April 1, 2019

Tax Body Collecting 67% Less From VAT

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Head Office of the Rwanda Revenue Authority in Kigali

The Rwanda Revenue Authority (RRA) is only able to collect about 33 percent of what it should from the Value Added Tax (VAT), says a new report.

In 2001, Rwanda replaced sales taxes with a VAT – which is a consumption tax paid on anything everyone buys.

At the same time Government replaced the 15 per cent sales tax in 2001 with a 15 per cent VAT and then raised it to 18 per cent in 2002.

Rwanda is not alone on the continent in making this shift, according to the report by the UN Economic Commission for Africa (UNECA).

Goods and services (sales) taxes are the principal source of tax revenue in many countries. Since 2000, governments have undertaken many reforms on this crucial tax source, ranging from introducing the VAT, to replace those taxes, and adjusting VAT rates.

As a result of the changes by Rwanda, VAT revenue rose from 3.2 per cent of GDP in 2001 to 4.7 per cent in 2016. This makes Rwanda depend largely on this source of tax revenue.

One of the major explanation for the rise in revenue has been use of technology by Rwanda which has substantially eased tax administration and collections.

The potential gains are substantial. Rwanda was able to increase revenue by 6 per cent of GDP after introducing e-taxation and e-filing. One of these is the so called EBM or Electronic Billing Machine – a small tool that captures all sales, thereby allowing RRA to know how much you owe it.

The other policy action Rwanda took was that it reduced the time to file VAT returns from 45 hours to 5.

However, despite VAT being such necessity to the Rwandan government as a major source of revenue, the tax body has tax gap of 67.3%.

The tax gap for the VAT is essentially the shortfall between potential and actual VAT collections. And Rwanda is not alone.

UNECA’s report studied 24 African countries, the only ones found to have adequate data. Twelve (12) had a VAT gap of 50 per cent or more in 2018 – including Rwanda, while 12 had a gap of less than 50 per cent.

But even as Rwanda seems to be getting less revenue, the situation is worse in Uganda at 71.4% – which is third worst level after wartorn Central African Republic (CAR) at 92.2%, and Eswatini (former Swaziland) at 86.1%.

Tanzania is collecting 70.4% less revenue from VAT, a key source of tax. Meanwhile, Kenya is at 65% – essentially meaning all East African Community members are losing out on more than 60% of VAT revenue.

The reason Rwanda, and the others are getting less from VAT is attributable to inadequate fiscal policy and low tax capacity, leakages in revenue collection and weak enforcement.

South Africa, Cape Verde, Mauritius and Morocco are the star performers that are missing out on less than 30% of VAT revenue.

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