Abstract
Selected Issues
Revenue Mobilization1
A. Background and Recent Trends
1. Tax revenue mobilization remains a key macroeconomic and developmental challenge for Sudan. A sustained and consistent increase in revenue will not only lead to direct fiscal benefits but can also contribute to social stability in both post-conflict (i.e., Sudan) and fragile states (IMF, 2017). To achieve short- to medium-term macroeconomic stability as well as overcome key long-term developmental challenges, enhancing tax collection has always been one of the central themes particularly in low-income countries (LICs). Evidence from Gaspar et al (2016) confirmed a tax “tipping point” of about 12.75 percent of GDP, beyond which tax revenue enables a significant acceleration in economic growth. 2
2. As a fragile and conflict state, boosting tax revenue performance in Sudan is critical and urgent. This will create fiscal space for priority capital and social spending. It will also help mitigate the adjustment pains from reforms, the substantial reduction in donor support experienced recently and, the huge cut in oil revenue due to the secession of South Sudan. Cross-country evidence suggests scope for Sudan to double its tax revenue to levels comparable to other non-resource-rich countries.
3. Sudan’s tax revenue performance has been relatively stagnant over the past decade and remains significantly below potential. Total tax-to-GDP ratio in 2018 is at similar level to that in 2007 at about 5.4 percent (Figure 1). The share of income taxes (personal –PIT and corporate –CIT) and international trade taxes has continued to decline from 0.8 percent and 1.8 percent in 2007 to 0.5 percent and 1.3 percent in 2018 respectively.
Sudan: Components of Tax Revenue
(In percent of GDP)
Citation: IMF Staff Country Reports 2020, 073; 10.5089/9781513536743.002.A002
Sources: World Economic Outlook database; and IMF staff estimates.4. Multiple exchange rate practices have suppressed fiscal revenues substantially. While the low tax to GDP ratio partly reflects low direct tax rates, exemptions, and weak tax administration, the significantly overvalued official exchange rate for government transactions is a major reason. Notably, import-related and oil revenues are assessed at the overvalued official exchange rate, resulting in an estimated revenue loss of about 5 percent of GDP. Significant administrative reforms at the tax and customs offices are yet to be realized despite the technical assistance (TA) delivered by the IMF and other development partners.
B. Cross-Country Comparison
5. Tax collection in Sudan falls behind that of comparator countries and below the tax tipping point. The tax-to-GDP ratio in Sudan is at the bottom of countries with similar characteristics and per capita GDP (Figure 2). With broadly stable trend over the years, tax-to-GDP ratio remains far below the averages of non-resource-rich middle east and central Asia (MCD) countries, sub-Saharan Africa (SSA) countries, and countries with similar per capita income (Figure 3). Notably, Sudan has remained below the 12.75 percent of GDP “tax tipping point” identified by Gaspar et al. (2016), while other regional averages have consistently been above that threshold.
Sudan: Tax Revenue and Per Capita Income
(Average 2000–18)
Citation: IMF Staff Country Reports 2020, 073; 10.5089/9781513536743.002.A002
Sudan: CrossCountry Tax Revenue
(In percent of GDP)
Citation: IMF Staff Country Reports 2020, 073; 10.5089/9781513536743.002.A002
6. The tax ratios for Sudan fall below the average ratios of its peers in all major subcategories (Figure 4). During 2000–18, Sudan’s PIT has averaged 0.14 percent of GDP—the lowest among comparators, and far below the level of 2.6 percent of GDP of non-resource-rich MCD and SSA countries. A similar trend occurred with CIT which amounted to 0.6 percent of GDP, compared to 2.8 percent. For the same period, VAT collection in Sudan also remained at a low level of about 3 percent of GDP. This is below the average of other MCD and SSA by about 4 percent of GDP. Taxes on international trade—with almost 100 percent exemptions from export taxes—amounted to 1.9 percent of GDP compared to 3.2 percent in the comparator countries.
