namely, the late Hon. John Ndugulile Mgeja who was Member of Parliament for Solwa, the late Hon. Bhikhu Mohamed Bhikhu who was Member of Parliament for Solwa, the late Hon. Ernest Nyanda who was Member of Parliament for Busega, the late Hon. Prof. Chrispin Hauli who was Deputy Minister for Finance and Member of Parliament for Ludewa, and the late Hon. Abbas Gulamali who was Member of Parliament for Kilombero.  May Almighty God Rest their souls in Eternal Peace.  

5.         Mr. Speaker, this is the first Budget Session after the October, 2000 general election in which the President and Members of Parliament were elected. Chama cha Mapinduzi (CCM) won a landslide victory.  This is the first budget speech following the general election which aims at implementing the manifesto of the Ruling Party – CCM.  I would kindly request you Honourable Members of Parliament to receive it with trust and confidence.

REVIEW OF IMPLEMENTATION OF BUDGETARY POLICIES FOR 2000/2001

 6.         Mr. Speaker, macroeconomic and fiscal developments during 2000/2001 are on track and in line with government’s objectives and targets. GDP grew by 4.9 percent in real terms in calendar year 2000 compared with 4.7 percent in 1999.  Inflation rate fell to 5.3 percent during the period ended March, 2001 and is expected to decline further to 4.9 percent by end  June, 2001.  Foreign exchange reserves reached USD 1 billion at end - March, 2001, which is equivalent to five months  imports of goods and non-factor services. This is a record level of reserves in Tanzania’s history.  

7.         Mr. Speaker, the collection of government revenue during July 2000 - March 2001 reached Tshs. 686,316 million compared to projection of Tshs. 647,209 million for the same period, reflecting an increase of Tshs. 39,107 million over the target.  The likely outturn for end June, 2001 has been revised to Tshs. 912,906 million compared to the budget estimate of Tshs. 861,402 million.  This is Tshs. 51,504 million or 6 percent above the original target.  

8.         Mr. Speaker, the Government has maintained the cash budget system during the fiscal year 2000/2001, for effective control of expenditure and efficiency in the use of public funds. Effective from December 2000, the Government started releasing funds for recurrent expenditure to priority sectors on a quarterly basis instead of monthly.  This approach has enabled priority sectors to be assured of availability of funds for effective planning of their expenditures. During this financial year, the Parliament enacted two laws for revenue and expenditure management regarding audit, and procurement.  These are The Public Finance Act 2001 and The Public Procurement Act 2001, replacing the Exchequer and Audit Ordinance of 1961.  The Acts which will become operational from July 2001, aim at further improving supervision, control and auditing of public funds and acquisition of goods and services by the Government. A further development during the year under review is that accounts of all Ministries are now connected to the computer network -Integrated Financial Management System, (IFMS). Currently, preparations are underway to connect all Sub-treasuries in the regions to IFMS, and the exercise is expected to be completed soon.  In addition, 28 district councils have been connected and 29 more district councils are being piloted to be on-line with a view to incorporating all councils as soon as possible.  

9.         Mr. Speaker, the budgetary allocations during 2000/2001 continued to observe and adhere to the government’s policy of according priority to social sectors (education, health and water), and economic infrastructure such as roads.  The October 2000 elections were also adequately funded, and as a result problems encountered in the 1995 elections did not occur this time.   Further, the Government continued to retire verified domestic debt and as at end of March 2001, Tshs. 7,630 million had been paid to suppliers and Tshs. 45,008 million to other domestic creditors including TANESCO, DAWASA and financial institutions.  

10.       Mr. Speaker, I would like to inform the House that all debt arrears and claims between the Union Government on the one hand, and TANESCO and DAWASA on the other, have been reconciled and settled.  In this respect, from January 2001 TANESCO and DAWASA do not have any claim on the Government on account of previous utility bills from their monthly allocations.  Beginning July 2000, each Accounting Officer was required to settle electricity, water and telephone bills from their monthly allocations instead of the Treasury as was the case in the past.  

 11.      Mr. Speaker, actual total expenditure during July 2000 - March 2001 reached Tshs. 906,905 million compared with estimates of Tshs. 985,394 million.  Of this amount, Tshs. 736,024 million was recurrent expenditure and Tshs.170,881 million  development expenditure.  It is expected that total expenditure will amount to Tshs. 1,493,899 million (1.49 trillion) for the whole year 2000/2001, slightly above the original budget estimate of Tshs. 1, 394,588 million (1.39 trillion).  

FOREIGN GRANTS AND LOANS 

12.       Mr. Speaker, during the first nine months of the year, July 2000 - March 2001, disbursements of external assistance from the international community, including multilateral financial institutions and bilateral donors were broadly in line with expectations.  Total disbursements for the period stood at Tshs. 353,065 million.  Out of this, Tshs. 198,218 million was realised from balance of payments (BOP) support, multilateral debt relief fund (MDF), poverty reduction budget support (PRBS) and special programme for the health sector and local government (Basket Funding).  The amount received under these programmes was more than the estimate of Tshs. 154,456 million for the period.  During the same period, Tshs. 118,974 million was received for development projects, below the original projection of Tshs. 248,889 million. In addition, Tanzania received interim debt relief of Tshs. 46,062 million provided under the enhanced Heavily Indebted Poor Countries (HIPC) initiative. 

STRATEGIES FOR ECONOMIC GROWTH  

13.       Mr. Speaker, during the past five years the Government has implemented important measures under economic and financial reforms aimed at building a strong foundation for sustainable development.  A number of strategic initiatives have been articulated and are being implemented, drawing on Vision 2025 which sets the goals and objectives to be attained in the long-term. 

