IT Risks and Generic Areas of Audit in a Financial LSC Ss ie Lo a CueMole etelsies aaa (eletelmasaigeli wes INTRODUCTION ‘The 2004/05 Budget was devel- oped in the context of the Government's reform programme ‘with the view to implementing four Strategies; 1) The CCM Election Manifesto 2000, 9) The National Development Vision 2025, 3) The Poverty Reduction Strategy (PRS), ‘and 4) The Macro —economic poli- cies and targets for 2004/05. These Strategies relied on the effective ness of the Budget management which involved Fiscal Stability, Improved predictability of resources flows, increased efficien- cy in resources use, budget integra- tion, and donor participation in determining resource envelope. ‘The Budget performance aimed at achieving the Government's short and medium term policy objectives 1) enhancement of the Domestic reventie 2) lowering of aid depend- ency 3) allocating higher expendi- ture for poverty reduction and 4) ensuring the Debt Sustainability. The Minister for Finance and the President’s Office (Planning and Privatization) were exclusively responsible to prepare the Budget Guidelines which were approved by the Cabinet of the Ministers. This Abstract et eta coute oe nment to ensure that the buda- Creer imm oc menue Rei eeu tus petformance including revenue meas- ures undertaken by the Government Gree ny whether the G pod Se coe Grseto sin irony cate objectives or not. Most of the inform: Gee Serene) 2005, TL examines three key parts Fire tae cers uate ivartran rons Poiana ro aa rte srea Prarie raat Roses stew aren mete i yr? Arete ener erecta pore gee gettetecn ta ene Farrar ica Ere tatae rece rene aa enue measures resulted in achiovi Creieor attire Ingredients for Revenue forecasting has been done in tandem with the preparation of the estimates by the MDAs, Regions and Local Authorities. The Budget data was then consolidated in the computer sshile Budget Frame was approved by the Ministers. Thereafter, Budget documents were printed and submitted to Parliament for discussion and authorization. In order to ensure involvement and transparency in policy formulation especially on revenues, the Minister for Finance has a Special Task- Foree on Tax Reform which involves Members representing the business community, Ministries, Consultants, Professional bodies (eg.NBAA) and other Stakeholders. ‘The Task-Foree received and dis- cussed technically and profession- ally in the Matrix form proposals from individuals, group of compa- nies and from the Ministries including Ministry of Finance. ‘Thereafter, the Secretariat of the Task- Force prepared the refined Matrix for further diseussion by the ‘Think-Tank which involves experts in taxation, Economists, Professors from. Universities, Consultants, representative of business Community, TRA, TIC ete, under the Chairmanship of the Minister for Finance. This is done as a © Time series data on revenue estimates and actual collections for the previous years © Macro-economie assumptions © Base line data on the actual revenue collections for the past peviod. ‘The Time series data on revenue estimate and actual collections for the previous years determines the accuracy of estimates by isolating any biases in estimation to see if there are any breaks in the seriesprocess for the * preparation of the Budget book. ECONOMIC BACKGROUND The economic setting for the 2004/05 budget has been better regardless of whatsoever risks anticipated. The GDP has grown by 6.7% above the target of 6.5%. With, inflation down to 4.1% from 4.8% as at the end of May 2005, the year is ending with good news on the growth and inflation fronts. The estimated inflation target is 4% for the period ended June 2005. The ‘causes for inflation decline are pru- dent monetary and fiscal policy, food supply ‘improvement, and improvement in infrastructure which inereased production output, facilitated distribution, and avail- ability of goods and services, ‘The decline in inflation contributed to positively stability of exchange rate, (the value of the currency is fairly stable in dollar terms with an average annual depreciation rate of ess than 10%), predictability of macro-economic variables and enhanced overall business confi- dence, RESOURCES ENVELOPE STRUCTURE ‘The government source of revenue is divided into two categories; 1) Fungible sources i.e tax revenue, programme /budget loans and grants, privatization funds, bank borrowings and the government draw-down reserves and 2) Non Fungible sourees i.e project loans and grants including basket sup- port. TAX REVENUE PATTERNS The growth of tax revenue must approximate the growth in expen- diture for macroeconomic stability to hold (World Bank, 1990), ‘The Government therefore ensured that tax structure is stable and flexible. It should bear in mind that stability of a tax structure allows revenue to be predicted with certainty. The revenue collection reaches the tar- get with 13.8% of the GDP as a con- sequence of the following meas- ures; 1. Widening the tax base in order to enhance the elasticity of the tax system. The