Sudan: Cross-Country Comparison of Sudan’s Tax Revenue Performance, 2000–18
Citation: IMF Staff Country Reports 2020, 073; 10.5089/9781513536743.002.A002
Source: World Economic Outlook database; and IMF staff estimates.7. Tax rates in Sudan are generally on the low side among its comparators (Table 1). CIT and PIT rates in Sudan are among the lowest in the non-resource-rich MCD and SSA countries, and, uniquely, below the region’s averages. While Sudan’s VAT rates are comparable and in line with international standards, CIT and PIT rates are not comparable to rates prevailing in most comparator’s countries.
Sudan: Tax Rates in Selected Non-Resource-Rich MCD and SSA Countries 1/
PIT and CIT rates are for the top income bracket.
Sudan: Tax Rates in Selected Non-Resource-Rich MCD and SSA Countries 1/
| Corporate Income Tax | Personal Income Tax | Value Added Tax | |
|---|---|---|---|
| (In percent) | |||
| Benin | 30 | 45 | 18 |
| Cabo Verde | 25 | 20 | 15 |
| Central African Republic | 30 | 40 | 19 |
| Djibouti | 25 | 30 | 10 |
| Eritrea | 34 | 30 | -- |
| Gambia, The | 31 | 30 | 15 |
| Georgia | 15 | 20 | 18 |
| Ghana | 25 | 25 | 15 |
| Guinea-Bissau | 25 | 12 | -- |
| Jordan | 20 | 20 | 16 |
| Kyrgyz Republic | 10 | 10 | 0 |
| Mauritius | 15 | 15 | 15 |
| Morocco | 30 | 38 | 20 |
| Namibia | 33 | 37 | 15 |
| São Tomé and Príncipe | 25 | 25 | -- |
| Sudan | 10 | 15 | 17 |
| Tajikistan | 24 | 13 | 18 |
| Togo | 29 | 35 | 18 |
| Uganda | 30 | 40 | 18 |
| Zimbabwe | 25 | 50 | 15 |
| Average | 25 | 28 | 15 |
PIT and CIT rates are for the top income bracket.
Sudan: Tax Rates in Selected Non-Resource-Rich MCD and SSA Countries 1/
| Corporate Income Tax | Personal Income Tax | Value Added Tax | |
|---|---|---|---|
| (In percent) | |||
| Benin | 30 | 45 | 18 |
| Cabo Verde | 25 | 20 | 15 |
| Central African Republic | 30 | 40 | 19 |
| Djibouti | 25 | 30 | 10 |
| Eritrea | 34 | 30 | -- |
| Gambia, The | 31 | 30 | 15 |
| Georgia | 15 | 20 | 18 |
| Ghana | 25 | 25 | 15 |
| Guinea-Bissau | 25 | 12 | -- |
| Jordan | 20 | 20 | 16 |
| Kyrgyz Republic | 10 | 10 | 0 |
| Mauritius | 15 | 15 | 15 |
| Morocco | 30 | 38 | 20 |
| Namibia | 33 | 37 | 15 |
| São Tomé and Príncipe | 25 | 25 | -- |
| Sudan | 10 | 15 | 17 |
| Tajikistan | 24 | 13 | 18 |
| Togo | 29 | 35 | 18 |
| Uganda | 30 | 40 | 18 |
| Zimbabwe | 25 | 50 | 15 |
| Average | 25 | 28 | 15 |
PIT and CIT rates are for the top income bracket.
C. Successful Country Experiences in Mobilizing Tax Revenue
8. Many fragile states and low-income countries (LICs) have significantly increased tax revenue collection over a medium-term period. As highlighted in Akitoby et al (2018), several fragile states and LICs have sustained increases in their tax-to-GDP ratios, even under unstable economic and political conditions. These have been achieved through a combination of improved revenue administration (i.e. modernizing tax administration, improving tax compliance and combating tax evasion and corruption) and tax policy reforms (i.e. removing huge tax exemptions, changing tax rates and broadening the tax base). Liberia and Burkina Faso are good case studies that have managed to increase tax-to-GDP ratios by at least 5 percentage points between 2008 and 2012.
D. How Can Sudan Mobilize More Tax Revenue?
9. Improving tax performance in Sudan will entail overcoming many obstacles. Sudan will have to embark on a combination of tax policy and administrative reforms to overcome weak administrative capacity, generous tax exemptions, poor tax compliance and limited skilled human resources. Removal of all tax exemptions is urgent and should be one of the first policy action of the authorities.
