In Rwanda, New Startups Are Exempted From Taxes For Two Years

Sometime in August 2019, two young men in Kicukiro district, a suburb in Kigali City, were discussing a plan to start a barbershop business.

Both men have experience they acquired while working for other barbershops in the city.

It was a hot Friday evening as they sat on a bench at a verandah of a grocery store listening to a sports show, when they began an informal conversation about hatching their business idea.

They talked about numbers. It all was adding up until one of them raised a concern about taxes and countless fees for this and that.

A seemingly middle class gentleman, blue-colar-job-holder kind of, walked into the store, and was eavesdropping on the conversation, because the two men were a bit loud.

When he walked out, he interrupted the conversation.

“A new law exempts you from all those taxes you are talking about,” he said.

The three men spent about five minutes in a heated debate; the typical “that’s not possible, it’s possible” kind of exchange.

The barbers finally agreed to do some research, because they found it unbelievable that the Rwanda Revenue Authority (RRA) could actually exempt taxes.

They would later find out that, indeed Rwanda has scrapped of taxes for newly-formed small and medium enterprises for their first two years of operation.

Rwanda ranks the 38th in the world on the Paying Taxes indicator in the World Bank Doing Business Report 2020 after dropping from 35 in 2018.

Despite the slight drop, Rwanda’s tax regime is undergoing robust reforms, and rapidly.

The tax payments indicator reflects the total number of taxes and contributions paid, the method of payment, the frequency of payment, the frequency of filing and the number of agencies involved for the standardized case study company during the second year of operation.

It includes taxes withheld by the company, such as sales tax, VAT and employee-borne labor taxes.

Why did Rwanda scrap off taxes for new companies?

“This is the time for a company to do its business and make some profit, then the third year it can begin paying taxes,” says Fred Karara, RRA Business Analyst.

More reforms have aslo been implemented to ease the doing business environment.

Additionaly, for example, the introduction of the electric tax paying scheme, replacing the EBM machine, has made paying taxes much easier.

According to Karara, time spent paying taxes and making sales and purchase declarations with RRA has since reduced from 48 hours to 9 hours per year.

This, he says, “reduces the stress and time spent filing taxes and allows business owners and administrators to focus.”

Building on the existing reforms, RRA has also introduced a single declaration form that combines Pay As You Earn, Pension Scheme Contributions, Medical Scheme Contributions, and Maternity Leave Contributions.

“We dropped from 35 to 38, but we continue to reform to make our business environment better,” Karara says.

Meanwhile, after learning about the new tax reforms, the barbers have already began a process to register their shop.

They have kept contact with the gentleman who gave them a lesson and has promised to become their regular customer.

Rwanda remains one of the most committed countries when it comes to reforms that improve the business environment, now ranking 2nd in Africa and 1st in East Africa.

The World Bank says smaller countries like Rwanda have been performing very well. “We have been doing this for seventeen years now, and it is usually the smaller countries that were interested in reforming their business climate and improving regulations,” says Rita Ramalho, Senior Manager, Global Indicators Group, World Bank.

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Author: Staff Writer

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