Entrepreneurship

Sub-topic area: Taxation

Key unit competence: To be able to analyse the roles of taxes in Rwanda

5.1 Taxation

 A tax is a levy that is obligatory (required by law). In Rwanda, taxes are collected by the Rwanda Revenue Authority (RRA). Tax can also be imposed by administrative divisions such as districts, sectors or cells. Taxation is the largest source of revenue for the government. The state uses the money raised from taxes to build and maintain roads, schools and hospitals. A person that earns an income must pay income tax. We also pay tax when we buy certain goods. If there was no income from tax, the government would not be able to provide public goods and services. Instead, the private sector would provide services to those who could afford it. The poor would not be able to afford services and would have to go without.

In Rwanda we pay a certain percentage of our income in tax. The amount of tax increases the more a person earns – this is called progressive tax system. Businesses pay tax on their profits. Do you recall that profit is income minus expenses?

5.2 Taxes in Rwanda 

Taxation is the largest source of revenue for the government. The state uses the money raised from taxes to build and maintain roads, schools and hospitals. Taxes consist of direct or indirect taxes. A tax system should be simple, easy to understand and administer.

Read the scenario on the previous page.Then answer the questions. 

1. Do you agree with Mr Karimunda’s suggestions for reducing his tax bill? Explain your answer. 

2. Explain the difference between tax avoidance and tax evasion. 

3. Do you think Mr Karimunda is avoiding or evading tax? Explain your answer

Tax avoidance 

Sometimes people can avoid paying taxes because they find ways to reduce the amount of taxes that they must pay. This is called tax avoidance. A person or a business can avoid paying taxes in different ways. For example, if you support a charity, the money that you pay may be deducted from your tax bill. Tax avoidance is legal. Some people try hard to avoid paying taxes. If a tax system is not clear, people can find loopholes that allow them to avoid paying tax.

5.2.1 Tax evasion 

You are allowed to avoid paying tax if you follow legal rules. However, tax evasion is illegal. Evasion means hiding your income so that you pay no tax or less tax than you owe. If you state that your income is lower than it is or do not declare it at all, you are committing a criminal offence. An example of tax evasion is when you claim that you have expenses that are fake. A business can evade paying taxes by stating that expenses are higher than they really are or by claiming that it sells less goods or services than it really does. Tax evasion is punished by penalties and fines, or even prison.

Tax offences include: 

• keeping more than one set of records and preparing two sets of final accounts 

• using false names or false documents

 • not filing tax returns 

• not paying tax.

5.2.3 Paying government workers 

People who work for a government are called civil servants. They do important work. Civil servants include: • teachers who educate children 

• doctors and nurses who care for sick people 

• policemen and women who ensure that we adhere to the laws of Rwanda

 • prison wardens who ensure that prisons are well run 

• judges who preside (are in charge) over trials

 • district workers who work on roads and power stations. Civil servants do important jobs. They are paid with the tax revenue that the government collects from businesses.

Activity 5.4

 1. Explain what is meant by public expenditure. 

2. Discuss the importance of paying taxes in a country. Make a presentation of your findings to the class. In your presentation, you can use the Rwanda Revenue Authority statement: ‘Without taxes there is no peace, no roads, no hospitals, and no schools.

Exercise 5.1 

1. An employee earns 4 000 000 Frw in one year. Calculate the tax that the employee must pay. 

2. An employer pays 74 000 Frw in tax for the above employee. Work out the balance that the employer must still pay

5.3.2 Corporate income tax 

Businesses pay tax on their profits. This tax is called corporate income tax (or company tax). In Rwanda, a business generally pays 30% of its profit in tax. As the government wants to encourage business growth, many businesses receive tax discounts. For example, a business that exports goods and services receives a discount on their tax bill. A small enterprise that sells goods and services to the value of up to 50 Frw million per year pays a flat tax. This tax is a percentage of the turnover (total sales) of the business. The business can also choose to be registered to pay regular company tax.

5.3.3 Personal and business property tax

 An individual or a business that owns property must pay property tax. This tax is collected by Rwanda Revenue Authority on behalf of the district. The amount of tax payable depends on the value of the property.

5.3.4 Business sales

 You pay a sales tax called Value-added Tax (VAT) when you buy goods and services. You do not pay this tax on all goods and services. Basic nonprocessed food items and some equipment are exempt from VAT. This makes it easier for poor people to afford buying necessary items. In Rwanda, we pay 18% in VAT. The businesses that charge VAT on goods are also responsible for collecting the money using electronic billing machines (EBM). They pay the VAT to the Rwanda Revenue Authority every month.

5.4 Rights of taxpayers 

As a taxpayer you have many rights when paying tax. The Rwandan government states that it is the right of each taxpayer to always be treated fairly and to be informed of taxpayer services and obligations (duties). Taxpayers also have several other important rights.

5.4.1 Right to confidentiality

 The information that you send to the Rwanda Revenue Authority is confidential (private and kept secret). The information can only be used if the information must be used to investigate criminal activities such as tax offences.

