Tanzania’s SMEs: Navigating tax landscape (Part 1)

TANZANIA: SMALL and Medium Enterprises (SMEs) are the heartbeat of the country’s economy, serving as dynamic drivers of growth, innovation and opportunity.

These enterprises contribute over 35 per cent to the national GDP and employ a vast segment of the workforce, making them indispensable to the country’s prosperity.

Beyond spurring economic progress, SMEs actively transform lives by reducing poverty and uplifting communities through localised solutions and entrepreneurial ventures.

They embody resilience and adaptability, reflecting the vibrant spirit of Tanzania’s socio-economic evolution. This discussion delves into the intricate tax landscape faced by SMEs in Tanzania.

It aims to illuminate the challenges and opportunities inherent in the taxation system and explore how these factors influence the growth and sustainability of small businesses.

By understanding these dynamics, policymakers, stakeholders and entrepreneurs can collaboratively shape a more enabling environment for SMEs to thrive.

To provide a comprehensive analysis, this exploration relies on a robust methodology, incorporating a combination of case studies, surveys and interviews with SME owners.

The case studies offer in-depth insights into the real-world experiences of businesses navigating the tax system.

Policies Review

Mr Simbawene Kitalu, a renowned consultant from Tanzania, highlights the significant strides the country has made in fostering the growth of SMEs through progressive policies.

“The National SME Development Policy, introduced in 2003, serves as a cornerstone for SME growth by addressing critical challenges in accessing finance, technology and markets,” explains the Arushabased expert.

“This policy has successfully bridged the gap in financial access, increasing the percentage of SMEs with access to credit facilities from 20 per cent to over 40 per cent. Moreover, it has emphasised technology transfer initiatives, equipping nearly 30,000 SMEs with modern tools and techniques since its implementation,” he elaborates.

Supporting these insights, Mr Yudathadey Kavishe, an esteemed expert in the field, underscores the importance of formalisation as a critical pillar for SME growth.

“Formalised SMEs contribute approximately 70 per cent more in tax revenues compared to informal ones,” he points out.

To encourage this transition, he highlights the government’s proactive measures, such as simplifying business registration processes reducing the time from 30 days to less than 7 days and launching nationwide public awareness campaigns.

“These campaigns have successfully reached over 1 million informal businesses, motivating them to formalise their operations and integrate into the formal economy,” Mr Kavishe adds.

Together, their insights paint a compelling picture of how Tanzania is creating an enabling environment for SMEs to thrive.

An anonymous BoT executive based in Mwanza highlighted the pivotal role of initiatives like the Small and Medium Enterprises Credit Guarantee Scheme (SMECGS) in fostering financial accessibility for SMEs.

This scheme significantly reduces the risk borne by financial institutions, encouraging them to extend affordable credit to small businesses.

Additionally, the government actively partners with banks and Microfinance institutions to develop customised financial products that cater to the unique challenges faced by SMEs.

Beyond facilitating access to credit, targeted capacitybuilding programmes are also implemented, equipping SME owners with vital skills in financial management, entrepreneurship and technology adoption. These efforts collectively enhance the competitiveness and resilience of small businesses in the evolving market landscape.

Tax System Review

The tax landscape for SMEs in Tanzania is governed by a blend of supportive and compliance-driven policies. Key tax policies include the Presumptive Tax System, the Value Added Tax (VAT) structure and the Tax Administration Act of 2015, all of which simplify tax obligations for small businesses.

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During an interview, Lisa Kileghe, a tax consultant based in Kahama, shed light on how the Presumptive Tax System effectively supports SMEs with annual turnovers below 100m/- by offering a tiered structure that significantly reduces administrative complexities.

She further highlighted that the VAT system mandates registration for businesses exceeding 100m/- in turnover, requiring them to contribute to public revenue through a standardised 18 per cent rate.

Ms Kileghe emphasised that the Tax Administration Act complements these systems by providing SMEs with clear guidelines on compliance, dispute resolution and penalties, thereby fostering a transparent and predictable taxation environment.

Building on this, Seleman Issa, an economist based in Shinyanga, elaborated that compliance requirements are carefully tailored to different turnover brackets, striking a balance between regulation and business growth. He explained that SMEs earning below 4m/- annually are exempt from income tax, while those in higher brackets follow specific turnover-based obligations.

Mr Issa also pointed out that VAT registration entails periodic filings and the mandatory use of Electronic Fiscal Devices (EFDs) to enhance accuracy and accountability. These combined measures, he noted, demonstrate the government’s strong commitment to fostering a tax system that not only supports SME growth but also ensures robust regulatory adherence.

To illustrate the impact of these reforms, a recent survey highlighted the case of Kazi Bora Traders, a small retail shop in Arusha. Before enrolling in the Presumptive Tax System, the business struggled with complex tax filing procedures that hindered growth.

However, by adopting this simplified framework, Kazi Bora Traders was able to streamline its tax obligations, cutting administrative costs by 30 per cent. This enabled the owner to dedicate more time and resources to operations, resulting in a 15 per cent increase in annual turnover.

Despite these successes, the owner acknowledged challenges such as limited digital literacy, which occasionally impeded the effective use of electronic tax systems. Such examples underscore the dual need for simplified compliance processes and targeted capacity-building initiatives to fully empower SMEs.

