The Taxation of Low Incomes in African Countries

THE TAXATION OF LOW INCOMES is peculiar to less developed countries where a high proportion (70-90 per cent) of the population is dependent on agriculture and where per capita incomes are low compared with those of the advanced countries. Using the rough index of low per capita incomes, most countries in Africa, Asia, and South America with an annual per capita income of, say, less than US$300 would be classified as less developed. The need for taxing people with low incomes in these countries arises partly because of the existence of fairly large subsistence sectors where production is for household consumption rather than for the market, hence the lack of a broad base for taxation, and partly because of the pressure to raise revenues in order to provide basic services and to undertake development projects. Because of the low per capita incomes of a large part of the potential taxpaying public, and because of the economic structure and social factors, the use of the normal income tax is severely limited.

Abstract

THE TAXATION OF LOW INCOMES is peculiar to less developed countries where a high proportion (70-90 per cent) of the population is dependent on agriculture and where per capita incomes are low compared with those of the advanced countries. Using the rough index of low per capita incomes, most countries in Africa, Asia, and South America with an annual per capita income of, say, less than US$300 would be classified as less developed. The need for taxing people with low incomes in these countries arises partly because of the existence of fairly large subsistence sectors where production is for household consumption rather than for the market, hence the lack of a broad base for taxation, and partly because of the pressure to raise revenues in order to provide basic services and to undertake development projects. Because of the low per capita incomes of a large part of the potential taxpaying public, and because of the economic structure and social factors, the use of the normal income tax is severely limited.

THE TAXATION OF LOW INCOMES is peculiar to less developed countries where a high proportion (70-90 per cent) of the population is dependent on agriculture and where per capita incomes are low compared with those of the advanced countries. Using the rough index of low per capita incomes, most countries in Africa, Asia, and South America with an annual per capita income of, say, less than US$300 would be classified as less developed. The need for taxing people with low incomes in these countries arises partly because of the existence of fairly large subsistence sectors where production is for household consumption rather than for the market, hence the lack of a broad base for taxation, and partly because of the pressure to raise revenues in order to provide basic services and to undertake development projects. Because of the low per capita incomes of a large part of the potential taxpaying public, and because of the economic structure and social factors, the use of the normal income tax is severely limited.

Broadly, there are two types of problems connected with the taxation of low incomes. The first is the determination of the rate structure suitable to the income level and economic structure, taking into account the effects of tax rates both on the supply curve of effort and on the goal of achieving equity in taxation. The second is the ability of the authorities to achieve effective tax administration, under the economic and social environment of less developed countries. Given the tax rate structure, the maximization of the yield from any tax depends on effective administration.

This analysis covers only the direct taxes on low incomes, which in the context of African countries are referred to as personal taxes in contrast to the familiar individual income tax. No exhaustive treatment of income tax is undertaken, but references are made to the relationship between it and the personal taxes in the countries examined. The discussion also excludes indirect taxes and export taxes, which may be imposed upon the low income groups but which are not assessed on the basis of either individual resources or individual income. In order to appreciate some of the conditions of these economies, the economic structures of selected African countries as they affect their ability to raise revenues are examined. The influence of economic structure on the pattern of revenues is clearly shown in the relatively smaller proportion of direct taxes (taxes on individual and corporate incomes and all varieties of taxes on low incomes) in revenues. In the remaining part of the paper, the experience of a few African countries in imposing direct taxes on low incomes is examined.

I. Low Incomes and Economic Structure

The economies of many African countries are characterized by a heavy dependence on agriculture and a sizable proportion of agricultural output in the subsistence sector. For example, in 1965 the ratios of subsistence output to gross domestic product (GDP) at current prices in Uganda, Tanzania, and Kenya were 33 per cent, 28 per cent, and 23 per cent, respectively. (See Table 1.) In Sierra Leone the ratio was 40 per cent, while in Malawi it was 37.3 per cent. The high proportion of subsistence output in GDP further limits the productiveness of the normal income tax or any form of direct taxes and of indirect taxes as well. A large segment of the population is dependent on agriculture; the ratio varies from a low of 75 per cent in Kenya, Malawi, and Sierra Leone to a high of 90 per cent in Liberia and Uganda. (See Table 1, column 2.)

Table 1.

Selected African Countries: Indicators of Economic and Revenue Structures, 1965

(Amounts in millions of U.S. dollars)

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Sources: The East African Common Services Organization, Economic and Statistical Review, various issues, 1966; Kenyan Ministry of Economic Planning and Development, Economic Survey, 1966, and Statistical Abstract, 1966; Tanzania, Background to the Budget: An Economic Survey, 1966-67; Ugandan Ministry of Finance, Background to the Budget, 1965-66; Malawi, Budget 1966: Background Information (Treasury Document No. 5); U Tun Wai and others, “The Economy of Togo,” Staff Papers, Vol. XII (1965), pp. 409-69; International Monetary Fund, International Financial Statistics.

Accrues to local governments.

Data are for 1964.

Estimate.

Population in 1966 was estimated at 4.03 million.

Excluding Zanzibar.

Includes a development levy of US$5.6 million.

Data relate to 1962.

Excludes overseas reimbursements but includes appropriations-in-aid receipts.