10. There is a need to increase the tax base and eliminate the huge exemptions on some sectors and population groups (Table 2). The current PIT scheme indicates that 85 percent of public employees are exempted from paying taxes given that most employees earn below the tax-free threshold and are in the agricultural sector. Moreover, tax brackets are narrow, and the 15 percent highest PIT rate does not indicate a progressive tax system. Staff proposed a more progressive PIT system which broadens the tax brackets and makes top income earners pay higher tax rates of 30 percent.
Sudan: Tax Revenue Scheme and Indicative Exemptions
Sudan: Tax Revenue Scheme and Indicative Exemptions
| Current PIT Scheme | |||||
| Income group (SDG) | ≤ 9,009 | 9,010–9,129 | 9,130–9,399 | >9,400 | |
| Tax rate (%) | 0 | 5 | 10 | 15 | |
| Proposed PIT Scheme | |||||
| Income group (SDG) | ≤7,500 | 7,500–10,000 | 10,000–20,000 | 20,000–50,000 | > 50,000 |
| Rate (%) | 0 | 5 | 10 | 20 | 30 |
| Indicative PIT Exemptions | |||||
| Agricultural sector | Age 50 years & above | Below tax threshold | Total tax payers | ||
| Employees’ population (%) | 46 | 9 | 30 | 15 | |
| Current CIT Scheme | |||||
| Agricultural activities | Industrial activities | Commercial & service activities | Tobacco & mining companies | Oil & gas activities | |
| Tax rate (%) | 0 | 10 | 15 | 30 | 35 |
Sudan: Tax Revenue Scheme and Indicative Exemptions
| Current PIT Scheme | |||||
| Income group (SDG) | ≤ 9,009 | 9,010–9,129 | 9,130–9,399 | >9,400 | |
| Tax rate (%) | 0 | 5 | 10 | 15 | |
| Proposed PIT Scheme | |||||
| Income group (SDG) | ≤7,500 | 7,500–10,000 | 10,000–20,000 | 20,000–50,000 | > 50,000 |
| Rate (%) | 0 | 5 | 10 | 20 | 30 |
| Indicative PIT Exemptions | |||||
| Agricultural sector | Age 50 years & above | Below tax threshold | Total tax payers | ||
| Employees’ population (%) | 46 | 9 | 30 | 15 | |
| Current CIT Scheme | |||||
| Agricultural activities | Industrial activities | Commercial & service activities | Tobacco & mining companies | Oil & gas activities | |
| Tax rate (%) | 0 | 10 | 15 | 30 | 35 |
11. Steps to remove PIT exemptions could broaden the tax base by an additional 55 percent or more. Only 15 percent of employees are captured in the current PIT system. About 55 percent (income from agricultural sector and public employees age 50 years and above) of total employees are exempted from PIT. This figure may be higher if income earners below the tax threshold and others in the informal sector could be quantified.
12. Corporate income tax yields could be increased through unification of the tax rates and broadening of the tax base. Staff have recommended a unification of the 5 CIT rates to at least 15 percent and that all agricultural activities should be included in the tax system. Like PIT, 15 percent CIT tax rate on agricultural activities could boost CIT revenue significantly. Agriculture represents about 31 percent of GDP but does not contribute any CIT, which is likely to promote rent-seeking behavior which creates corruption and weaker governance.
13. Eliminating the huge exemptions on international trade taxes could boost tax revenue by an additional 1.2 percent of GDP. Based on Sudan customs’ monthly financial performance report 2017, revenue loss of imports tax exempted from customs duty amounted to about 43 percent of import duty collected while revenue loss of imported value added tax (VAT) is recorded to be 37 percent of imported VAT collected (Table 3). Exemptions from investment law and financial sector are the largest with about 32.7 percent and 22 percent loss in revenue respectively. Authorities will need to focus on the full implementation of a risk management function and the control of the free zones to limit potential revenue leakages.
