Tax Reforms help Rwanda’s Government Register More Informal Businesses and Simplify Compliance Processes

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Tax collection in Rwanda has become more effective over the past decade due to government reforms, a new report from the Organisation for Economic Cooperation and Development (OECD) has confirmed.

The improvement is due to significant fiscal and administrative reforms together with other initiatives, data from the African Development Bank (AfDB) has shown.

The objective of the government was to expand the tax base by registering informal businesses and simplifying compliance processes. To achieve this, Rwanda established what is known as the Small and Medium Taxpayers Office in 2006 and implemented a sort of block management system designed to manage the tax affairs of Small and Medium Taxpayers by segmenting the businesses into manageable blocks.

These reforms have had a major impact in increasing tax revenues and the compliance rate of large taxpayers has improved significantly to reach 97%.

“This is an important development considering that these taxpayers contribute around 75% of total domestic tax revenues. Other reforms contributing to the increase of tax revenues included the introduction of a Value Added Tax (VAT) in 2001, and new income tax laws and tax rates in 2005 and 2006,” says the OECD report, which was released just hours ago.

According to OECD officials, the compliance enforcement system was also strengthened, enabling better identification of risks and more systematic tax inspections and penalties. In addition, the tax authorities strengthened their internal processes, leading to efficiency improvements and a reduction in the cost of collection.

Other non-fiscal measures also had an impact on tax revenues, such as the increase of expenditure on priority agriculture and infrastructure projects.

“The introduction of VAT was the most important tax reform in Africa since the 1980s. Twelve countries introduced VAT before 2000,” says the report which drew its conclusion for the works of researchers, Tony Addison and Jörgen Levin, as well as the International Monetary fund, the AfDB and its partner organisations.

Cabo Verde and Rwanda introduced VAT in 2004 and 2001, respectively, and both the Democratic Republic of the Congo and Swaziland introduced VAT in 2012.

It has since been determined that in many countries, the introduction of VAT was accompanied by major tax administration reforms that contributed to increases in VAT revenues over that period.

The OECD is an intergovernmental economic organisation with 35 member countries that was founded in 1960 to stimulate economic progress and world trade.

 

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