Government sought to raise the tax revenue to GDP ratio from 11.8% in 2003/04 to 12.8% in 2004/05 and. Domestic revenue from 13.4% in 2003/04 to 13.8% in 2004/05. However, the Domestic revenne effort is being supplemented by Sustained support from ‘Tanzania’ Development Partners, 2, Improving efficiency in tax eol- Cielo eater oe c=) BUDGET PERFORMANCE lections whereby Goverament sought to reduce compliance and administrative costs through low and rationalized tax structure, wider tax, bases, exemptions scheme, uses of computers and audit surveil- lance, and enhancement of i: tutional capacity to manage tax policy by establishing the Data base management ” systems. However, trade off between administration and compliance costs does not always exists due to the fact that measurement of those costs is still in its infaney hence no data available to sup- port the level of its Regressivity, though measurement of some- how can be reflected from the decrease in the costs associated with tax collections and level of tax compliance. Expansion of Large Taxpayers Department which is merely the implementation of the Organizational reforms was undertaken in order to modern- ize tax administration. This was made in tandem with strength- ening taxpayer education and services. ‘Tax reforms; ‘The revenue strac- ture of most developing eoun- tries have not been productive as preferred, the Developing countries therefore have then had to reform their tax structure with the general objectives of revenue adequacy, economic ‘The Macro-economic assumptions are; Real GDP growth rat, Inflation rate, Exchange rate depreciation rate, Import growth rate and ‘Nominal GDP growah rate, The relevance of these assumptions is based on the fact that they inform us on the projected performance of the economy which isthe revenue base, We willbe able to know how prices are expected to behave over the projected time period and ‘we wil be inthe position to get idea of the demand for the imported produets and rev- enue collection. They therefore help us to set the denominator forthe revenue collections. ‘We do choose to use these ingredients pur- posely because the Baseline deta on the actual revenue collected in previous years shows the ‘rend of performance reflecting the cumulative poliey and administration yield. It therefore forms a basis for forecasting revenue collee- tions for the immediate future period, ‘The Bases upon which Income Tax Act, 2004 is built; ‘The primary objectives for the Income Tax reform were of fourfold; 1, Restructuring; - Timing, Quantification, and Allocation of income are grouped together and fully covered. There were a rationalization and 4 arrangement of provisions in a logical manner, 2. Neutralization;-The law brings tax profits closer to commercial profits and provides tax treatment for virtually all payments made or received in a ‘musiness so as to avoid tax evasion and avoidance ‘Modemnization;- ‘The law adopts impact of globalization, internalization and electronic age by addressing issues of income source, Residence, Controfled Foreign Companies and international anti-abuse rules. It addresses issue of ‘Thin Capitalization rates of debt to equity among associates, Quarantines capital losses to protect tax base and self-assess- ‘ment provisions. ‘Simplicity and Certainty;- The Income Tax Act, 2004 balances simple and certain tax rules with equity and anti-abuse rules. It provides breakdawn of capital/ revenue distinction in their tax treatment and rationalizes eapital allowances in arder to be mote comprehensive and closor to the economic depreciation.LOCAL TECHNICAL PAPER Beles eels efficiency, equity and fairness and simplicity (Osoro, 1993). In Tanzania the Tax reform focused on magnitudes i 1) set- ting tax system that maximizes social welfare, balancing effi- ciency and equity in line with poverty reduction objectives, 2) internal structure of the tax sys ‘tem and impact of taxes on real aggregates such as growth rate and level of distribution of income and wealth 3) adminis- trative dimensions of the tax system with regard to the sim- plicity principle and 4) Equity, transparency and accountability ‘on the revenue and expenditure sides of the budget, where taxa- tion has been recognized as an integral part of the social con- tract so as to be in line with the “Benefit to Pay Principle”. DIRECT TAXES: ‘Those comprise of the personal taxes, corporate taxes, withholding tax, capital gains tax ete. It is there fore charged on business income, employment income and invest ment income, In this.category there has been a significant over per formance while the main drivers stemmed from personal tax regime (PAYE) (which surged due to the substantial increase in the employ- ment level and delay of the targeted retrenchment exercise in some of the entities) and Corporate tax whose elasticity was not volatile because Corporate profits grew in ine with the overall economic growth, However, this has primarily been contributed by the introduction of the income tax law reform and