Tax, Taxation, Tax Avoidance and Tax Evasion

1Why this matters

The classroom you sit in, the tarmac road to your district, the health centre where your family is treated and your teachers' salaries are all paid for, largely, by taxes. Rwanda aims to pay for more of its own development instead of relying on foreign aid, and that only works if people and businesses pay what they owe. As a future entrepreneur you will pay taxes yourself and also collect some on the government's behalf, so you need to understand how the system works.

2Key terms

• A tax is a compulsory payment that a government collects from people and businesses to pay for public spending. It is not the price of one particular service: you pay it whether or not you use a given road or school, and refusing to pay is punishable by law.
• Taxation is the whole system by which a government decides what to tax, sets the rates and collects the money.
• A taxpayer is the person or business that the law requires to pay a tax.
• The tax base is the thing being taxed (an income, a sale, a building). The tax rate is the share or amount charged on it, for example 18%.

In Rwanda, the Rwanda Revenue Authority (RRA) assesses, collects and accounts for taxes. It was created by a law passed in 1997, started work in 1998, and is supervised by the Ministry of Finance and Economic Planning (MINECOFIN). RRA also collects some taxes on behalf of the districts and the City of Kigali.

3Tax avoidance and tax evasion

Both lower the tax a person pays, but one is legal and the other is a crime.

• Tax avoidance means lowering your tax by legal means, using exemptions, allowances and deductions that the law itself provides. Example: the law exempts new micro and small businesses from trading licence tax for their first two years, so a new small bakery that claims this exemption is avoiding tax legally. Avoidance becomes a problem when complicated schemes are designed only to defeat the purpose of the law; governments then change the law to close these loopholes.
• Tax evasion means illegally not paying tax that is owed. Examples: hiding sales, not issuing EBM receipts, declaring “no sales” when there were sales, using forged accounts, or smuggling goods past customs. In Rwanda, tax evasion is an offence that can lead to fines and imprisonment.

4Why paying taxes matters

• Public services: taxes pay for schools, health centres, water, roads, security and courts.
• Self-reliance: the more a country raises from its own taxes, the less it depends on loans and aid, and the more freely it chooses its own priorities.
• Fair sharing: taxes that take a bigger share of higher incomes help pay for services for people who could not afford them.
• Guiding behaviour: taxes on cigarettes and alcohol discourage harmful consumption.
• Protecting local producers: customs duties on imports can make locally made goods more competitive.
• Fair competition: when every business pays, an honest trader is not undercut by one who evades.

Worked example: compliance, avoidance or evasion?

This case is written by Ganzaa. Classify each trader.

1. Niyonzima sells shoes in Rubavu. He issues an EBM receipt for every sale and declares all his sales to RRA.
   Compliance. He pays exactly what the law requires.
2. Keza opens a small bakery and, in her first year, does not pay trading licence tax because the law exempts new small businesses for two years.
   Tax avoidance (legal). She is using an exemption the law provides, and nothing is hidden.
3. Gatete sells beans and tells customers, “It is cheaper without a receipt.” He records only half his sales.
   Tax evasion (illegal). He hides sales, so tax that is owed is never paid.
4. A trader carries phones from a neighbouring country along an unofficial path to avoid the border post.
   Tax evasion (smuggling). Customs duty and VAT that are owed on the imports are not paid.

Practice