How VAT Reductions on Capital Commodities can Foster Industrialization and Boost Growth in Tanzania

The Tanzanian government is taking active steps to foster industrialization under the Tanzania Development Vision (TDV) 2025 plan. By 2025, the industrial sector should contribute 40% to GDP. The government’s priorities include interventions to encourage economic growth and industrial development, and create a conducive business environment. One of the initiatives for industrial development is a VAT exemption on capital goods to reduce the procurement costs of machines and equipment used for production. While the VAT exemption aims to promote manufacturing and processing, it also reduces government tax income and may reduce the funds available for development programs against poverty and income inequality. Sectors that use capital goods contribute a lot to Tanzania’s GDP, with manufacturing contributing over 25%. Thus, a team of local PEP researchers sought to understand the impacts of a partial VAT reduction, rather than a complete exemption, on capital commodities. Capital commodities, which include electricity, gas and steam, vehicles, machinery, and electrical and transportation equipment, are used to produce consumer goods.