administrative improvements such as to curb tax evasion, These showed a growth beyond the accu- mulated targeted estimates of 436,9g6million as at the end of Disadvantages of Budget Deficit ‘The Budget deficit lowers the standard of living because it slows the economic growth especially when government competes with private sector fora limited pool of savings or borrows more from other countries. It ereates dependence which passes on larger fiscal burden to the future generations etc. The Buget deficit ean be curbed by the expenditure cuts via reduction of goverment subsidies to commercial activities, eutting entitlements such as Medicaid, Social security and Medicare, elimination of wasteful spending and via inerease in tax revenue by raising tax, soale-back the tax cuts or eliminate PAYEE ceilings. June2004/05. Generally, the main factors contributing to an improved revenue performance are changes in Tax legislation, tax administra tion and minimal tax evasion (Morisset and Izquierdo, 1993). ‘There was also an introduction of Presumptive Income tax as a meas- ure to expand the income tax base; this tax system provides incentives for taxpayers to keep records at ower rate for record keepers and higher rates for non-tecord keep- ers. In the 2004/05 _ the Presumptive income tax registered 100% performance on revenue col- ection and it has improved compli- ance; Furthermore, the tax brackets and tax relief have been reviewed with the objective of raising rev- enues and reducing tax burden. VAT In Tanzania we use consumption type VAT which has become a pri- mary source of revenue because each and every individual or com- panies has to pay tax on their eon- sumption at a final stage. Expediently, VAT has less adverse impact on investment and exports. ‘The VAT on imports inereased beyond the estimated target, the main driver is VAT collections in petroleum products whieh increased in line with the global inerease in petroleum prices. ‘The VAT on local purchases inereased beyond the estimated target, gener ally, increase in VAT revenue has deen caused primarily by an inerease in Threshold from 20m per annum to 4om per annum which increased efficleney in tax administration with reasonable downsized span of control in con- trol verification, collection and enforcement functions that conse- quently reduced compliance and administrative costs. In dealing with small number of potential tax- payers with fewer risks will auto- matically facilitate detection of fraud, tax evasion and avoidance and foster voluntary compliance, IMPORT DUTY (CUSTOMS DUTY) In theory Import duty should not be used as a major source of rev- enue because of their non-neutral effects. In practice, however such uty has a role if no other conven ient tax handle is available and basie level of protection is justified. For revenue purpose import duty should he levied at a uniform ad valorem rate on all imports. However, due to the Regional inte- gration and tariff harmonization, import duty in Tanzania is levied on. Phase basis under EAC jurisdiction on revenue reasons with three rates (0% for capital goods, 10% for inter- mediates goods and 25% for other goods under Common External ‘Tariff. There are also Specific excise duty rates under Excise Tariff Ordinance (Cap 332) which are imposed annually and adjusted in accordance with the projected infla- tion rate. Inthe short-run, import duty would be equivalent in effect to a devalua- tion of the curreney because the price of foreign commodities increases. However, this price increase saves on foreign exchange which would boost the value of the importing country’s currency in longer term, This devaluation in turn is equivalent in effeet to a tax on exports. ‘The Time series analysis of revenue collections has shown a reduction of 30% from the targeted estimates up to the end of May 2005 which isequivalent to 67% performance of the estimated targets. The under- performance was primarily driven by the substantial increase in the volume of capital goods which face 0% (per cent) import duty. Other reasons include harmonization of tariffs (Common External Tariffs) and exemptions regime (however the use of Treasury Voucher ‘Cheque (TVCs) has to a large extent eliminated fictitious exemptions on imports). EXCISE DUTY The rationale for imposing excise duty is based on the five fundamen- tal objectives; 1) to raise revenue for economic, social, and political rea- sons; 2} to meet external costs asso- ciated with consumption or pro- duction but not accounted for in Price (smoking, drinking, driving, polluting); 3) to discourage con- sumption that is deemed undesir- able (smoking, drinking, gambling, carbon emissions); 4) to charge users indireetly for the cost of the government provided services (par- ticularly roadways); and 5) to improve the progressivity of the tax system (luxury goods), ‘The Excise duty on imports has shown approximately a decrease from the targeted estimates of up to the end of May 2005. This has been riven by the excise exemptions on petroleum where excise on some