14.       Mr. Speaker, the key requirement for reducing poverty is to increase incomes of the people and to improve delivery of social services.   The only way to raise income is for our economy to grow faster than the current growth rate of 5 percent.  We need the economy to grow at more than 8 percent per annum in real terms, then we can be confident of a sustained basis for reducing poverty.  When the economy grows at a higher rate, the tax base for domestic revenue expands and the capacity of government to finance poverty reduction and other national development activities will increase.   

15.       Mr. Speaker, the main source of increasing economic growth is the revival of agriculture, which supports 80 percent of Tanzanians. A sustainable growth rate of at least 5 percent in agriculture will have a significant impact on poverty reduction. The Government is in the process of finalising the Agriculture Sector Development Strategy, and my colleague, the Minister for Agriculture and Food Security, will elucidate this further when he presents his sector budget in the House.  

16.       Mr. Speaker, another important strategy for economic growth is the promotion and strengthening of the private sector, both domestic and foreign. The government has been supporting private sector development since 1993 through a number of ways, such as:

(i)  Macroeconomic reforms

(ii)  The Investment Acts of 1993 and 1997

(iii)  Privatization  of government owned enterprises

(iv)  Restructuring of TIC to focus on promoting investments

(v)  Reform of  the taxation  system

(vi)  Participation of the private sector in the formulation and development of policies such as in the financial sector, tax reforms, communication, transportation, energy, road sector development etc.  

17.       Mr. Speaker, the Government will sustain this policy stance and further, enhance the reforms geared towards creating a more conducive environment for investment to facilitate growth. This will in turn contribute more to national development and poverty reduction.  Areas in which reforms are on-going and will be accelerated, include:-  

POVERTY REDUCTION STRATEGY  

18.       Mr. Speaker, the government has prepared a comprehensive Poverty Reduction Strategy with participation of domestic and international stakeholders. The strategy was presented to and endorsed by the Executive Boards of the World Bank and the International Monetary Fund in November 2000.  While we were  preparing the Poverty Reduction Strategy Paper (PRSP), the government was simultaneously implementing certain agreed activities concerning  poverty. These included: improving statistics on poverty incidence in the country; strengthening institutional capacity for monitoring of our plans; ensuring that the government budget is focused towards poverty reduction; carrying out school mapping; continuing with the immunisation programme for children; strengthening the fight against the spread of HIV/AIDS; and continuing dialogue with other creditors in order for them to participate in the HIPC debt relief initiative.  In the meantime Tanzania is receiving interim debt relief from the World Bank, the International Monetary Fund, the African Development Bank Group and the Paris Club Creditors. As mentioned earlier, as at end of April 2001 we have received a total of USD 54.6 million in HIPC relief, equivalent to Tshs. 46,062 million.  

19.       Mr. Speaker, Tanzania expects to reach  HIPC completion point before December 2001. Meanwhile, the Government is finalising the PRSP Implementation Progress Report, which is a key requirement for reaching HIPC completion point. Indications are that, upon reaching completion point, the Paris Club creditors will write off all debts, while the IMF, the World Bank and the African Development Bank Group combined will grant debt relief of over 70 percent.  

20.       Mr. Speaker, in addition to implementing specific poverty reduction measures, we must continue to implement sound macro economic, fiscal and good governance policies. The important benchmarks are those related to fiscal management including increasing domestic revenue; controlling public expenditures; and improving business and investment climate, including the tax structure, economic and social infrastructure and other economic services.  

21.       Mr. Speaker, the National Poverty Eradication Strategy has to be accorded high priority through the involvement and participation of civil society and the international community, especially those development partners who have been supporting and continue to support us. Accordingly, we must address three things:-

 

(i) Set very clear and achievable national targets;  

(ii) Create a national economic environment that stimulates  national development;

(iii) Build a system for monitoring and evaluation.  

All these pillars are spelt out in the National Vision 2025 and in the PRSP. 

22.       Mr. Speaker, in a nutshell, the objectives, targets, and indicators of the Poverty Reduction Strategy do focus on three guiding principles:  

(i)                 Reducing income poverty

(ii)               Improving human capabilities, quality of life, survival and social well-being, and,

(iii)             Reducing extreme vulnerability amongst the poor  

Income poverty will be reduced by promoting activities which generate income for the poor. This will be achieved by increasing the real value added in agriculture, expanding traditional and modern investment for production, improving infrastructure, especially in the rural areas, developing support mechanisms and effective schemes for small and medium enterprises, and strengthening good governance and the rule of law.  Non-income poverty is a result of lack of basic education, bad health and social well being.  In order to improve human capabilities, it is important to ensure equal access to at least primary education, good health, the provision of clean and safe water, food security, nutrition, and safeguards against HIV/AIDS. 

23.       Mr. Speaker, bearing in mind the depth of poverty, and the fact that the private sector is still weak, the financing of the poverty reduction strategy will continue to be the responsibility of the government through the budget. The main source of financing will be domestic revenue bolstered by assistance from our development partners, including concessional borrowing from international financial institutions, and HIPC relief.  

24.       Mr. Speaker, at the moment we are still not sure exactly what the full cost of financing the poverty reduction programme will be in future.  This is partly because some key sector strategies like the Agricultural Sector Development Strategy and the Rural Development Strategy are still being finalised.  However, there is no doubt that the requirements will be in excess of available resources, and therefore, the need to strengthen domestic revenue base, improve public expenditure management as well as maintaining the good relationship we have with our development partners, and all others who support our development endeavours.  

OBJECTIVES FOR 2001/2002 BUDGET  

25.       Mr. Speaker, as I mentioned earlier, the thrust of the 2001/2002 budget is to implement the election manifesto of the ruling party which in general focuses on sustaining macroeconomic stability and at the same time increasing budgetary outlays to the priority sectors for poverty reduction. The overall economic, revenue and expenditure targets for the year 2001/02 are given below:  

(i)       To increase growth rate of the economy to 5.9 percent in 2001 and 6.2 percent in 2002. Economic growth in 2001 will be spurred by favourable weather conditions and the measures that I explained earlier.

