CHAPTER ONE

INTRODUCTION, OBJECTIVES, AND PROBLEM DEFINITION

1.1 Introduction

Taxation forms an important part of fiscal policy of any government. Through taxation the

government raises the revenue which is required for recurrent and development expenditure

and for implementing various social and economic policies. Citizens of any country have a

civic obligation to pay taxes to the government so as to enable it meet the cost of

providing the social- economic services which then become their right to demand through

their representatives in the Parliament or the House of Representatives.

The United Republic of Tanzania came into being in 1964 with the unification of

Tanganyika and Zanzibar. However the Union is not comprehensive, the Union

Government is responsible for national security, external affairs and monetary

management. Zanzibar is an autonomous to the extent of having its own Government,

President, Chief Minister, Cabinet, Parliament, Judiciary and its own Flag. Further,

Zanzibar is responsible for its development so it manages its own budgets and controls its

own foreign exchange reserves.

According to Zanzibar Fiscal Study of 1997 done by ESRF, the Revolutionary Government

of Zanzibar has been facing growing revenue shortfalls relative to expenditure needs. With

an estimated per capita income in the region of US$ 215, Zanzibar is ranked amongst the

poorest in the world. Historically, Zanzibar was the leading producer of cloves in the

world, but now is far behind Indonesia, Madagascar and Sri Lanka. Like many other small

island economies.

Zanzibar has been traditionally dependent on this single major crop as the mainstay of its

economy and the major determinant of an increase or decrease of its national output.

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Tax administration in Zanzibar is under two main authorities namely:-

Tanzania Revenue Authority (TRA).

Zanzibar Revenue Board (ZRB).

Tanzania Revenue Authority (TRA) was established by Act No. 11 of 1995 and started its

operations in July 1996. Prior to its establishment, tax administration in Tanzania was

directly under the Ministry of Finance operating under loosely related three revenue

departments of Customs and Excise, Income Tax and Sales Tax and Internal Revenue.

TRA in Zanzibar handles only the Union taxes, which are Income tax and Customs duties while

the local taxes are under the jurisdiction of Zanzibar Revenue Board (ZRB).

On the other hand, the Zanzibar Revenue Board (ZRB) was established under the ZRB Act No. 7

of 1996 as the prime agency of the Government of Zanzibar for collection and administration of

all taxes from Inland Revenue sources other than Customs and Excise, and Income taxes which

are administered by the Tanzania Revenue Authority (TRA).

Other tax laws which are administered by ZRB include the Business License Act No. 3 of 1983,

the Petroleum Products Levy Act No. 3 of 1991, the Hotel levy Act No.1 of 1995,the Value

Added Tax (VAT) Act No. 4 of 1998, the Stamp Duty Act No. 6 of 1996, and the Port Service

Charge Act No. 2 of 1999.

Both TRA and ZRB collect taxes in Zanzibar on behalf of the Revolutionary Government of

Zanzibar (SMZ).

The study addressed issues pertaining to customs administration in Zanzibar including laws and

procedures of importation of goods into Zanzibar which is part of Tanzania (Tanzania is among

the present five Partner states in East African Customs Union), as well as the procedures

involved when transferring such goods from Zanzibar to Tanzania Mainland and vice versa.

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1.2.0 Objectives of the Research

1.2.1 General Objective

The main objective of the research was to evaluate the major opportunities and

challenges facing Customs administration in Zanzibar and give recommendations for

improvement.

1.2.2 Specific Objectives

To examine customs procedures per customs guidelines and its application in

Tanzania Mainland and Zanzibar.

To establish the contribution of import duty in revenue collection.

To establish the value of goods transferred from Zanzibar to Tanzania mainland

and to examine processes and procedures applied in re-assessing and re-valuation

of the same goods on Tanzania Mainland.

1.3 Problem Definition

Section 2(1) of the Constitution of Tanzania provides that Zanzibar is part of the United

Republic of Tanzania. And the same Constitution under Section 138(2) gives powers to the

Revolution Council of Zanzibar to charge any tax which is under its jurisdiction.

As a result, there are two Tax Authorities which are taxing the same individuals and entities in

Zanzibar different from Tanzania Mainland. Apart from having two Tax Authorities which are

working in the same jurisdiction, the Revolutionary Government of Zanzibar has been facing

growing revenue shortfalls relative to expenditure needs. Also there are a lot of complaints

from both sides of the Union which some especially the politicians refer as part of the

“Problems facing the Union”.

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As of today, goods entering the Republic of Tanzania through Zanzibar are subjected to normal

customs processes and procedures. However, the same goods, if transferred to Tanzania

Mainland from Zanzibar are subjected to re-assessment and re-valuation by Customs

Department of the Tanzania Revenue Authority. This has raised much concern and outcry by

Zanzibar businessmen and the politicians.

Therefore, this study was done so as to understand the real problems facing the structure and tax

administration in Zanzibar as part of the Union and propose alternatives or options for problem-

solving.

1.4 Significance of the study

The study evaluated and revealed the challenges which encounter Customs Administration in

Zanzibar and suggested corrective and preventive measures. The study is expected to be of much

value to a number of people as follows:-

It will help the TRA Management and the TRA Board of Directors to formulate policies and

strategies in minimization of tax evasion in Customs and Excise Department particularly in

Zanzibar entry points. Also, It is anticipated that the study will form the basis for the TRA to

handle and manage customs goods which are transferred to Tanzania Mainland from Zanzibar

equitably (Streamline trans-shipment procedures).

(i) It will be useful to stakeholders engaged in international trade such as

Importers, Clearing and Forwarding Agents and shipping operators.

(ii) It will be used as an additional reference to help researchers identify viable

areas for further researches on other taxation aspects.

(iii) The study is done specifically to enable the researcher to fulfill the

requirement for the degree of Masters of Business Administration of Mzumbe

University.

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1.4.1 Scope of the study

The study covered Customs and Excise department in Zanzibar which is under the Tanzania

Revenue Authority. Zanzibar entry points are among customs entry points (Such as borders,

airports and ports) which are under the control of the Commissioner for Customs and Excise

Department under TRA.

The area of study is not the representative of the whole Customs Administration in Tanzania.

This is likely going to affect the generalization of the results but it leaves an open room for

further study in those other customs areas in the whole United Republic of Tanzania.

1.5 Constraints of the study

(i) The researcher had no financial support from any other source except from his

own sources. Therefore it was not possible to cover the large population of

taxpayers and other stakeholders who are engaged in customs operations.

(ii) Some respondents especially in Wete Pemba were reluctant to complete the

questioners. They thought it is a strategy of the Government to introduce new

taxes.

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CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

“There is no art which one government sooner learns of another than that of draining money

from the pockets of the people” by Smith, A. (1776). This signifies that taxation has a very long

history like the life of human being, therefore there are various literatures exist on the field of

taxation. The Researcher consulted some of these literatures for review purposes in undertaking

the study.

2.2 Theories of Taxation

2.2.1 Meaning

The Bible records that the people of Israel asked the prophet Samuel to “make a King to judge us

like all the nations” (1Samuel 8:5), the prophet tried to discourage them by describing what life

will be under a monarchy, as the king will provide things that the people want but only at a cost

which the prophet graphically explains refers to taxes/duties which can be a serious burden to

them (1Samuel 8:15). Even today taxation is considered as a burden to taxpayers thus why some

of them tend to practice tax avoidance or tax evasion.

In a different perspective, “Taxation is part of the price of civilization: for a while it is possible

to have governments without taxation, but it is not possible to have taxation without

government” by Sabine, B.E (1980). Governments derives receipts to finance expenditures,

whether transfers or purchases, or to pay off public debt. These receipts may tax the form of

taxes, charges or borrowing. Musgrave, R.A (1984) defines taxes as “are compulsory imposts

withdrawn from the private sector without leaving the government with a liability to the payee”.

Taxes differ with borrowing due to the fact that borrowing involves a withdrawal made in return

for the government’s promise to repay at a future date (For example, Treasury bills).

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In 1899, The US Supreme Court declared: “The power to tax is the one great power upon which

the whole national fabric is based. It is as necessary to the existence and prosperity of a nation as

is the air he breathes to the natural man. It is not only the power to destroy but also the power to

keep alive [Nical v. Ames, 173 US 509, 515 (1899)].

Many authors define taxation as a “compulsory levy or charge imposed by the state on her

citizens and non – citizens that is usually payable in monetary terms”. Taxes are compulsory

financial contribution made by a person or body of persons towards the expenditure of a public

authority.

In OXFORD Advanced Learner’s Dictionary (1995) the word tax means “money that has to be

paid to government”. This definition is lacking the important legal aspect as the government

cannot enforce any tax without the legal powers under the law.

In the OXFORD Dictionary of Business and Management (2006), taxation is defined as “a levy

on individuals or corporate bodies by central or local government in order to finance the

expenditure of that government and also as a means of implementing its fiscal policy”.