of the petroleuin products decreased by 24%. Excise duty on local sales increased from the estimated target, this has been caused by the introduction of excise duty on satellite Televisions Broadcasting (which however does not account for an effective trends Source; Performance of the Budget has been 103% performance of the estimates which reflects decrease of only 7% from the targeted esti- mates. TAX EXPENDITURE SCOPE VS REVENUE MEASURES. ‘This includes those provisions of the taxation law that effectively tax certain classes of taxpayers ot par- ticular types of activities differently from the chosen benchmark strue- ture. It involves an analytical quan- tification and evaluation of the impact of tax policies brought by exemptions and incentives $0 pro- vided within the tax system. In the Budget 2004/05 Government used both ex-post methodology for estimating rev- enue forgone due to the enactment of certain provisions and Ex-ante methodology for estimating inerease of revenues due to the removal of provisions. LOCAL TECHNICAL PAPER BUDGET PERFORMANCE because up to December 2004 approximately Shillings 1gomillion was collected primarily in two regions Arusha and” Dar-Es- Salaam), reforms in excise tariff which incorporates adjustment for inflation to capture dilution effects on revente and increase in the pro- duction outputs of the excisable products. OTHER TAXES ‘Those comprise the Business Skills Development Levy (which is levied at 6%), Fuel Levy (whieh is ‘Tshs 90/= per litre of petrol or diesel) and transit Fee, Stamp duty, Departure Fee, Motor Vehicle ‘Taxes, Licenses, Gaming Tax, and Livestock Development Levy. The performance was good as compared to the previous years and approxi- ‘mates the targeted estimates. There = Actual Collection VAT The zero rate scope under section 9 of the VAT Act, 1997 was expanded in the First Schedule from 6 items to 11 items, The aim was to acceler- ate GDP growth, increase competi- tive capacity for local manufacturer in global market, reduce the costs associated with the production of their final products because they were able to reclaim input tax and ‘generally to foster the social welfarein Agriculture, Fishing, Livestock industry, and Health sectors (Mafwenga 2004). The favourable treatment was made to the local manufacturers in respect of the supply relating to Agricultural equipments, implements, Fishing nets and accessories and Out boat engines for fishing, Veterinary medicines, drugs, equipments and Human medicines, drugs and equipment both approved by the Minister of Health upon recom- mendation of the Tanzania Food and Drugs Authority and articles designed for use by the blind or dis- abled. Moreover, the tax expendi- ‘ture was expanded under section 10 by incorporating locally grown tea whether in the form of made tea blended or packed tea in the VAT relief. In the Third Schedule of the VAT Act, 1997 the limitation of goo0ce ‘on motor vehieles imported by reli- gious Organizations was removed and concessions were expanded from 21 items to 23 items where Domestie Manufacturers who sell goods in duly Licensed duty free shop were also given Special relief. Yet, Supply of Destination Inspection Services to TRA was relieved from VAT obligation. The Destination Inspection is conduct- ‘Tax Structure 2005/06 ed at the point of destination, it replaced the __Pre-Shipment Inspection. The aim has been to create conducive business environ- ‘ment, improve investment climate, and eliminate that would be harass- ment faced by importers (if any) and curb the false declaration on imports. ‘The Government has been reluctant to reduce tax rate of 20% after eom- parative and sensitivity analysis of VAT rate which indicated that VAT revenue performance is sensitive to VAT rate, reducing VAT rate to 17% will erode the revenue causing a loss of shillings 120bn and this ‘would have to demand enforcement for compliance which should be raised to 85% in order to create neutrality. (Muganyizi et al 2004). However, we should bear in mind that 20% is a nominal rate in regressing it with different vari- ables such rate might be even lower in real terms than whichever rate below 19%. There are indeed differ- ent variables that differs from one country to another in the same region leading to reluctance in reducing VAT rate such as: 1) level of accumulated stocks 2) degree of tax evasion and avoidance 3) administrative capacity 4) Consumer Price Index and Purchasing power 5) business envi- ronment and behaviors 6) level of inflation and 7) influx of business- men from Kenya and Uganda to Tanzania is extremely higher than those from Tanzania to Kenya and Uganda. All these parameters would likely justify non-reduction of VAT rate in either of the Partner States (Mafwenga 2004). INCOME TAX ‘The Governments in the revenue ‘measures 2004/05 removed di tionary provisions in calculating income and replaced Self- ment and comprehensive rules in caleulating income. Exemptions from income tax were provided in the Income Tax Aet, 2004. There were incentives given via