(ii)      To reduce inflation (the rate of increase in cost of living) from 4.9 percent expected at end - June 2001, to 4.4 percent by end - June 2002.  

(iii)     To target the budget deficit (before grants and foreign financed projects) at 3.1 percent of GDP, higher than that expected during the current fiscal year (1.2% of GDP).  The increase in the projected fiscal deficit reflects the need to increase expenditure allocations to priority sectors for poverty reduction. These expenditures are for primary education, health, water, rural roads, agriculture, judiciary, and control of HIV/AIDS.  

(iv)    To increase total government expenditure (excluding foreign - financed development projects) from 13 percent of GDP (2000/01) to 15.2 percent of GDP for 2001/02; with non-wage expenditure for priority sectors increasing by 28 percent.  Wage bill will increase by 10 percent.  

(v)      To expand the tax base so that tax revenue to GDP ratio increases to 12.1 percent in 2001/2002.  

(vi)     To maintain foreign exchange reserves at a level equivalent to at least 4 months of imports of goods and services. Currently foreign exchange reserves stand at Tshs. 900,000 million, equivalent to USD 1 billion.  

Revenue Policies  

26.       Mr. Speaker, revenue policies for 2001/2002 are aimed at consolidating tax reforms which began in recent years, including expanding the tax base, improving tax administration, to enhance voluntary compliance, and eliminating tax evasion by unscrupulous traders. 

27.       Mr. Speaker, appropriate tax policies are necessary for the following reasons: 

(i)         the need to raise revenue to increase government capacity to finance  economic infrastructure, social services, law and order, and to service national debt. 

(ii)        the need to put in place a tax administration that minimises the cost of compliance.

 

(iii)       the need to improve the country’s international competitiveness.

 

(iv)       the need to put in place a predictable tax system.

 

(v)        to provide special tax inducement for selected  sectors  such as agriculture, and avoid  imposing a heavy burden on the poor.

 

28.       Mr. Speaker, these underlying objectives of tax policies are embodied in the new revenue measures, which I will present shortly. 

Expenditure Policies  

29.       Mr. Speaker, in the fiscal year 2001/2002  expenditure policies are  geared towards the government’s commitment of reducing poverty, as I highlighted earlier. However, increased  allocation of resources to priority sectors will have the desired effect  only if they are managed properly.  In this connection, the government will implement fully the Public Finance Act and the Public Procurement Act, both of which will become effective from 1st July 2001.  Further, the Government will restrain from building up of new arrears which result from unauthorised borrowing through procurement of goods and services by some government institutions. The Integrated Financial Management System (IFMS) is now operational in all the Ministries and has been extended to the regions in order to capture revenue and expenditure information on a real-time basis. The goal is to extend the system to all district councils. The Cash Budget system will be maintained with priority sectors given cash funds on quarterly basis, and other sectors continuing to receive funds on monthly basis, with indications of likely availability of funds in subsequent months. These changes to the cash budget system are directed towards helping Accounting Officers to enhance cash flow  planning and induce discipline in terms of planning and execution.   The system of cash budget has improved discipline in public finance management, and has reduced misuse of funds which was rampant in the past. 

30.       Mr. Speaker, another area where public resources have not been used properly and where immediate attention is required is in respect of special funds.  These include the Agricultural Input Fund, the Youth Fund, the Women’s Fund and others.  We all know that loans advanced to beneficiaries from these funds are not recovered, such situation renders the sustainability of the funds impossible.  A new procedure for managing such funds is under preparation.  This will involve using domestic banks to manage the funds on behalf of the government within the context of micro-finance regulations. In this regard there will be no disbursement under these funds until a new management system is put in place. 

31.       Mr. Speaker, in order for a country to plan its development effectively, it is important to have accurate information on the population of its citizens. Our country has not conducted a population census for more than 10 years.  In this case, we plan to conduct a population census across the whole country in August 2002.  Preparations for the census have to start now, and therefore the 2001/2002 budget has allocated Tshs. 8,000 million to finance the preparations for the exercise.  This exercise is of great importance, and I take this opportunity to appeal to all citizens to register themselves in order to ensure its success. 

CIVIL SERVICE WELFARE  

32.       Mr. Speaker, the Government recognises the unsatisfactory living conditions of public servants due to low pay. This situation not only lowers employees’ morale and productivity in the work place, but it also leads some of the public servants to involve themselves in dubious behaviour such as soliciting bribes and embezzlement of public funds.  To address this problem, the Government has allocated funds for salary adjustment in the 2001/2002 budget.  The amount set aside for this exercise is Tshs. 30,000 million.  The Civil Service Department will provide details of the adjustment after completion of analysis.  With regard to Pensioners, it is intended to increase the minimum entitlement by 20 percent.  Also during the coming fiscal year, following completion of the necessary preparations, the Government will implement the health insurance scheme for civil servants. Under this scheme, employer and employee each shall contribute 3 percent of the employee's salary towards health insurance.  The arrangement will be effective from 1st July, 2001 and the Government has made provision of Tshs. 11,000 million in this budget.  

Education Fund  

33.       Mr. Speaker, in April, 2001 this House passed the law establishing the Education Fund with the objective of supporting higher education.  One of the functions of this Fund will be to sponsor children from extremely poor families.   The Minister responsible for higher education will issue regulations and guidelines on the management of this Fund.  In this budget to begin with, the Government has set aside Tshs. 5,000 million for this purpose. 

Foreign Loans and Grants:  

34.       Mr. Speaker, despite the government’s efforts to increase domestic revenue collection, the expected amount is still inadequate to finance basic needs of the budget.  The Government will therefore continue to need assistance in the form of grants and concessional loans from our international development partners. 

