‘Un-refunded VAT, additional 15% import duty on industrial sugar cause business decline’ – CTI Survey

‘Un-refunded VAT, additional 15% import duty on industrial sugar cause business decline’ – CTI Survey

A survey conducted by the Confederation of Tanzania Industries (CTI) to its members has established that un-refunded Value Added Tax (VAT) and the additional 15% import duty on industrial sugar have significantly contributed to the decline of businesses to some manufacturers as it costs TZS 30bn and TZS 3bn in bank interest.

The additional 15% import duty on industrial sugar was introduced by the government purportedly to curb few unscrupulous importers of the commodity who the government say were using it for unintended purposes, an act which denies the government the badly needed revenue.

The findings of the survey: 

  • Demand for construction materials such as cement, iron and steel and chemicals have decreased but few increased their demand especially for cheap and low-quality brands while high quality premium brands in general experienced a decline in sales and consequently their returns for investments.
  • Capacity utilization is above average (50%) for manufacturers such as food and beverages (soft drinks), printing and paper manufacturers, cement, plastics, iron and steel, pharmaceutical and chemicals, but below average for manufactures such as hard drinks, textiles, soap and detergents. Decline in consumer purchasing power and stiff competition from cheap imports are cited as major reasons for the situation.
  • On average, many industries had not changed their employment significantly. However, various sources of information including the Ministry of finance and institutions such as TRA, TPSF, and CTI show that a number of businesses and industries were closed (either permanently or temporally). One TPSF study quotes a speech by the Ministry of Finance and Planning indicating more than 1,872 businesses organizations closed their businesses in DSM and Arusha leading to employment reduction in the country (more than 1076 only in DSM).
  • Additionally, available information from various sources shows that more than 200 industries closed their business in the past few years leading to unemployment (direct and indirect) for majority of their workers.
  • Most industries are facing challenges in their production and capacity utilization affecting profitability and returns on their investments. Disaggregated results show that manufacturers of high quality roofing products (premium brands), hard drinks and carbonated drinks such as Beer, Spirits, and Soda producers were negatively affected with the trend.
  • The un-refunded Value Added Tax (VAT) and the additional 15% import duty on Industrial Sugar represent borrowed funds in financial institution. It ties manufacturers’ capital and increases cost of production for local producers and makes Tanzania producers competitively disadvantaged in some products. Moreover, Soft drinks manufactures were of the view that when all additional costs and VAT payment for imported industrial sugar is added, the effective tariff for imported industrial sugar is approximately paged at 16% of the CIF value of the commodity as compared to other East African Manufacturers who only pay an additional VAT of 10% of CIF value. Since this represents one key red tape for industrial growth, the government has been requested to quickly repay the long-standing refunds. 

Why the survey: 

  1. To illustrate the performance of the sector and key challenges that affect and constrain industrial growth in Tanzania by answering questions regarding the trend in the production (capacity utilization) for industries, current trend in investments, employment, consumer demand, sales or profit, affected products and type of manufacturing industries highly affected and why.
  2. Interviews were held with executive officers/representatives for umbrella organizations such the TPSF, CTI, TCCIA, and Tanzania National Business Council (TNBC) while consultation with sampled industrial owners as categorised by the CTI industrial sub-sectors were also held
  3. A sample of 60 members was purposefully selected from Dar es Salaam region and questionnaires were distributed to the organizations. However, only 48 (80%) of sampled manufacturers managed to respond to the questionnaires distributed

Recommendations: 

a. Protection for local industries from unfair competition

The study has established that majority of manufactures are operating below capacity, decline sales volume, profits, and fall in returns for investments. Consequently, some have laid off their workers as a copping strategy and some lowered their market prices. This problem is partly attributed to existence of un-fair competition brought by cheap imports. There is a need to restrict importation for sub-standard goods and make sure there is level playing field in the market. Cheap imports (sometime done under a dumping strategy) are confirmed to exist in the market and bring unfair competition to local products denying local manufacturers a market.

b.Address Inconsistent in tax structure 

The study has established that inconsistent tax structure is one critical challenge especially for imported raw materials, semi-finished and capital goods as some are treated at the same import tax rates as completed goods leading to high cost for raw materials. The case studies presented show challenges in tax policy and tax rates for imported raw materials. The challenge is sometimes a result of policy dilemma and conflicting policy objectives where-by attaining one objective requires foregoing another. There is a need for the Government of Tanzania (GOT) to reform the tax structure such that it well recognizes raw materials, semi-finished and finished products at all value additional stage. Moreover, with the 5th phase industrialisation objective at hand, the government should be ready to forego some tax revenue through import tax lost when import duty is lowered for industrial growth purposes (at least for short and medium terms).

c.Improving the business environment

The survey has established that one element that worsens the business environment is the existence of un-refunded import duty (for imported industrial sugar) and VAT (for exporters) which amounts to approximately TZS 30bn and TZS 3bn as bank interests. As this represents borrowed funds it ties manufacturer’s capital, increases cost of production for local producers, makes Tanzania producers competitively disadvantaged in some products and generally worsen the country’s business environment. GOT is requested to quickly finish the long-standing audits that delay the import duty and VAT re-imbursements and finally repay the due re-imbursements. Other suggested reforms include reducing unnecessary cross border trade restrictions such as export bans for foods items, ensure reliable power sources and reduce unnecessary bureaucracy in getting various business permits.

Other policy recommendations:

GOT should desist from ad-hock policy decisions that may impact negatively in businesses. As suggested in the Blue print report the government of Tanzania is requested to merge some regulatory agencies with similar functions as they increase cost for producers and sometimes cause confusion in their decisions. Additionally, GOT should try as much as possible to reduce Political interferences in businesses; improve its consultation process and research; this comes from the fact that some manufacturers were of the view that some of their concerns are the results of in-available enough consultations and researches before making major policy decisions.