Capital Allowance Deductions by expand- ing the Classification of Machinery from Class 7 to Class 8 which relates to Plant and Machinery (including Windmills, electric gen- erators and distributions equip- ments) used in Agriculture, these were allowed 100% deduction (The previous Law had only 3 classes of Machinery). ‘The 100% allowance in respect of the manufacturing process and fixed ina factory, fishing farming or plant and machinery that is used Turnover Tax Payable on Incomplete Records ‘Tax payable on Complete Records Where tumover does not exceed Tshs 3,000,000/= ‘Tshs 35,000/= 1% of the turnover Where urnover exceeds ‘Tshs 3,000,000/= but does not exceed 7,000,000 ‘Tshs 95,000/= ‘Tshs 33,000/= plus 1.3% of the turnover in 3,000,000/= excess of | Tshs ‘Where turnover exceeds 291,000/= Tshs_ 85,000/= plus 2.5% of the 7,000,000/= but does not turnover in excess of ‘Ths exceed 14,000,000/= 7,000,000/= Where ogtmover Sceets | tshs 520,000 Tshs 260,000/- plus 3.9% of the 4.000000 bik dots. 0 turnover in” excess’ of Tshs exeeed Tshs 20,000,001 davon Hoole Input-Output Approach for Estimating VAT-Base; ‘Vat base is estimated by employing the equivalence of the VAT base to a retal sales tax levied on final selling price of goods and services, The starting point is the detailed information on domestic consumption which is obtained by netting the personal and. government expenditures abroad from the total exp domestic consumption m minus commodity indirect taxes being replaced minus other adjustments. yenditures contained in the final matrix of the input-output. VAT base= 1us Zero rated supplies minus Exempt supplies minus Adjustments for business exempt activitiesfor providing services to tourists and fixed in Hotels and that is added to class 2 or 3 pools of depre- ciable asset shall be apportioned in ‘two phases 1) initial allowance of 50% shall be available in the Year of Income in which the asset is added to the person's pool of depreciable assets and 2) the remaining 50% shall be available during the Year of Income following that in whieh the first portion is added but not if the pool has been dissolved. ‘The Income Tax Act, 2004 expand ed the scope of deduction in Section animals including forestry, bee- Change in total tax revenue Tax: buoyancy = of the Government to ensure that it adopt Yachange in income keeping, acqua-culture and farming with the view of deriving profit but excludes extraction of natural resources or processing of agricul- tural produce other than preparing such produce for the purpose of sale in its origin form. ‘The Minimum taxable income was ineteased to whichever amount in excess of shillings 720,000 per annum from shillings 600,000 per annum in tandem with rationaliza- tion of the tax rates so as to create neutrality in tax system, ‘The productivity of tax system is Total tax revenue tax buoyancy is calculated using the following expression; In other words buoyaney of taxes with respect to the GDP in 2004 as a proxy base is derived from the logatithmic LogiR, =, + B,Log(B), +E... @ (eeore i gaa BUDGET PERFORMANCE reflected in tax buoyaney and elas- ticity, Assessing tax productivity is important not only because it allows us to examine the respon- siveness of the tax system but also because it affects the system's equi- ty and efficiency (Amin 2000) While reviewing the patterns in the overall tax buoyancy in 2004/08, it is pertinent to examine the rela- tionship between the buoyancy in tax collection and the industrial activity as reflected in the GDP. The concern of the Government is to i i hi system whic ime- | Reetelasinarvedongseatond TAX BUOYANCY AND —hnSynoymt'erintacreemes | rate loss ineurred on aj a | fhsinese That is the business INDUSTRIAL Should netease ata rate equa oor : involving husbandry of crops or GROWTH ‘greater than the growth of the GDP or GNP. Hence, it has been the role ts a tax policy that includes growing sectors of the economy in the base. The Source: Performance of the Budget 2004/05 | Figure 2: Tax buoyancy and Industrial growth (GDP ratio) ih } 10.0 72 i ; ea 67 € Eco é 8 e238 B 40 g 20 org | 00 52 | 2002103 2003/04, 2004/05, + Expansion of Deduction Scope 2005/06 Section 16(1) which deals with gifts to Public and Charitable Institutions has enrolled the amount paid to local government authority which are statutory obligations or government directives to support Community development projects in the : deduction Scheme this appears as paragraph (c) to Section 16(1),LOCAL TE iene vos. BUDGET PERFORMANG! ‘Tax Bands for 2005/06, ‘Total Income Rate Payable Where total income does not exceeds Tshs 960,000/= NIE ‘Where total income exceeds Tshs 960,000/= biit does ‘not exeged 2160,000/= 18.5% ofthe arnioumnt in excess of Tshs 960,000/= ‘Where total income exceeds 2,160,000/= but does not exceed 4,920,000/= ‘Tehs 292,000/= plus 20% of the amount in excess of Tshs 2160,000/= Where total amount exceeds Tshs 4,320,000/=but does not exeeed 6,480,000/= ‘Tshs 654,000/= plus 25% of the amount in excess of Ths 2,160,000/= ‘Where total