5.4.2 Right to legal representation

 You can declare taxes yourself, but you also have the right to ask a legal representative, such as an accountant, to help with declaring taxes.

5.4.3 Right to tax refund

 If you have paid more tax than you should, the Rwanda Revenue Authority will issue a tax refund. This means that they will pay back the excess money. Sometimes the excess tax paid is simply offset against the next tax payment.

Activity 5.5

Discuss the following questions. 

1. Why are taxpayers’ rights important? 

2. Why is it in the government’s best interests to uphold these rights?

5.5 Obligations of taxpayers 

As a taxpayer you have many obligations.

5.5.1 Register with Rwanda Revenue Authority 

Each taxpayer must apply for a unique Tax Identification Number (TIN). This number identifies the taxpayer. When you start a business you also need to register the business with Rwanda Revenue Authority within 7 days.

5.5.2 Filing tax returns 

Nowadays you fill out a tax return electronically, you indicate how much money you have made in a tax year and the system calculates how much money you must pay in tax. This is a legal document that must be an accurate and truthful statement.

5.5.3 Provide all the information and documents

 When you submit a tax return, you must also add additional information called supporting documents where it is required. For example: 

• medical expenses (not covered by the medical aid) 

• proof of payments to a retirement fund 

• proof of purchase or sale of assets. 

You must state the following: 

• Tax identification number (TIN) 

• period of employment or activity

 • amount earned

 • type of tax 

• correct postal address.

Activity 5.6

 1. Why do taxpayers have certain obligations? What are they? 

2. What information must taxpayers give to the tax authority when filling in tax forms?

If you rent out machinery, land, house or livestock the rental amount is an income. You must pay tax on this income, but can deduct your expenses such as interest paid on loans. Rental tax is therefore also a direct tax. Property tax is also a direct tax. This tax is levied on the value of property such as land or buildings. When a person dies, the relatives inherit his/her assets. To inherit means to receive money as an heir. In some countries, the heir pays inheritance tax. This tax is a percentage of the value of the money and properties that he or she received. Inheritance tax is a direct tax.

5.6.2 Indirect taxes 

An indirect tax is a tax that is collected by an intermediary, for example a retail store, from the person who pays the tax. The intermediary then files a tax declaration and forwards the tax to the government. Valueadded Tax (VAT) is an example of an indirect tax. A business must register for VAT if its turnover is more than 20 Frw million in one year. This means that the business will charge VAT to its customers and pay over the amount to the RRA. We do not pay VAT on all goods. Some goods are classified as exempt or zero-rated supplies. We pay a standard rate of 18% on all other goods. Some items are considered luxuries. The government adds an additional tax called consumption tax to these goods. This tax is also known as excise tax. This tax is paid by those that can best afford it. The tax is also a deliberate attempt to encourage people to buy and use less of certain goods. In Rwanda, we pay consumption tax on locally produced or imported beers, lemonades, mineral water, juices, liquors, wines, fuel, vehicles and powdered milk. It is also levied on cigarettes and telephone communication. When we buy a product that is imported into Rwanda we pay customs duties. This duty is paid when the products enter the country. As the products arrive in Rwanda, the importer pays taxes and duties like VAT and consumption tax.

Case study 5.1

 Read the case study. Then discuss the questions.

 Duties and taxes for import into Rwanda 

Some goods are not made in Rwanda. We must import them from other countries. Different stakeholders are involved in importing goods. First, there is the producer of the goods in the foreign country. Then we must insure the goods. The goods are then transported to Rwanda by road, boat or air. Here, the Rwanda Revenue Customs Service calculates duties and taxes on the value of the products. If the import consists of goods produced in the East African Community (EAC) countries, then the Customs Services applies the duties and tariffs that have been agreed in the trading bloc. Imports from members of the COMESA trade bloc have preferential tarrifs compared to imports from other countries. Importers pay different levies depending on the product that is imported. For raw materials, there is no duty (0%). The duty for finished goods is 25%. The importer must also add 18% VAT to the value of the goods. In addition, the importer must pay consumption tax if the import is an alcoholic beverage or tobacco. This tax ranges from 3% to 150% of the value of the products. 

Questions

 In each scenario described below, discuss which stakeholders are involved in the process. List the different types of taxes the entrepreneur must pay for the imports. 

1. Marie Louise wants to start a business that provides fertilisers to farmers. She wants to import fertilisers from a factory in Kenya.

 2. Theoneste travels to Germany. He wants to import kitchen utensils that he plans to sell to restaurants. 3. Cherise has just returned from visiting a supplier of beauty products in Namibia. She wants to open beauty salons all around Rwanda.

Legal form of a business

 A business can have many legal forms. Below are a few examples: 

• Sole proprietorship – this business is owned and managed by one person, the owner.

 • Partnership – this business is owned and managed by two or more partners. 

• Company – some companies are owned by a few people who hold shares (shareholders) in the company. Other companies sell their shares to the pubic on a stock exchange. These are public companies.

