Munich Personal RePEc Archive The reform of the tax system in Swaziland Ayoki, Milton Institute of Policy Research and Analysis 30 November 2017 Online at https://mpra.ub.uni-muenchen.de/84739/ MPRA Paper No. 84739, posted 23 Feb 2018 17:40 UTC The reform of the tax system in Swaziland Milton Ayoki Institute of Policy Research and Analysis Kampala, Uganda IPRA Working Paper 58 Institute of Policy Research and Analysis, Kampala November 2017 ii 1 Introduction Disclaimer: This is a working paper, and hence it represents research in progress. IPRA Working Papers contain preliminary material and research results, and are circulated prior to a full peer review in order to stimulate discussion and critical comment. Abstract This paper documents the tax reforms implemented in Swaziland since the 1990s and how they have contributed to revenue collection. Reforms have had a major impact on collection of indirect taxes (especially VAT) but no clear impact on receipts of direct taxes and trade taxes. Despite efforts to broaden the tax base, tax collection is still heavily concentrated on very few sources, with SACU receipts alone accounting for more than one-half of total revenue. Growth in revenue collections from direct taxes on income and profits, and indirect taxes on goods and services remain substantially too low to compensate for the loss in import tariff revenues. JEL Classification: H20, H24, H27. Key words: Tax Reform, Tax System, Tax Administration and Policy, Swaziland. ii REFORM OF THE TAX SYSTEM IN SWAZILAND iii Contents 1 Introduction ............................................................................................................... 1 2 Major tax reforms in Swaziland .............................................................................. 2 3 Structure of domestic taxes ...................................................................................... 7 3.1 Income tax ................................................................................................................... 7 3.2 Withholding taxes ..................................................................................................... 11 3.3 Value added tax ......................................................................................................... 11 3.4 Excise taxes ............................................................................................................... 17 3.5 International trade taxes ............................................................................................ 17 3.6 Other taxes ................................................................................................................ 19 3.7 International comparison ........................................... 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Bookmark not defined. 4 Tax administration .................................................................................................. 19 4.1 Historical perspective ................................................................................................ 19 4.2 Organization of tax administration operation ........................................................... 21 4.3 Tax management processes ....................................................................................... 23 5 Revenue performance ............................................................................................. 29 5.1 Overall tax effort ....................................................................................................... 29 5.2 Taxes on international trade ...................................................................................... 32 5.3 Indirect taxes on goods and services ......................................................................... 33 5.4 Direct domestic taxes ................................................................................................ 34 5 Conclusions ............................................................................................................... 38 References ............................................................................................................................... 39 iii 1 Introduction Over the past one decade, the Government of Swaziland has undertaken a comprehensive reform of its tax system to enhance revenue collection including rationalizing the tax structure and rates, replacing the sales tax with value-added tax and modernization of tax administration system, among other measures. This paper documents the major tax reforms that have been implemented in Swaziland since the 1990s and the trends in tax revenues. For over thirty years since independence in 1968, Swaziland maintained a tax system that can best be described as a simplified version of the colonial tax system as it existed around 1920s and 1950s. Since the major reforms of the income tax in 1975 and 2001, no major changes of the indirect taxes and tax administration system took place until recently. In terms of aggregate revenues raised, Swaziland did well until the late 1990s when the full effect of trade liberalization began to emerge. The recent reforms of the tax system have been triggered by five revolutionary events that have impacted the domestic economy—(i) a reduction in common external tariff rates due to trade liberalization; (ii) the fiscal crisis of 2010–11; (iii) the high volatility of the SACU revenue and the uncertain prospects for South African economy; (iv) rising budget deficit, aggravated by the collapse of the fiscal discipline; and (v) the increased pressure to maintain a prudent fiscal policy stance—and strengthen Swaziland’s resilience to shocks. Reforms implemented since 2001 aim at improving administrative efficiency and tax compliance; rationalizing the tax structure and rates, widening the tax base and simplifying tax procedures. The tax system is now much different from the one that existed in the 1990s. The income tax rate structure has been transformed, the taxation of savings has been adjusted, the indirect tax has been transformed (the sales tax replaced with VAT, and some excise duty rates have adjusted). The question that remains is the outcomes of these reforms, in terms of revenue collection. Evidence suggests that the record of tax reforms in improving tax effort in developing countries is mixed (Ayoki, 2007). In Uganda, Ayoki (2005) concludes that reform had a major impact on collection of direct taxes but no discernable effect on receipts of import duties and excise taxes. In Tanzania, the improvement in tax effort was modest. The tax-to-GDP ratio increased by about one percentage point in Tanzania, between 1995 and 1996, and less than 0.3 percentage point in Rwanda between 2 2 Major tax reforms in Swaziland 1997 and 1998, compared with 3 percentage points in Burundi between 2010 and 2011. While the tax-to-GDP ratio increased by less than five percentage point in Mexico between 1996 and 2005, it rose by 6 percentage point in Peru between 1987 and 1997 (i.e. from 9 percent in 1987 to 15 percent in 1997) with the establishment of the new revenue authority. Revenue collection also improved by 7 percentage point in the first 6 years of Uganda Revenue Authority (from 4 percent in 1990 to 11 percent in 1996) and by 9 percentage point in Ghana (from 7 percent in 1984 to 16 percent in 1996). In other countries such as Ethiopia, South Africa and Venezuela, the improvement in tax effort has been rather modest. In Ethiopia, for example, tax/GDP ratio increased from 9.5 percent in 2008 to 11.2 percent in 2010, while in South Africa, tax effort rose from 24 percent in 1996 to 26 percent in 1999. In Venezuela, the tax/GDP ratio went up from 14 percent in 1993 to 17 percent in 1997. Similarly, in Colombia, the ratio rose from 10 percent in 1990 to 13 percent in 1997. This paper shows that the tax reforms have had a major impact on collection of indirect taxes especially, VAT but no discernable impact on receipts of direct taxes. Despite efforts to broaden the tax base, tax collection is still heavily concentrated on very few sources. We begin in Section 2 with a description of the major tax reforms in Swaziland. The structure of each of the main taxes: income tax; value added tax; excise taxes and other indirect taxes; and taxes on international trade are examined in Section 3, while Section 4 looks at the tax administration. Section 5 assesses the total amount of revenue raised by Swazi tax system and the contribution made by each tax to this total, and section 6 concludes. 2 Major tax reforms in Swaziland Recent reform of the tax system in Swaziland has been driven by the need to improve the institutional capacity to collect taxes, and the realization that resource mobilization and development would be better served by a gradual shift from taxes on trade toward taxes on consumption and income. In addition, reforms have been motivated by the changes in South Africa’s business taxation, and the need to remain competitive with South Africa. Seen this way (and following the same template that many other African countries have used to reform their tax systems), three broad sets of reforms have been implemented: (i) 2 Reform of the Tax System in Swaziland 3 reforms aimed at simplifying the tax structure and reducing the administrative burden of tax compliance; (ii) reforms aimed at strengthening tax administration and maximising efficiency of revenue collection, and broadening the tax base; and (iii) reforms aimed at removing inconsistencies between existing revenue laws and closing possible loopholes in the tax