Per capita incomes, as could be measured roughly by the per capita GDP, are also low. Thus, in Malawi the per capita income in 1965 was only US$45, while in the three East African countries per capita incomes averaged US$80. The higher per capita incomes in Sierra Leone (US$148) and Liberia (US$198) are explained by the importance of foreign economic enclaves—mining—in these economies.

The ratio of current revenues to GDP varies among countries, indicating different abilities to raise revenues, given the various economic and social factors. Of significance in this context is the low share of direct taxes in current revenues. In Kenya the ratio of direct taxes to total current revenues in 1965 was 29.5 per cent, while in Liberia, Malawi, and Togo the ratios were 38.3 per cent, 33 per cent, and 8.5 per cent, respectively. This pattern of revenues is identifiable in many African countries, indicating heavier reliance on indirect taxes because of the limitations imposed by low incomes and associated factors on the collection of direct taxes.1

From the standpoint of direct taxation of income, low incomes within a country are relative to the structure of income distribution, the level of income tax rates, and the exemption limit for income tax purposes. In many countries it is possible for people with low incomes to pay taxes indirectly through customs and excise duties, sales taxes, consumption taxes, export taxes, etc. How productive such indirect taxes are depends on the size of the segment of the economy involved in cash transactions. However, the imposition of a normal direct tax on low incomes poses a problem; the level of personal exemptions may be so high as to eliminate most of the population from tax liability, as occurs in many developing countries (see Table 2), and it may be difficult to ascertain individual incomes for a large part of the potential taxpaying public under existing social and economic organization.

Table 2.

Selected African Countries: Relation of Per Capita Income Tax Relief to Per Capita Income, 1965

(Amounts in U.S. dollars)

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Sources: Table 1 and data supplied by the authorities of various countries.

Per capita GDP.

1966.

Excluding Zanzibar.

In the advanced countries, the question of the direct taxation of low incomes may not arise for obvious reasons: for example, the ratio of per capita income to the amount of exemptions is higher and, because there is a large number of individuals in the middle-income and high-income levels who are potential and actual income-tax payers, there is a great scope for productively imposing an income tax. Also, because of the relatively higher level of development there are more companies and corporations capable of paying direct taxes on profits. In fact, in most developed countries there is no urgency to tax low incomes; on the contrary, social security payments (negative tax on low incomes) in different forms are made in many developed countries.

The question of taxing low incomes in many less developed countries is, however, an acute one. The income tax exemption limits are fairly high, so that, prima facie, most people in the middle-income groups may not be liable to pay income tax.2 The extent to which this situation exists is indicated by relating per capita incomes to an unmarried person’s exemption allowance. (See Table 2.)

In Kenya, the individual tax relief was 7.1 times the per capita income in 1965, while in Tanzania it was 8.9 times. The multiple is even higher for a married person; in Kenya it was nearly 20 times the per capita income. On the other hand, in Burundi and Sierra Leone, individual tax relief was, respectively, only 3.4 and 3.8 times the per capita income. In many African countries the effective exemption limit is substantially higher than these ratios indicate because the incomes of wives in most cases are negligible. The effect of the combination of generally low incomes and high personal relief is to exclude a high proportion of the working population from the payment of income tax. The problem is that in existing circumstances a much lower limit for exemptions would make costs of collection unduly high, while the existing high limit makes income tax contribution to revenues relatively small.

In view of these problems, many countries in Africa have found it necessary, at either the central or the local government level, to design various ways of directly taxing low incomes. These types of direct taxes will be referred to simply as African Personal Taxes; the latest developments of these taxes, their rates, yield, assessment, and collection procedures in Tanzania, Nigeria, and Chad will be examined.

II. African Personal Taxes

Nature of African Personal Tax

The African Personal Tax (APT) is a common feature of the taxation systems in many African countries. It takes various forms, such as personal tax, poll tax, minimum fiscal, cattle tax, income-rate tax, and, in its latest development, the graduated personal tax.3 These taxes had their origin in the attempt to impose direct taxes on the incomes of Africans in conformity with their level of economic and social development so as to ensure a contribution to the revenue of the territory in which they were levied. In addition, the personal taxes were originally imposed, particularly in south and east Africa, with a view to stimulating the supply of unskilled labor for plantations and industrial undertakings. In general, however, the impact of the levy has been to help the reallocation of resources from the subsistence sector to the money sector, either through production for the market or through wage employment for unskilled labor. It should be added, too, that until the early 1950’s direct taxation in most countries had a unique feature of distinguishing between Africans who paid personal taxes and non-Africans who invariably paid income tax, sometimes in addition to non-African poll taxes. While the income tax laws were expected to be applied on a nonracial basis—except in Malawi (Nyasaland), Nigeria (other than Lagos and Colony), and Zambia (Northern Rhodesia) where Africans were specifically excluded—in practice, income tax was paid almost exclusively by non-Africans, partly because it was administratively difficult to apply it to Africans and partly because only a few Africans had incomes high enough to require them to pay income tax.4

By its nature the APT is a quasi-income-tax because it is imposed on the individual on the basis of ascertained income, estimated income, or imputed income based on apparent wealth. The APT has evolved considerably, and what started as a hut or poll tax at a flat rate, payable by adult males, has been gradually modified to become a limited, graduated tax based on earned or imputed income. This development has been in keeping with the expansion of the money sector, higher levels of income, and the spread of literacy.