Sudan: Exemptions from Customs Duty and VAT Imports
Sudan: Exemptions from Customs Duty and VAT Imports
| Type of exemption | Percent loss in revenue: Ratio of total collection | |
|---|---|---|
| Customs duty | VAT imports | |
| (In percent) | ||
| Imports by investment law | 33 | 9.5 |
| Imports by COMESA agreement | 4.4 | - |
| Imports of diplomatic corps | 1.7 | 1.6 |
| Exemption under article 54 | 1.9 | 2.2 |
| Exemption under article 186 | 0.6 | 0.4 |
| Arab zone | 0.3 | 0.0 |
| Financial | - | 22 |
| Bilateral: Sudan & Ethiopia | 1.0 | - |
| Other | 0.4 | 1.1 |
| Total revenue loss | 43 | 37 |
Sudan: Exemptions from Customs Duty and VAT Imports
| Type of exemption | Percent loss in revenue: Ratio of total collection | |
|---|---|---|
| Customs duty | VAT imports | |
| (In percent) | ||
| Imports by investment law | 33 | 9.5 |
| Imports by COMESA agreement | 4.4 | - |
| Imports of diplomatic corps | 1.7 | 1.6 |
| Exemption under article 54 | 1.9 | 2.2 |
| Exemption under article 186 | 0.6 | 0.4 |
| Arab zone | 0.3 | 0.0 |
| Financial | - | 22 |
| Bilateral: Sudan & Ethiopia | 1.0 | - |
| Other | 0.4 | 1.1 |
| Total revenue loss | 43 | 37 |
14. Exchange rate liberalization and stronger tax administrative capacity will boost tax revenue and give room for more social spending to cushion the pain of reform. Staff estimate that with the full liberalization of the exchange rate, import-related tax revenue will be boosted by at least 3.2 percent of GDP.3 This will be achieved alongside with strengthening of tax administration and improved compliance. Given the weak tax administration and compliance, import-related tax revenue remains subdued in 2018 –with a decline of about 0.02 percent of GDP— despite a 168 percent (from SDG 6.67 to SDG 18 per US$ to SDG 45 per US$) devaluation of the exchange rate at the beginning and last quarter of 2018.4 To strengthen tax administration, it is important to focus on taxpayer segmentation that identify and address compliance risk especially for large and medium taxpayers.
E. Conclusions
15. This analysis shows that Sudan is behind its comparators in tax revenue mobilization and that there is substantial opportunity to raise tax revenue. Tax revenue in Sudan is below comparator countries due to inadequacies and weaknesses in tax administration and policy existing over the past decades. Given the huge cut in oil revenue and declining donor support, the government of Sudan is faced with a new challenge of mobilizing tax revenue to support investment and other priority spending. Tax revenue collection needs to rapidly increase to the level of its comparator countries. Countries with similar economic and political circumstances like Sudan have been able to achieve significant increase in their tax revenue performance over the medium-term. To attain a target of about 13 percent tax-to-GDP ratio in Sudan may take more than a medium-term horizon but a steadfast improvement in tax policy alone could achieve about 50 percent of this target over the short-term.
References
Akitoby, B., A. Baum, C. Hackney, O. Harrison, K. Primus, and V. Salins, (2018), “Large Tax Revenue Mobilization Episodes in Emerging Markets Low-Income Countries: Lessons from a New Dataset”, IMF Working Paper 18/234 (Washington: International Monetary Fund).
Gaspar, V., L. Jaramillo, and P. Wingender, 2016, “Tax Capacity and Growth: Is there a Tipping Point?” IMF Working Paper No. 16/234 (Washington: International Monetary Fund).
International Monetary Fund, 2017, “Building Fiscal Capacity in Fragile Space,” IMF Policy Paper (Washington: International Monetary Fund).
International Monetary Fund, 2013, “Tax Reform Strategy for Revenue Mobilization,” IMF Technical Assistance Report by Peter Mullins, Dora Benedek, and Ashraf Al Arabi (Washington: International Monetary Fund).
Prepared by Olusegun Akanbi.
This tax tipping point has been widely accepted as the minimum threshold needed by any country and is similar to average tax revenue as percent of GDP of most LICs.
An additional 1.8 percent of GDP is also expected from oil-related revenue when exchange rate is fully liberalized.
Additional revenue from oil of about 0.5 percent of GDP was realized in 2018 mainly due to exchange rate devaluation and increases in crude oil prices. This was valued at SDG 18 per US$.
