Rwanda is to introduce a raft of reforms in its taxation system that will see businesses and households file tax returns online.

As the country seeks to boost its revenue to finance growing budgetary needs in the new financial year, the government is targeting an overall 10 per cent increase in tax revenues.

Domestic revenues projected to increase from about 13.6 per cent of gross domestic product in 2011/2012 to about 14.8 per cent of GDP by 2014/2015. Of the total revenues, direct taxes are expected to contribute Rwf199.9 billion ($33.5 million) compared with the Rwf175.8 billion ($29.4 million) collected in 2010, /2011, reflecting an increase of about 13.7 per cent.

While the reduction of tax on fuel by Rwf100 ($0.16) per litre for both petrol and gasoline was the most significant change announced for 2011/2012, new tax administration changes are expected to mitigate the expected losses from excise tax.

The government also intends to introduce new tax administration measures such as Electronic Transaction Devices (ETD), e-filing and e-payments to improve efficiency and minimise revenue leakage. ETD implementation is scheduled to start from July 1 and will be done through a phased approach beginning with about 2,500 large and medium sized retailers.

Rwanda will be the third country in East Africa to implement an e-filing and payment system. Kenya and Uganda implemented the system in 2008 and 2009 respectively.

Pilot project

Ben Kagarama, commissioner general of the Rwanda Revenue Authority, told The EastAfrican that the government is in the process of procuring ETDs that will be used in the pilot project, though businesses will be expected to foot the bill in the long run.

“We are looking at purchasing about 2,000 units, though we are yet to establish the cost,” he said. Estimates from Tanzania and Kenya put the cost of the ETDs at $1,000 per unit.

“These reforms have to be implemented as soon as possible for us to meet our targets. Achieving our targets will depend on how quickly we implement these reforms,” said Mr Kagarama.

Specifically, implementing the ETD system is expected to increase efficiency and minimise leakage of value added tax collections, which are expected to contribute approximately 50 per cent of the tax revenue projection.

“The system is mandatory for small and medium enterprises (SMEs) that come under the VAT tax system while for those below the VAT threshold, it will be voluntary,” he said. In Rwanda, all SMEs with a turnover above Rwf20 million ($3.3 million) are obliged to pay VAT.

In addition, the government plans to improve compliance and increase collection by strengthening risk-based assessments and audits.

However, analysts say that while this is a bold proposal, given that experience from other countries such as Greece and Kenya has confirmed the effectiveness of ETDs in widening the tax net and enhancing the level of tax compliance, the extent of benefits to taxpayers will depend on the implementation modalities for ETDs.

Specifically, analysts underline taxpayer education, improving bandwidth and quality of the Internet network as key to successful implementation of the new reforms.

In addition, an appropriate IT platform at the revenue authority and the interface between the authority and bank payments systems will be critical to the flexibility of the Online forms and processes in minimising filing delays and rejection of information.

“In Kenya, there was a lot of opposition, particularly from various business groups when the process was started in 2004, but eventually the government got everyone on board,” said Nelson Ogara, senior manager, tax services at PwC Rwanda.

He said Kenyan businesses were forced to comply by being required to present documents that have passed through the electronic transaction machines for them to claim input VAT refunds.

The tax consultant added that the government will also have to ensure a transparent process of vetting suppliers of the machines to avoid fraud. “The Rwanda Revenue Authority must have a committee to vet suppliers otherwise people will bring in substandard machines,” said Mr Ogara, adding that the tax changes, once fully implemented, will ease the regulator’s administrative burden.