Administration

The administration of the APT differs widely among African countries, but the tendency has been toward improvement and uniformity in introducing graduated rates based on income. In Table 3, the similarities and differences in nomenclature, assessment, and collection arrangements among 22 countries are shown.

Table 3.

African Personal Taxes: Nomenclature and Levying and Collecting Authorities1

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Sources: Lord Hailey, An African Survey, Revised 1956; Pierre Doublet, Trait é de L é gislation Fiscale dans les Territoires d’Outre-Mer, Vol. II (Paris, 1952); John F. Due, Taxation and Economic Development in Tropical Africa.

Collection in all countries is carried out by local authorities, but centralized organization for collection tends to emerge with the introduction of the graduated personal tax.

There is also a tax imposed by local authorities.

Part of the proceeds are allocated to the local authorities.

Other varieties are discussed in the text.

Information relates to territorial governments existing before the attainment of independence in 1959. Imp ô t personnel is translated as “personal tax,” while imp ô t du minimum fiscal is written simply as “minimum fiscal.” All the countries imposed some form of tax based on cattle or livestock, hence cattle tax is a feature of the personal tax but is omitted from the nomenclature list.

Refers to the territorial government.

The proceeds of tax spéciale de cercle accrued to local budgets.

In the initial stages of the imposition of APT, the assessments of taxpayers were based on tax rolls without individual income or wealth returns, a procedure that was necessary because of the high degree of illiteracy and low incomes which precluded the granting of personal relief in the determination of tax liability. Also, the administration of the tax was completely decentralized, and assessments were made by laymen at the local level, such as local assessment committees, village councils, or headmen; tax policy issues were determined as part of the over-all administration. Collection arrangements were also decentralized, with great reliance placed on agents—an arrangement which probably minimized the collection costs. However, evasion was difficult to check, and effective administration was somewhat limited.

In most countries, the personal tax is administered separately from the normal income tax, and individuals with sufficiently high incomes pay both taxes. Only in Northern Nigeria has the personal tax been completely integrated with the income tax (see pp. 332-35). In Kenya, Uganda, and Tanzania, such a development is unlikely as long as the collection of income tax remains the function of a supranational body (the East African Community), while responsibility for collection of the personal taxes varies between the central and local governments.5

APT in selected countries

Tanzania

In mainland Tanzania, the Personal Tax Ordinance of 1955 replaced the provisions of the former Native Tax Ordinance, which had imposed the poll tax.6 The new ordinance introduced a graduated system of personal tax with a minimum payment provision and is, in general, patterned along the lines of the East African Income Tax Law. With individual income as the basis of assessment, it is (as in Northern Nigeria) a quasi-income-tax, except that there is a ceiling to the tax payable.

The annual personal tax is imposed on every adult male and every unmarried woman, who is not exempt either by law or by proclamation, on the basis of his annual income.

Originally, there was provision for five steps in the graduation of the tax and the maximum tax payable was set at US$21, but with the revisions in 1961 and 1962 the steps were increased and the ceiling on personal tax payable was raised to US$62. The 1962 amendment to the law removed from the liability to pay tax persons earning less than £100 per annum. This relieved the administration of burdensome and expensive work in the collection of the minimum tax from numerous payers. In January 1966, a new schedule of personal tax rates was introduced. (See Table 4.) The rates of tax are basically progressive in their effects, but they have a regressive element within each bracket as well as in the top bracket. While the closer interval between steps reduces the regressiveness of the tax structure as a whole, there still exists some element of regressiveness within each income range (column 4 of Table 4). No personal relief is granted when computing tax liability.

Table 4.

Tanzania: Personal Tax Rates, 1966

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Source: United Republic of Tanzania, Act No. 41 of 1965, July 1965.

Represents ratio within prescribed income range, e.g., £100-149 in the first range.

Calculated on the maximum annual income, minus £ 1.

Personal tax rates in Tanzania are not related to income tax rates, and in principle the APT is paid in addition to the income tax. Beginning in July 1965, income tax rates were established on a two-tier system consisting of a flat rate of 12.5 per cent on chargeable incomes and a surtax at progressive rates which vary from a minimum of T Sh 3 of surtax per T Sh 20 on chargeable incomes of between T Sh 20,000 and T Sh 40,000 to T Sh 12 per T Sh 20 on chargeable incomes above T Sh 200,000 (T Sh 20=£1).7 With the personal allowance for an unmarried person established at T Sh 4,320, income tax in addition to the personal tax is paid by an unmarried taxpayer only in respect of annual incomes in excess of T Sh 4,320; the point of liability to double taxation for a married man is T Sh 12,000.8 Apart from the fact that the abolition of the personal tax on incomes of less than T Sh 2,000 removed many taxpayers from liability, the combined effect of the income tax relief is to remove a large number of taxpayers from double payment of tax on incomes below T Sh 16,000 a year. In effect, income tax proper is still payable by the high-income group; this is also shown by the fact that in 1964 only 22,209 persons were assessed for income tax out of a population of nearly 10 million and about 351,000 in wage employment.9

Each appointed collector is responsible for making assessments. He may require the filing of returns of income by taxpayers, but he may assess without such returns. Even where returns are filed, the collector can still raise a “best-of-judgment” assessment.

