The tax refund processes has been saved
The tax refund processes
A case for improvement
The saying ‘Kiendacho Kwa Mganga, Hakirudi’ may ring true for many taxpayers who have sought to get refunds of overpaid taxes. Many of them will have experienced hurdles when following-up on tax refunds from the Tanzania Revenue Authority. In many cases, taxpayers wait for months for their refund applications to be processed, let alone be paid.
The law does allow taxpayers with overpaid taxes to request a refund. The legislation guiding the tax refund applications gives the Commissioner General Ninety (90) days to make a decision. This is as provided under Section 72(1) of the Tax Administration Act which reads as follows: “The Commissioner General shall consider and make a refund decision on an application made under Section 71 within ninety days from the date of the receipt of the application”.
It is worth noting that the law is worded in such a way that there are serious interest and penalty consequences when taxpayers underpay taxes, but it provides no negative consequences for the Revenue Authority when tax refunds due to taxpayers remain unpaid or delayed. There is therefore very little incentive for the Tanzania Revenue Authority (TRA) to act urgently, which may mean that billions of taxpayer funds remain stuck with the TRA as unpaid tax refunds.
Recently, the Government of the United Republic of Tanzania has embarked on the implementation of the Blueprint for Regulatory Reforms to improve the Business Environment in Tanzania. The aim is to attract foreign investments from various corners of the world and to promote local investments in Tanzania. In my view, regulatory reforms should include radical reforms to the TRA tax refund system. The tax refund system is slow, bureaucratic and exceeds the timeline stipulated by the law for the refunds.
The ineffectiveness of the tax refund system derails the goal of implementing the blueprint which aims at making Tanzania an attractive investment destination in Africa. Tax policies and effective implementation of tax policies play a critical role in creating an attractive business environment for investors.
Under normal circumstances, it may be impossible for the investors whose significant tax refunds are yet to be attended by the TRA to have a positive opinion on the business environment of Tanzania. Ineffective tax refund systems may also have consequential cashflow impact to the taxpayers’ businesses affecting other planned investments or initiatives.
In summary, the protracted delays in tax refunds may affect taxpayers’ businesses as follows:
a) Taxpayers may be compelled to resort to borrowing to supplement their cash deficits due to cash tied-up at the TRA.
Availability of cash is critical to a taxpayers’ day-to-day business, allowing businesses meet their day-to-day obligations like operational, financial, and investing activities.
The survival of businesses depends on effective management of cash flow. Cash flow is a key indicator of financial health of any business.
When taxpayers pay tax, that is a cash outflow from their businesses which reduces the cash balance available for other activities. On the other hand, if taxpayers receive cash refunds from the TRA that is cash inflow to their businesses, and it strengthen the cash position of businesses.
However, as the Revenue Authority does not process the tax refund applications and cash become tied up at the TRA (some taxpayers have billions of shillings tied up at the Revenue Authority), taxpayers may be compelled find alternatives to supplement their cash deficits. The most common way to supplement the cash deficits is through borrowing from the financial institutions and other lenders like the related parties’ companies.
The borrowing option is not free as there are financial cost associated with it. The associated cost includes interest on loans, insurance, and processing fees. Therefore, in the borrowing, taxpayers end up paying the mentioned costs. If not well managed, these additional cost to the taxpayers end up affecting the stability of taxpayers’ businesses.
b) Missing reinvestment/ business expansion opportunities
Expansion of businesses depends on various factors which may include the market for the good or services and other supporting resources, like the availability of sufficient cash. As the cash remain tied up with the TRA due to inefficient processing of tax refunds, taxpayers’ miss the opportunity to reinvest or expand their business. Timely processing of tax refunds would mean that cash is available for other activities which may include reinvestment or expansion of taxpayers’ businesses.
c) Shortage of cash circulation
Cash in circulation in the economy may be enhanced through effective fiscal and monetary policies. Fiscal policies are mainly done through imposition and administration of tax laws. In my view, proper administration of tax refunds should be given high considerations as part of implementing the fiscal policies in Tanzania which enhances cash circulation in the economy.
As noted above, billions of shillings of tax refunds are tied up at the TRA. The amount is so significant and may contribute to increase the cash in circulation in the economy if it is fully refunded to the taxpayers.
However, as the amount is still tied up at the TRA, it contributes to shortening the amount of cash in circulation.
What should be done to improve the situation
In my view, the best way to improve the situation should be done by amending the existing tax laws on tax refunds. Amending the existing tax laws from the TRA side may help to turn the tide and make the TRA to be more responsive.
The amendment may include amending the Tax Administration Act in such a way that it provides the statutory limits of processing the tax refund application from the TRA side. For example, the law may state clearly that if the Revenue Authority does not process the application within one year, the taxpayers should be allowed for automatic refund utilization against future tax liabilities, or the Tax Administration Act may be amended to impose reasonable interest on late payment of tax refunds to taxpayers. This may compel the TRA to be more responsive.
In conclusion, the law is very clear about tax refunds that if excess tax is paid by the taxpayer, cash refunds should be done, or the taxpayer may apply to offset the excess tax paid against the future tax liabilities; and the TRA should implement the law as it is.
The idiom says, “Action speaks louder than words”. It is the time for the TRA to start acting on tax refunds application as required by the law and not being unresponsive when applications are submitted at their offices.
Christopher Mwanilwa is a Senior Tax Consultant with Deloitte Consulting. He can be reached at email@example.com.
The views explained herein are those of the author and do not necessarily represent the views of Deloitte.