What might the Budget hold in store for excise duty on goods, or on fuel taxes?

The key challenge in this year’s Budget is for the Minister for Finance to identify measures that widen the tax base and thereby significantly increase tax revenues.  At the same time – and in the spirit of improving the economy – he needs to ensure that the budget catalyses rather than curtails economic activity, in other words it should be expansionary.  

Indirect taxes (namely taxes on imports, and on local consumption) are a particular focus of attention at budget time as these comprise approximately 60% of all collections.  Although the general customs duty rates (agreed at an EAC level) do not change, there are normally some product specific measures to protect local industry; VAT generally does not change - the last rate change was in 2009 when the rate reduced to 18% from 20%; so the focus tends to be on excise duties and fuel taxes.

Excise duty on consumer goods has typically been applied to goods seen as discretionary or luxury spend, or with adverse health or environmental impact (hence the term “sin tax”).  In particular, apart from application to fuel (discussed above), it has been levied for many years on alcohol and tobacco products, soft drinks (mostly at specific rather than ad valorem tariffs) and certain vehicles (ad valorem basis); these items remain the main sources of excise on non-petroleum goods, albeit recent years have seen an extension of the scope of excise duty to a wider scope of goods.

The practice in many (but not all) years has been to adjust fixed excise duties on non-petroleum products, and normally by an amount equivalent to inflation.  However, the trend has not been consistent - for example, the last three budgets have seen no increase on specific excise duties on local goods. The challenge this year in considering an increase in such excise duty, if any, is what is a very much constrained consumer wallet.  Against this background, the concern is whether an increase in such taxes will result in increased revenue or not (once any impact on demand is considered); and indeed, this is presumably the thinking that informed the decision not to increase rates in the most recent years.

A very significant component of excise collections is the excise duty on electronic communication services - but this is charged on an ad valorem basis (percentage of value) so unlike fixed tariffs there is no need for an adjustment for inflation.  The current excise duty rate (17%) is the highest in East Africa, and second highest in Sub-Saharan Africa

So with limited if any scope for increase of excise duty on services and on non-petroleum consumer goods, where else to look?  Well,  one area to consider might be fuel taxes, which are a significant contributor to tax collections - typically, in previous years representing approximately one third of total taxes on imports, or around 13% or 14% of total tax revenue.

The taxes on fuel (excise duty, road toll, petroleum levy) are calculated on a specific rather than ad valorem basis – in other words, fixed TZS amounts per quantity rather than percentage of value. Ordinarily, specific tariffs should be adjusted on an annual basis for inflation so as to maintain the real value of these taxes.  However, unlike other fixed tariffs (eg excise on alcohol, tobacco, soft drinks) in recent years there has been a reluctance to adjust fuel taxes – the last increase being a TZS 40 excise duty increase in 2017, mainly to compensate for the loss in revenue resulting from the abolition of the annual motor vehicle licence fee.

In fact since 2007, and prior to 2017, the only changes were in 2013 (introduction of petroleum levy at TZS 50/litre and TZS 63/litre increase in road toll) and in 2015 (increase in petroleum levy to TZS 100/litre and additional TZS 50/litre in road toll). So if one compares the position now with 2007, then taxes on fuel are much lower in real terms.

Given that fuel is a necessity, its demand is not as elastic as other consumer products and so in principle such tax rises will normally generate additional revenue.  A key question will be whether this budget will see a change to fuel taxes to adjust for inflation.  One approach to rebasing taxes on fuel would be to subject them to VAT, and if so then some element of downward adjustment on fixed tariffs so as to not have too excessive an impact on the pump price.  The approach of incorporating VAT as opposed to upward adjustment of fixed tariffs would be one that would be more beneficial for VAT registered businesses (as they can recover the VAT as input tax). 

Apart from being an economic instrument, the budget is also a political instrument - and the lack of automatic fuel tax increases in recent years, is a reflection that politics often wins.  In particular, fuel taxes are sensitive because they automatically feed through to the pump price and with that create a political reaction.  However, one approach to manage this might be to have an automatic mechanism to adjust these taxes not at budget time but periodically - for example, an indexation adjustment on a quarterly basis.

It is important to remember that fuel purchases do have a big impact on the country’s balance of trade position – and changes in international fuel prices do significantly influence the exchange rate of the TZ shilling. Given this wider macro-economic impact, taxes can also have a role to play in managing demand.

Given the economic challenges driven by the global pandemic, the Budget preparation process this year will be even more challenging than usual. Whatever the case, I would argue that in considering potential changes now is the time for the Minister for Finance to prioritise the economic drivers.

By Jafari Mbaye is an indirect tax manager at PwC Tanzania.