The collector is required to communicate the tax liability to each taxpayer before March 31 of each year by means of a demand notice, which requires the addressee to pay his tax before May 31, unless another date is specified. The penalty provision, 50 per cent of the tax due, serves as a deterrent to noncompliance. Defaulters can also be sued in court, while the collector has power to appoint an agent for collection. Provisions for checking evasion are adequate; individual receipts are issued in respect of tax paid, and a tax inspector10 can request any taxable person to produce his tax receipt or exemption certificate. Failure to do so is regarded as evidence of evasion. The power conferred under this policing provision is stringent, especially the discretion to “detain” potential tax evaders until early evening of the day on which a tax receipt is demanded.11

Deduction of tax from the earnings of employees was authorized in 1961. The procedure amounts to a selective withholding system, since it is applicable only to specifically approved employers (those who have more than ten employees) who are held responsible for the payment of tax not collected. The law provides that deduction can be made either in three installments or in one sum, as the collector may direct. A tax receipt is issued only after the full amount of tax due has been deducted. The scheme not only is restricted in coverage but also appears to present many opportunities for evasion where labor turnover is considerable.

The introduction of graduation has had a considerable impact on the revenue contribution of the personal tax. In recent years, however, personal tax proceeds to the Central Government have stabilized at about £1 million a year; in the fiscal year 1965/66 they amounted to £0.97 million, representing 2.6 per cent of current revenues.

Northern Nigeria

Northern Nigeria’s Personal Tax Law of 1962 consolidated existing methods of direct taxation of Africans.12 It reduced the variety of assessment procedures, and simplified the law and brought it into line with the political development of the region as a part of the Federal Republic of Nigeria. Prior to 1962, seven methods of assessing and collecting personal taxes were used, but the new law reduced these to three.

The law defines the personal tax as income tax, community tax, or cattle tax. The graduated personal tax approximates an income tax where incomes exceed £400; for lower incomes, other factors in addition to income form the basis of assessment. The law retains the assessment of relatively wealthy individuals and persons in the salary and wage-earning class by reference to scheduled rates (Table 5). The community tax is imposed where it is difficult to ascertain individual incomes or where existing differentiation in the incomes of individuals is narrow. In such circumstances a community tax is practicable from an administrative standpoint, while the apportioned tax is broadly equitable. Cattle tax is imposed in addition to, or in lieu of, any community tax payable (see p. 334).

Table 5.

Northern Nigeria: Personal Tax Rates, 1962

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Source: Northern Nigeria, Personal Tax Law, 1962.

The basis of assessment of the personal tax is global income. Chargeable income is ascertained by granting a consolidated personal allowance of £240 for a male individual liable for the graduated tax13 and of other deductions, including special allowances for children’s education, maintenance of relatives, life insurance premiums. All the deductions follow the income tax procedure, but a limit of £500 is set as the allowable deduction in respect of children. Where the total income of a taxpayer exceeds £400, tax liability is determined by reference to chargeable income and the schedule of rates as shown in Table 5. If total income is less than £400, the tax liability is a flat rate of sixpence per pound (2.5 per cent) on total income without granting the consolidated personal allowance.

Many employees come within the pay-as-you-earn (PAYE) system, and only those with incomes larger than £400 per annum or with other sources of income are expected to file returns.14 The collection procedure for taxpayers who are within the PAYE system is simple. The employer deducts as directed the tax payable from an employee’s earnings every month, the year’s liability being spread over 12 months. The tax to be deducted need not be limited to that arising from wages and salaries but may include tax due on other sources of income, or even outstanding tax in respect of an earlier year. No separate individual receipts are issued in respect of deductions, but at the end of the year the employer normally issues a “certificate of pay and tax deducted” for the relevant year. There is provision for the Revenue Division to adjust the tax liability at the end of the year, and refunds are made in the event of overpayment.

Continuity is provided when an individual changes his employment. The former employer is expected to send a “transfer certificate” to the Revenue Division and to provide two carbon copies of the certificate for the new employer, who sends one to the Revenue Division; the other copy is given to the employee as evidence of tax payment up to the time of his change of employment. This procedure ensures that tax deduction continues smoothly to the convenience of both taxpayer and the Revenue Division; it also assists the Division in locating taxpayers.

Unlike the past, present-day coverage of the graduated personal tax is nonracial, since non-Africans are also liable. Proceeds of the tax are shared between the Regional Government and the collecting native or local authority in the ratio of 80:20, except that tax collected under the PAYE scheme is credited in full to the Regional Government.

Community tax remains as operated in the past. It is an “apportioned tax” as far as the individual taxpayer is concerned. Section 49 of the Personal Tax Law states, inter alia, that community tax “shall be levied upon and shall be paid by every such community or individual in respect of each year of assessment.”15 Students in full-time attendance at any training institution, indigent persons, persons under 16 years of age, and any person who receives a notice of personal tax assessment or who otherwise is liable for personal tax, either through the PAYE system or by intimation that he is liable for personal tax, are exempt.16 The italicized clause brings into focus the point of contact between personal tax and community tax—a significant aspect in the evolution of the personal tax.