income exceeds Tshs 6,480,000/= Tshs 1,104,000 plus 30% of the amount in excess of Tshs 6,480,000/= regressions of unadjusted revenue data on such base. Where is the buoyancy ratio and is the error term whieh is equal to zero. ‘The overall tox buoyancy moved more or less in tandem with the industrial performance. It shot up and hit a high at approximately in line with 11.8% of Tax revenue to GDP ratio in 2005 while the Domestic revenue to GDP ratio is 13.8%. The relatively high growth in tax collection as T have noted before actually prevailed because of the surge in corporate tax collee- tion, PAYE and VAT as depicted in Figure 1. ‘The trends show that the economy is growing but short of the level that is needed to significantly reduce poverty. The growing is largely eon- tributed to by Agriculture, hunting, forestry and Fishing, Mining and Quarrying, Manufacturing, Electricity and Water supply, Construction, Tourism and Trade, and Communication and ‘Transport. As noted above widening of the tax base and reforming Income Tax Laws becomes an important factor behind the high tax buoyancy. Tax collection should be linked to the industrial performance as the over all tax buoyancy tends to pick up during high industrial growth, In order to examine the veracity of tax revenues the Government always Jinks it with the implicit GDP growth for industry in the Budget. It should also bear in mind that, as income rises, the size of the public sector becomes relatively larger. After some point however, this “Income determinism” of the tax level declines and the relationship between income and tax levels largely disappears (Richard M. Bird and Erie M. Zolt, 2003). NON-TAX REVENUE PATTERN AND OTHER REFORMS ‘The non-tax revenues category con- sists of Parastatals dividends, Appropriation in—Aid, and any other revenues collected by the Ministries and Regions incuding, the Treasury. The performance of this category was good as the trend, shows that revenue surpassed the targeted levels. There was 114% performance of the estimated tar- gels up to the period ending May 2005. ‘The good performance comes from Parastatals dividends which went beyond the targeted estimates. However large portion comes from Ministries and Regions preceded by the Treasury, The com- parative analysis of performance is based on the actual collection Vs estimated targets in each and every sector independently of the other. ‘The Government undertook eritieal review in Business License Fees and Businesses Visa Fees. The busi- ness License fees for Health servi es operated by the religious Organizations and businesses with a tumover of less than Tshs 2omil- lion per annum was abolished order to ease administration and reduce transaction costs on part of the businessmen. EXPENDITURE STRUCTURE ‘The Expenditure part of the budget has two categories 1) Recurrent Expenditure which comprises of salaries and wages for the central and local governments, interest payments on domestic and foreign loans, expenditure incurred for the acquisition of goods and services, ‘Transfer of funds for Parastatals wages, eg. TRA, CMSA, the Consolidated Fund Services, and Priority Sectors Spending, This ‘meant for running day to day gor ernment activities for the immedi- ate present, and 2) Development Expenditure which comprises the money spent on local and foreign development projects. The fund is channeled through different pro- grammes while revenues are trans- ferred directly. The development budget relates mostly to investment involving a longer period of time. In the 2004/05 Budget the Expenditure management was strengthened while control and accountability in the use of public funds have been well-performed by monitoring more closely the Expenditure Float and building capacity for the better projection of the expenditure requirements, Enactment of the Publicill | Procurements Act, 2004 has been the cornerstone for expenditure disciplines while it is used as a legal tactic to increase responsibility and aceountability. Another methodolo- gy is Cash Budget system which creates Equilibrium between resources and expenditure in allo- cation process such that expendi- ‘tures are made in accordance with the available resources. The Government has been con- cerned to ensure that the intensity of fraud or theft of publie funds does not exist hence, in the Budget 2004/05 the Integrated Financial Management System (IFMS) has ical goals of the State. The indica- tors for efficient and effective expenditure performance among other things include streamlining of government spending, effectiveness of property management, delivery of quality services etc. It is perti- nent to argue that by systematically maintaining expenditure disei- plines, efficiency and reallocating funds to the buoyant programmes, the Expenditure Review process has been somewhat “a Win-Win process”. During the period ending May, 2005 the actual total expenditure was 2,814,533million of this LOCAL TECHNICAL PAPE Ewbeaecasgonn We attests to the commitment to renew and augment national