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.
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.
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.
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.
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.
See Lord Hailey, An African Survey, Revised 1956 (London, 1957), pp. 645-46.
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.
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).
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).
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.
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.
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.
Until 1951, tax defaulters could discharge their liabilities by working on government undertakings, a continuation of a practice adopted in the 1930’s.
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).
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.
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).
Northern Nigeria, Personal Tax Law, Section 49, p. 27.
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.
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.
Great Britain, Colonial Office, Uganda: Report for the Year 1961 (London, 1963).
Hicks, op. cit., pp. 299-300.
International Bank for Reconstruction and Development, The Economic Development of Nigeria (Baltimore, 1955), pp. 121 and 656-57.
Western Nigeria, Statistical Bulletin, Vol. V (June and December 1963).
Ministry of Local Government of Eastern Nigeria, Annual Report, 1960-61 (Enugu, 1962), pp. 7-8.