Some organisations are called non-profit. This type of organisation has a specific purpose other than making a profit. This purpose can be a social cause, such as caring for the elderly. Non-Profit Organisations do not pay income tax. When you register your business with the Rwanda Revenue Authority, you need to ensure that you register the correct form of business.

5.8 Documents used for taxation 

You need to register a new business with the Rwanda Revenue Authority and fill in the required documents within a period of seven days from starting the business. Before you can open your door for business you also need to ensure that you have the correct permits and licenses to operate the business. A business can be registered as an individual business, local or foreign company. A business needs to be registered with the Rwanda Development Board (RBD). When you register your business, you receive a certificate of company registration (see Figure 5.7). This certificate must be displayed in the business.

Identification documents 

To register for a Taxpayer Identification Number (TIN), you need to bring the completed application to the RRA. You also need to bring the following identification documents:

 • your national identity card 

• a passport photo.

Activity 5.7 

1. What are the steps and procedures one must follow to subscribe to the Rwanda tax system? 

2. Explain why the subscribing or registering with the tax system is important.

5.9 Advantages of being part of the tax system 

There are many good reasons for being part of a tax system.

Taking part in business 

• When you apply for small business loans, you need to prove that you own a business. Lenders and investors will ask to see your business registration before approving a loan. You also need to show your business registration to apply for a credit card.

 • Your customers will also feel more confident about buying from a legal business than from one that is not registered.

 • Many export businesses receive tax discounts from the government. This is done to encourage the growth of Rwanda’s export sector. 

• When a business subscribes to the tax system, the business also protects its employees. The business deducts funds for a national pension scheme. This money is used to pay pensions to people that have retired.

 • Paying taxes help the government to build and fund different public activities such as building and maintaining roads, schools and hospitals. 

• When you become part of the tax system, you are entitled to a tax certificate. This allows you to be an official operator in a business sector.

Case study 5.2

 Read the case study. Then answer the questions that follow.

 Register your business – it is the law 

Government has threatened to close all unregistered businesses as it steps up efforts to make all business operations in the country formal and to increase its tax revenue base. The move is also aimed at enforcing the Company Act, which was passed in April 2009. This requires all companies to register with the Registrar of Companies at the Rwanda Development Board (RDB). The government introduced a two-year grace period to allow all unregistered businesses to register. Businesses that had registered using the old law also needed to re-register. The law was passed as government wants to encourage small businesses to grow. To implement the law, the Ministry of Trade and Industry embarked on a sensitisation (learning) process where the relevance of this law was explained to the business community. 

Source: http://www.newtimes.co.rw/section/article/2012-06-26/54389/ ;

Questions

 1. Why is it important to grow the country’s tax base? 

2. Explain the advantages of subscribing to the tax system.

Cancellation of the registration certificate 

The Rwanda Development Board will issue the cancellation certificate when the business stops operating and has paid all taxes owed.

Unit summary

Taxation and taxes 

• Taxation is a source of income for the government. 

• The government uses the taxes collected to build roads, provide state pensions, state funded education and healthcare.

 • Taxes are collected in different ways: businesses pay tax on profits, employees pay tax on their income earned and consumers pay a general tax (VAT at 18%) when they buy goods. 

• Rwanda uses a progressive tax system (the more you earn, the more tax you pay). 

• Taxes are collected by Rwanda Revenue Authority (RRA).

Tax avoidance and tax evasion

 • Tax avoidance is when people legally reduce their income according to current tax legislation to pay less tax. 

• Tax evasion is when people illegally reduce their income to pay less tax.

The importance of paying taxes

 • People working for the government are called civil servants are paid from the taxes that the government collect. 

• A shortfall of tax collection will result in the government being required to borrow money from other countries to pay for certain essential services. 

• It is expensive to borrow money from other countries therefore the Rwandan government would prefer that more people earn an income so more people can pay taxes. 

• Taxpayers have certain rights. 

• Right to confidentiality. • Right to legal representation.

• Right to tax refund.

 • Taxpayers have obligations. 

• Register with the RRA.

 • Signing tax returns. 

• Supply supporting documentation when submitting tax returns.

Types of taxes

 • Direct tax is tax paid on profit, income, or property tax. 

• Indirect tax is paid on goods and services. 

• Advantages of being part of the tax system include: 

             • Customers will know that the business is a legal entity. 

              • A business must be registered to qualify for a bank loan or to apply for a business credit card.

               • A registered business that export goods can receive refunds from the government. 

                • A registered business protects its employees. • A registered business contributes to the well-                        being of Rwanda’s economy.

Sanctions and penalties 

• If a taxpayer does not comply with the law, he must pay penalties. 

• A business that decides to stop conducting.

Self-assessment 

1. Draw up a table where you list direct and indirect taxes paid in Rwanda. 

2. Explain the purpose of adding consumption tax to certain products. 

3. Imagine that you have just completed your education and are working for a business. Describe your obligations as a taxpayer.