2.2.2 Taxation and Income Distribution

In any society always there is debate of whether the tax burden is distributed fairly. In a book of

Harvey & Ted (2008) has demonstrated how taxes affect the distribution of income through the

following example:-

“Suppose the price of a bottle of wine is $10. The government imposes a tax of $1 per bottle, to

be collected every time a bottle is purchased; the tax collector (who is lurking about the store)

takes a dollar out of the wine seller’s hand before the money is put into the cash register. A

casual observer might conclude that the wine seller is paying the tax. However, suppose that a

few weeks after its imposition, the tax induces a price rise to $11 per bottle. Clearly, the

proprietor receives the same amount per bottle as did before the tax. The consumers pay the

entire tax in the form of higher prices.”

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The statutory incidence of tax indicates who is legally responsible for the tax. The above two

scenarios the statutory incidence of tax is on the seller. But the question is who really bears the

burden of tax. Because the prices change as a result of the imposition of tax, is where the

economic incidence of tax is shifted from the seller to the consumer.

The study has also reflected the perception of taxpayers regarding current customs external

tariffs which are applicable in East African Community.

In the book of Messere, K. and Kam, F (2003) explained two conflicting but complementary

principles used to justify taxes:

The ability to pay (Accretion principle) – Those who are able to pay more should pay

more.

The benefit principle - Those who benefit most should contribute most.

Further the same authors explained that practically the above principles may not hold water.

It is the question of how a particular tax meets the criteria of equity, efficiency and simplicity.

This study focused mostly on these criteria by looking into the customs procedures which are in

place in the importation and trans-shipment of goods and how can be improved.

2.2.3 Taxpayers’ Perceptions and Compliance

Tax compliance to a certain extent depends on the perceptions of taxpayers on fiscal policy, and

how the taxes collected are spent by the government. Messere, K and Kam, F (2003)

mentioned “Tax visibility” and “Fiscal Justice and Public Relations” as factors which lead to

positive or negative taxpayers’ perception.

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(i) Tax visibility

The greater the visibility of a tax the more unpopular is likely to be. For example if the taxpayers

are aware that in a certain product the VAT rate is increased it is possible to resist paying. So you

can hide it by writing a tax invoice without showing the tax to pay (you can show a price as

“VAT INCLUSIVE”.

But this is not recommended as it is not per best practice of “Full disclosure and transparency”.

(ii) Fiscal Justice and Public Relations

The countries are required to improve the services provided to taxpayers because modern tax

systems require cooperation from the taxpayers if they want to operate efficiently and also as a

result of changing attitudes towards the role of tax administration in relation to taxpayers.

(iii) Transparency in government spending

Taxation is a “contractual relationship” between the people and the state. The state has the

obligation to collect tax from its people and use the taxes in a transparent manner and for the

benefit of the people (Public good). Taxpayer will not be willing to pay their taxes if they do not

know where their taxes are used.

The study focused on the evaluation of the collection of import duty and not how it is used. But it

is understood that our Governments are making much efforts to communicate with people

through their representatives and through the media on government expenditure in development

projects.

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2.3 Tax Administration

Tax administration is a challenging aspect as there a number of issues to be analyzed. Such as,

who and what to be taxed? When? And how? According to Ashworth, W. J. (2003) tax

administration has been equated to, like the skills of physician of “choosing the proper vein to

Bleed, and knowing what quantity of Blood to draw” from his Patient. This is true, as tax

administrators they must know their taxpayers and group according to their levels of potentiality

(Small, Medium and Large Taxpayers).

2.3.1 Principles of Good Tax Administration

The basic principles of taxation have remained more or less unchanged for the past 220 years.

Smith, A (1776) as founder and followed by other authors like Stiglitz (1980) and Glenn &

Gangadhar (1999) stated the main principles by which a tax system is judged to be good or not

are as follows:-

(i) Benefit Principle of taxation.

People who benefit from the service can be required to pay for it. Foe example

social security taxes will directly benefit those people who later are paid pension.

Indirectly, all taxpayers are benefiting from taxes which the government collects

from them through good infrastructure, social services and security which is

provided by the government.

(ii) Ability to pay Principle

The taxpayer is required to contribute according to his or her ability to pay. The tax

system should be fair in its treatment of different individuals. Horizontal Equity:

Individuals who are the same in all relevant aspects should be treated equally; Vertical

Equity: Individuals who are better able to pay higher taxes should bear a higher share of

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total taxes (except in the case of benefit taxes where individuals are charged taxes in

accordance with the benefit they derive from a public good or service).

(iii) Economic efficiency

A tax increases the price of a good by adding the percentage or fixed amount to the

original price. This creates a gap between the value that consumers pay for the good and

economic resource cost of production, such market distortions caused by taxation create

a loss economic efficiency. The economic efficiency of a tax is an important

consideration when designing a tax system.

(iv) Economic growth.

The tax system should not create a disincentive to work but it should encourage

competition across various sectors of the economy.

(v) Revenue adequacy

The taxes introduced should be appropriate and sufficient to finance the

government need over a time.

(vi) Stability

Constant changes in the rates and rules of taxation make difficult for the private

sector to make long term plans. When the tax system is structurally unstable it

become a source of risk and impose element of economic inefficiency.

The uncertainty of taxation encourages the insolence and favors the corruption of

an order of men who are naturally unpopular, even where they are neither insolent

nor corrupt. The certainty of what each individual ought to pay is, in taxation, a

matter of so great importance that a very considerable degree of inequality, it

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appears, I believe, from the experience of all nations, is not near so great an evil as

a very small degree of uncertainty.

(vii) Simplicity

A tax system should be simple so that it is easy to comply with by taxpayers.

The more complex the rules of taxation are, the more they can be subverted and

evaded. As the tax law becomes difficult that can only be understood by

specialists, then those who can afford to pay the specialists can take advantage of

the loopholes which are available in that law.

(viii) Low administration and compliance cost

The higher the cost of collection of tax reduces the net tax available to the

government. If great resources must be devoted to the collection of taxes, they

are simply wasted! Indirect taxes (such as Value Added Tax and import duty) are

imposed on traders and importers at lower administrative cost. Through advanced

technology the compliance cost is also reduced, for example the traders and

importers can lodge their returns and documents electronically. The systems like

ASYCUDA++ and ASYSCAN which TRA has introduced at Customs have

made customs operations to be modern and increased the speed of clearing goods

and the ports.

(ix) Neutrality

The tax system should not create major distortion in consumption and production

behavior. A tax should not change the investment decisions by favoring one set

of investments over others

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Musgrave, R. (1984) in the book Public Finance in Theory and Practice

summarized the canons of taxation from Adam Smith and other economists and

social philosophers as follows:-

(a) The distribution of the tax burden should be equitable.

Everyone should be made to pay his or her “fair share”.

(b) Taxes should be chosen so as to minimize interference with

economic decisions in otherwise efficient markets. Such

interferences impose “excess burden” which should be

minimized.

(c) Where tax policy is used to achieve other objectives such as to

grant investment incentives, this should be done so as to

minimize interference with the equity of the system.

(d) The tax structure should facilitate the use of fiscal policy for

stabilization and growth objectives.

(e) The tax system should permit fair and no arbitrary

administration and it should be understandable to the taxpayer.

(f) Administration and compliance costs should be as low as is

compatible with other objectives.

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2.3.2 Tax Administration and Politics

The question to be asked is does there exist a connection between the politicians and the tax

administration? According to Alejandro Estelle (esteller@eco.ub.es) in his paper tilled “The

Politics of Tax Administration: Evidence from Spain” concluded that there is connection

between the two. On one hand the tax administration reacts to the budgetary situation of the

government on the other hand the politicians who are in power takes advantage of the tax

administration in order to gain electoral popularity.

“In addition, as part of the recovery plan I signed into law yesterday, we are going to award

$2 billion in competitive grants to communities that are bringing together stakeholders and

testing new and innovative ways to prevent foreclosures. Communities have shown a lot of

initiative, taking responsibility for this crisis when many others have not. Supporting these

neighborhood efforts is exactly what we should be doing.” Obama, B (2009): (The Speech of

President of United States at Phoenix, Arizona in February 18, 2009).

Every politician in power depends on the efficiency and effectiveness of tax administration to

accomplish their political objectives. Obama will never dish out $2 billion in his recovery

plan if IRS (Internal Revenue Service) has nothing to be collected.

Similarly, in our case Tanzania (Zanzibar is inclusive) there is an election manifesto of CCM

(Chama Cha Mapinduzi) which came up with its motto of “good livelihood to all

Tanzanians”.

This motto of CCM cannot be accomplished without efficient and effective tax

administration which can be able to generate more revenue to finance various programs

which will lead to achieve those objectives. Another new slogan of politicians is “Agriculture

First” this will never be realized without tax collection.

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2.4 Empirical Literature in Taxation

The world of taxes today is very different from that of 1900s. As a result of globalization and

other economic, social and technological developments taxation has become complex to

define and administer.

