The Government of Rwanda has, recently, resolved to reform decentralized taxes and fees in order to respond to the impacts of COVID19 and different global crises, compound by the effects of climate change in Rwanda.
The Cabinet has approved, in April 2023, comprehensive tax reforms which brought significant reduction of tax rates. According to the Government, the reforms are intended to broaden the tax base, improve tax compliance and curb tax evasion while ensuring tax revenues increase as a result of Gross domestic product increase.
Particularly, the reforms targeted the existing taxes and fees being directly paid by citizens to decentralized administrative entities. This move reduced some decentralized revenues collections reduced while some service fees were totally waived.
The intervention that triggered the reforms was partially in form of relief and recovery for the affected people, particularly the vulnerable. The reforms aim also at increasing domestic and foreign investments, which shall contribute to local economic development.
The key reforms that directly affects local governments include the reduction of property and land taxes rates. With the new tax regime, land tax has been set between Frw 0 to 80 Frw per square meter from Frw 0 to Frw 300 currently. With regard to buildings, a second residential house will be taxed at 0.5% of the combined market value of the house and land, down from 1%.
The tax rate for commercial buildings was reduced from 0.5 % to 0.3% of its market value on both building and land. Tax charges on commercial buildings are capped at Frw 30 billion. Additionally, tax rates were also revised in relation to selling properties whereby a levy will be applied at 2% of the property value for registered taxpayers and 2.5% on non-registered taxpayers while the first five million of the sale of every immovable property will be tax exempt.
In these reforms, businesses and traders will pay a single trading license tax, that combines market and public cleaning fees. Businesses with more than one branch will pay only one license per district.
The recent reforms also waived various fees usually collected by decentralized entities for several services such as certificates of land ownership and land registration; the authorization for rehabilitation of a building, the authorization for construction of a fence around a building, the certificate of life and death, license for forest harvesting, license of producing wood charcoal, clay bricks and tiles burning, a building permit in rural villages and any other document issued by decentralized entities.
It is expected that these reforms shall affect local governments in a way or another since property taxes and fees collections constitute the major source of income for decentralized entities. As per experience, reforms related to land and property taxes have direct effect on targets for revenue collections in local governments.
The available reports indicate that, Local Government taxes and fees collections for 2020/21 fiscal year was Frw 77.8 billion representing 94.3% of the Frw 82.5 billion projected. This report stated that the main reasons for such a shortfall included the revision of land tax rates downward among others. The recent reforms in land taxes and waiving of fees for services offered by decentralized entities may have similar adverse effects.
The Government sees the recent comprehensive tax reforms as a strategic move to not only attract foreign investment but also promote local businesses and investments.
Though new tax reforms may negatively affect local governments revenues and fees collections for the ongoing fiscal year, RALGA observes that, in a long term, the reforms will significantly contribute to increasing local economic development.
“As intended by the Government, the recent tax reforms were conducted to among others, increase tax base, attract foreign investors and promote local investments. It is about citizen centered governance. The Government has balanced the opportunity cost. It is obviously clear that the effective implementation of these reforms will benefit local governments in long term as the citizens shall benefit directly and recover from the effects of COVID19 and other global crises. This shall result into increased local economic development through infrastructure development, circulation of money and job creation”; said Ngendahimana Ladislas, the Secretary General of RALGA.
The Secretary General of RALGA affirmed that in relation to its mandate, RALGA shall support local governments to leverage new tax reforms to increase local economic development and improving the welfare of citizens.
“RALGA will build necessary capacities and do required advocacy for local governments to increase their tax base, maximize revenue potential and attain a high rate of tax compliance”; he added.