Fiscal Policy Reforms and SME Performance in Tanzania: An Empirical Analysis of Tax Policy and VAT Implications

Abstract

Small and Medium Enterprises (SMEs) are critical drivers of Tanzania's economic development, yet their performance remains constrained by unfavorable fiscal policies, particularly tax-related burdens and Value Added Tax (VAT) administration. This secondary data study examines the impact of fiscal policy reforms on SME performance in Tanzania from 2019-2026, synthesizing evidence from government reports, Tanzania Revenue Authority (TRA) data, and peer-reviewed empirical literature. The research evaluates how income tax policies, VAT reforms, and digital tax system implementations affect SME profitability, cash flow, operational efficiency, and growth trajectories. Key findings reveal that while digital tax reforms (e-filing, Electronic Fiscal Devices) have improved compliance tracking, they simultaneously increased administrative burdens, particularly for micro and small enterprises. VAT registration thresholds at TZS 100 million continue to exclude significant SME sectors from formal registration, with an estimated 4,575 eligible taxpayers remaining outside the tax system by 2022, representing lost government revenue of TZS 23,350 billion. Tax rates (corporate income tax at 30%, VAT at 18%, business license fees) constitute substantial operational cost increases, with survey data from Iringa Municipality showing 70% of respondents reporting that high tax rates increase operational costs and 65% citing VAT-related profit margin compression. The study recommends targeted fiscal policy reforms including reduced VAT rates for essential goods, simplified tax registration procedures, differentiated tax regimes for enterprise size categories, and enhanced taxpayer education programs to improve compliance voluntarily. Evidence-based fiscal decentralization transferring tax administration to regional authorities, coupled with performance-based incentive structures for compliant SMEs, could generate estimated 15-25% compliance rate improvements while supporting long-term SME sustainability.