35.       Mr. Speaker, the donor community is impressed by what Tanzania has achieved so far and has indicated its willingness to continue providing assistance. Implementation of the Poverty Reduction and Growth Facility (PRGF) sponsored by the IMF has entered its second year.  Under this facility in the year 2001/2002, USD 51.6 million or Tshs. 46,440 million is expected to be disbursed.  This disbursement will augment our foreign exchange reserves and enhance our ability to import goods and services and service remaining external debt.  Additionally, the World Bank is expected to disburse two floating tranches amounting to USD 80 million or Tshs. 72,000 million under the Programmatic Structural Adjustment Credit (PSAC) during 2001/2002.  It is estimated that the African Development Bank (AFDB) will disburse USD 25.0 million or Tshs. 22,500 million during the fiscal year. 

36.       Mr. Speaker, in addition to concessional loans from international financial institutions, Tanzania expects to benefit more from the enhanced HIPC debt relief as soon as we reach HIPC completion point, estimated at USD 100 million, equal to Tshs. 90,000 million per annum.  Moreover, in the year 2001/2002 we expect our donors to continue to support Tanzania and projections show that grants amounting to USD 225 million or Tshs. 202,500 million, through the Poverty Reduction Budget Support and Basket Funding mechanisms will be disbursed.  We project USD 336 million, equivalent to Tshs. 302,272 million to be disbursed, for development projects.    

37.       Mr. Speaker, I would like to request Honourable Members of Parliament to join me in sincerely congratulating H.E. Mr. Benjamin William Mkapa, the President of the United Republic of Tanzania on behalf of the people of Tanzania, particularly the poor, for his personal effort which has contributed immensely in boosting Tanzania’s relation with the international community. His emphasis on prudence in economic management and raising Tanzania’s image abroad as one committed to development, democratic principles, openness, transparency and good governance, has greatly raised Tanzania’s status.  Tanzania is among the first four HIPC countries to have developed a pragmatic and full poverty reduction strategy endorsed by the international community and thereby accelerating her qualification for debt relief.  

THE STRUCTURE OF 2001/2002 BUDGET ESTIMATES  

38.       Mr. Speaker, as I said earlier, the budget for 2001/2002 has the main objective of implementing the ruling party’s election manifesto, which regards poverty eradication as its top priority.  Based on economic policies explained earlier by the Minister of State, Planning and Privatisation, and those that I explained; and on the basis of existing tax structure; the Government projects revenue collection totalling Tshs. 991,198 million in fiscal year 2001/2002.  On the other hand, the government intends to spend Tshs. 1,764,737 million (1.76 trillion).  

39.       Mr. Speaker, with revenue projected at Tshs. 991,198 million on existing structure, and expenditures estimated at Tshs. 1,764,737 million, a gap of Tshs. 773,539 million emerges. For the year 2001/2002 external assistance in form of grants and concessional loans including debt relief is projected at Tshs. 649,643 million.  Of this, Tshs. 283,770 million are loans and grants that will be channelled through the budget under the various programmes, Tshs. 63,600 million will be saving from HIPC debt relief, and Tshs. 302,272 million loans and grants for development projects.   It is noted that some of the donors continue to provide assistance channelled outside the government budget.  It is the aim of the Government to ensure that all donor assistance is channelled through the exchequer system.  Contributions from external assistance will reduce the projected gap to Tshs. 123,896 million.   

40.       Mr. Speaker, the Government intends to draw down its reserve accumulated in the current fiscal year by Tshs. 69,910 million. In addition, the government expects to realise Tshs. 20,000 million from sale of some shares in previously divested parastatal enterprises. This will reduce the gap to Tshs. 33,986 million, which will have to be covered from new revenue measures.  

REFORM OF THE TAX STRUCTURE AND NEW REVENUE MEASURES

41.       Mr. Speaker, in an effort to improve the tax structure, fees and tax administration, it is proposed to make a wide range of amendments in the tax system.  The purpose of the amendments, which I am proposing, is to ensure realization of the objectives which I explained earlier.  These objectives include achieving the government revenue target set in this budget; rationalising the tax regime; reducing inconveniences and nuisances to tax payers; putting in place a conducive environment for better utilization of human and other resources in priority areas in the economy such as agriculture, industry, tourism, mining and trade.  Moreover, the reform of the tax system will greatly assist our Poverty Reduction Strategy.  

42.       Mr. Speaker, the Government is proposing to make changes in the following areas:  

  1. The Customs Tariff structure

  2. The Income Tax structure

  3. The Value Added Tax structure

  4. The Excise Tariff structure

  5. Introduce a new Tax on Games of Chance

  6. Local Government Levies and Fees

  7. Amendment to various legislations

  8. Airport Service Charge

  9. Land Rent on commercial farms

  10. Levies and Fees collected by the Central Government  

The Customs Tariff Structure 

43.       Mr. Speaker, concerning the customs tariff structure, the following amendments are proposed:   

(a)               The non-zero import tariff bands be reduced to three from the current four.  As a result of this proposal, the new rates of import duty compared with current ones will be  as follows:-

 

Current Tariff Rate

Proposed Tariff Rate

Description of Goods

 

0%

 

0%

Inputs for agriculture, animal husbandry and fishing; human and livestock pharmaceuticals and medicaments; motor vehicle in CKD form; and inputs for manufacturing pharmaceutical products.

5%

0%

Raw materials, capital goods and replacement parts

10%

10%

Semi-processed inputs and spare parts other than for motor vehicles.

20%

15%

Fully processed inputs and motor vehicle spares.

25%

25%

Final consumer goods

 

44.       Mr. Speaker, the effect of these amendments is that there will now be only three rates of import duty (other than zero) that is, 10, 15 and 25 percent in that order.  Goods which currently carry a duty rate of 5 percent will have no duty charged.  It is the expectation of the Government that this measure will reduce the cost of production especially with respect to industries.