infrastruc- ture in support of private sector growth, The resources allocated to Poverty Reduction Strategy (PRS) priority sectors have been increasing and hhave set the stage for ever increas- ing allocations in tine with the National Strategy for Growth and Reduction of Poverty (NSGRP) or commonly known as MKUKUTA clusters. The MKUKUTA came into being as a result of Poverty Reduction Strategy review af 2004 It is broader, comprehensive, and more outcome-focused than previ- Figure No.5: Ratio of Recurrent and Development Expenditures to GDP 100 Bevelopinent expenditure asa % of cop I See | exponditure asa %ot & sol) 1896/97 1997/98 1996/69 1999100 2000/01 2001/02 2002/03 2008/04 2004/05 2005/08 Sour been further improved by installa- tion of a Disaster Recovery Site. ‘The aim of IFMS is to restrict all payments to the budgeted levels approved by the Parliament and enables quick and accurate detec- tion of any fraud or theft of public funds, To what extent the system has been integrated is reflected from the dimensions of the operant while Ministries, Independent Departments, Regions, and 32 dis- trict Couneils are connected to IEMS. As a normal practice, the Government undertook Expenditure review in 2004/05 in order to test for its relevance, effi- cieney and excellence. This has been used a measure to ensure that 2005/06 spending is consistent with the social, economic and polit- Ministry of Finance Financia yoars shillings 1,788,205milion is Recurrent “Expenditure and shillings 1,026,308million is Development Expenditure which is Jess than the budgeted target of Shillings 3,198,152million, In ‘essence the Fiscal gap signals the reed for reduction in total expendi- ture but in the 2004/05 Budget the deficit signaled the need for broad- er revenue which reduced the pro- grammatie fiscal gap. Itshould be noted that under PRS it is unfair to reduce the expenditure requirements because expenditure requirements is a proxy for revenue sources, As depictéd in Figure No § both the Recurrent and Development Expenditures are increasing, ‘The rising in the Development expenditure share ‘ous review processes. It addresses the eross-eutting issues and all see- tors are expected to contribute to the achievements ofits outcomes. It has about three Clusters 1) growth and reduction of income poverty 2) improved quality of life and social well being and 3) good governance and accountability. It is pertinent to note that the seenario of priority sectors allocation Scheme has no room under MKUKUTA. because each and every sector is prior. FISCAL BALANCE AND FINANCING ‘The Fiscal gap is often expressed in ‘Tanzania Shillings or as a share of GDP. It is an accounting measure intended to reflect the current long-LOCAL TECHNICAL PAPER BUDGET PERFORMANCE term budgetary status of the Government, It measures the size of the immediate and permanent increase in revenue and/or reduc tions in non-interest expenditures that would be required to set the present value of all future primary surplus equal to the current value of the National debt where primary surplus is the difference between revenues and non-interest expendi- tures and the deficit is the excess ‘of non-interest expenditures to rev- cenues. ‘The Fiscal gap has been allocated in line with the programmatic expen- diture requirements. This needs some assumptions either implicit or explicit about how fature general revenue is to be allocated by budg- etary category. Henee, the role of tax policy has been to ensure that fiscal gap does not necessarily ‘mean the projection were insuffi- cient to finance the expenditure in 2004/05 because entailed adjust- ment. The total budgetary balance vwas financed entirely through new borrowings and from foreign and domestic sources respectively. LOAN AND GRANTS ‘The main devices of this category of revenues come from International Donor Agencies and other Metropolitan Financiers. The Development Partners. and Financial institutions in the budget support gave grants and conces- sional loans which is about 13% during the period within July to March 2005 less than the projected disbursements for the period end- ing June 2005, In the Development Expenditure 23% above the pro- jected disbursements for the period was spent as part of the grants and concessional loans. Tn the Budget 2004/05 consider- able improvement has been made in the Stabilization or relatively slow growth in the Debt/GDP ratio, the ratio of central government debt to GDP has heen dropping as a result of sound debt management, ‘The stabilization of the debt ratio is due to the differential of growth rates over interest rates. There was also a stabilization of the internal debt/GDP ratio up to May 2005 which is equivalent to 45% per formance of the estimated targets. Likewise, the ratio of external grants to GDP has been increasing as a result of confidence in the gov- ernment to sound macroeconomic management. The stabilization of debt/GDP, together with decreas- {ng interest cost has moderated the growth in interest burden. Interest payments have also