The Rwandan government faces an uphill task in balancing promoting private investment with tax incentives, and increasing domestic resources to finance development expenditure and reduce dependency on aid.

The government has come under pressure from the private sector, which wants a review of taxes related to dividends and interests, royalties, fees for technical services and other types of income, capital gains and corporate tax.

The private sector also wants a review of personal income tax for specific talents and skills that boost the economy, and VAT on services and products that could affect competitiveness of the country.

READ: Business people express tax increase worries

“If the tax incentives are not as attractive as those available in jurisdictions that compete with Rwanda, it will be very difficult to attract significant businesses and investments. We propose the provision of tax efficient vehicles for international trade and cross border investments,” states the private sector’s position paper prepared by its umbrella organisation, the Private Sector Federation.

The government had proposed an increase in excise tax on airtime from 8 per cent to 10 per cent in the new financial year, but the private sector wants it to remain as is.

READ: Mobile calls to cost more as duty on airtime is increased

“While this generates more revenue, it increases the cost of doing business in our country. The government should stay the current excise tax on airtime as well as design and amend tax laws to come up with a tax structure that is simple, straight forward and investment friendly,” the paper states.

In the fiscal year 2014/15, total tax revenue collections are projected to increase to Rwf906.8 billion ($1.34 billion) from Rwf782.5 billion ($1.16 billion) in 2013/2014.

To achieve this target, the government will implement tax reforms that include increasing excise duty to 10 per cent on airtime and reducing exemptions on VAT for investment certificate holders under the current investment code. It will also improve revenue collection by enforcing the use of electronic tax devices.

Although the government is the largest employer in the economy, analysts argue that for the country to sustain high economic growth – 11 per cent target as enshrined in its second Economic and Development Poverty Reduction Strategy — the private sector must be the growth engine.

“Rwanda is doing well on social indicators such as education and health, but economic transformation will be driven by the private sector that can create jobs. Currently, the economy is not generating enough jobs because it needs 200,000 off-farm jobs per year,” said Dickson Malunda, a senior research fellow at the Institute of Policy Analysis Rwanda.

Rwanda’s Vision 2020 seeks to generate 3.2 million off-farm jobs by 2020.

Dr Malunda said there is need for further private sector development, especially by encouraging domestic direct investment.

The private sector wants the government to facilitate access to credit as well as consider lifting the ban on plastic materials to encourage investment and exports.

“The cost of packaging for manufacturing companies increased by between three and eight times, and the total cost of production is higher — between 15 per cent and 30 per cent more. The increase in cost has affected competitiveness of Rwandan products in the EAC,” the private sector position paper states.

In a statement released this week, the International Monetary Fund said Rwanda faces the challenge of sustaining high inclusive growth while reducing its reliance on aid.

The government is banking on a rebound in the service sector, low inflation and better performance of the agriculture sector to drive growth to 6 per cent in 2014 and 6.7 per cent in 2015 However, there are significant risks to the rosy outlook.

“The key risk remains around agriculture. This year the rains disappeared earlier than expected, in April; this is likely to affect output. Food prices are likely to go up in the coming months,” said Eric Rutabana, the chief investment officer of Business Partners International Rwanda.