The first question is what constitutes a “tax”. According to the interpretation guide of a Paris-

based Organization for Economic Co-operation and Development (OECD) confine the term

as “compulsory unrequited payments to general government”. The payment of tax is

unrequited because the benefit of it provided by the state to taxpayers is not proportion to that

payment.

2.4.1 Classification of Taxes

According to OECD taxes are classified in order to the weight of taxation both between

countries and in the same country over time. The measure used is the total tax receipts to

Gross Domestic Product (GDP) at market prices. The OECD classification of taxes is

reproduced below:-

Table 1: Organization for Economic Co-operation and Development (OECD) Model of

Classification of taxes

Code Number Type of taxes

1000 Income taxes

1100 Personal

1200 Corporate

2000 Social Security contribution

2100 Employees

2200 Employers

2300 Self – Employed

3000 Payroll taxes

4000 Property taxes

4100 Immovable property

4200 Net Wealth

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4300 Death and gift

4400 Financial and capital transactions

5000 Goods and Services

5100 Consumption

5110 General (Mostly Value Added Tax)

5120 Selective (mostly excises)

5200 Permission and use

6000 Other taxes

Source: Journal of Economic Psychology, No. 13 (1992)

In this study it has singled out on tax under consumption taxes which is the import duty. The

import duty is one of the oldest major forms of taxation while the Value Added Tax is the

newest.

Basically, there are two types of taxes. Each type is classified according to the legal and effective

incidence to the final payer. These two types are direct and indirect taxes.

(i) Direct taxes

These are taxes levied directly on people’s income from employment, business or ownership of

property and an investment. The impact and incidence of the tax falls on the same person. That

is, incidence cannot be shifted to another person, for example the Corporation Tax, Pay As You

Earn (PAYE) and Withholding Taxes.

(ii) Indirect taxes

These are taxes, which are based on consumption. Examples of such taxes are like Import Duty,

Excise Duty, and Value Added Tax (VAT) etc. By definition the legal incidence of the tax falls

on the trader who acts as a collection agent of the Government while the effective incidence falls

on the final consumer of goods or service that eventually pays the tax.

2.4.2 Tax Evasion

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Tax evasion involves intentional concealment or misrepresentation of financial facts with a view

to escape liability to tax. Evasion therefore constitutes an illegal act which calls for criminal

sanctions.

On the other hand, there is tax avoidance. The main feature of tax avoidance is that it occurs

where a taxpayer takes advantage of the apparent ambiguity in the provisions of tax laws.

Avoidance offers a tax free exit through an elaborate expert planning arrangement. It

entails manipulation of tax laws to obtain tax advantages through artificial schemes.

This advantage may be taken in relation to any tax in the form of relief or increased relief

from the tax, the avoidance or reduction of a charge to tax or the deferral or shifting of

taxable incomes outside the reach of national tax authorities.

On tax evasion Lord Tomlin (1936) said, “Every man is entitled, if he can, to order his affairs so

that the tax attaching under the appropriate Acts is less than it otherwise would be.”

There are a number of reasons as to why people evade tax, some of them are: -

(i) Fairness of the Tax System

The perceived fairness of the tax system is important both to its acceptability and smooth

functioning of the system. A tax can be seen as unfair in a number of ways, one if those of

similar incomes are taxed differently, for instance if the government is seen to have little back in

return. Cowell (1992) has shown that a person’s perception on his own role in influencing the

perceived inequality is of central importance and taxpayer may withdraw by evading taxes if he

sees that the system is not fair to him. A work by Adams (1996) perceived inequality in the tax

system as one of the most important variables, which led to tax evasion.

Again dissatisfaction with the tax authorities in other ways has also been suggested by a number

of investigators as a motivation to evade tax. It is believed that the ineffective of the authorities

correlates positively with a propensity to evade tax.

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(ii) Egoism

Some individuals may be characterized by egoistic tendencies, whilst others may exhibit a strong

identification with community responsibilities, and such be less motivated to avoid taxes owed as

stated by Weigel, Hessing and Elffers, (1998). In other words, the more the egoism an individual,

the less likely he or she will comply with rules and laws since compliance conflicts with their

interests. There is a great deal of evidence that egoism predicts rule – breaking in a number of

areas including income tax evasion, social security fraud and the like.

(iii) Mental Accounting

How business people think about the tax they withhold such as VAT or PAYE which is money

they collect on behalf of the tax Authority, may influence their behavior towards it, the notional

of mental accounting (Shefrin and Thaler, 1998, cited by Webley & other, 2002) mental

accounting is described as a psychological mechanism whereby income is framed (Winnett &

Lewis, 1995, cited by Webley & other, 2002). It is proposed, in respect of personal finance, that

people have a number of mental accounts that operate independently of one another. What is

interesting in the current context is whether businessmen and women psychologically separates

monies owned to VAT or PAYE into separate mental account from the business turnover. If they

do not, they may be more likely to try to evade VAT as a result of seeing it as their money.

The more the taxpayers know that tax evaders who are not caught or punished, the more likely

they will join the bandwagon of tax evaders.

(v) High Tax Rates

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Generally tax rates are presumed to reflect a reasonable compromise between several competing

considerations namely revenue adequacy, economic efficiency, political aspiration and fairness.

As regard the revenue adequacy the rates selected should guarantee mobilization of adequate

revenue. It is hypothesized that overly high tax rates induce taxpayers to resort to tax evasion and

thereby afford from moderate taxes. With high tax rates the taxpayers will not be willing to

disclose all their income or the actual value of their imports or production costs.

(vi) Complexity of Tax Laws

Complex legislations are susceptible to tax evasion. There is a need to have a legislation, which

takes into account of the various segments of the population including having the law in popular

language instead of a single complex to comprehend language.

Tax Administrations have an important mandate to collect taxes at minimum costs to

Government, while at the same time encouraging business activities through implementation of

prudent fiscal policy. The practice of tax evasion and tax avoidance has been a challenge of

many tax authorities including TRA and ZRB.

Tax evasion is a deliberate attempt to understate the tax exposure of person by illegal means.

This may be done through various methods depending on the type of tax under consideration.

2.4.3 Indicators of the Effectiveness and Efficiency of a Tax Authority

It is important to know how effectively and efficiently any Tax Authority is currently performing

its functions and what are the areas where performance problems are acute. The following are

quantitative and qualitative indicators in measuring the effectiveness and efficiency as provided

by Dr. Kasilo from his Abridged Versions (2009)

(a) Quantitative Indicators are such as:-

(i) Type of taxes and duties administered by the Tax Authority

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(ii) Number of registered taxpayers

(iii) Number of large taxpayers who account for 80% of tax revenues.

(iv) Number and frequency of declarations (i.e. tax returns and customs declarations)

processed annually.

(v) Amount of taxes collected annually by tax type

(vi) Amount of taxes in arrears.

(vii) Amount of taxes refunded annually.

(viii) Number of employees of the Tax Authority –Managers, Technical staff and

Support staff.

(ix) Total revenue collected/ Annual revenue collection target.

(x) Total revenue collected/GDP.

(xi) Tax Gap = 1 - Total revenue collected

Potential revenue

(b) Qualitative Indicators are such as:-

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(i) Mode of organization of the Tax Authority: whether based

.

(ii) Overall organizational structure of the Tax Authority

- Number of offices at the Regional and Local levels.

(iii) Perception of taxpayers regarding:

Risk of detection of non-compliance and severity of consequences.

Quality of assistance provided by the RA to enable taxpayers to comply

with their legal obligations.

(iv) Effectiveness of the Tax Authority in resolving taxpayer problems.

(v) Public perception regarding the degree of corruption in the Tax Authority.

(vi) Tax Authority morale and its image to the public.

2.5 Tax Administration in Tanzania

2.5.1 Establishment and Functions of Tanzania TRA

According to TRA Handbook (2007) tilled “Tax Administration and Structure in Tanzania: The

Tanzania Revenue Authority (TRA) was established by Act No. 11 of 1995 and commenced

operations in 1996. The Authority is a semi-autonomous agency of the government vested with

the responsibility for the administration of the Central Government taxes as well as several non –

tax revenues.

The following are the main functions of TRA: -

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(i) To assess, collect and account for all Central Government Revenue.

(ii) To administer efficiently and effectively all the revenue Laws of the central Government.

(iii) To advise the Government on all matters relating to fiscal Policy.

(iv) To promote voluntary tax compliance

(v) To improve the quality of services provided to taxpayers.

(vi) To counteract fraud and other forms of tax and fiscal Evasion.

2.5.2 Organization Structure of TRA

TRA has a Board of Directors which plays a supervisory role of all operations of the

Organization. The key officers of TRA are as follows:-

Commissioner General (CG)

Apart from Board there is a Commissioner General who is the Chief Executive Officer

of the Authority.

Deputy Commissioner General (DCG)

The Deputy Commissioner General assists the Commissioner General of The

Authority.

