How far can Rwanda go in expanding tax bracket?

Mr Paul Kagame: Rwanda president
and chairman of the
EAC summit. Photo/FILE

By Eugene Kwibuka  (email the author)


Until last year, Jean Nepomuscene
Ndahimana, a street hawker in
the Nyamirambo area of Kigali
in Rwanda, was able to go about
his business selling socks
without being hassled by the police.

He bought a small house in the
town's poor suburb of Rwampara
for his family and was able
to make a respectable, if simple, living.

But last year the government began
to enforce a trade law
prohibiting street hawkers.

The police began a campaign
to get hawkers off the streets and
Mr Ndahimana found himself
in a dilemma: unable to afford
a trading licence to sell his wares
legally, but not prepared
to give up his livelihood.

So he continued to sell his socks
while trying to dodge the police.
He has evaded them many times.

But the 30-year-old says he has
also been arrested, even temporarily
locked up, and had his goods
confiscated innumerable times.

He ended up in debt, was forced
to sell his house and to send
his wife and two children back
to his home village while he continues
to try to eke out a living while
staying one step ahead of the police.

Create jobs

"President Kagame said that
every Rwandan should create a job
and this is the job I created for myself,
why should I be denied (the right)
to do it?"

he asks while carefully setting out
the various socks that he sells.

A banner banning street
hawking hangs close by.

Mr Ndahimana's predicament is
becoming a common story in Kigali,
where the government is currently
trying to bring the informal sector
into the tax bracket.

President Paul Kagame has said
he wants his government to raise
enough money through taxes so that
Rwanda no longer depends
on foreign aid from countries
such as Britain.

At the country's eighth National
Tax Day recently, where awards
such as "most compliant and
exemplary taxpayer" are handed out,
Mr Kagame called upon all
Rwandans to stop looking at tax
as a burden but rather a means
of facilitating the country's progress
and economic growth.

But there are many hurdles,
not least the high cost of
buying the necessary licences.

Small-time traders like
Mr Ndahimana say they
cannot afford to pay.

Mr Ndahimana spends around
Rwf 85,000 ($150) a month buying socks.

If he sells them all he can make up
to Rwf 10,000 ($18) over two weeks.

Mr Ndahimana insists he is
too poor to formalise his business.

"Starting a shop is too expensive
for me and it doesn't guarantee me
that I will obtain the profit I used
to get by hawking," he says.

"I always tell [the police and
local officials] that I will continue
to do it because despite their threats
this is how I earn a living."

Mr Ndahimana's determination
to stay in the informal sector
presents a challenge for the government.

Difficulties of collecting taxes

Collecting taxes in many
developing countries is hard.

The Rwandan Revenue Authority,
which was set up in 1995,
has been held up as
an example of success
in terms of tax collection.

A three-fold increase in tax revenues
between 1998 and 2006 saw
the national budget also grow
three-fold, from Rwf 175 billion
($308 million) to Rwf 528 billion
($928 million).

And as tax revenues have
increased the proportion of
Rwanda's budget financed
by aid has declined.

In 2001, only 34.62 per cent of
the total budget was financed by
domestic sources, while in 2008
it hit 44 per cent and is
expected to rise again this year.

However, Rwanda's major remaining
hurdle to strengthening its
domestic revenue base is
integrating the country's informal sector.

According to the Private Sector Federation
(PSF), an organisation
dedicated to promoting business
in Rwanda, about 0.3 per cent
of tax payers currently contribute
48 per cent of Rwanda's tax revenue.

There are fewer than 3,000
registered companies paying
national taxes in Rwanda,
according to a case study on
the Rwandan Revenue Authority
by the UK's Department for
International Development (DfID)
and the Foreign Investment
Advisory Service (FIAS).

Of these, the top 13 companies are
estimated to pay some 80 per cent
of all taxes collected in Rwanda.

"Over 40 per cent of Rwanda's dealers
are in the informal economy,"
says Gerald Nkusi Mukubu,
director of the Taxpayer Services
Department at the Rwanda
Revenue Authority.

"Every year we have a target for
tax collection and it depends on
the situation of the country's economy.

If all of those people in the
informal sector pay taxes, there is
no doubt that we can finance
the whole budget of the country."

Explaining the importance of paying taxes

Gustave Tombola, the Director
of Research and Consultancy
at Kigali Independent University,
recently led a three-year
research project into taxing
small and medium businesses.

He says if the government is
to successfully collect tax
from the informal sector
it will have many hurdles to overcome.

"The biggest challenge of taxing
the informal sector is to locate
where its businesses are
working from," he said.

Mr Tombola, who defines
the informal sector in Rwanda as
any business with no clear
accounting records, adds that
the second challenge is
a lack of knowledge about
the tax system by informal sector workers.

Because they do not always
understand the system, and cannot
afford to hire an accountant,
they can end up paying
higher taxes than they need to.

The study calls on the Rwanda
Revenue Authority to train
small and medium enterprises
on fiscal laws and visit them
to explain the importance of paying taxes.

Sells vegetables

In Nyamirambo market, just
a few metres from where
Mr Ndahimana hawks his socks,
Julienne Mukarugambwa,
a 56-year-old mother of
six children has a different story to tell.

Mrs Mukarugambwa sells
vegetables from a small,
one metre square space that
she rents for Rwf 3,600 every month.

This fee covers Rwf 2,000 as
a tax for the district, while
the remainder pays towards
cleaning and guarding the market.

With an outlay of around
Rwf 15,000 ($26) on vegetables
for resale, Mrs Mukarugambwa can
make a profit of
Rwf 4,000 ($7) in two days.

She says that she is happy to pay
tax as it is good for her country.
However, more importantly, she says,
it means she no longer faces
any hassle from the police.

"I am happy today because no one
threatens me," she said.

"I would have died from police beatings
and efforts to escape arrest if
I hadn't come here," she says,
gesturing to her stall.

"I also think that the taxes we pay
help to support the country's many
orphans, widows, and AIDS patients."

The aim of the RRA is now to turn
the country's Mr Ndahimanas into
Mrs Mukarugambwas.

Link here

Sent from Kigali, Rwanda

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