Rwanda Revenue Authority (RRA) has been urged to scrap income tax as a way of increasing tax compliance among small businesses.

A study done by the Institute of Policy Analysis and Research (IPAR) has revealed that the process involved with filing profit tax is complicated thus discouraging small businesses from paying taxes.

The research says the move will encourage formalisation of Small and Medium Enterprises (SMEs) and support their growth in the long run.

This was one of the key findings from an assessment done to scrutinise the challenges that Rwanda’s SMEs face in relation to tax compliance.

Of the 25,554 registered taxpayers in 2008, only 24 percent filed for income tax, 12 percent for Value Added Tax (VAT) and 14 percent for Pay As You Earn (PAYE).

"Income tax is a complicated tax; it is hard for most small business to pay income tax under the profit tax regime and so over 70 percent opt for presumptive regime,” said Ivan Murenzi, last week.

Under the presumptive regime, small businesses have the obligation of withholding PAYE and dividend tax. However, given their small size and their difficulty to maintain proper accounting records there is a great incentive to underreport turnover as well as to arbitrage between salaries and dividends.

"The presumptive regime has a number of inefficiencies, no tax exemption as it is under the profit tax regime (zero tax for business profit Rwf0-360, 00), you pay the tax even when you have made a loss or take into account interest paid on a loan,” he added.

Murenzi who is a research fellow with IPAR argued that SMEs can only afford to break even in their initial years of operation, hence an income tax of 4 percent of the sales is a big cost to the business.

"Such inefficiencies are a big disincentive for a small business to register for taxes, and the reason for low levels of tax compliance for those registered with RRA,” he said.

Results from the survey also show that over 80 percent of SMEs have only between 6-8 years of school, which is also why 74 percent prefer presumptive regime.

"It is hard for them to keep proper books of accounts -a key requirement under the profit tax regime, and yet it is also a big cost to hire tax auditors,” Murenzi said.

While past efforts to improve compliance include reduction in the number of procedures involved in paying taxes , increased RRA operational hours , the research finds that such interventions have had limited impact with a significant number of  SMEs remaining in the informal sector .

It also wants VAT threshold to be reduced from 20 to 10 million to increase the number of taxpayers. This would increase revenue from VAT, and ensure fairness among the taxpayers.

However commenting on the research findings, Gerald Nkusi Mukubu, the Director of Taxpayer Services at RRA observed that removing income tax is impossible and not a tangible solution to helping SMEs to grow.

Abolishing the tax he said, would undermine government efforts to be independent as it would easily lock out potential tax payers.  

"We are focusing on promoting SMEs to become more compliant and to develop schemes that propagate their growth.  If SMEs pay tax they can boost the economy to become economically independent which is our vision has a country,” he said.

According to Mukubu, RRA will continue focusing on tax payer education and sensitization to encourage compliance as non compliance has more to do with culture than the taxes in place.

‘The government has put in a lot of effort – reforming the tax laws and simplifying them to encourage compliance,” he said.

In a bid to improve financial management skills within SMEs, Mukubu observed that RRA is working with Private Sector Federation (PSF) through their Business Development Service (BDS) program to help them prepare annual financial statements using accounting software.

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