The pandemic, Covid-19, continues to hit almost all economic sectors in Tanzania. This is despite the official reports that the pandemic is now subsiding in Tanzania. Tourism is among the worst-hit sectors so far. The United Nations World Tourism Organization (UNWTO) estimates a decline of between 20-30 per cent in global international tourist arrivals in 2020. Before the pandemic, a 3-4 per cent growth was estimated for 2020. According to UNWTO, this may mean a loss of US$30-50 billion in spending by international visitors.
Early May 2020, the government (through the Minister for Natural Resources and Tourism) projected that 76 per cent (i.e. from 623,000 to 146,000 jobs) of the total direct employment in tourism will be lost as the number of tourists estimated to visit Tanzania during that Covid-19 period declines to 437,000 (from 1.9 million tourists recorded by end of 2019). The earnings from the sector are expected to shrink from US$2.6 billion to US$598 million by the end of 2020. The sector is the leading foreign exchange earner for Tanzania’s economy. It has been a positive contributor to economic growth and employment. With tourism’s multiplier effect, several related sectors or subsectors are, by implication, also severely affected. Think of tourists spending on, for example, hunting, accommodation, meals and drinks, shopping, transportation (charters, car hire), tours, communication, travel agency business, recreation, cultural and sporting activities. These have all been affected.
UNWTO claims that tourism is a sector with a proven capacity to bounce back and multiply recovery to other sectors of economies. But obviously, some measures need to be taken. Measures that would attract again tourists and stimulate their spending while in Tanzania. Also, measures that would encourage most players in the sector to revive their businesses and attract new investments into the sector. Tax is among the areas that can be reformed to help the sector resuscitating. Even before COVID-19, already, tax was one of the most problematic areas in the tourism sector in Tanzania. Both, from the perspectives of taxpayers as well as tax administration (TRA). In 2015, Jacques Morisset, the World Bank lead economist for Tanzania, in his report a report titled “The Elephant in the Room: Unlocking the Potential of the Tourism Industry for Tanzanians” identified several challenges in the sector. Morisset argued that multiple taxes and levies inhibit tourism, discourage investors, and create room for corruption. In 2018, similar sentiments were echoed by the Blueprint for Regulatory Reforms to Improve Business Environment, a report authored by the Ministry of Industry and Trade.
So, as we near the Budget day for 2020/21, one would reasonably expect some tax stimulus for the tourism sector. The economic outlook suggests the need for policies that would stimulate the tourism sector in the short run. But, the long-run revenue impact of stimulus policies should be projected and limited, to avoid exacerbating long-term fiscal challenges.
Any thoughts? As a short-term measure, operators (employers) in the tourism sector can be exempted from both the Skills and Development Levy (SDL) and Workers Compensation Fund (WCF), say, for up to three years. Currently, SDL rate stands at 4.5 per cent and WCF is 1 per cent of the employment cost. The exemption will reduce the cost to employers in the sector and may encourage new jobs, job retention and probably also translate into even better pays to employees. Another area is the VAT. VAT is a tax on consumption. Reduction of this tax is likely to stimulate consumption. If the VAT refund system could be made to work, one option would be to zero-rate some services that are supplied to international tourists. Another option is to exempt the services, although this is less likely to reduce prices. But given the current complexities and controversies in accounting for the VAT by most players in the sector, the exemption will be received with jubilation. Also, income tax reforms can be made to encourage new investments. Temporary provisions can be made to provide accelerated depreciation allowance, expensing, or tax credits for new investments in the tourism sector.
By Shabu Maurus, Tax Partner, Auditax International.