Commissioners and Deputy Commissioners

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There are four Commissioners who are assisted by Deputy Commissioners. Each

Commissioner is responsible for one revenue department as follows:

(i) Domestic Revenue Department

This Department administers the following taxes and fees: - Income tax for

individuals and corporations, Value added tax (VAT), Excise duty on locally

manufactured goods, Motor vehicle registration and transfer fees, Skills and

Development levy which is charged to employers, Driving license fees and Port

and Airport service charges.

(ii) Customs and Excise Department

The Customs and Excise Department administers all taxes on international trade,

which are import duty, Excise duty on imported goods and VAT on imports.

Other responsibilities of this Department are controlling prohibited and restricted

goods or items imported into the country through borders, seaports and Airports

and the function of compiling Trade Statistics and facilitation of international

trade.

(iii) Large Taxpayers Department

The Department is headed by the Commissioner, who is assisted by the Deputy

Commissioner (Operations), Managers and Assistant Managers. . There are no offices

of this Department at the regions other than Dar es Salaam.

The Department has registered 370 taxpayers who are considered to have large and

more complex business activities and consequently more complex tax affairs, The

Number of Taxpayers may increase depending on the taxpayers whether they meet the

criteria of selection.

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Taxpayers for this department include all financial institutions, all insurance

companies including mining. Others include multinational companies big oil

marketing companies and big manufacturing companies whose aggregate payments of

VAT Income Tax and Excise Duty is at least Sh. 400 million and above per annum.

(iv) Tax Investigation Department

The Tax Investigations Department supports directly the Revenue Departments in

enforcing the various tax laws through regular investigation of tax cases with

substantial amounts of revenue at risk.

In collaboration with the Legal Services Department, it is responsible for prosecution

of the established cases of tax evasion.

It has the Commissioner, two Deputy Commissioners, one is responsible for Cases

Development, Processes and Procedures and another deals with daily operations.

2.5.3 Local Government Taxes

Tanzania has a two-tier system of Government, that is the central Government and the Local

Government, which is at the District, Town, City or Municipal level. The source of revenue

for each local Government is from a number of local taxes and fees collected within its

jurisdiction

The Local Government Act, 1982 and Urban Authority Act of 1983 empowers any Local

Authority to pass by-laws that allow the Authority to charge local taxes and collect levies and

fees within its jurisdiction. These by-laws are supposed to be published in the Government

Gazette after the minister of state responsible for Regional Administration and Local

Government has approved.

24

The type and number of taxes, fees and levies, which are collected, differ from one Local

Authority to another because of differences in the economic base of the areas, which affects

the tax base. However, most of the Local Authorities collect Property Tax, Service Levy,

Hotel Levy or Guest House Levy, Slaughtering Fees, Bill boards and Sign Fees, Market Fees,

Trading License Fees, Liquor License Fees

In addition to the above, there are other user fees such as burial fees, refuse collection etc

which are collected by Local Authority

2.6 Tax Administration in Zanzibar

Administration of the Union Government taxes in Zanzibar is under TRA. These taxes

are Customs Duties, Excise Duty on imports and Income Tax. TRA collects the taxes

and remits them to the Zanzibar Government.

The Deputy Commissioner is the in charge of TRA in Zanzibar assisted by three

managers these are:

Manager – Domestic Revenue Zanzibar.

Manager – Domestic Revenue Pemba.

Manager – Customs and Excise Zanzibar.

The Zanzibar Revenue Board (ZRB), which is a semi autonomous tax collection agency

of the Government of Zanzibar, administers other internal (local) taxes and levies. VAT

is the main local tax collected by the ZRB. Other local taxes under the administration of

ZRB are the Stamp Duty, Hotel Levy, Entertainment Tax, Excise Duty on locally

manufactured goods and fees from various business licenses.

25

The Commissioner is the chief Executive Officer of ZRB under the supervision of the

Board of Directors. The Commissioner is assisted by Managers.

2.7 Customs Administration in Zanzibar

2.7.1 Importance of Customs

Wulf, L.D. and Sokol, J.B. (2004) said “The responsibilities of customs continue to evolve,

Customs administration are now regarded as the key border agencies responsible for all

transactions related to issues arising from the border crossings of goods and people” This

indicate clearly the importance of customs in facilitating international trade and collection of tax

revenue. Customs is also the nation’s guard against external threats to health, safety and

environment and protecting (for better or for worse) domestic industry.

Import duty is an international trade tax which has been popular in Less Developing Countries

like Tanzania and particularly Zanzibar. The import duty has the following characteristics:-

Easy to levy and collect at points of entry.

Import tariff can be used as a policy instrument for inducing economic development.

Taxes on international trade are an important source of revenue for the Zanzibar Government,

According to Research conducted by TRA (2001) it is accounting for 60% of all Government

revenue in 1999/2000.

Although custom duties are a Union matter, the revenue sharing arrangement of all major

Union taxes is based on the “derivation principle”, that is, the Union Government retains the

proceeds from all Union taxes collected in Tanzania Mainland and the Zanzibar Government

retains those collected in Zanzibar.

26

The Customs and Excise Department in Zanzibar is headed by the Deputy Commissioner who is

required to report to the Commissioner of customs and Excise duty who is based in Dar es

Salaam.

2.7.2 Customs Procedures

According to the paper presented by TRA in a Workshop on compilation of International

Merchandise Trade Statistics in Addis Ababa (November 2004) as from 1st July 2004 Tanzania

(customs department) abolished the Pre-shipment Inspection (PI) and started to implement the

Destination Inspection System (DIS).

Under the DIS unless otherwise determined by TRA, all commercial imports are inspected upon

arrival at destination in Tanzania. The Inspection process may be done either manually or

through X- ray scanning for full loaded containers or through Fast Track Release without any

inspection this is mostly done to compliant importers.

Unfortunately, the X – ray scanner is only available at the port of Dar es salaam, Zanzibar has no

X-ray scanner facility.

2.7.3 Customs Administration in Tanzania Mainland visas Zanzibar

Customs operation takes place on designated customs stations in Tanzania Mainland and

Zanzibar by the TRA. In an endeavor to fulfill its functions the Customs Department is set to

administer customs operations in both Tanzania Mainland and Zanzibar. Valuation process in

customs administration is guided by the EAC Customs Management Act, 2004, EAC Customs

Regulations, 2006, EAC/SADC Common Internal Tariff, Customs Procedure

Manual/Departmental Instructions which are issued to facilitate administration and

operationalization of customs operations effectively.

For administrative purposes the competent authority (The Commissioner of Customs and

Excise Department) issues and publishes decisions and administrative rulings of general

application giving effect to the interpretation of Customs Laws and tariffs. Customs operations in

27

Zanzibar are required to adhere to the same procedures and instructions as provided in the

respective laws, guidelines and administrative decisions.

2.7.4 Customs Valuation

According to the EACCMA, 2004 customs value of imported goods means the value of

goods for the purposes of levying ad valorem duties of customs on imported goods. For

economics reasons goods are allocated values to ascertain economic gains or loses and determine

value addition in a given geographical location at a particular period of time. However, for

customs purposes goods entering or leaving a particular country are allocated value objectively to

ascertain an amount of duty to be levied on the imported goods.

Customs administration involves determination of customs value for tax purposes. It is therefore

important to note that determination of customs value of imported goods liable to ad valorem

import duty features is the key function of Customs administration.

Methods of valuation

The Fourth Schedule to the EACCMA, 2004 prescribes six methods of valuation of imported

goods as follows:

(a) Transaction Value

(b) Transaction Value of Identical Goods

(c) Transaction Value of Similar Goods

(d) Deductive Value

(e) Computed Value

28

(f) Fall Back Value

The transaction value is the first criteria used by Customs to determine value of imported goods.

This is the actual price paid or payable by the importer/exporter when goods are imported or

exported at the international market. The price so paid can only be accepted as the true value

subject to fulfillment of certain tests. In such case the circumstances surrounding the transaction

are examine critically, and if, in light of information provided by the importer or otherwise

proved beyond doubt of the legitimate transaction methods the price declared is accepted as the

true value for customs of the goods imported.

Where the customs value of the imported goods cannot be established using the transaction

value then Customs Department is required to apply the transaction value of identical goods

imported at or within same time as the goods being valued at the moment. The test though

involves comparison of the specifications and quantities of the goods in the database and the

goods so valued to determine their identity for valuation purposes. If the imported goods are

identical with imported goods existing in the database then the valuation for identical goods is

done in line with imported goods in a short period. The application of this method requires the

use of more than one transaction value of identical goods.

Where goods cannot be valued basing on the transaction value or criteria of identical goods the

option is to use the transaction value of similar goods. Unlike the identical goods the similar

good criteria requires comparison of similarity features of the imported goods and similar goods

to be valued. Transaction value of similar goods method ignores differences in qualities and

quantities but allows adjustment for commercial level basing on evidences to justify accuracy to

an increase or decrease in value. Like the identical goods method the application of this method

also requires the use/comparison of more than one transaction value of similar goods. However,

in both situations the lowest values are used to determine the customs value of the goods to be

valued.