45.       Mr. Speaker, the reform of the customs tariff structure is expected to result in revenue loss of Tshs. 18,791 million.  Side by side with this loss of revenue, the new customs tariff structure will reduce revenue from VAT on imported goods by Tshs. 1,939 million.

Revocation of Government Notice (GN) no. 433 of 2000

46.       Mr. Speaker, following the custom tariff structure reform I have explained above, there is no need of retaining GN. No. 433 of 2000.  This notice was meant to adjust the rates in the Harmonised Tariff Book applying to certain raw materials/inputs used by local industries in order to grant preferential import duty treatment.  The newly proposed rates will take care of that objective. This measure is expected to result in loss of revenue by Tshs. 3,500 million.  

Imposition of Suspended Duty on Certain Imported Goods  

47.       Mr. Speaker, in order to address dumping and transhipment, which imposes unfair competition upon domestic industry, it is proposed to impose suspended duty on certain imported goods.  The list of goods to be affected is in the Finance Bill, 2001. This measure will generate new government revenue by Tshs. 2,400 million. 

New Procedure for Valuation of Imports  

48.       Mr. Speaker, consistent with the rules of the World Trade Organisation (WTO) of which Tanzania is a member, the procedure for  valuation of goods for taxation purposes has changed.  The procedure known as “Agreement on Customs Valuation (ACV)” is now in use.  That is to say, Minimum Dutiable Values (MDV) are no longer used as the basis for tax assessment; with the exception of Sugar which is governed by a special agreement between the government and the investors.  

49.       Mr. Speaker, I am proposing to amend  Government Notice No.133 of 1996 in order to place a cap on the import duty charged at 5 percent per month on temporary importation of hunting equipment and tools for professional hunting. This measure is aimed at addressing  complaints aired by the tourism sector that the tariff was inhibitive. This measure has no implication on government revenue.  

Amendment of Income Tax Structure 

50.       Mr. Speaker, it is proposed to make certain amendments in the area of income tax as follows:

(a)   Withholding tax on goods and services is abolished for holders of Tax Identification Number (TIN). This measure will result in a revenue loss of Tshs. 12,179 million.  

(b)   The additional 15 percent capital allowance on unredeemed expenditure under the Mining Act, 1998 be maintained for the existing investors only.  New investors should not be granted this incentive.  This move stems from the fact that Section 17 of this Act already allows 100 percent capital allowance deduction.  Moreover, this measure will assist in simplifying tax administration in the Mining Sector.  This proposal will have no effect on government revenue.  

(c)   To amend section 87(1) of the Mining Act, 1998 which allows mining companies to defer payment of Mineral Royalty or to obtain refund of paid royalty when cash operating margins fall below zero. I propose that this section of the Act be applied only to existing investors.  This amendment is not expected to have any effect on government revenue in the short-run.  

(d) I propose to merge the Housing  Levy with Vocational Education Training Authority (VETA) Levy  to become one levy to be known as “Vocational Training Levy”. The levy will be charged at 6 percent of wage bill. This levy will now be collected by Tanzania Revenue Authority (TRA) and will be shared as follows: Two thirds will be remitted to the Treasury, and one third will be remitted to VETA. This measure will reduce employment cost while it does not reduce revenue either for the government or VETA.  

(e)  I propose to abolish Withholding Tax on interest on foreign sourced loans.  This proposal is aimed at rationalisation and improving the investment environment. This measure will render revenue loss of Tshs.378 million only.  

(f)  I propose to revoke the section on Deemed Dividends in the Income Tax Act, 1973. This measure removes  powers of the Commissioner for Income Tax to declare dividends in the event of non-declaration by a company.   This will reduce inconvenience which tax paying companies currently face.  

(g)   I propose to abolish advance payment of income tax which individuals or groups are obliged to pay prior to commencement of business.  This proposal is intended to enable people especially those wishing to enter micro and small scale businesses to obtain business licenses and to do legitimate business, which they fail to do currently as they cannot pay the tax and resort to doing business without licenses.  Revenue loss estimated from this measure is Tshs. 3,179 million.  

The Value Added Tax (VAT)  

51.       Mr. Speaker, in the area of VAT I am proposing to make the following amendments:

 

(i)  I am abolishing VAT exemptions to Government and its institutions.  This means that central government, local governments and institutions that derive their budgets from the Government will pay VAT on their purchases. However, exemptions will remain for goods and services for projects which are financed by donors, voluntary and charitable organisations under existing law and special agreements. This measure is expected to earn the Government new revenue to the tune of Tshs. 56,000 million for the year 2001/2002.  

(ii)      In view of a new “gaming tax” which I will propose shortly, the VAT currently paid on games of chance will be removed so as to simplify collection of the new tax.  This measure is expected to reduce the government revenue by Tshs. 2,000 million, which will be recovered from the new tax.  

(iii)      I am abolishing VAT on ground transport run by Tour Operators.  The aim of this measure is to bring about fairness and equity in the taxation of tourism business.  This measure will result in revenue loss of Tshs. 500 million.  

(iv)     I propose to abolish VAT on milk packaging materials. This measure is aimed at reducing the cost of locally processed milk to make milk affordable and to provide a milk market for livestock keepers. This proposal will reduce revenue by Tshs. 400 million. In addition, it is proposed to ban the importation of powdered milk and impose suspended duty at a rate of 25 percent on all other types of imported milk with exception of infant milk (Infant Formula).  

(v)      I propose to remove VAT on computers, printers and their accessories.  This measure is aimed at hastening the pace of Tanzania entering the 21st century in the era of globalisation, communication and growing dependence on the Internet.  This is also intended to motivate the Youth to engage in computer related activities in the same way as their counterparts worldwide do.  It is my expectation that schools, colleges, and other institutions of learning will take advantage of this move to intensify computer teaching. This measure will reduce government revenue by Tshs.1,544.0 million.

