Instead of taxing retained earnings, the government should focus on improving tax compliance, expanding the tax base through formalisation of the informal sector…
The 2025/26 financial year budget, a raft of new taxes has been introduced – one of which is a 10% withholding tax on retained earnings. While intended to enhance domestic revenue mobilisation, this move raises serious concerns regarding its economic rationale, timing and long-term implications. Retained earnings are a key source of reinvestment for companies and a critical component of private sector-led growth. Taxing these earnings risks undermining investment, deterring capital accumulation, and weakening the country’s industrialisation and job creation efforts.
Put differently, taxing retained earnings contradicts the principle of encouraging business reinvestment. Retained earnings are profits that companies choose not to distribute as dividends, but instead to finance future growth – such as purchasing new equipment, expanding operations, or increasing working capital. By taxing these funds, the government is effectively discouraging reinvestment and innovation. Companies may opt to distribute more dividends to avoid the tax, instead of investing in planning and sustainability.
This is particularly counterproductive in an economy like Tanzania’s, which still relies heavily on private capital for infrastructure development and industrial upgrading.
Secondly, the new tax threatens to make Tanzania less attractive to both local and foreign investors. Investors are highly sensitive to changes in tax policy, especially those that reduce after-tax returns or increase uncertainty. It is a signal that the government is willing to introduce ad hoc tax measures that penalise investment. In fact, the recent financial report of the East African region – where neighbouring countries like Kenya, Rwanda, and Uganda are actively courting investors with more business-friendly tax regimes – Tanzania risks losing its competitive edge.
Moreover, the timing of the tax is questionable. Businesses across sectors are still recovering from the multiple effects of the COVID-19 pandemic, global supply chain disruptions, and inflationary pressures. Many firms are grappling with increased input prices, lower consumer demand and cash flow shocks. Introducing a tax on undistributed profits now cuts into businesses and reduces liquidity – especially for small and medium-sized enterprises (SMEs), which are often financially constrained and depend heavily on internal earnings for expansion.
From a fiscal perspective, the benefits of such a tax are questionable. If new barriers to investment result in lower growth, the government may in the long run collect less revenue. Alternative measures should include corporate tax reform, simplified procedures, and disincentive audits by the tax office. A predictable, growth-friendly tax system would eventually create more jobs and increase the sales tax revenue. It is a classic case of sacrificing long-term development for immediate short-term revenue.
Instead of taxing retained earnings, the government should focus on improving tax compliance, expanding the tax base through formalising the informal sector, and curbing wasteful public expenditure. Investment and private sector-led growth should be the foundation on which revenue targets are built – not punished through conflicting taxes. To do otherwise is to turn the withholding tax on retained earnings into a politically convenient, but economically regressive return, as an additional upfront cost just as dividends were.
Policymakers hampering industrial progress in pursuit of short-term revenues is counterproductive. Parliament should reject this tax proposal and direct the tax base to more progressive and pro-growth models.
Elly Manjale is an economist, business and management writer on economic, business, social and political issues.
Email: emanjele@gmail.com