The determination of customs value of imported goods can also be established basing on the

computed value which consists of the sum of the costs of the value added to the imported goods.

29

In this case the proper officer should be in position to ascertain the cost or value involved in

producing that particular good, related profit as well as any related expenses.

The last optional method to determine customs value of imported goods is the fall back value.

This is applicable where all the above methods have proved failure. Under this method the

customs value is determined using reasonable means consistent with the principles and general

provisions provided in the Fourth Schedule basing on the data available in the database.

2.8 Research Questions

The research question was used to serve as guidance for collecting the data that had been used to

complement the objectives of this study.

Referring the above discussed taxation literature review some of the key questions were:-

(i) What is the practice when dealing with movement of goods between Zanzibar and

Tanzania mainland? What are the problems experienced by both TRA and business

community?

(ii) Is any consistency in customs valuation of goods between both sides of United Republic

of Tanzania?

(iii) What is the performance of TRA Zanzibar in terms of revenue collection?

30

CHAPTER THREE

THE ANALYTICAL FRAMEWORK OF THE STUDY

3.1 Developing the Framework

(i) Principles of Taxation

The Principles or Canons of taxation are considered as primary variables in evaluating the

customs administration in Zanzibar. These principles are such as Equality or Equity

Principle, Certainty Principle, and Convenience Principle, Economy Principle, Productivity

Principle, Flexibility Principle, Transparency Principle, Simplicity Principle, Diversity

Principle and Fairness Principle.

(ii) The Level of Taxpayers Voluntary Tax Compliance

This is another variable which is very important for any customs administration. This is the

willingness and commitment of taxpayers to adhere to all tax laws and procedures.

(iii) Tax Education Programmes and Provision of Quality Services to Taxpayers

Tax education programmes and provision of quality taxpayer services are key factors which

have positive effect to the level of voluntary tax compliance and have impact in revenue

collection.

(iv) Altitude of business community

The business community can be categorized into small, medium and large. Or

categorized in terms ownership (Sole proprietorship, partnership and Limited company)

each has different altitudes in implementing their tax obligations.

31

(v) Core Values of TRA Staff as per Corporate Plan

The Core Values state how employees are expected to relate to their clients, colleagues

and the TRA itself, and how they will accomplish their work. The following are core

values for TRA employees:-

(a)Business –Oriented and Professional in appearance and

approach.

(b)Fair and Accountable for the decisions they make in

their areas of responsibility.

(c) Prompt in the delivery of services and are Accessible.

(d)Treating taxpayers, colleagues and stakeholders with

Dignity and Respect.

(e)Honest and have Integrity in their dealings.

(f) Committed and Motivated to the achievement of TRA goals and objectives.

(g)Competent in the delivery of high quality services.

The greater the chances of abiding to the core values, the higher are likely to be the level of

integrity and commitment to the organizational goals.

(vi) Customs Laws and Procedures

The East African Community Customs Management Act, 2004 (EACCMA) is another key

variable in the study of importation and transfer of goods into Zanzibar and Tanzania Mainland.

32

(vii) Contribution of import duty in revenue generation

The performance of customs in Zanzibar is also a key variable in evaluating the viability of

customs reforms made by TRA.

3.2 The Analytical Framework of the Study

The greater the chances of complying with the canons of taxation by any Customs Authority, the

higher are likely to increase voluntary tax compliance and hence increase the revenue

performance. The issues of equality, fairness, transparency, certainty, flexibility, simplicity,

economy and diversity in tax administration are variables which must be considered in

developing customs laws, procedures and tariff structure. The methods of Customs valuation,

collection and enforcement measures should consider the principles of good tax administration

outlined above.

Other variables of interest to this study were tax education and quality service. If taxpayers are

provided with adequate tax knowledge, they will understand their rights and obligations and

hence tax compliance will increase.

Issues of taxpayers’ altitudes towards tax evasion, integrity of TRA staff and strict interpretation

and implementation of tax laws are crucial in achieving the objectives of any Tax Authority.

3.3 The Hypotheses

From the framework discussed above the following hypotheses were developed:-

Ha: There were weaknesses in Customs administration in Zanzibar in relation to the

importation of goods and transshipment to Tanzania Mainland.

Ho: There were no weaknesses in the Customs administration in Zanzibar in relation to the

importation of goods and transshipment to Tanzania Mainland.

33

3.4 Operational Definitions

For the purpose of this study:-

(a) The Principles of Taxation means all variables which form the acceptable standards to

judge any tax system as whether it is good or otherwise.

(b) Tax compliance means the level at which taxpayers pay their taxes in accordance to

tax laws and laid down procedures. However the level of tax compliance depends on

the adherence to the Principles of Taxation.

34

CHAPTER FOUR

RESEARCH DESIGN

4.1 Name of the Research Design

The name of the Research design used in the evaluation of tax administration in Zanzibar

was the “Survey type” This research design assisted the researcher to gather facts from the

field so that to understand the customs procedures which are involved in the importation

and transshipment of goods from Zanzibar to Mainland.

4.2 Data Collection Strategy

The types of data collected were statistical and narrative supporting the findings of the

research. The main sources of data were from the records of Tanzania Revenue Authority

and face to face interviews with taxpayers, TRA officials in Zanzibar. The sample was also

drawn from Taxpayers representatives such as Tax Consultants, Clearing and Forwarding

Agents and Leaders of Zanzibar Chamber of Commerce on one side and tax officials on the

other. Random sampling technique was applied.

The questionnaires and the interviewing leading questions were used to collect information

from the respondents.

4.3 Data Analyses Strategy

The data collected were analyzed on the basis of the number of respondents who were

interviewed. The nonparametric statistical test approach for measuring strength of relationships

between variables was applied for the purpose of this study.

The following Table presents a framework upon which data collection strategy was construed

and implemented.

35

Table 2: A framework upon which data collection strategy was

Construed and implemented

Variable

Measurement/ indicator Type of Data Carriers of

data

(Sources)

1 Revenue Collection

Collection performance of

import duty in Zanzibar

Tax collected

Vs Targets

for 5 years

Monthly

reports of

tax

collection

2 Transshipment of

goods from

Zanzibar to

Mainland

Items which are imported

and transshipped

Quantity of

selected

sensitive items

Differential

taxes collected

TRA

ASYCUDA

++ data

base and

economic

reports

3 Taxpayers’

satisfaction Number of complaints

regarding importation and

transshipment of goods

Registered

complaints

Help Desk

– TRA

Zanzibar

4 Tax awareness

Knowledge on tax issues by

taxpayers

Demonstration

of tax

awareness

Taxpayers

5 TRA Staff integrity

Percentage of respondents

who rated TRA staff

Registered

taxpayers and

other

stakeholders

Taxpayers

Source: Researcher’s analysis

36

4.4 Drawing the Conclusions

The conclusion focused on the recommendations on how to improve Customs administration in

Zanzibar in relation to importation and transshipment of goods between Zanzibar and Tanzania

Mainland.

37

CHAPTER FIVE

DATA ANALYSES AND DISCUSSIONS ON THE FINDINGS

5.1 Introduction

The main objective of the study was to evaluate the major opportunities and challenges facing

Customs administration in Zanzibar and give recommendations for improvement. In achieving

that objective, the study used both primary and secondary data.

Primary data

The primary data were gathered by using a questionnaire and interview. The questionnaire

method was the main data collection tool because the targeted sampled taxpayers had little or no

time for interview. An interview with the TRA management team in Zanzibar was conducted and

the focus was on the operations of Customs and Excise Department in the Islands of Zanzibar in

relation to mainland.

Secondary data

Various TRA documents both published and unpublished reports were visited including the TRA

Website ( www.tra.go.tz ). The Secondary data were important to this research so as to enrich the

collected primary data.

5.2 Name of the Statistical Test

The researcher applied the nonparametric statistical test in measuring strength of relationships

between variables and testing the hypotheses discussed in Chapter three above.

38

The researcher used both quantitative and qualitative methods in data analysis. Qualitative

method was used because most of the information gathered from the respondents was in a form

of opinions or views that expressed how they perceive Customs administration in Zanzibar;

Quantitative data were also used in this research for quantifying and measuring performance in

terms of revenue collection and level of compliance.

5.3 Methodology and Decision Criteria

The study was conducted in Zanzibar (both Unguja and Pemba islands). The researcher

employed purposeful stratified sampling method in selecting the respondents. This assisted the

researcher to include all element of population (Large, medium, small taxpayers and other

stakeholders in customs); hence, the sample was representative as targeted group had equal

chance of being selected.

The total of 74 respondents was sampled from both islands to represent the whole population of

taxpayers and other stakeholders. 38 of the total respondents (51%) were Sole traders, 10 (14%)

were in Partnerships and 26 (35%) were Limited Companies.

The total 5 of TRA staff were interviewed who comprised the Management Team in Unguja.