come down. ‘The Debt Sustainability analysis was conducted in 2002 and in 2003. The Government has policy objective in Debt management whereby Debt assessment is con ducted on an annual basis and eval- uation of the performance under the HIPC Debt relief initiatives are also annually conducted. CONCLUSION ‘The performance of the Budget 2004/05 was extremely impressive as it did not divert from the “Practical “issues of tax policy and it was in line with the favourable economic indicators. The Revenue arm of the Budget has sufficed the objectives set, the Expenditure arm ‘was compatible with expenditure policy, and the expenditure disci- plines have been preserved sup- ported by various measures. ‘This reduced government dependency to finance the Budget deficit thereby relying on narrow scope of new Debt financing. Of course, Domestic revenue to GDP ratio is growing at decreasing rate, inerease in’ Government expenditure is consistent with Poverty Reduction Strategy and fis- cal gap before grants is not widen- ing tremendously. It is suffice to comment that the Government has made good achievement that fulfills the betterment of the society. There has been stable political environ- ment, macro-economic stability, good growth rate, strong revenue collections which refleets voluntary compliance rather than maximiza~ tion of revenue, and Government has achieved to make partial Customs reform via BAC. It is a widely held view that the 2004/05 Budget isa base for the 2005/06 Budget operation which among other things will have to finance the General election in 2005. The 2004/05 Budget is therefore an input device for 2005/06 Budget because it has p vided political, economic, adminis trative dimensions and social approach as methodologies to maintain Fiscal stability, Predictability of resources flows, efficieney in resourees use, Budget integration, Donor participation in line with NSRGP (MKUKUTA) dusters. The challenge for the 2005/06 Budget performers is to ensure that there is improved domestic revenue to GDP ratio; Expenditure to GDP ratio and the Budget deficit conse~ quently decreases. The Domestic revenue sources should be expand- ‘in measuring Budget deficits, the Government analyses the change in Public Sector Net Worth ie Assets-Liabilities though val- tuation of Public Sector assets is difficult. Alternatively, the conventional deficit measure eaptures the change in Publie Sector Liabilities. In the conventional measures, the inflation-correeted and consolidated represents total excess of expenditure over revenue for all Government entitiesed and exploited to generate more revenue, this should be done in tan- dem with the adoption of interna- tional best practice in taxation including implementation of TRA's second Corporate plan revenue tar- gets. References; 1, Amin A.A. 2000 “Equity, mieroeco- nomic and efficiency effects of rev ‘enue policy in Africa” Paper present teat the Fourth AERC Senior Policy Seminar =. Gaborone, Botswana, February 2000. 2, Cecil Bazert “Tax Evasion and Tax avoidance; Are Government responses Rational?" 3. Hon Basil P. Mramba(MP), Minister For Finanee “The Budget Speech 2004/05” LOCAL TECHNICAL BUDGET PERFORM 4. Hon Basil P. Mramba (MP)- Minister For Finance “The Budget Speech 2005/08” 5. Mafiwenga Mpoki H., 2004, “The Historical Perspective of VAT Concessions regime in Tanzania” July 2005 6. Mansfield, CY 1972, "Elasticity and buoyaney of a tax system — A method applied to Paraguay” IMF Staff Papers, Vol19, 7. Mortisset, J and A. Iaquierdo 1993. “Bffects of tax reform on Argentina's revenues" WPS 1192. The World Bank, Washington, DC. 5 8. Mosses Kinyanjui Muriithi and Elivd Dismass Moyi "Tas: reforms and rev- enue mobilization in Kenya” AERC Research Paper 131 May 2003, 9. Muganyiai TK “Proposal for a Review of the Tax Structure in 2005/06" Research, Policy and Planning Department (TRA) ~Paper presented in the “Task-Force on Tax Reform”Treasary 10.0e, A.M.1975. “Income elasticity of tax structure in Kenya”, 1962/63- 1972/73” MA dissertation, University of Nairobi 11.0sor0, N-B_ 1993. “Revenue Productivity implications: of Tax reform in Tanzania”. Research Paper 'Noz0, African Economie Research Consortium, Nairobi. 12Richard M. Bird and Eric M. Zo “Introduction to Tax Policy Design and Development” April 2003, 13.Richard M. Bird, “Managing Tax ‘Reform”-Bulleting Feb 2004 iibren Cnossen “The Economics of Excise Taxation in SADC Countries” May 26, 2003. 15.William M. Gentry 14s “Optimal ‘ate OF? ‘es progam aly Sit ne program fan 46 wookepo [BFC isan abbreviation torbusiess ram dans for toons France ‘Sonata, whch lst host preparation ‘sad at, Snel Tone ad ‘rsen cf rowana ihe” at Incorones sujet, en 0 Dees! tetog ard farce! seme spe dey or stodons Stns ars Se tae. a enn te 8 dig hs ‘Sropulrt 2 none) sd pat Sol (Oneeks)sevoach Teer gece erence Sea ee wt TES sn a “The. ig eonsed by NOAA to Conic GPA Rewew” programs, ‘ic pad to an amar oh CPA ‘led by the National Shor ot ceountans ed ors of Tara (NAA. 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