(vi)     I propose to abolish VAT on hospital equipment and all taxes for drugs used by those affected by HIV/AIDS, Malaria and Tuberculosis (TB).  This proposal has the objective of increasing the availability of diagnostic equipment, treatment equipment, machinery, and life saving drugs.  It will provide relief to the health sector and reduce the cost of  equipment and machinery which are very expensive even without taxes. In particular, this move will reduce the cost of treatment abroad and is not expected to reduce government revenue.  The proposal to provide tax-free medication for HIV/AIDS victims is aimed at elongating life span of patients and is in line with current national and international thinking.  It should be reiterated that there are no drugs to cure the disease and that the drugs are still only available at a very high cost.

 

(vii)    I propose to abolish VAT on locally produced yarn.  This proposal is aimed at reducing the cost of yarn and increasing employment of small scale weavers who use handlooms.  This measure will reduce government revenue by Tshs. 9 million only.

 

(viii)   I propose to abolish VAT on capital goods for investment in education projects.  This proposal is intended to attract investment in schools, colleges and institutes with international standards and change the current situation in which many parents are forced to send children to other countries even for primary schooling, especially to neighbouring countries.  This measure responds to complaints from the public that the tax policy is retarding investments in modern education.  There will be a loss in government revenue of Tshs. 88.7 million only.  

The Structure of Excise Tariff 

52.       Mr. Speaker, the Structure of Excise Tariff is proposed to be amended as follows:

(a)               I propose to amend excise duty rates on petroleum products as follows:

 

 

Type of Product                                                Shs. Per Litre

 

(i)            Liquefied Petroleum Gas (LPG)                     228.0

(ii)         Motor Spirit Premium            (MSP)               146.0

(iii)        Motor Spirit Regular            (MSR)               135.0

iv)         JET A-1                                                   56.0

(v)            Illuminating Kerosene            (IK)                   122.0

(vi)        Gas Oil                         (GO)                 127.0

(vii)            Industrial Diesel Oil            (IDO)                 201.0

(viii)       Heavy Furnace Oil            (HFO)                 35.0

 

This adjustment is aimed at protecting revenue that will be lost following the abolition of the import duty rate of 5 percent under the reforms I explained earlier on the customs tariff structure.  There will now be three taxes only on petroleum products namely, Excise Duty, VAT and Fuel Levy.  This measure will protect government revenue by Tshs. 8,311 million.  I would like to emphasize here that this proposal does not increase tax on petroleum products except it is reducing the number of such taxes.

 

(b)               I propose to reduce the excise duty on wine produced using locally grown grapes, from the current Tshs.700 per litre to Tshs. 350 per litre.  This proposal is aimed at reviving grape farming and expanding the winery industry in the Dodoma region and therefore contributing to reducing poverty.  This measure will reduce government revenue by Tshs. 1.2 million only.

 

(c)               Alongside this, I propose to introduce Tax Stamps on imported wine in order to curb tax evasion on this product and to protect the local wine industry.  Imposition of Tax Stamps on imported wine will commence in January, 2002.

 

(d)               I propose to adjust excise duty by 5 percent on cigarettes, beer and soft drinks (soda), consistent with inflation. This adjustment will earn the government excess revenue of Tshs. 3,624.0 million in 2001/2002.

 

New Tax on Games of Chance

53.       Mr. Speaker, as a result of experience which the Government has now gained with respect to Games of Chance, I propose to introduce Gaming Tax.  I propose that the new tax  be as follows:

 

(i)            Casino:

(a)              Tshs.500,000 per table per month

(b)              Tshs. 100,000 per machine per month.

 

(ii)               Private Lotteries: 60 percent of total gross

           sales.

(iii)             Slot Machines: Tshs.20,000 per machine

           per month.

This new tax is expected to yield revenue for the government of Tshs. 7,000 million in 2001/2002. I propose that the proceeds from Gaming Tax on Private Lotteries be shared as follows: 92 percent to accrue to Treasury and 8 percent to the regulating body.

 

Local Government Levies and Fees

54.     Mr. Speaker, in this area, I would like to make a reminder that:-

 

(i)                 The legal requirement to the effect that the Minister responsible for Local Government should consult with the Minister for Finance before making any amendments to legislation on levies and fees for Local Governments needs to be enforced.  This is due to the fact that it is still evident that national policies pronounced by Minister for Finance often conflict with levies and fees introduced by Local Governments. This measure is aimed at removing nuisance resulting from multiplicity of taxes affecting especially farmers, businesses and investors.

 

(ii)               The cap of 5 percent on produce and livestock cess be enforced. This will address the complaints raised by villages and co-operatives that this cap which was legislated in 1999 is not enforced.

 

(iii)             I propose to transfer the issuance of the following licences from Local Governments to Central Government:

 

(a)               Import Trade

(b)               Commission Agents

(c)               Manufacturers’ Representatives

(d)               Travel Agents

(e)               Tourist Camps

(f)                 Motor Vehicle Dealers

(g)               Tour Operators

(h)               Goldsmiths.

 

These licenses will be issued by Authorities responsible for regulating respective areas. This measure is aimed at rationalising regulation in areas which are of a national and international character.

 

(iv)             I propose to transfer to District Councils, registration and licensing of  small scale industry and all micro enterprises.  This measure is aimed at rationalisation of various licenses between central and local governments in a bid to reduce costs to taxpayers.

 

(v)               I propose that the conditions for issuance of business licenses be substantially simplified. One method to achieve this is to have a one stop centre for issuance of business licenses at village, district, region and ministerial levels.

(vi)             It is proposed to abolish professional license fees for employees because they are a nuisance, they increase cost of employment, and hinder employment especially of educated citizens.

