Causes and Implications of Tax Evasion and Avoidance in Rwandan Economy Case Study of Rwanda Revenue Authority

ABSTRACT

Taxation is the major source of government revenue in Rwanda and developing countries at large. Following the economic crisis of 1994 genocide, Rwanda has made a substantial progress in rebuilding the country's economy and social infrastructure compared to the situation before the war. This economic reform has been possible due to a number of reforms undertaken by the government of Rwanda including tax policy and tax administration reforms among others, the establishment of Rwanda Revenue authority (RRA) as support organ to curb tax evasion and avoidance. The specific study aimed at identifying the forms of tax evasion; find out the techniques used by Rwanda Revenue Authority in minimizing chances of tax evasion and analyzing the causes and effects of tax evasion. Questionnaires and interview guide were employed to collect primary data while secondary data was collected from various books and publications. Data is organized and presented in the table form. Purposive techniques were used to meet the purpose of the study. The study findings revealed that, the major causes of tax evasion and avoidance include desire of getting higher profits and low taxable income. While the ways of evading and avoiding taxes include; minimizing revenues, inflating expenses and misquotation of origin for their products. The types of business where tax evasion and avoidance are very rampant were revealed as; retail and import type of businesses respectively while the magnitude of tax evasion and avoidance was still very high. The major effects of tax evasion and tax avoidance are limitations of public infrastructures, reduction of national budget and increase of income inequalities and hindrance of investment. From the above, the researcher has made major recommendations as follows; Rwanda Revenue Authority to revise tax policy in order to be moderate, tax payer's sensitization and tax decentralization policy. The researcher found out that taxes play a positive role for economic development of the country. However the findings indicated that imposing high tax rate, complicated tax laws and long procedures would result the problems like smuggling, tax evasion and avoidance.

TABLE OF CONTENTS

DECLARATION ............................................................................................................................ ii

CERTIFICATION ......................................................................................................................... iii

DEDICATION ............................................................................................................................... iv

ACKNOWLEDGEMENTS ............................................................................................................ v

LIST OF ABREVIATIONS .......................................................................................................... vi

LIST OF TABLES ........................................................................................................................ vii

TABLE OF CONTENTS ............................................................................................................. viii

ABSTRACT ................................................................................................................................. xiii

CHAPTER ONE ............................................................................................................................. I

1.1 BACKGROUND OF THE STUDY ......................................................................................... I

1.2 Problem Statement .................................................................................................................... 2

1.3 Objectives of the Study ........................................................................................................... 2

1.3.l General objectives .................................................................................................................. 2

1.3.2. Specific Objectives ............................................................................................................... 2

1.4 Research Questions ................................................................................................................... 3

1.5. Significance of the Study ......................................................................................................... 3

1.5.1. To the Researcher ................................................................................................................. 3

1.5.2. To the Rwanda Revenue ....................................................................................................... 3

1.5.3. To Kampala International University (KIU) community ..................................................... 3

1.5.4. To Investors .......................................................................................................................... 4

1.5.5. To the Rwandan Population .................................................................................................. 4

1.6. The Scope of the Study ............................................................................................................ 4

1. 7. Research Methodology .......................................................................................................... 4

1.7.1. Population ............................................................................................................................. 4 viii

"Causes and implications of tax evasion and tax avoidance in Rwandan economy"

1.5.5. To the Rwandan Population .................................................................................................. 4

1.6. The Scope of the Study ............................................................................................................ 4

1. 7. Research Methodology .......................................................................................................... 4

1.7.1. Population ............................................................................................................................. 4

1.7.2. Sampling techniques ........................................................................................................... 4

1.7.3 Sample Size ............................................................................................................................ 5

1. 7.4 Data Collection Method ......................................................................................................... 5

1.7.4.1 Source of data ..................................................................................................................... 6

1.7.5. Data Analysis ...................................................................................................................... 6

' CHAPTER TWO: LITERATURE REVIEW ................................................................................. 8

2 .0 Introduction .............................................................................................................................. 8

2.1 Definitions of Key Concepts ................................................................................................... 8

2.2. Historical Development of Tax System In Rwanda .............................................................. 10

2.3 Tax Evasion and Tax Avoidance In Rwanda .......................................................................... 12

2.3.1 Forms of tax evasion and avoidance in Rwanda .................................................................. 14

2.3 .2. Causes of tax evasion and tax avoidance ............................................................................ 15

2.3.3. Need to check evasion and avoidance ................................................................................ 17

2.3.4 Enhanced measures to detect and combat evasion and avoidance of customers duties and

fraud .............................................................................................................................................. 17

2.3.4.1. Level of evasion and punishment ................................................................................. 18

2.3.4.2. Privatization of tax enforcement ...................................................................................... 18

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"Causes a11d implicatio11s of tax evasion a11d tax avoidance in Rwa11da11 eco110111y"

