Rwanda’s tax incentives are probably too generous and risk being unsustainable in the long run, finance experts from the International Monetary Fund (IMF) said yesterday.

According to the IMF, the tax-based incentives are important to attract investors, however, in the long run, such incentives become an obstacle to domestic resource mobilisation efforts.

The tax incentives that can be detrimental include waivers on Value Added Tax (VAT).

IMF estimates the leakage at about 50 per cent of VAT revenues.

While presenting Rwanda’s economic outlook, the IMF country Representative Alun Thomas said that there seems to be a tension of sorts between domestic revenue mobilization and remaining attractive for investment especially Foreign Direct Investment.

"To make investing in Rwanda more attractive, the government decided to increase the incentives in the case of taking off VAT on some imports. There has been quite some tension between resource mobilization and attracting investors. There might be quite a bit of an imbalance,” Thomas said.

Incentives apply on certain investments in sectors that the government considers a priority.

He said that there is need to understand the leakages and potential approaches to address them without necessarily affecting foreign investment flow into the country.

Commenting on the observation, the economic advisor to the Minister of Finance, Leonard Rugwabiza, said that Rwanda has been doing its best to balance between the two priorities; mobilising resources and attracting more investment.

Rugwabiza observed that private sector investment is essential to Rwanda’s development goals and tax incentives play a key role in boosting the private sector.

"When you look at what we are trying to achieve, there are two things that need to happen. Private investment and domestic revenue mobilisation. Without private investment, there is no vision 2050 for Rwanda. Private sector investments need to grow,” he noted.

Rugwabiza said that the government was aware of what is at stake and is in the process of conducting an extensive study on the impact of various tax incentives.

"We are doing a study on tax incentives and discuss as the government on the way forward. Not all tax incentives are good, not all are bad. We need to access and see what has worked and what has not worked. We will then see if to expel them or amend them,” he said.

The study involves evaluating the impact of the various incentives over time as well as cost-benefit analysis.

The study is also considering approaches towards incentives as to whether it should be on profit or to reduce cost of business.

"We changed the investment code to reduce some of the incentives in 2015. We are continuously improving. Incentives do not always have to be tax related, it can be around after care services and other business facilitation,” Rugwabiza added.

Economic projections

The IMF maintained a positive outlook that the economy would grow by 7.2 per cent in 2018 riding on the services sector, agriculture and a rebound in construction activities.

The World Bank Group also revised their projections yesterday morning noting that the economy will grow by 7 per cent riding on exports, agriculture sector and narrowing trade imbalance.

The group has previously projected economic growth in 2018 would be at 6.2 per cent.

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