Excise duties and withholding taxes are applicable to specific industries, such as manufacturing and construction.

These taxes are calculated based on the nature of the goods or services provided. For SMEs involved in cross-border trade, customs duties and tariffs are governed by the East African Community (EAC) Common External Tariff, ensuring uniformity and reducing trade barriers within the region.

Penelope Mhandiki, an independent researcher based in Dar es Salaam and an alumnus of Wits Business School, highlights the significant strides made in SME tax compliance in recent years.

“Between 2015 and 2023, compliance rates for VAT filing increased from 65 per cent to 78 per cent, driven largely by digital innovations such as the Electronic Tax Management System (ETMS) and targeted education campaigns by the Tanzania Revenue Authority (TRA),” she explained.

According to TRA reports, as of 2022, over 50,000 SMEs had registered on the ETMS platform, resulting in a 20 per cent reduction in tax filing errors.

Furthermore, the adoption of Electronic Fiscal Devices (EFDs) has significantly improved transparency and accountability, with more than 90,000 EFDs distributed to SMEs nationwide by 2023. When discussing these findings, Ms Joyce Kachema from Kachema Associates remarked, “This data clearly demonstrates how these initiatives have helped reduce tax evasion by nearly 25 per cent in critical sectors such as retail and manufacturing, contributing an impressive 300bn/- in additional annual tax revenue.”

Despite these achievements, both experts emphasised that challenges remain, particularly in reaching rural SMEs where awareness of tax compliance tools is limited and operational costs for adopting such tools are high. These ongoing issues underscore the importance of continuous reforms and targeted support programmes to create a more inclusive and optimised tax environment for SMEs in Tanzania.

Market Access and Regulatory Frameworks

When discussing Tanzania’s market access strategies, a panel of four procurement experts Mr James Kirika, Juma Pendaeli, Juliana Peter and David DAILY NEWS FRIDAY, JANUARY 24, 2025 5 Tanzania’s SMEs: Navigating tax landscape (Part 1) “Out of a population of more than 60 million people, only about 2 million individuals pay taxes, creating an imbalance in which a small minority shoulders the tax burden for the entire country.”

Tax for Development & Better Social Services President Samia Suluhu Hassan Mosha unanimously agreed that the government has implemented impactful initiatives and policies prioritising SMEs in local procurement.

James Kirika, a prominent specialist in procurement, logistics and supply chain management, highlighted the Local Content Regulations under the Public Procurement Act, which mandate that SMEs receive at least 25 per cent of government contracts.

“This policy has directed over 1.2tri/- annually to SMEs since 2020, creating significant opportunities for local businesses,” he explained.

The panel further emphasised on the importance of platforms such as the Dar es Salaam International Trade Fair, which attracts over 500,000 participants from more than 30 countries annually.

“These trade fairs facilitate deals worth approximately 200bn/- each year, helping SMEs expand their reach and revenue streams,” noted Juliana Peter.

Government-sponsored initiatives like the Export Credit Guarantee Scheme (ECGS) were also praised for extending over 50bn/- in credit guarantees to SMEs since their inception, enabling access to international markets.

Juma Pendaeli underscored the value of partnerships with regional organisations such as the East African Business Council (EABC).

“These collaborations have bolstered cross-border trade opportunities, with SMEs contributing over 15 per cent to intra-EAC trade by 2023,” he remarked.

The panel concluded that these initiatives not only diversify revenue streams for SMEs but also encourage innovation and improvements in product quality to meet global standards. Regulatory frameworks have been streamlined to create a more business-friendly environment.

SHOE traders arrange their items near Mbezi Bus Terminal in Dar es Salaam while waiting for customers

For instance, the establishment of the Business Registration and Licensing Agency (BRELA) has made it easier for entrepreneurs to register their businesses online, reducing the registration time to as little as three days.

Additionally, the government introduced the Fair Competition Act, which actively addresses monopolistic practices and ensures fair play in the marketplace.

Another notable example is the Tanzania Investment Act, which provides incentives and protections to SMEs investing in priority sectors such as agriculture and renewable energy. These frameworks collectively aim to minimise bureaucratic hurdles, promote transparency and create a level playing field for SMEs to thrive in a competitive economy.

Conclusion

By implementing these multifaceted policies, the country is cultivating an ecosystem where SMEs can thrive by addressing their unique challenges and unlocking growth potential.

Strategic initiatives in tax reform, capacity building and regulatory enhancements not only simplify business processes but also empower SMEs to drive substantial contributions to the national GDP, create employment opportunities and compete effectively on a global scale.

These initiatives exemplify Tanzania’s forward-looking vision to establish SMEs as essential engines of economic progress and pillars of inclusive development, ensuring long-term resilience and prosperity.

Stay tuned for part two of this article, where the ‘Daily News’ will delve deeper into the specific challenges SMEs face and explore the hurdles that must be overcome to fully realise their potential.

● We want to hear from you! Share your thoughts and experiences on how Tanzania’s tax system impacts SMEs by reaching out to us at 0655963224 or emailing kelvinmsangi@ protonmail.com Your input is invaluable in shaping policies that are fair, efficient and supportive of SME growth. Let’s work together to create a tax environment that empowers small businesses and drives economic progress for all Tanzanians. Join the conversation today

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