2.3.4.3. The distinction in various jurisdictions ............................................................................ 18

2.3.4.4 Public opinion on tax avoidance ....................................................................................... 19

2.3.4.5. Responses to tax avoidance ............................................................................................. 19

2.3.4.6. Tax protesters and tax resistance ..................................................................................... 20

2.3.4.7. Tax shelters ...................................................................................................................... 21

2.4. What is economic growth? ................................................................................................... 21

2.4.1 Economic growth ................................................................................................................. 21

2.4.3. Benefits of economic growth ........................................................................................... 22

2.5. Economic Aspect Of Taxation .............................................................................................. 22

2.5.1. Acceleration of economic growth ..................................................................................... 22

2.5.2. Economic stabilization ........................................................................................................ 23

2.5.3. Social objectives ................................................................................................................. 23

2.5.4. Relationship between tax and economic growth ................................................................ 23

2.6. Purposes and Effects of Taxation .......................................................................................... 24

2.6.1. Principles of taxation .......................................................................................................... 26

2.7. Essential of Good Tax System ............................................................................................... 28

2. 7. I. The tax system as an instrument of growth ...................................................................... 29

2.8. Incidence, Impact and Taxable Capacity ............................................................................... 30

2.8.1. Meaning of incidence .......................................................................................................... 30

2.8.2. Impact and incidence distinguished .................................................................................... 30

2.8.3 Importance of incidence ..................................................................................................... 30

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2.9 Types of Taxes and Tax Policies In Rwanda ........................................................................ 31

2.9.1.1. Advantages of direct taxes ............................................................................................... 31

2.9.1.2 Disadvantages of direct taxes .......................................................................................... 32

2.9.2. Indirect taxes ....................................................................................................................... 33

2.9.2.1. Advantages of indirect taxes ............................................................................................ 33

2.9.2.2. Disadvantages of indirect taxes ....................................................................................... 34

2.9.2.3. Characteristics of Indirect tax .......................................................................................... 34

2.10. Problems of Tax Administration .......................................................................................... 35

2.11 Taxes and Duties Collected In Rwanda ............................................................................. 36

2.11.1 Direct Tax .......................................................................................................................... 36

2.11.1.1 Tax on income ................................................................................................................. 36

2.11.1.2 Pay As You Earn (PAYE) .............................................................................................. 36

2.11.1.3 Taxonloans .................................................................................................................... 37

2.11.4 Prope1ty tax ........................................................................................................................ 37

2.11.2. Indirect taxes ..................................................................................................................... 3 7

2.11.2.1. Exercise duties ............................................................................................................... 3 7

2.11.2.2. Import duties .................................................................................................................. 38

2.11.2.3. Value Added Tax (VAT) ............................................................................................... 40

2.12. Fiscal Decentralization for Economic Development ........................................................... 40

CHAPTER THREE: RESEARCH METHODOLOGY .............................................................. 42

3.0 Introduction ............................................................................................................................. 42

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3.1 Research design .................................................................................................................... 42

3.2 Population of The Study ......................................................................................................... 42

3.3 Sampling Technique ............................................................................................................... 42

3.3.1. Sample ................................................................................................................................. 43

3.4. Data Collection method ......................................................................................................... 43

3.5. Sources of data ....................................................................................................................... 43

3.5.1. Primaiydata ........................................................................................................................ 43

3.5.1.1 Secondary data .................................................................................................................. 43

3.6 Tools of the Data Collection ................................................................................................... 44

3.7. Literature review .................................................................................................................... 45

3.8. Data Processing Tools ............................................................................................................ 45

3.8.1 Editing .................................................................................................................................. 46

3.8.2. Tabulation ........................................................................................................................... 46

3. 8.3 Limitations of The Study .................................................................................................... 46

CHAPTER FOUR: PRESENTATION, ANALYSIS AND INTERPRETATION OF THE

FINDINGS .................................................................................................................................... 48

4.1.Introduction ............................................................................................................................ 48

4.2.The Types Of Taxes Levied In Rwanda ............................................................................... 48

4.3. Ways through Which Tax Payers Evade And Avoid Taxes .................................................. 49

4.4. Major Types of Business Where Taxes are Evaded And Avoided ........................................ 51

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" 4.5. EFFECTS OF TAX EVASION AND AVOIDANCE ON NATIONAL ECONOMIC

GROWTH ..................................................................................................................................... 54

CHAPTER FIVE: FINDINGS, CONCLUSIONS AND RECOMMENDATIONS .................... 55

5.1. Introduction ............................................................................................................................ 55

5.2. Summary of the findings ....................................................................................................... 55

5.2.1. Major types of business where taxes are mostly evaded and avoided ................................ 55

5.3. Conclusion ............................................................................................................................. 56

5.4 Recommendations ................................................................................................................... 57

BIBLIOGRAPHY ......................................................................................................................... 59

APPENDICES .............................................................................................................................. 60