The responsibility for the determination of community tax for each area is that of the Provincial Commissioner, who is expected to act in consultation with the local or native authority. The Commissioner is guided in the determination of the community tax by such factors as the amount paid in the preceding year of assessment, the change in population, and any change in the “general state of prosperity.” This assessed community tax must then be approved by the Minister of Local Government. The amount of tax and the time of payment is communicated to the local or native authority whose responsibility it is, in consultation with or by directions to district heads or village councils, to apportion “such amount of the community tax as may be just and equitable for each individual in the community to pay having regard to his wealth.”17 Collection is also carried out by the local authority. Any person who pays the personal tax at a flat rate of sixpence per pound under the PAYE system (i.e., whose annual income is less than ¿400) is allowed to deduct the amount of withheld tax from his apportioned community tax; thus, community tax is paid to the extent that it exceeds income tax. Proceeds from the tax are deposited in local treasuries until account is rendered to the Provincial Commissioner. Ultimately, the proceeds of community and cattle tax are shared between the Regional Government (12.5 per cent) and the collecting native or local authority (87.5 percent).

No payment of cattle tax is expected where such cattle form part of the basis for the determination of the community tax for the area in which the cattle owner is registered; in practice, this applies largely to the nomadic Fulani tribe. Cattle, for the purposes of the Act, is defined to include oxen, sheep, and lambs. Rates of cattle tax vary according to the type of cattle and by group of provinces, except that there is a uniform tax of 2 shillings per head for sheep and lambs throughout the region.

The contribution of the personal tax to the revenue of the Regional Government has increased substantially in recent years. It increased from £1.7 million in 1962/63 to an estimated £2.5 million in 1964/65 and, in the latter year, accounted for about 10 per cent of the Government’s current revenues.

Chad

In the Republic of Chad a graduated personal tax (GPT) has been added to the existing capitation tax, and the personal tax system now consists of the civic tax (taxe civique), the cattle tax, and the GPT.

The civic tax is identical with the minimum fiscal of other countries that apply the French system and is administered along the same pattern. It is levied only on males who are 18 years of age and over and who derive an annual income, except in agriculture, of not more than 60,000 francs. Invalids and those with nonagricultural incomes of more than 60,000 francs a year who are liable for the GPT are exempt.

Lists giving the number of village taxpayers are compiled from the latest official census and corrected by additional information supplied by village chiefs. At present, it is estimated that 800,000 persons are liable for the tax but on the average only 630,000 persons actually pay. The rate of the civic tax varies for different areas based on the ability of people in the particular area to meet the tax apportioned for the area. The current average rate is 900 francs but rates vary as follows: communes, 900 to 1,400 francs; principal cities of Departments, 900 francs—except in Borkou, Ennedi, and Tibesti, where the rate is only 360 francs; and in the Districts, 900 francs.

Collection is the responsibility of the village chiefs under the direction of the regional authorities. The proceeds of the tax were 522 million francs in 1963. Except in the communes, where 25 per cent of the proceeds (e.g., of the GPT) goes into the “communal” budget, the tax revenue is credited to the general revenue of the Republic.

The cattle tax is imposed on all owners of cows, sheep, horses, and camels; animals which are under three years old are exempt. The tax is assessed on the number of animals owned and is collected in the same manner as the civic tax, with the proceeds credited in full to the national budget. The present rates per animal are 225 francs for horses and 20 francs for sheep; the rates are generally lower in the Borkou, Ennedi, and Tibesti regions.

As in Tanzania and those countries which now levy the GPT, the new personal tax in Chad is related to individual income. It is, however, essentially a proportional tax. (See Table 6.) The wide income ranges made the tax markedly regressive within each bracket level.

Table 6.

Chad: Graduated Personal Tax Schedule, 1964

(In CFA francs)

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Source: République du Tchad, Propositions de Réforme Fiscal (Paris, 1964), pp. 5-6.

Ratio is calculated on the basis of the stated minimum in each range (except the lowest range), plus 10,000 francs.

All males, and from 1965 females, with nonagricultural incomes in excess of 60,000 francs a year are liable for the tax. At present, more than 60 per cent of those liable are wage earners who also pay the “schedular tax.” Only invalids and the maimed are exempt. Taxpayers are put on nominal rolls but the tax is collected from most taxpayers by anticipation, that is, at the same time that the schedular tax (for wage earners) and the business fees are due. Only 13,000 persons pay the tax out of an estimated potential of 25,000 taxpayers, and the contribution of the GPT to revenue is still modest.

III. Trends in Revenue Contribution

The varieties of the personal tax make quite a significant contribution to the revenues of the central governments of many African countries. (See Table 7.) In addition, personal taxes add considerably to the revenues of the local governments. For example, in 1960 they accounted for 30 per cent to 46 per cent of the budgets of the local governments in Uganda.18 In Kenya between 10 per cent and 31 per cent, and in Ghana about 20 per cent, of local government revenues accrued from personal taxes in 1960/61.19 In 1951/52, more than 60 per cent of the revenues of local governments in Nigeria accrued from personal taxes.20 In 1960/61 the proportion was 48 per cent in Western Nigeria21 and about 25 per cent in Eastern Nigeria,22 where the taxation of low incomes below an established limit is the responsibility of the local governments.

Table 7.

Selected African Countries: Contribution of African Personal Taxes to Central Government Revenues, 1960/61 and 1963/64

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Sources: Annual budgets of various countries; “L’Economie Volta ï que en 1964-1965,” Banque Centrale des Etats de l’Afrique de l’Ouest, Conjuncture Ouest Africaine (Paris), April 1965; Service de la Statistique G é nérale de la Comptabilité Nationale et de la Mécanographie, Bulletin Mensuel de Statistique (Bamako), various issues; Chambre de Commerce, d’Agriculture et d’Industrie de Bamako, Annuaire Statistique de la République du Mali, 1964, April 1965.