The decision criteria depended on the percentage of people or data which supported or disagreed

on the issues rose. The measurements were defined as follows:-

High - 70% to 100%

Medium – 50% to 69%

Low - 0% to 49%

39

5.4 Interpretation and Discussions of the Findings

This part discusses the interpretations of both secondary and primary data which were collected

in the course of research findings as follows:-

5.4.1 Secondary data

(i) Collection of customs taxes Vs. Total taxes collected by TRA.

TRA in Zanzibar is responsible to collect all Union Taxes which are Customs Duties and Income

Taxes. The contribution of Customs for the period of five (5) years is as indicated below:-

Table 3: Contribution of customs duties in revenue collections by

TRA Zanzibar (Tshs. Billions)

Tax Type 2002/03 2003/04 2004/05 2005/06 2006/07

Customs duties 17.64 16.63 14.99 14.48 20.42

Income Taxes 4.36 4.97 5.51 7.92 9.98

Total 22.00 21.60 20.50 22.40 30.40

Contri. of

Customs in %

80% 77% 73% 65% 67%

Source: TRA Zanzibar- Annual reports

The table above indicates that the contribution to the total revenue by customs is higher if we

compare with domestic taxes (Income Taxes). This is not a good fiscal policy to rely on as it

shows that the local production of goods and services in the country is very low. The

Government should encourage more direct investment in manufacturing, fishing and tourism

sectors and reduce tax exemptions on corporation profits and Value added tax.

40

On the other hand, the performance of customs – Zanzibar for the past four (4) years has been

below the targets as shown per table below.

Table 4: Actual collections from customs Vs .Targets by TRA Zanzibar (Tshs Billions)

2002/03 2003/04 2004/05 2005/06 2006/07

Targets 26.61 25.45 23.16 22.01 15.93

Actual 17.64 16.63 14.99 14.48 20.42

Perf. rate 66% 65% 64% 65% 128%

Source: TRA Zanzibar - Annual reports

According to TRA Management there is number of reasons for such poor performance including

loopholes for tax evasion, laxity of some officers, corruption and political interferences. In

2006/07 TRA Management undertook some initiatives to transform the Customs Administration

in Zanzibar including termination and transfers of staff, modernization of customs procedures

and enhancement of quality and responsive customer service and the provision of tax education

to taxpayers and other Stakeholders including the politicians as a result in that year the

performance was good.

It is recommended that TRA should continue to modernize its customs procedures and be

harmonized in both parts of the United Republic of Tanzania. And also training and re-training

on customer care to all staff should be seriously emphasized.

(ii) Imports vs. Transshipments/re-exports

The main source of revenue is mainly from customs duties charged on at least five sensitive

commodities of rice, wheat flour, sugar, cooking oil and kanga. However, majority of these goods

were transferred to mainland where the market is significantly bigger than that of Zanzibar.

The table below shows how much higher per capita importation of five commodities was in

Zanzibar than on the mainland

41

Table 5: Sensitive commodities- Average level of imports per Capita in Mainland and Zanzibar

(1997)

Item Mainland Zanzibar

Estimated

imports

(millions)

Population

in

(millions)

Per

capita

imports

Estimated

imports

(Thousands)

Population

in

(millions)

Per capita

imports

Rice (kg) 100.0 30.5 3.30 30.0 0.8 37.5

Wheat

Flour (kg)

20.0 30.5 0.66 12.0 0.8 15.0

Sugar (kg) 150.0 30.5 4.90 15.1 0.8 18.9

Cooking oil

(kg)

75.0 30.5 2.46 4.0 0.8 5.0

Kanga

(pairs)

6.0 30.5 0.20 0.8 0.8 1.0

Source: ESRF Report on Zanzibar Fiscal Policy, September 1997

The table above shows that at least half of what was imported was re-exported to mainland or nearby

countries such as Comoro and Mauritius. This has been the position for many years and even today.

However, in recent years importers who were based in Zanzibar now have decided to shift their

offices to Dar es Salaam where there is huge market for their importation. To those importers who

still use Zanzibar port instead of DSM port to import their goods and then transship them to

mainland claim to do this because of the following reasons:-

(a) Cargo clearance in Zanzibar takes short time compared to Dar es Salaam port.

(b) There are no demurrage charges at the Zanzibar port.

(c) Warehousing and internal transportation costs in Zanzibar are very low.

(d) Security of goods is very high in Zanzibar compared to Tanzania Mainland ports

42

(e) It is important to make the Zanzibar port busy and create employment through other related

services.

(f) Several interventions by the TRA staff, the Police and other security organs who ask for

bribe to clear your goods.

On the other side of TRA Management (The Commissioner for Customs & Excise Department

in Dar es salaam in particular) suspects that there was gross undervaluation, under-declaration

and existence of smuggling of goods into Tanzanian Mainland through Zanzibar. Both parties

may be right and also there may other more reasons. However It is recommended that TRA

should harmonize the valuation process so that the same goods are taxed in the same tax in

Zanzibar and mainland (all entry points) and more disciplinary and legal actions should be

instituted to those officers and clearing agents who collude to evade tax.

(iii) Staff capacity in customs operations at Zanzibar TRA Office

The strength or weakness of an organization depends on the competences of its work

force. The staff position that is under custom in Zanzibar is as indicated below:-

Table 6: Staff position in Customs – TRA Zanzibar as at 30 June 2009

Sin Qualifications Number of staff Percentage

1 Degree and above 12 16%

2 Post Graduate Diploma 6 8%

3 Advanced Diploma 6 8%

4 Ordinary Diploma 2 2%

5 Form IV – VI 48 62%

6 Below Form IV 3 4%

TOTAL 77 100%

Source: TRA Zanzibar- Human Resource files

43

TRA at side of Zanzibar has a total of 139 employees. 77 which is equivalent to 55% are

working with Customs and Excise Department, the rest 45% are in other departments.

66% of staffs who are working in Customs Zanzibar have no degree or diploma certificate. This

is another weakness which the TRA Management should consider to address. These people

should be upgraded academically due to many challenges of globalization and technological

advancement which they may encounter in their day to day activities.

The list of TRA Staff working in Customs and Excise Department- Zanzibar is shown in

appendix 1.

(iv) Registered complaints on various tax issues and corrective measures

TRA in Zanzibar has established the Taxpayers Services and Education section which

among of other duties it handles taxpayers’ complaints and enquiries. During 2008/09 the

section handled the following complaints.

Table 7: Registered Complaints on customs issues in relation to other tax issues in

Zanzibar TRA Office for the year 2008/09.

Sn Issues Number %

1 Customs Issues 6 16%

2 Other Tax Issues 32 84%

Total 38 100%

Source: TRA Zanzibar – Taxpayers’ Services and Education reports

During the year only 38 taxpayers used the official channel to register their complaints regarding

tax issues and only 6 were related to customs issues. It seems that most taxpayers are not ready

or they are not aware to use the laid down procedures to register their complaints or tax

objections.

44

The major issue which most taxpayers in Zanzibar complain is double taxation of goods which

they transfer from Zanzibar to mainland.

A sample list of types of goods frequently transshipped to Tanzania Mainland from Zanzibar

shows that a wide range of such goods are motor vehicles and general merchandise. As an

evidence of double taxation which is claimed by taxpayers from Zanzibar the table below show a

list of motor vehicles which were re assessed and the deferential taxes were charged by TRA

Customs Officers in Dar es Salaam.

Table 8: Re -assessed motor vehicles which entered in mainland from Zanzibar

During the month of July and August 2008

Sn Car make Zanzibar Valuation

In USD (CIF)

DSM Valuation

In USD (CIF)

Differential tax

in TSHS

1 Toyota Cresta

Model 1996

1,827.00 2,600.00 738,335.00

2 Suzuki Escudo 1,878.00 2,750 858,288

3 CMC M/Cycle 130.00 250 63,808.00

4 Suzuki Escudo 2,250 3000.00 400,784.00

5 Suzuki Jeep

1993

5,800.00 8,441 435,040.00

6 Suzuki Escudo

1994

AED 6,600.00 AED 8,833.00 356,939.00

7 Toyota P/up

1995

1,800.00 2,500.00 362,367.00

8 Suzuki Escudo HKD 11,344.00 HKD 14,607.00 412,902.00

9 Toyota cresta

1993

1,898.00 2000.00 87,922.00

10 Mitsubishi

canter 1996

2,202.00 3,200.00 596,447.00

11 Mitsubishi p/up

1992

2,600.00 5,013.00 873,077.00

45

12 Suzuki Escudo

1994

1,876.00 2,300.00 393,051.00

13 Mitsubishi

canter 1993

2,810.00 3,600.00 353,003.00

14 Toyota Dyna

p/up 1992

3,200.00 4,207.00 341,700.00

15 Toyota Collora

1995

1,345.00 2,320.00 932,469.00

16 Suzuki Escudo

1996

1,575.00 2,400,00 795,314.00

17 Toyota Mark II

1996

1,826.00 2,450.00 540,775.00

18 Mitsubishi

Canter

1,937.00 2,400.00 278,897.00

19 Suzuki Escudo 1,400.00 2,200.00 455,025,00

20 Nissan Mirch

1996

650.00 1,400.00 458,158.00

Source: TRA Dar es Salaam ASYCUDA print outs

Since both sides Tanzania are using the same customs law and procedures it unbecoming a

difficult to understand the reasons for charging differential tax on the goods crossing to mainland

from Zanzibar. This is big weakness in our tax administration.

