INTENSE observations on the balance between revenue aims and promoting growth were at hand as private sector executives raised significant concerns over specific proposals in the Finance Bill for fiscal 2025/2026, particularly the 10 percent withholding tax on retained earnings. A top official of the Tanzania Private Sector Foundation (TPSF) CEO, told the Budget Committee of the National Assembly at the weekend that this proposal could stifle investment, impede growth and undermine economic predictability.

He aired the view that the government replaces punitive tax measures with strategies that actively encourage business expansion. He saw the 10 percent withholding tax on retained earnings as likely to hit firms of all sizes, so informal businesses won’t formalize for higher tax fears.

 The big issue is whether indeed the government is not aware of the principle that it has to tax to promote growth and not just for revenue, and as the TPSF executive underlined, while a 10 percent tax on retained earnings might generate up to 130bn/- in revenue, it risks inflicting deeper economic harm by severely stifling reinvestment. It is similar to how the government removed 700bn/- state corporate deposits in commercial banks in 2017, touching off a free fall in export earnings as banks were now short of routine disposable cash its depositors are unlikely to need. The sort of instability TPSF fears is systematic, that one can’t keep much earnings.

As a matter of fact, there is a point that such a measure is disguised double taxation as retained earnings have already been subjected to corporate income tax, a situation similar to objections to levies raised on mobile cash transfers, as tax has already been paid on a bank account or withdrawal, and then it is paid in receiving or sending. While the mobile cash objection was an end user problem that has an impact on overall feel good situation, the retained earnings 10 percent levy is like nationalizing a portion of it. A company first pays tax and a tax on what remains…

There were other aspects of potential damage of the retained earnings tax sounded by other top bankers, noting for instance that commercial banks are governed by regulations set by the Bank of Tanzania, requiring strong core capital. As the banks rely heavily on retained profits, taxing the funds further will erode financial sector stability as it discouraged ‘retaining’ those earnings. It is in actual fact a signal for outflows of capital and potential closure of firms with fairly marginal profitability.

There were some compromise suggestions for instance a a tax partner at Deloitte suggesting that instead of imposing new taxes, authorities should focus on enhancing profit-reporting systems to combat evasion. He affirmed that globally, retained earnings are typically tax-neutral, where start-ups and banks need to receive exemptions. Startups need to be encouraged while banks need not be discouraged holding finances of other people; it can be catastrophic for economy.

The point that the private sector executives did not raise was the reason for this sort of steep taxation of the private sector as necessary for budgetary balances. They did not pick up from the 4Rs of President Samia Suluhu Hassan though it is visible that the consequences feared from the retained earnings tax will diminish economic resilience as firms export earnings instead of keeping them in the country. There are many ways of doing that, like higher charges for imported components by taking shares in the supplier firm, etc. Negative taxation ruins investment growth; the government won’t need it if it reforms own companies to get higher earnings.