Data are for calendar years 1960 and 1964 for former French territories.

Fiscal year ends on June 30.

The power of levy and collection of personal tax transferred to local authorities.

Data relates to calendar year 1964; previous fiscal year, July-June, changed in January 1964.

Fiscal year ends on March 31.

Excluding Zanzibar.

Estimate.

The share of personal taxes in central government revenues depends on the fiscal arrangements between local and central governments. The relative share of personal taxes in the central government revenues of the former British territories has been declining, partly as a result of increasing scope of income tax proper and partly as a result of the transfer, from the central governments to local authorities, of the power to tax low incomes. In Kenya the share of personal taxes in central government revenues declined from 8.9 per cent in 1947 to 3.6 per cent in the fiscal year 1962, while in Malawi it maintained a stable ratio of about 14 per cent until 1962, when it fell to 10.2 per cent. The same declining trend is evident in Tanzania where the ratio of 16.7 per cent in 1947 fell to 3.2 per cent in 1962. In Uganda the ratio was only 3.1 per cent in 1961/62, a year before the power to tax was transferred to local governments. This trend is likely to continue in the future as a result of the increasing relative importance of other sources of revenue, such as indirect taxes and income tax proceeds, and the gradual abandonment of the personal tax field to local governments.

The same declining trend in the relative importance of revenues from personal taxes has been experienced in the former French African countries since the attainment of independence, although they still constitute a more significant source of revenue than in the former British territories. In Upper Volta, the ratio was some 17.6 per cent in 1960, and in Chad and Niger it was 13.5 per cent and 26.6 per cent, respectively. These three countries are landlocked and do not have as many alternatives for raising taxes as other countries. In fact in 1964 the ratios in Chad and Upper Volta were about 15 per cent and 21 per cent, respectively. In Niger the ratio was 30 per cent in 1964, compared with 26.6 per cent in 1960 and 46.7 per cent in 1950. In relation to direct taxes, the contribution is more significant for all the countries, with Niger and Upper Volta deriving more than 60 per cent, and Chad nearly 50 per cent, from personal taxes. With the fiscal reform of 1960, Ivory Coast has been able to dispense with the minimum fiscal as a source of central government revenue; in Senegal a larger part of the tax goes to the local authorities, while in Togo proceeds of the capitation tax accrue to the local government.

IV. Conclusion

African personal taxes have proved quite effective in tapping the limited revenue potential of the low-income groups. The tax rates have been set in most countries at levels compatible with the normal supply of effort; in no country is there any evidence that there has been a contraction in the supply of individual effort to procure cash income mainly as a result of the level of personal tax rates. On the contrary, in a few countries, one of the reasons for introducing the flat rate tax was to induce people in the subsistence sector to move into the money sector, either by producing surplus agricultural products for sale in the market or by coming into the labor market as wage earners.

The development in many countries has been the modification of personal tax rates, including limited graduation to reflect increasing levels of income; hence, tax policy has been suitably designed to conform to economic development. Nonetheless, the question of equity may be raised in view of the limited progressiveness in rates and the canon of ability to pay in taxation. There is no doubt that the original, pure poll taxes were regressive, unfair to the poorer classes, and unduly advantageous to the wealthy, who had better ability to meet heavier tax burdens. But in economies with large subsistence sectors, these are taxes that are easiest to collect with a minimum of administrative cost, even if they cause discomfort in some instances, especially where the level of the minimum tax is high in relation to the general level of economic well-being. Moreover, measures have been taken in many countries to make the tax more equitable and to minimize the regressiveness through the adoption of limited graduation of rates. Rates of the GPT in Tanzania, Uganda, and Northern Nigeria show considerable improvement. Irrespective of the level of government that has jurisdiction over the taxation of low incomes, the degree to which progressiveness in the rate structure can be achieved will continue to limited as long as the GPT has to exist side by side with income tax and has to be limited either by fixing a maximum payable tax or a maximum assessable income.

While there are no absolute criteria for appraising the efficiency of tax administration, indications are that the administration of personal taxes was related to the conditions of developing countries with predominantly agricultural economies, large subsistence sectors, limited wage systems, and mass illiteracy. In such an environment, a tax has to be simple, low in rate, and easy to administer. Tax administrative practices differ among countries and sometimes within the same country, reflecting the special situations in each area. The reliance on nonprofessionals and local personnel tends to lead to tax evasion in many areas. The general opinion, however, is that tax evasion was widespread before the introduction of the GPT. Little is known about enforcement activities, but it was not uncommon to detain taxpayers for a limited period of time (usually a day in some countries) if it was found that they failed to discharge their tax obligations. Penalties for noncompliance with the tax laws were imposed in some countries: In Malawi, up to 50 per cent of the poll tax is imposed as a penalty upon failure to pay on a prescribed date; in Northern Nigeria, a penalty equal to the amount of tax due is payable, while in Tanzania, the law provides for a penalty of 50 per cent of the tax due.

