The categorisation of private security companies as ‘professional services’ has landed them with a hefty tax burden under the 5 percent withholding tax policy. This move is crippling the industry, while being counterproductive in its revenue-raising motive.
Among the new tax legislation introduced in last year’s Finance Act was a change that has serious implications for Tanzania’s security industry. For the first time, private security companies have been included among the ‘professional services’ that are subject to the 5 percent withholding tax – an obligation applied to higher-wage professionals in areas such as accountancy and consultancy. This re-classification of private security is causing damaging and deepening impacts to the industry.
There are fundamental differences between the financial make-up of security companies when compared to the professional services which the 5 percent tax was originally devised to include. Professional services such as architecture and law are essentially skills- and knowledge-based. The security industry, by contrast, is highly manpower-intensive and engages low-skill labour in employment following a short period of training. The upshot is that security firms’ gross incomes do not far exceed the costs of meeting the payroll of guard staff. When overheads, statutory taxes and other costs are added, the result is a narrow profit margin.
In this scenario, the requirement that a security company’s clients deduct a 5% withholding tax from their payment upfront has major ramifications for the profits and cashflow of the security company. Payment of staff wages, other tax obligations and general operational costs becomes more of a challenge. Furthermore, while companies in other industries are able to claim back their withholding tax payments from corporate tax, the proportionally low net profit level typical in the security industry means they are illegible for such refunds.
With the inordinate financial pressure the 5 percent tax places on security companies, the inevitable outcome is that they are forced to raise fees – both to counteract the loss of income and to try to push net profits over the 16 percent threshold above which the tax can be discounted. The knock-on effect of these rises will be that some security clients cancel their contracts. We might also expect company closures and for some guards to be driven out into the informal sector. All of this means fewer people employed as guards in decent, law-abiding companies and therefore less tax revenue, making the 5 percent tax not only undesirable, but counterproductive.
This comes at a time when trade unions are reporting a concerning rise in the number of workers losing their jobs in the face of a difficult business climate. As an employer of hundreds of thousands of staff, the security industry contributes enormously to the economy and its tax revenues. Continuing to impose the thoroughly ill-fitting 5 percent withholding tax will serve to undermine this vital contribution. Reversing the decision to include security companies under this additional tax burden will be good for security staff, good for the industry and good for Tanzania.