The President of Tanzania, Dr. John Magufuli, has announced that his government will reduce the lowest Pay as You Earn (PAYE) income tax on salaries from 11% to 9%, starting the next fiscal year 2016/2017.
PAYE is a withholding tax on income payments to employees, and amounts withheld are treated as advance payments of income tax due.
Tanzania’s lower income tax bracket was already reduced in 2015–2016 budget, from 12% to 11%.
The announcement was made on May 1st 2016 during Workers’ Day celebrations, when President Magufuli also promised workers that after tax reduction on salaries, his government will work on proposals to increase salaries.
He also restated that salaries for all heads of government institutions should not exceed TZS15m per month, and that the rest of the money should be used to improve workers’ remunerations.
The Association of Tanzania Employers (ATE) welcomed the tax reduction, as it would lessen the cost of doing business in Tanzania.
However, Economist Honest Prosper Ngowi of the Mzumbe University of Dar es Salaam and board member of Tanzania’s Economic and Social Research Foundation (ESRF) warned that the 2% tax-cut benefit would be nulled by inflation as exchange rate and consumption tax increases in the 2016–17 budget.
In addition, Dr. Ngowi argued that the salary cap of TZS15m will result in brain drain as Tanzanians abroad won’t be incentivized to return.