Money Markets
How far can Rwanda go in expanding tax bracket?
Mr Paul Kagame: Rwanda president and chairman of the EAC summit. Photo/FILE
Mr Ndahimana spends around Rwf 85,000 ($150) a month buying socks.
If he sells them all he can make up to Rwf 10,000 ($18) over two weeks.
Mr Ndahimana insists he is too poor to formalise his business.
“Starting a shop is too expensive for me and it doesn’t guarantee me that I will obtain the profit I used to get by hawking,” he says. “I always tell [the police and local officials] that I will continue to do it because despite their threats this is how I earn a living.”
Mr Ndahimana’s determination to stay in the informal sector presents a challenge for the government.
Difficulties of collecting taxes
Collecting taxes in many developing countries is hard.
The Rwandan Revenue Authority, which was set up in 1995, has been held up as an example of success in terms of tax collection.
A three-fold increase in tax revenues between 1998 and 2006 saw the national budget also grow three-fold, from Rwf 175 billion ($308 million) to Rwf 528 billion ($928 million).
And as tax revenues have increased the proportion of Rwanda’s budget financed by aid has declined.
In 2001, only 34.62 per cent of the total budget was financed by domestic sources, while in 2008 it hit 44 per cent and is expected to rise again this year.
However, Rwanda’s major remaining hurdle to strengthening its domestic revenue base is integrating the country’s informal sector.
According to the Private Sector Federation (PSF), an organisation dedicated to promoting business in Rwanda, about 0.3 per cent of tax payers currently contribute 48 per cent of Rwanda’s tax revenue.
There are fewer than 3,000 registered companies paying national taxes in Rwanda, according to a case study on the Rwandan Revenue Authority by the UK’s Department for International Development (DfID) and the Foreign Investment Advisory Service (FIAS).
Of these, the top 13 companies are estimated to pay some 80 per cent of all taxes collected in Rwanda.
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