Through the imposition and extension of the APT, the fiscal objective of ensuring the contribution by the low-income groups to the financing of central government operations has been met successfully. A large majority of Africans have been even more adequately prepared for payment of income tax by the existence of the personal tax than by the tribute payments that preceded its introduction.

The importance of the APT in the tax revenue structure of the central governments in African countries will in all likelihood continue to decline, and the tax may be replaced eventually by the income tax. However, on the local government level a greater use can be made of the personal tax, particularly the GPT, if it is synchronized with the existing income tax. With the experience gained in administering it, the personal tax will fulfill a better role in providing a stable and an independent means of financing local government services than property taxes, the assessment of which is handicapped by a lack of trained staff and by complicated systems of property ownership. Hence, the trend of abandoning the personal tax to local governments, as in Uganda, Kenya, Dahomey, and, to an extent, Mali and Senegal, may be preferred to a complete abolition of the tax.

L’imposition des faibles revenus dans les pays africains

Résumé

L’imposition directe des faibles revenus — ce que l’on appelle l’impôt personnel dans les pays africains — tient, d’une part, à l’existence d’un secteur de subsistance relativement important dans ces pays, ce qui restreint la masse imposable, et, d’autre part, à la nécessité d’accroître les recettes fiscales pour financer les services essentiels et les projets de développement. L’Impôt Personnel Africain (African Personal Tax ou APT) se retrouve dans la fiscalité de la plupart des pays africains et revêt des formes variées dans les 22 pays étudiés. A l’origine, l’impôt personnel africain visait, notamment en Afrique de l’est et du sud, à renforcer l’effectif de main-d’œuvre africaine non qualifiée recherchée par les plantations et les entreprises industrielles. D’une manière générale, ce prélèvement fiscal a toutefois contribué à faire passer les ressources du secteur de subsistance au secteur monétisé, soit en augmentant la production commercialisée, soit en développant le travail salarié.

Les modalités d’application de l’impôt personnel africain varient considérablement de pays à pays, mais on a observé une tendance à le rationaliser et l’uniformiser grâce à l’introduction de taux progressifs qui sont fonction du revenu. Dans de nombreux pays, la perception de l’impôt personnel est distincte de celle de l’impôt normal sur le revenu. Le présent article étudie l’assiette et le mode de recouvrement de l’impôt personnel en Tanzanie, au Nigéria et au Tchad.

Quelle que soit la forme qu’il revête, l’impôt personnel africain augmente dans des proportions appréciables les rentrées fiscales des Etats et s’est révélé un moyen relativement efficace d’imposer les ressources limitées des groupes sociaux à faible revenu. Néanmoins, l’importance relative du produit des impôts personnels tend à décroître, en raison de l’élargissement du champ d’application de l’impôt sur le revenu proprement dit, d’une part, et du transfert par l’Etat aux autorités locales de ses pouvoirs en matière d’imposition des revenus peu élevés, d’autre part. Avec l’abandon du taux fixe en faveur de taux progressifs, la politique fiscale répond de façon appropriée aux besoins de l’évolution économique. L’impôt personnel africain a également préparé la grande majorité des africains au paiement de l’impôt sur le revenu.

La tributación de los bajos ingresos en los países africanos

Resumen

La tributación directa de los bajos ingresos—que en los países africanos se denomina impuestos personales—se debe en parte al hecho de que existen sectores de subsistencia bastante extensos, lo cual explica la falta de una base impositiva amplia, y en parte a la apremiante necesidad de obtener recaudaciones a fin de proporcionar servicios básicos y emprender proyectos de desarrollo. El impuesto personal africano es una característica común de los sistemas tributarios de la mayoría de los países africanos y reviste diversas formas en los veintidós países examinados. Dicho impuesto, especialmente en lo que se refiere al Africa Oriental y Meridional se originó en los esfuerzos dirigidos a acrecentar la oferta de trabajadores africanos no especializados para plantaciones y empresas industriales. No obstante, en general, el efecto producido por la exacción ha sido el de contribuir a que las personas que de otro modo permanecerían en el sector de mera subsistencia resulten elementos activos en el sector monetizado, ya sea mediante su producción para el mercado o por medio de trabajo a jornal.

Si bien la administración del aludido impuesto difiere considerablemente de un país africano a otro, la tendencia observada ha sido de mejoramiento y uniformidad en la implantación de tasas escalonadas según el ingreso. En muchos países la administración del impuesto personal es independiente de la del impuesto ordinario sobre la renta. El trabajo examina los procedimientos para su determinación y cobro vigentes en Tanzania, Nigeria y Chad.

Los diversos impuestos personales africanos aumentan modestamente las recaudaciones totales de los gobiernos centrales y han resultado bastante eficaces para aprovechar el limitado potencial para recaudaciones que ofrecen los sectores de bajos ingresos. Sin embargo, la importancia relativa de las recaudaciones provenientes de impuestos personales acusa una tendencia descendente como consecuencia en parte del creciente alcance del impuesto a la renta propiamente dicho, y en parte de que el gobierno central transfiera a los gobiernos locales la potestad de gravar los bajos ingresos. Al abandonarse las tasas fijas de impuestos y adoptarse en cambio tasas escalonadas, la política tributaria ha podido ser adaptada convenientemente al desarrollo económico. Asimismo los impuestos personales de los países de Africa han venido preparando a una gran mayoría de africanos para el pago del impuesto a la renta.

