What to Expect from the Penalty Reduction for EFD Offenses

The recent change in the penalty for not issuing receipts or not using Electronic Fiscal Devices (EFDs)—from 300 currency points (equivalent to TSh 4,500,000) to 200 currency points (equivalent to TSh 3,000,000) or 20% of the evaded tax amount (whichever is greater)—is expected to have several economic implications for businesses and tax administration. Here’s what this adjustment could mean for the business environment:

1. Potential Reduction in Deterrence

Lowering the penalty may reduce the deterrent effect on businesses regarding tax compliance. With a less severe financial consequence, some business owners might be more inclined to avoid issuing receipts or using EFDs, which could lead to an increase in tax evasion. This scenario poses a risk of revenue loss for the government, as non-compliant behaviors may become more prevalent.

2. Increased Risk of Tax Evasion

The reduced penalty could unintentionally incentivize some businesses to engage in tax evasion. When the financial risk of non-compliance is lowered, businesses may be tempted to underreport sales, manipulate financial records, or bypass proper tax procedures. This could ultimately lead to a decline in tax revenues, impacting public resources and services.

3. Leveling the Competitive Playing Field

Conversely, the penalty reduction might create a more equitable environment for compliant businesses. If the previous penalty was seen as disproportionately high, it may have placed compliant businesses at a competitive disadvantage compared to those skirting the rules. The new, lower penalty could help level the playing field, making compliance more manageable without penalizing responsible business owners excessively.

4. Potential Improvement in Compliance

A more manageable penalty, paired with effective enforcement and educational measures, could actually encourage better compliance. Business owners who previously viewed the penalties as overwhelming might now be more willing to invest in EFDs and ensure proper receipt issuance. This could lead to a higher overall compliance rate, particularly if tax authorities also focus on support and education initiatives.

5. Impact on Government Revenue

While a reduction in penalties could result in short-term revenue loss due to increased non-compliance, the long-term impact depends on how businesses respond. If the change is accompanied by better education, enforcement, and support for compliance, the overall effect on government revenue might be less significant. However, if non-compliance becomes more widespread, the government could face a decline in tax collections.

6. Administrative Challenges for Tax Authorities

A lower penalty could introduce additional administrative challenges. With a potentially higher rate of non-compliance, tax authorities may need to invest more resources into monitoring, audits, and investigations. This could increase the cost of tax administration, requiring the government to allocate more funding to enforcement activities to maintain tax integrity.