Rwanda considers lowering Value Added Tax

On 3 March 2024 at 01:31

The Commissioner General of the Rwanda Revenue Authority (RRA), Bizimana Ruganintwali Pascal, has revealed that a comprehensive analysis is underway to pinpoint taxation loopholes and devise strategies that may lead to pivotal reforms, including a potential decrease in the Value Added Tax (VAT) rate. Since its introduction in 2001, this tax has been applied to a wide array of goods and services at a standard rate of 18%, accounting for 34% of the total tax revenue collected.

Speaking on a Radio Rwanda talk show on Saturday, Ruganintwali highlighted that the ongoing review has identified VAT as a significant financial burden for citizens. This is largely because individuals are taxed on their income (PAYE) and subsequently taxed again through VAT on their purchases. Although traders have the option to claim refunds for the VAT paid on their inventory if the VAT collected from sales is lower, such a mechanism is not available for the end consumers.

Ruganintwali elaborated, "We are exploring the possibility of reducing the VAT rate from the current 18% to potentially 10%. This initiative, however, is contingent upon widening the base for income tax. Given that individuals earn income, it is only fair they contribute their share in taxes." He believes that an increase in the number of income taxpayers could bolster overall tax revenue, thus facilitating a reduction in VAT. "Implementing this plan is challenging and requires a shift in the collective mindset towards understanding the importance of minimizing tax obligations on all earnings."

The review encompasses a thorough examination of all tax categories and is slated for completion by the end of 2024. Immediate actions will be taken based on feasible recommendations. "We anticipate a detailed report by year’s end, covering the spectrum of domestic taxes and those internationally applicable that we might adopt, such as taxes on the digital economy," Ruganintwali mentioned.

Given the existing legislative framework, a business must have a physical establishment in Rwanda and operate within the country for a consecutive period of 183 days to be subjected to taxation. However, advancements in technology now allow businesses to operate virtually from any location. Ruganintwali pointed out, "Globally, steps are being taken to combat tax erosion caused by the digital economy. We are committed to conducting thorough research and engaging with stakeholders to introduce this form of taxation responsibly, ensuring public familiarity and consent."

Enhancing VAT collection through EBM

The adoption of Electronic Billing Machine (EBM) technology has been instrumental in significantly increasing VAT collection. Since its inception in 2013, targeting initially only registered taxpayers, the requirement to use EBMs has been extended to all business entities. From the fiscal year 2013/14 to 2022/2023, VAT revenue surged by 170.0%, from 259.1 billion to 699.3 billion Rwandan francs, concurrently amplifying income tax collections from 120.2 billion to 538.3 billion Rwandan francs.

To motivate traders further in utilizing EBMs, the government has introduced a reward system offering 10% of the VAT indicated on the invoice to customers. Additionally, customers who report non-compliance by traders in issuing invoices are entitled to 50% of the fines levied against the offending traders.

Ruganintwali disclosed plans for an imminent sector-wide inspection to scrutinize the issuance of EBM invoices. The investigation aims to address non-compliance among traders, some of whom avoid issuing invoices either due to the dubious acquisition of goods or intentions to evade tax. "We are determined to uncover the reasons behind the failure to issue invoices. Effective immediately, individuals caught engaging in such activities will face public exposure as deterrents, emphasizing that VAT is an obligation of the consumer, not a discretionary charge by the trader."

Individuals must register in a new system being developed by the RRA to qualify for the reward, with the system’s completion expected shortly. Rewards will be issued quarterly.

As discussions on VAT adjustments progress, the government continues to implement legislative measures aimed at alleviating the tax burden on taxpayers, including notable tax reductions. For instance, the corporate income tax rate was reduced from 50% to 30% in 2005 and further to 28% recently, with aspirations to reduce it to 20%. Additionally, the tax exemption threshold for employee benefits was raised from 15,000 to 60,000 Rwandan francs, alongside tax reductions for subsequent income brackets.

The Commissioner General of the Rwanda Revenue Authority (RRA), Bizimana Ruganintwali Pascal.