*

Mr. Arowolo, economist in the African Department (previously in the Fiscal Affairs Department), is a graduate of London University. He did postgraduate work at the University of Saskatchewan and McGill University, and was formerly an Inspector of Taxes in the Treasury, Ministry of Finance, Western Nigeria.

1

See, for example, United Nations, Economic Commission for Africa, Economic Bulletin for Africa (Addis Ababa), June 1961, and A. Abdel-Rahman, “The Revenue Structure of the CFA Countries,” Staff Papers, Vol. XII (1965), pp. 73-118.

2

For example, in East Africa (Kenya, Tanzania, Uganda) out of a population estimated at 26.2 million in 1963 only 90,365 individuals (0.3 per cent) paid income tax in the fiscal year ended June 30, 1964. See F. H. Vallibhoy, Tax Enquiry Report, 1964/65 (Ugandan Ministry of Finance, Entebbe, 1965), and the East African Common Services Organization, Economic and Statistical Review, June 1966, p. 5.

3

See John F. Due, Taxation and Economic Development in Tropical Africa (Cambridge, Massachusetts, 1963), p. 61; Ursula K. Hicks, Development from Below: Local Government and Finance in Developing Countries of the Commonwealth (London, 1961), p. 298.

4

See Lord Hailey, An African Survey, Revised 1956 (London, 1957), pp. 645-46.

5

In Tanzania a development levy, which was first imposed as a flat rate tax on income in July 1965, has been merged with the existing personal tax with effect from January 1968. (See the budget speech for 1967/68 by Tanzania’s Minister of Finance, in The Standard, Dar es Salaam, June 15, 1967.) Efforts are being made to relate the personal tax rates to the income tax rates so as to secure an over-all elastic and more progressive rate of personal tax, taking into account the combined effect of the income tax.

6

Tanganyika, Personal Tax, Chapter 355 of the Laws, Annual Supplement 1955 (Dar es Salaam, 1956), pp. 3-6. For the development of the personal tax system, see Great Britain, Colonial Office, Development of African Local Government in Tanganyika, No. 277 (London, 1951).

7

A new marginal rate of surtax of 65 per cent (T Sh 13 per T Sh 20) on chargeable incomes in excess of T Sh 300,000 was announced in the 1967/68 budget (see budget speech cited in footnote 5).

8

The following main personal allowances are deductible from taxable incomes to arrive at the taxpayer’s chargeable income: single allowance, T Sh 4,320; married allowance, T Sh 12,000; for each of four children aged up to 19 years, T Sh 1,920; for fifth and sixth child, T Sh 960 (see the budget speech for 1965/66 by the Minister of Finance, Dar es Salaam, June 15, 1966). Thus, a married man with, say, four children is not liable to pay income tax until his income exceeds T Sh 19,680, while a single person with two dependent children is not liable to pay income tax until his income exceeds T Sh 8,160.

9

Background to the Budget: An Economic Survey, 1967-68 (Dar es Salaam, 1967). This is also borne out by the fact that of the total adult male employees (estimated at 254,200 in 1965), about 91.5 per cent earned less than T Sh 4,800 per annum, while 1.3 per cent earned T Sh 12,000 and more per annum.

10

Tax inspectors are not only those who are charged with the administration of the law—tax agents and tax clerks—but also police officers who are not below the rank of subinspector and are assigned for checking such evasion.

11

Until 1951, tax defaulters could discharge their liabilities by working on government undertakings, a continuation of a practice adopted in the 1930’s.

12

Northern Nigeria, Personal Tax Law, 1962, N.N. No. 6 of 1962 (Kaduna). The law came into operation on April 1, 1962. Prior to the enactment of this law, seven types of direct taxes were imposed, namely, a locally distributed tax, a poll tax, a tax on ascertainable incomes, a wealthy traders’ tax, a mines’ labor tax, a strangers’ tax, and a land revenue tax. See Great Britain, Colonial Office, Annual Report on Nigeria, 1946-49 (London, 1947-50).

13

This consolidated allowance is granted to a female individual who has income of her own on which tax is payable but a woman’s income is not aggregated with that of her husband.

14

At present the scheme does not cover all employees or pensioners but only employees of designated employers, who are provided with requisite instruction or material. For a description of the assessment procedure, see Personal Taxation of Individuals in Northern Nigeria (Revenue Division, Ministry of Finance of Northern Nigeria, Kaduna, September 1964).

15

Northern Nigeria, Personal Tax Law, Section 49, p. 27.

16

The law is not clear on the liability for community tax of those who, in principle, are liable for the graduated personal tax but who because of relief to which they are entitled would not actually be called upon to pay. It can, however, be presumed that people in this category would be liable for the payment of the community tax.

17

Northern Nigeria, Personal Tax Law, Section 53, p. 29. A native authority can vary the amount allocated to an individual by a district head or village council.

18

Great Britain, Colonial Office, Uganda: Report for the Year 1961 (London, 1963).

19

Hicks, op. cit., pp. 299-300.

20

International Bank for Reconstruction and Development, The Economic Development of Nigeria (Baltimore, 1955), pp. 121 and 656-57.

21

Western Nigeria, Statistical Bulletin, Vol. V (June and December 1963).

22

Ministry of Local Government of Eastern Nigeria, Annual Report, 1960-61 (Enugu, 1962), pp. 7-8.