(v) Tax education programmes conducted

Tax education seminars are one of the programmes of imparting tax knowledge to taxpayers in

order of enhancing tax compliance. The following seminars were conducted for 2007/08 and

2008/09 by TRA Zanzibar as shown per table below:-

46

Table 9: Number of Tax education seminars conducted in Zanzibar in 2007/08 and 2008/09

Sn Issues 2007/08 2008/09

1 Customs Issues 2 4

2 Other Tax Issues 9 19

Total 11 23

Source: TRA Zanzibar – Tax education Seminars monthly reports

For the period of two years 34 tax education seminars were conducted in Zanzibar, 6 seminars

(18%) were on customs issues. If we take into account that customs duties contribute more in

terms of revenue collection than other taxes the number of seminars conducted on this regard are

not adequate and more efforts is needed to educated the importers, clearing agents, shipping

agents and other stakeholders on customs procedures which on changing.

5.4.2 Primary data

(i) Rating of Customs administration in Zanzibar in the adherence to the Principles of good

Tax administration

71 respondents rated customs administration in Zanzibar as per table below.-

Table 10: Rating of customs administration in Zanzibar by Respondents

Sn Rating Frequency Percentage

1 Excellent 2 3%

2 Good 29 41%

3 Fair 40 56%

Total 71 100%

Source: Researcher’s Survey (2009)

47

From the table above, it seems that more than 50% of the respondents have indicated a negative

perception on customs administration in Zanzibar as regards to the adherence to the principles of

good tax administration. TRA should continue with its efforts of modernizing customs processes

in order to speed up clearance of goods and improve the trade facilitation.

(vi) Whether the current situation of having two revenue authorities is appropriate

54 respondents which is equivalent to 78% for various reasons are not satisfied with the current

situation of having two revenue authorities (TRA and ZRB) operating in Zanzibar only 13

(16%) respondents agreed to continue with the system while 7 (6%) were not aware on the

system.

This is the responsibility of higher authorities of the two Governments to put as an agendum

when discussing the union matters between Tanzania Mainland and Zanzibar. However it is

economically ideal to have one tax authority which can operate in both sides of Tanzania.

(vii) The type of taxes which are mostly evaded by non- compliant taxpayers

The respondents confirmed that there is tax evasion in Zanzibar to a certain degree. VAT is

leading followed with customs duties. The table below shows the response of the respondents on

the of tax evasion

48

Table 11: Response by Taxpayers on Tax evasion in Zanzibar

Sn Tax Type Frequency Percentage

1 Income Tax 5 8%

2 VAT 15 25%

3 Customs Duties 13 21%

4 Motor Vehicle taxes 4 7%

5 None 24 39%

Total 61 100%

Source: Researcher’s Survey (2009)

Customs is rated the second after VAT as the most evaded taxes. 39% of the respondents stated

that there is no tax evasion in Zanzibar. This indicates that tax evasion is still a challenge to TRA

if 61% of the respondents confirm that people evade tax in various areas.

(viii) Rating the performance of TRA and ZRB in collecting revenue

42 respondents out of 71 making a rate of (59%) confirmed that TRA in Zanzibar is perfoming

well in its role of revenue collection. On the other hand 32 (45%) respondents were happy with

the performance of ZRB.

There is need for these two tax Authorities to team up and cooperate in various aspects because

both of them are serving the same taxpayers and the same Government.

(ix) The assessment of corruption and an area where is more serious

The aim of this question was to get feedback from taxpayers on the issues of integrity of

tax officers. 23% of the respondents had the opinion that corruption is still higher in tax

administration especially in customs operations (At Zanzibar port). It is only 16% of the

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respondents who said that there is no corruption. Table 12 below gives general picture of

how the respondents perceived the level of corruption in Tax administration in Zanzibar.

Table 12: Perception of respondents on the issue corruption in tax administration in

Zanzibar

Sn Perception Frequency Percentage

1 High Level 14 23%

2 Moderate 22 36%

3 Low level 15 25%

4 Free corruption zone 10 16%

Total 61 100%

Source: Researcher’s Survey (2009)

If 84% of the respondents believe that there is corruption in tax administration then it is

upon the TRA Management and the enforcement organs to carry out further studies on

this issue and come up with recommendations which will lead for preventive actions.

(vi) Tax education programmes which meet taxpayers’ needs

The aim of this question was to measure the adequacy of tax education which is

offered by tax authorities in Zanzibar. Only 7 (10%) respondents out of 71 were

satisfied with tax education programmes which are offered by both TRA and ZRB in

Zanzibar.

This is true if we refer to Table 9 above, 34 tax education seminars were conducted

for two yeas an average of 1 seminar per month. The main problem which was

noticed is that there is only one person (Principal Taxpayer Education Officer) who

is responsible to educate taxpayers for both islands (Unguja and Pemba). TRA

50

should take a deliberate move to arrest the situation by adding at least two officers

responsible for tax education and services.

(vii) What is your opinion on the current customs tariff which is applicable on imports

62 respondents which is equivalent to 87% commented that the tariffs are extremely

higher. The “ability to pay” principle should be considered in setting the tax rates. It

seems that the current tax rates are higher and as a result people tend to evade tax.

5.4.3 Observations

(i) It was observed that although the law allows for tax payers to appeal when they are

aggrieved. But businessmen in Zanzibar usually do not appeal because most of the traders

are semi-literate and the appeal procedure is too cumbersome and most likely appeal

process increases compliance cost by businessmen. People just complain in different

forums on the issue of re-assessment of goods which are transferred to Mainland from

Zanzibar but they do not take actions to appeal through the appropriate legal machinery.

(ii) It has been noticed that a large section of the business community lack awareness over

their civic obligations to pay their contributions in form of taxes to facilitate the

Government provision of social services. Tax evasion is not considered as a crime like

other crimes by many people.

(iii) There is good cooperation between TRA and ZRB this is demonstrated by the fact that

some of staffs from ZRB are trained at the Institute of Tax Administration (ITA) which is

owned by TRA.

(iv) The business community in Zanzibar prefers to have a single tax authority which will be

capable to administer all taxes, instead of having two authorities (TRA and ZRB) as it

the case today, according to them this causes tax competition in Tax administration.

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CHAPTER SIX

CONCLUSIONS

6.1 Introduction

The evaluation of customs administration in Zanzibar shows that there are some weaknesses and

challenges which should be addressed. Regardless that customs duty is the major source of

revenue to the government but still is one of the areas which are encountered with complaints

from stakeholders.

Most of the taxpayers in Zanzibar complain on double taxation subjected on the goods which are

trans-shipped from Zanzibar to Mainland. On the hand the TRA Management have the opinion

that Zanzibar due to its nature is used as a corridor to evade tax through undervaluation and

smuggling of goods.

6.2 Conclusions

In summing up it was established that there are some problems in customs administration

especially when it comes to movement of imported goods between Zanzibar and Tanzania

Mainland.

The key identified problems are as follows:-

i. There is misconception of what constitutes transfer and trans-shipment of goods as it is

provided in the East African Community Customs Management Act, 2004.

ii. There is mistrust between TRA staff in Zanzibar and Mainland on the aspect of the basis

of valuation of imported goods.

52

iii. The allegation of interference by Politicians in Customs operations in Zanzibar is another

problem which cannot be overlooked.

iv. Illiteracy level on tax issues by businessmen in Zanzibar.

v. Some of the TRA officers lack adequate knowledge and skills as 66% of the staff in

Customs and Excise Department their basic education is Form VI and below.

vi. There are businessmen who are honest and others who are not. In the same way there are

Customs employees in Zanzibar and in Mainland who are not doing their job correctly.

This in manifested by 61% of respondents who believe there are tax evaders and 84% of

the respondents who agreed that corruption is still a problem in tax administration.

6.3 Recommendations

On the basis of findings of this study and the conclusions drawn above, the following

recommendations are made:-

i. At this point administrative measures should be applied to ensure that there is consistency

in customs operations at both levels of the Union. The common data base should

establish and enforced in all customs entry points.

ii. It is important to make known to all players that customs operations is a Union issue and

should be handled in the perspective of union without discrimination of one part.

iii. Tax education programmes should be enhanced including the establishment of the

Stakeholders Forum for Zanzibar like the one which was established in Mainland

iv. In carrying out the interviews with TRA Officers it was observed that there were political

interference and directives from the Zanzibar Government which most of them do not

53

have legal backing. The higher Authority from both Governments (Union and SMZ)

should discuss the issue and agree on the preventive measures.

v. There is a need to integrate TRA and ZRB in Zanzibar. We hope that this political move

will increase efficiency in Tax Administration.

vi. Much as there is need to aid Zanzibar traders to access the Tanzania Mainland market,

there is also a need to aid Customs in Zanzibar to collect the requisite taxes. This can

done through improvement of technology, increase the number of staff and equipment

such as the patrol boats.

vii. There is need to empower all Customs Officers with skills and knowledge and especially

on customer care.

viii. As shown in Table 3. The contribution of customs duties is more than 60% of total tax

revenue collected. This is an indication that the production of goods and services in the

country is very low. It is recommended that the SMZ in collaboration with the Union

Government to make measures of attracting Foreign and local investment in

manufacturing, fishing and tourism sectors.

