Rethinking How We Tax Income: Are We Drifting Toward Gross Revenue Taxation?

The Tanzanian Income Tax Act currently classifies taxable income into three main categories: business income, employment income, and investment income. The determination of business income is covered under Section 8, while Sections 11 to 19 specify allowable and disallowable deductions in computing taxable income. These provisions reflect the foundational principle of taxing net profits—a fair basis for assessing a taxpayer’s ability to pay.

However, in recent years, there has been a subtle but noticeable shift from taxing net income to taxing gross revenue. Some legislative changes and proposals point to this trend, raising critical questions about the direction of our tax policy.

Presumptive Tax: A Simpler System with Deeper Implications

A leading example of this shift is the presumptive tax system, outlined in the First Schedule of the Income Tax Act. It applies to businesses with annual gross revenue below TZS 100 million, calculating tax based on turnover alone, with no reference to actual expenses incurred.

The rationale is simple: reduce compliance costs and eliminate the need for small businesses to prepare detailed financial statements. This aligns with the practice in other countries—Kenya and Uganda also use presumptive tax systems to accommodate micro and small enterprises.

This simplified approach has gradually expanded. The single instalment tax, originally applicable only to certain investment incomes under Section 90, has now been extended to include some forms of business income—also calculated on gross receipts, with no requirement for further tax filing or expense reporting.

Additionally, the taxation of gross revenue has been proposed in new areas—such as the 3.5% tax on the gross value of forest produce. Separately, a flat tax regime now applies to transportation service businesses under Section 65T, where tax is charged at a fixed amount regardless of revenue or expenses. While both measures simplify administration, they bypass the traditional profit-based framework and collectively reinforce the broader shift away from taxing net income.

For businesses that continue to be taxed on net profits, the Minister proposed in his budget speech to increase the rate charged on their gross revenue from 0.5% to 1% in cases where they consistently report losses.

It is also important to note that gross revenue has long been subject to a 0.3% service levy imposed by local authorities. This is in addition to various fixed costs such as licenses and permit fees, which are effectively paid out of the same revenue—regardless of the business’s profitability.

The Big Question: Should Gross Revenue Be the New Tax Base?

These developments raise a crucial policy question: Do we move—intentionally or not—toward taxing gross revenue rather than net profits? And if so, what are the broader implications for taxpayers, government revenue, the accounting profession, and the economy?

Pros of Gross Revenue-Based Taxation

1. Predictable Revenue for Government

Taxing turnover offers the government a more stable and predictable revenue stream. Unlike profits, which fluctuate and are often manipulated, gross revenue provides a clearer picture of business activity.

2. Lower Administrative Costs

With simplified returns and reduced audit needs, this system saves time and resources for both taxpayers and the Tanzania Revenue Authority (TRA).

3. Reduced Tax Avoidance

Gross receipts are harder to conceal. With tools like Electronic Fiscal Devices (EFDs), when effectively used, verifying revenue is easier than auditing expenses.

Cons of Gross Revenue Taxation

1. Unfair to Loss-Making Businesses

Taxing revenue regardless of profitability can harm businesses operating at a loss. This violates the principle of equity, which seeks to tax based on ability to pay.

2. Undermines Financial Statements

If tax obligations no longer rely on audited financials, the role of financial statements in tax compliance diminishes—reducing their credibility and relevance for lenders, investors, regulators, and other users.

3. Policy Contradictions

The Companies Act requires companies to prepare audited financial statements. If these are not used for taxation, should audit requirements also be revised? Or are we signalling that audits are only for shareholders, banks/loans, and tenders?

4. Discourages Formalization

Simplified tax for smaller, informal businesses—paired with stricter obligations for larger ones—could disincentivize formal growth or even lead to deliberate revenue splitting.

5. Loss of Cross-Taxpayer Visibility

When businesses report expenses, they inadvertently help the tax authority identify revenue earned by other parties—such as suppliers, subcontractors, or service providers. These reported expenses can serve as a trail to uncover income that should be declared by other potential taxpayers, thus expanding the tax base. By removing the need to report expenses under a gross revenue model, the tax system may lose a valuable mechanism for broadening the tax base through cross-verification.

A Caution from International Experience

Globally, gross-revenue-based taxes are used primarily for micro-enterprises, and often as a temporary, transitional measure. Both the IMF and OECD caution that such systems should be graduated toward profit-based taxation as businesses grow. The emphasis should be that the presumptive taxation scheme should be optional, capped, and designed to promote voluntary compliance and progression into the formal tax regime.

New Concerns from the Finance Bill 2025

The Finance Bill 2025 proposes a clarification that only companies earning over TZS 100 million, and individuals earning over TZS 500 million per year, must have their tax returns certified by a Certified Public Accountant (CPA). While this reduces compliance costs for smaller entities, it also raises deeper concerns:

If the government itself no longer requires independently audited tax returns for the majority of taxpayers, what message does that send about the trustworthiness of financial statements—and why should anyone else trust them?

• If the role of public accountants in tax filing continues to diminish, how can unaudited taxpayer claims be trusted? Does this mean that declared expenses—however inflated—will go unscrutinized unless selected for tax audit? And if the tax authority begins to rely on such unaudited figures, does that reduce risk—or instead open the door to misreporting, fraud, and erosion of the tax base? Or are we, perhaps, moving toward a gross-revenue taxation model, where scrutinizing expenses becomes irrelevant and tax is simply levied on gross revenue?

It could be argued that, after years of tax audits revealing manipulated financial statements, the government has lost confidence in the accountants. If that is the case, it should serve as a wake-up call for the NBAA and the accounting profession to reflect, restore integrity, and take the lead in rebuilding public trust in financial reporting.

The Risk of Indirect Taxation by Design

Another concern is that taxing gross revenue could unintentionally transform income tax into an indirect tax. Businesses may treat tax as a predictable cost, include it in their pricing, and pass it on to consumers—contradicting the progressive nature of income taxation.

Moreover, when both large and small businesses are taxed the same way, it harms market competitiveness. New or low-margin businesses may struggle to compete with well-capitalized players taxed at the same flat rate.

Toward a Balanced and Fair Tax System

The best tax system is equitable, simple, efficient, transparent, predictable, administratively feasible, and accountable.

So we must ask:

• Do the deductions under Sections 11 to 19 undermine tax system quality—or promote fairness by taxing only actual profits?

• Is the way forward to strengthen enforcement, or to abandon profit-based taxation altogether?

• Are we seeking long-term compliance and trust, or chasing short-term administrative ease?

  
  

The answer to these questions will determine whether our tax system promotes investment, growth, and trust, or deters them.

Final Thought: Time to Reassess

This is not just a technical debate—it is a question of fiscal philosophy. It reflects how we value entrepreneurship, integrity, and public confidence in institutions.

Before we continue down this path, we must ask:

• Are we strengthening or weakening the tax system’s integrity?

• Are we supporting or stifling business growth and formalization?

• Are we future-proofing public finance—or simply taking the easier route?

  
  

There’s no doubt that inefficiencies and malpractices exist. But we must avoid policies that sacrifice fairness for simplicity. Now is the time to pause, reflect, and recalibrate.

Let’s step back—and think critically.