 

(vii)           I propose that the Immigration Law be harmonized and rationalized with the Business Licensing Act to remove complications affecting investors.

 

Amendment of Other Certain laws

55.    Mr. Speaker, in this area it is proposed to make the following amendments:

 

(i)            Concerning Road Toll Act, 1985, I propose to change the name “Road Toll” to “Fuel Levy”.  The purpose of this amendment is to remove confusion which has emerged where tax payers who do not use roads or whose businesses compete with road haulage, for instance railways, marine vessels or plantation equipment say they should not pay road toll.  Road Toll Act should therefore be amended so that all “fuel users” pay the tax, regardless of whether or not they use roads.

 

(ii)               I propose to amend the Stamp Duty Act, No. 20 of 1972 as follows:

 

(a)              Stamp Duty on Lease Agreements be 0.96 percent or Tshs. 10 million whichever is lower.  The aim is to reduce the cost of lease agreements which stakeholders have been protesting against.  This will also reduce the cost of doing business.

 

(b)              Stamp Duty on proceeds from sales of agricultural produce be abolished.  This duty has been a nuisance to farmers; its removal will safeguard farmers’ income and help to reduce poverty.

 

(c)               Stamp Duty on proceeds from rental income be reduced to 1.5 percent.  The aim is to create a conducive environment for investment in the housing sector and to check evasion.  This measure will reduce revenue by Tshs. 896.0 million.

 

Airport Departure Service Charges Act, 1985      

 

56.       Mr. Speaker, in this area, I propose to make the following amendments:-

 

(i)         To increase the rate of tax on air travel out of the country to USD 30 from the current rate of USD 20.

 

(ii)               To increase the rate of tax on domestic air travel  from the current Tshs. 3,000 to Tshs. 5,000. 

This measure is expected to generate additional revenue of Tshs. 2,640 million.

 

Land Rent on Commercial Farms

57.       Mr. Speaker, I propose to reduce the Land Rent on commercial farms from Tshs. 600 per acre to Tshs. 200 per acre per annum on agricultural farms, livestock ranches, and forests.  This measure will have no impact on revenue because currently it is not collected as holders of commercial farms  claim they cannot afford the rent.  The objective is to encourage expansion of large scale farms and avert hoarding of land, and at the same time emphasise the importance of paying tax on this resource.

 

Levies and Fees collected by Central Government

 

58.       Mr. Speaker, it is recommended to make amendment on the structure of levies and fees collected by central government.  The purpose of this amendment is to rationalise the rates of levies and fees.  Details of the rates being proposed are given in the Finance Bill, 2001.

 

Border Trade

 

59.       Mr. Speaker, recently the Heads of State of East African Community Member states agreed to put in place an environment conducive to encouraging cross-border investments in economic activities, infrastructure, and trade between countries within the Community.   Simplification of border trade was emphasised in order to motivate legitimate trade among the people of East Africa.  Accordingly, import tariffs on cross-border trade have been reduced substantially. Exports from Tanzania and Uganda to Kenya will enter with import duty reduction of 90 percent. For instance if import duty in Kenya is 25 percent, exports from Tanzania to Kenya will be charged only 2.5 percent.  Goods from Tanzania to Uganda will get a reduction in import duty of 80 percent.  Therefore, if import duty in Uganda is 25 percent then goods from Tanzania will enter Uganda at import duty of only 5 percent.  Under this arrangement, goods exported from Kenya to Uganda or Tanzania will get a reduction in import duty of 80 percent.

 

60.       Mr. Speaker, the tariff reduction in the East African Community area presents a challenge to our people to make use of the expanded market.  I have instructed regional Customs Offices to increase public awareness through publicity campaigns, for example through posters etc. They should also simplify customs procedures to motivate people to do legitimate trade to take advantage of  the low tariffs.

 

Effective Date for  the New Tax Regime

61.       Mr. Speaker, the tax measures I have proposed will be effective from 1st July, 2001 except where it is stated otherwise.

 

Recap

 

62.       Mr. Speaker, the proposals for amending taxes and levies have the objective of improving the tax regime in order to expand the tax base through increasing compliance, removing nuisance taxes especially in the area of agriculture and animal husbandry, improving Tanzania’s international competitiveness, creating a conducive and transparent investment environment, and enhancing social development consistent with the Poverty Reduction Programme. In short, these proposals are intended to stimulate rapid economic growth and poverty reduction.

 

 

Summary

 

63.       Mr. Speaker, the summary of proposed measures and their outcome in terms of revenue are as follows:

 

 

Measure                                                       Revenue

                                                                (In Billion Tshs)

 (i)         Amendment of Customs Tariff Structure       -21.830

(ii)                 Amendment of Income Tax Structure                 –15.737

(iii)                Amendment of VAT                                     51.458

(iv)                Amendment of Excise Tariff                      11.934

(v)                  New Gaming Tax                                6.417

(vi)                Amendment of Airport Service

            Charge structure                                       2.640

(vii)               Amendment of Stamp Duty                    -0.896

     Total     33.986

 

The net revenue of Tshs.33,986 million bridges the resource gap  explained earlier, and the budget for 2001/2002 is fully financed.

