Good taxes reduce poverty in Rwanda
10 January 2008
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Rwanda country profile |
Millennium Development Goal 1: Poverty &
Hunger
 Image courtesy of Sven Torfinn/Panos Pictures
In 1994, Rwanda was convulsed by violence that claimed more than a million lives
and shattered the country's infrastructure. In the wake of the devastation, reforms
were needed across society to put Rwanda on the road to recovery. One area that
required urgent change was the taxation system. Failing to gather sufficient
revenues would hinder the rebuilding process, but collecting taxes had become
very difficult.
With DFID's support, the Government of Rwanda set about
modernising the country's tax system. A major part of this was the creation of a
new body that would replace the old, unreliable and often corrupt revenue
departments, and collect more legally due taxes, more effectively. In 1998, the
 Rwanda
Revenue Authority (RRA) was born, and since then it has gone from strength to
strength, collecting £60 million in its first year, and £240 million in 2006. As
a result of increased revenues, the national budget has grown, with more being
spent on vital areas like health, education and sanitation, and, with spending
increasing, poverty has fallen dramatically.
Stamping out corruption and tackling inefficiency
Tax and customs used to be managed by two different and under-staffed
departments in the Rwandan Ministry of Finances.
Within these departments, the same people were responsible for both generating
tax policy and organizing the collection of taxes. This gave rise to problems
such as tax evasion and the special treatment of friends of senior officials and
ministers. In addition, unqualified and corrupt revenue officers, and out of
date systems, meant that taxes weren't being collected efficiently enough.
As long as the revenue departments remained in the public sector, it was felt
that the myriad problems of Rwanda's tax system were unlikely
to be solved. Tax policy needed to be separated from tax
administration, employees required incentives for improving their
performance (and penalties for misconduct), and more investment had to be put
into equipment and infrastructure. DFID helped with the plans for a
semi-autonomous body - the RRA - that would aim to deliver on these
fronts.
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Ensuring new systems do the job
 Image courtesy of Sven Torfinn/Panos Pictures
First of all, DFID funded a study focusing on
the arrangements needed to establish the RRA. With DFID and the
International Monetary Fund’s
(IMF) assistance,
tax
and customs laws were revised and modernised, and income tax rates were reduced.
Secondly, DFID helped to provide training for RRA staff, making use of international, regional and in-country expertise to
provide guidance in a variety of areas. Very quickly, the RRA went from being an
organisation that depended on outside managerial expertise to one that worked
well with only minimal assistance from advisers.
Next, new computer systems were introduced. Now, all of a taxpayer’s tax accounts are combined on a single
file, and RRA offices across the country are linked to the Kigali headquarters,
enabling them to process customs transactions quickly online. In the past,
customs staff had to rely on typewriters to clear transactions, which was a much
slower process.
DFID's help has played a significant part in the successful
growth of the RRA. Having received £20.5 million from DFID since the early days,
the agency now collects the equivalent of that, on average, every four weeks. In
the words of Mary Baine, the Commissioner General of the RRA: “The great
thing about DFID's assistance is its reliability...it has always been flexible and responsive to our
needs even as our needs have changed rapidly over the years.” As DFID's support
continues, the focus is on building on the gains that have been made, to ensure
better management of taxes across the country, fuelling real
improvements to people's lives.
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Key facts
- The three-fold increase in revenues between 1998 and 2006
saw the national budget also grow
three-fold, from RWF175 billion to RWF528 billion. Since 2003, spending on water
and sanitation has increased more than five-fold, education expenditure has more
than doubled and health expenditure has grown to almost five times the 2003 level.
- As a result, poverty is falling in Rwanda, from 74% of the population in
1994 to 56.9% in 2006. The number of children in primary
education has increased from 74% in 2001 to 95% in 2006, which was also helped
by the introduction of free primary education. In health, user rates have
doubled.
- As tax revenues have increased, the gap between aid and
domestic revenue as a percentage of gross domestic product (GDP) is closing,
and the proportion of Rwanda's budget financed by aid has declined. In 2001, only
34.62% of the total budget was financed by domestic sources; by 2006, it had risen to 48.7%.
- The current phase of DFID support for the RRA has five
interlocking goals: increasing the agency's efficiency, to
achieve higher tax returns; strengthening the RRA to ensure that it is more
accountable, and motivating it towards improving its performance; enhancing its
support for local governments, in their efforts to improve the collection of
local revenues; improving the business
environment; and integrating Rwanda into the
East African
Community (EAC).
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