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BIBLIOGRAPHY

Adams, C. J. (1996): Satisfaction with the tax authorities and

propensity to avoid taxes, University of Exerter Unpublished MSc Dissertation.

Ashworth, W.J (2003): Customs and Excise Trade, Production and Consumption in England.

Cowell, F. (1992): Tax evasion and inequality, Journal of Economic Psychology, No. 13.

East African Community Customs Management Act, 2004

Jenkins, G.P (1999): Public Finance Economics, Harvard Institute for International Development

Johnston, H (1902): A paper on Commercial possibilities – Uganda Protectorate.

Kasilo, D.M (2009): Abridged Version of Principles of Taxation

Lord Tomlin (1936): CIR V. Duke of West minis

Ministry of Information and Tourism United Republic of Tanzania (1968): Tanzania Today:

A portrait of the United Republic – University Press of Africa, Nairobi Kenya.

Musgrave, R.A and Musgrave, P.B (1984): Public Finance in Theory and Practice,

MCGRAW-HALL INTERNATIONAL EDITIONS.

Pearce, F.B (1967): Zanzibar the Island of Metropolis of Eastern Africa: Frank CASS & Co.

LTD.

Rosen, H.S and Gayer, T (2008): Public Finance (8th Edition), Macgraw – Hill International

Editions.

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Sabine, B.E (1980): A Short History of Taxation: London Butterworth’s

The World Bank (2002): Global Development, Financing the poorest countries.

TRA (2007): Tax Administration and Structure in Tanzania.

Waris, A (2007): Taxation without Principles: A Historical Analysis of Kenyan Taxation

System, KENYA LAW REVIEW

Webley, P Adams, C. and Elffers, H. (2002): VAT compliance in the United Kingdom,

The Australian National University, Centre for tax system integrity,

Website: www.taxhistory.org/thp/readings.

Website: www.tra.go.tz

Winnett, A. and Lewis, A. (1995): Household accounts, mental accounts, and savings behavior:

Some old economics rediscovered. Journal of Economic psychology, No. 16.

Wulf, L.D and Sokol, J.B (2004): Customs Modernization Handbook, Published by The World

Bank

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Appendix I

LIST OF TRA STAFF WORKING WITH CUSTOMS & EXCISE DEPARTMENT IN

ZANZIBAR AS AT 30th JUNE 2009.

SN NAME OF STAFF Section/Unit/Position

1 Ali B. Ame Manager – Customs

Zanzibar

2 Abdalla H. Ali Wete

3 Ali F. Ali Import Shed

4 Allan Mroki Dhow Shed

5 Ayoub K. Hamad Valuation

6 Badru A. Abdalla Import Shed

7 Fatma A. Shein CSC – ZNZ

8 Habib S. Sultan Chake chake

9 Ahmed M. Chwaya Valuation

10 Ibni Ahmada Dhow Shed

11 Khadija K. Said Manifest

12 Mabrouk H. Simai Manifest

13 Mohd A. Amour Airport

14 Onar Majaliwa Import Shed

15 Pili I. Ali Import Shed

16 Said S. Juma Airport

17 Seif H. Kabanda CSC-ZNZ

18 Shaaban Salim Free port

19 Shuweikha Khalfan CSC –ZNZ

20 Suleiman Abdalla Import Shed

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21 Tunu Jabr Manifest

22 Vumilia M. Chando Airport

23 Yusuf Haji Import Shed

24 Zulekha Nassor CSC- ZNZ

25 Abdi A. Suwed Prevention Services

26 Abdallah J. Saidan Prevention Services

27 Abdallah M. Ali Prevention Services

28 Ahmad O. Ahmad Prevention Services

29 Ali H. Salum Prevention Services

30 Ali H. Mkondo Prevention Services

31 Ali M. Juma Prevention Services

32 Ali N. Ali Prevention Services

33 Bahati Mwinyi Prevention Services

34 Bathlomew S. Kanjale Prevention Services

35 Daudi M. Shauri Prevention Services

36 Fredric Kamakuru Prevention Services

37 Gharib S. Said Prevention Services

38 Gwasira G. Mwaisumo Prevention Services

39 Habab A. Mussa Prevention Services

40 Haji K. Silima Prevention Services

41 Hamad Bawji Prevention Services

42 Juma. M. Omar Prevention Services

43 Juma M. Salum Prevention Services

44 Khamis A. Juma Prevention Services

45 Khamis A. Msheba Prevention Services

46 Khatib T. Nassor Prevention Services

47 Mahmood Mzee Prevention Services

48 Mariam A. Abdallah Prevention Services

49 Omar Juma Prevention Services

50 Mohamed Hassan Prevention Services

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51 Maulid Haji Prevention Services

52 Mohammed H. Mashaka Prevention Services

53 Mohammed H. Othman Prevention Services

54 Mussa H. Mussa Prevention Services

55 Mwita H.Ali Prevention Services

56 Mwita Sagamo Prevention Services

57 Mzee S. Ameir Prevention Services

58 Mzee S. Mndewa Prevention Services

59 Nassor A. Nassor Prevention Services

60 Nassor S. Makame Prevention Services

61 Omar H. Ali Prevention Services

62 Othman A. Othman Prevention Services

63 Ramadhan K. Ramadhan Prevention Services

64 Said K. Abdalla Prevention Services

65 Salum A. Kapimila Prevention Services

66 Salum M. Salum Prevention Services

67 Seif S. Seif Prevention Services

68 Seif S. Sultan Prevention Services

69 Shaaban H. Shaaban Prevention Services

70 Shaaban Said Prevention Services

71 Stephen D. Manda Prevention Services

72 Suleiman F. Haji Prevention Services

73 Suleiman Khamis Prevention Services

74 Suleman M. Amour Prevention Services

75 Tahir B. Jaha Prevention Services

76 Zaitun H. Saleh Prevention Services

77 Zakia J. Mohamed Prevention Services

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Appendix 2

EVALUATION OF CUSTOMS ADMINISTRATION IN ZANZIBAR

QUESTIONNER FORM FOR TAXPAYERS.

Please tick what you think or believe is the appropriate answer from the following questions:-

1.0 What is the type of ownership of a business you are engaged in?

Sole proprietorship

Partnership

Company

2.0 Generally, how do you rate the Customs administration in Zanzibar considering in mind

the adherence to the principles of good tax administration?

Excellent

Good

Fair

3.0 Currently there are two revenue authorities operating in Zanzibar (TRA

and ZRB). Do you think this is appropriate?

Yes

No

If No, why? ………………………………………………………………………

……………………………………………………………………………………….

4.0 What type of tax is mostly evaded by non- compliant taxpayers?

Income tax

VAT

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Import duties

Motor vehicle taxes and fees

None

5.0 How you can rate the performance of TRA in collecting revenue on behalf of

the Government

Excellent

Good

Satisfactory

6.0 How you can rate the performance of ZRB in collecting revenue for

Government

Excellent

Good

Satisfactory

7.0 What is your assessment of corruption in tax administration in Zanzibar?

High level

Moderate

Low

Free corruption zone

In which area do you think corruption is more serious? …………………………

8.0 Do you think TRA and ZRB have adequate tax education programmes which

meet taxpayers’ needs?

More than adequate

Adequate

Inadequate

No programmes at all

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9.0 What is your opinion on the current customs tariff which is applicable

imports?

High

Affordable

Low

10.0 What are your recommendations in order to improve customs administration?

(In Zanzibar)

----------------------------------------------------------------------------------------------------

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Appendix 3

EVALUATION OF CUSTOMS ADMINISTRATION IN ZANZIBAR

CHECK LIST FOR INTERVIEWING TRA OFFICIALS

1.0 Check the number of staffs who are working under Customs and Excise Department in

relation to other departments. And their level of education.

2.0 Check the departmental revenue collections for five years in TRA Zanzibar.

3.0 Check the samples of goods which were re-assessed when were transferred to Mainland

from Zanzibar.

4.0 Check the number of registered complaints on various tax issues at Zanzibar TRA Office.

5.0 Ask the TRA Management in Zanzibar on the problems they are facing in collection of

import duties in comparison with other taxes.

6.0 Enquire on the role of Technology in customs administration. How taxpayers react on

changes which are introduced due modernization processes.

7.0 Check the number of Tax education seminars conducted for customs in comparison with

other taxes.

8.0 Ask if there is any political interference when making decisions of customs issues.

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64

65