 

The Budget Frame

64.       Mr. Speaker, on the basis of the budget structure  explained above, the budget frame for 2001/2002 will be as follows:

 

 Revenue                                       (In million Tshs)

A.     Domestic Revenue                 1,025,184

(i)  Tax Revenue                      892,228

      (ii)  Non Tax Revenue                 98,970

      (iii) New revenues                            33,986

 

B.          Foreign Loans and Grants

Including HIPC                              649,643

 

C            Drawdown on  Reserve                    69,910

 

D.         Privatisation Proceeds                       20,000

                         Total Revenue                 1,764,737

 

Expenditure

E.          Recurrent Expenditure                    1,412,225

(i)  Public Debt (CFS)            332,590

(ii  Ministries                         625,610

(iii) Regions                                   20,519

(iv) Special Expenditure         232,387

                    (a)     Health Insurance         (10,973)

                    (b)    Tax Refund                  (56,000)

                  (c)    HIV/AIDS                    (4,443)

                  (d)  Primary School fees     (11,000) 

                  (e)  Suppliers Arrears        ( 41,900)    

                  (f)   Others                    (108,071)          

 

         (v) Local Governments                    2 01,119

(a)   Urban          37,039

(b)   District          164,080

 

F.        Development Expenditure              352,512

(a)   Domestic      47,240  

(b)   Foreign        302,272 

(c)    Songo Songo  3,000  

 

Total Expenditure             1,764,737

 

 

CONCLUSION

 

65.       Mr. Speaker, this budget frame bears out the extent to which our country is still dependent.  Our domestic revenue can only finance 58 percent of total expenditure.  This means that about 42 percent of our budget is dependent on foreign assistance.   This is clear evidence that growth is inadequate.  The economy needs to grow at 8 percent or more per annum in order to increase self reliance and reduce poverty.

 

66.       Mr. Speaker, the budget I am proposing today intends to direct the nation’s efforts towards increasing growth and thereby reducing income poverty.  This is in accordance with the National Development Vision 2025, which sets the goal of reducing the incidence of absolute poverty from 48 percent to 24 percent by year 2010.   Rural poverty is to be reduced from the current level of 57 percent to 29 percent by 2010.  The best way of achieving these targets is to fully implement the agreed policies and strategies for agriculture, livestock, tourism, basic industries and mining.  However the people themselves are the only ones who can sustainably uplift their living standards by employing their skills and hard work, especially in the agricultural sector.  This is because, poverty is prevalent at the very micro level – among families and individuals, and this is not theory.  Let us remind ourselves that in order to develop, we need people, land and good governance.  This budget has put in place a conducive environment for everyone to pursue their own development under conditions of peace and harmony.

 

67.       Mr. Speaker, this budget, as will be elaborated later by different sector Ministries when presenting their sector development policies and strategies, is an initial process of fighting non-income poverty. The HIPC programme, if implemented as planned, will allow our children to be educated, will increase food security and nutrition for the poor, will reduce the spread of HIV/AIDS, will strengthen human rights and support good governance based on democracy and the rule of law. In addition, the programme aims at reducing the rates of both infant mortality     (children below 5 years) and maternal mortality.  Further the programme will hasten the provision of clean and safe water to people residing in both urban and rural areas as well as increase the number of tarmac and all-weather roads for the benefit of peasants, producers and businesses in general.

 

68.       Mr. Speaker, all this will be possible only if the implementers undertake to perform their responsibilities diligently and efficiently.  This requires sustained consideration of ways to overcome capacity constraints in the Ministries and District Councils.   There is still misuse and theft of government property, there are still people who are lazy in the Civil Service.  Therefore, I am urging the leaders, especially the Members of Parliament to be eager and strict in supervising management of government property and finances.  It is worrying to see this responsibility discharged by Ambassadors of donor missions while we watch.

 

69.       Mr. Speaker, this budget has also tried to help the poor including workers, peasants, small traders, and those who cannot afford to send their children to school.   This budget has provided an opportunity for graduates to venture into the field of education and the IT industry.  It has also provided a boost to the Small Industries Development Organisation (SIDO) and small businesses by abolishing the payment of start-up tax at the commencement of business.  For goods crossing the borders, within East Africa, custom duties have been reduced with the aim of discouraging the flow of goods through unofficial routes, but instead promoting open and legitimate trade. 

 

70.       Mr. Speaker, this budget has taken into account advice and recommendations made by various experts, the business community and manufacturers, tour operators, transporters, hunters, donors, international advisors, and farmers.   It has considered the views of Members of Parliament, particularly those expressed in the Finance and Economic Committee Meeting.   I wish to extend my gratitude to all those who offered their advice and suggestions for the preparation of this budget.

 

71.       Mr. Speaker, I take this opportunity to acknowledge that although we have made considerable progress in revenue collection, with average collection of Tshs. 76,000 million per month, a large part of potential revenue still remains uncollected due to intentional tax evasion.  It is no secret, for example, that most of the shop owners offer two prices, one inclusive of VAT and one excluding VAT.  Therefore, many customers do not demand receipts upon purchase, without realising that they are participating in tax evasion.   I therefore impress upon my fellow citizens that when they purchase goods or services from shops, they should insist upon getting  receipts for them, so that the laws are enforced. The Government has succeeded in a big way to curb  opportunity for tax evasion in the petroleum sector following the  introduction of labelling of white petroleum products. This measure has with it harsh penalties for those found selling unmarked petroleum.  Further efforts are being made to introduce additional measures to reduce opportunities for tax evasion.  As I explained earlier, the decision to make the Government pay tax on its purchases is one way by which the Government itself can fight tax evasion.  

 

72.  Mr. Speaker, the second problem is in the realm of taxation policy, particularly with regard to existence of multiple tax authorities: Local Government, the Minister for Finance and Parliament.  Complaints related to the multiplicity of taxes and licensing arise from the fact that District Councils use their by-laws to increase marginal tax rates above what has been already approved by the Minister for Finance and the Parliament or introduce new levies and fees as they wish.  It is my intention to address this problem in the next fiscal year, and I would appreciate comments from the Honourable Members of Parliament on this area.

 

73.       Mr. Speaker, another controversial area in the taxation system is related to exemptions.  Following a daunting experience in recent years, the Government has decided to reintroduce tax exemptions for religious and non-profit service delivery organisations.  This decision will be enforced through Government Notices and will address problems encountered by those organisations.  However, tight control will be instituted to avoid dishonest practices.

 

74.       Mr. Speaker, I beg to move.