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close this bookFinancing Cities for Sustainable Development (HABITAT - UNDESA, 67 p.)
View the document(introduction...)
View the documentAbbreviations
View the documentForeword
View the document1. Introduction
View the document2. Main Sources of Municipal Revenue
View the document3. Property Tax
View the document4. Income Tax
View the document5. Charging for Urban Services
View the document6. Tax on Provision of Goods and Services (Business Licences and Fees)
View the document7. Income-Generating Enterprises
View the document8. Borrowing
View the document9. Central Government Allocations
View the document10. Summary of Main Findings, Conclusions and Recommendations
View the documentReferences

6. Tax on Provision of Goods and Services (Business Licences and Fees)


Local authorities derive a lot of income from institutions involved in trade and supply of goods in their jurisdiction. The most important forms of taxes in this category are licences, market and food vendor charges, non-motorized taxes, street vehicle parking meters, entertainment taxes, sports and production. Taxes on production are, however, only important to county councils which are able to charge cess for major export commodities produced in their areas, such as coffee and tea.

The Local Government Act allows local authorities to charge fees on commercial premises used by traders and butcheries, lodging houses, bars and restaurants, theatres, kiosks, canteens and so on. They also charge fees on occupational licences, such as wholesalers, panel beaters, hawkers, and so on. The occupations covered are normally in a list that is approved by the Minister for Local Government from time to time (at the request of the Council, even though approval is mandatory).

The justification for licensing is to prohibit, control and regulate trade and occupations, as necessary. General schedules of all current tariffs and charges for services in the Municipality are published, while legal notices are used to cover new cases or inclusions.

Taxes in this category are either annual flat rate taxes, such as licences, or payable on use of services, such as market levies paid by traders on entry to markets, parking meter charges, some entertainment taxes and those in sports related activities.


Mombasa Municipality derives some substantial revenue from fees relating to licences. The most important licences for the council are trade and general licences. The Council also collects fees on covered way rentals and fees on cycles and dogs. A few other licenses are also collected.

The other significant category of taxes relating to sale of goods is the market undertaking and food vendor charges. While stall owners normally pay a licence fee, there are entry charges in both permanent facilities and open air markets for traders entering the facilities to sell their wares.

Mombasa Municipal council derives substantial income from 16 markets (13 retail, 1 wholesale, 1 fish market and 1 food vendors market located in the town). Out of the 16 markets 5 are permanent, 4 are half open and 7 are open air. This activity generates substantial income and ranks fourth in contribution to municipal council revenue.

Urban local authorities also derive income from vehicle parking and entertainment. Mombasa earns substantial income from the stadium and other playing fields, Kshs. 1.2 million in 1996. It also earns some money from vehicle parking meters installed in the main central district. There are also fines related to parking violations, which earn the Municipality some revenue. Other taxes in this category include taxes on non-motorized transport (carts and bicycles). These are important but they do not raise much revenue.

Licensing fees collection in Mombasa has risen substantially from about Ksh. 8 million in 1982 to Ksh. 28 million in 1995/6. These increases are a result of both growth in the number of businesses premises and occupations, and adjustments in the level of charges. Market undertaking has also grown significantly, from Ksh. 2 million to Ksh. 38 million between 1982 and 1996. During this period, a new wholesale market was built and opened. Facilities relating to other markets were also improved.


In Nairobi City, taxes on goods and services (fees and licences) are lumped together with other miscellaneous charges in a group called 'Administration and General Charges' (Table 19). The City levies charges on the following:

· Premises licences issued to traders, butcheries, lodging houses, bars and restaurants, theatres, kiosks etc.;

· Occupational licences issue to jua kali artisans, meat roasters etc.;

· Services or Facilities provided e.g. ambulance fees, survey, beacon, search fees, perching fees etc.; and

· Goods or Documents Supplied, including building plans approved, plot transfer fees, application forms etc.

Among all the above sources, the main items that bring in significant amounts of income are licensing and city planning activities. When consolidated, however, the income earned hardly meets 50 per cent of the cost of providing the services. For example, during the 1995-1996 financial year, income earned from licensing was Kenya Pounds 7,214,504 (net income from licensing activities was Kenya Pounds 4,522,422) while city planning earned Kenya Pounds 2,380,924, but the Administration and General Charges had a total deficit of Kenya Pounds 11,067,715. Table 19 shows the revenue trend of various categories of income under Administration and General Charges. Items which do not have corresponding income figures do not generate any income although they do accrue expenses.

The Administration and General Charges are collected by the Town Clerks Department (Litigation, Rents, Licensing, Courts etc), Planning Department (Valuation, Letting and Conveyancing etc) and the Treasurer's Department for other miscellaneous charges. Lack of coordination in the collection of these charges could be the cause of low and inconsistent revenue amounts.


Taxes on goods and services have earned local authorities high yields, even though the coverage in the case of urban areas in Kenya is limited. Among the various tax sources, they are only surpassed by rates and service charge in the case of Mombasa Municipality.

Table 19. Revenue trend of administration and general charges, Nairobi City Council (KPound '000 p.a.)

Activities under Admin & General Charges





1. Town Clerks Depart.





2. Litigation





3. City Hall Offices





4. County Hall Offices





5. City Inspectorate





6. Licensing





7. City Court





8. Country Bus Station





9. City Hall Annex





10. General Expenses





11. Miscellaneous





12. Donation





13. Grant in Aid





14. Security or Watchmen





15. City Treasurer's Dept.





16. Computer Sec.





17. Weighbridge





18. City Planning





19. Valuation





20. Letting





21. Conveyancing










Source: Nairobi City Council - Abstracts of Accounts

The fact that a substantial amount depends on business turnover reduces the effects of delays in approval in rate structural changes, and makes them more current. Because many of the tax revenues have shown tremendous growth, they appear to have a high degree of elasticity.

There is little cost or effort on the part of councils while collecting revenue from licences, as these are mandatory for businesses to be allowed to operate. In market undertakings, there is the possibility of inefficiency due to the nature of collections. There seems to be no serious problems in collection in the case of Mombasa, as figures for 1996 clearly illustrate. A total of Ksh. 37 million was collected, out of an expected figure of Kshs. 38 million. Defaults in payment are checked by frequent visits by enforcement officers, who normally close any premises operating without a licence. The owner/operator is then taken to court.

The levies are not politically sensitive, except for licences to certain groups such as hawkers. In market undertakings, the fact that traders can pass on costs to consumers also reduces their sensitivity (licence fee is also generally low).

The United Republic of Tanzania

As pointed out earlier, local authorities in the United Republic of Tanzania have 56 sources of revenue, including various goods and business licence taxes, levies and fees. Many of these yield very little. A number of those that yield substantial revenue are discussed below.

Tax on sale of goods: petrol levy (road toll)

The most important tax on the sale of goods is petrol levy, also known as Road Toll. Petrol Levy is administered under the Road Toll Act of 1985. It is levied on fuel supplied in bulk from bonded warehouses or refineries to fuelling stations. The tax is administered by the Tanzania Revenue Authority (TRA). The current rate is Tshs. 60.00 per litre of fuel. Out of the total collection, TShs. 5.00 goes to local authorities. The fund is collected by TRA and remitted to the Ministry of Finance, which then distributes collections in the ratio of 80 per cent to the Road Rehabilitation Fund, currently administered by the Ministry of Works, and 20 per cent to the Prime Minister's Office to augment local government road repairs and construction.

Both the DCC and the MMC prefer this kind of tax since it does not entail any individual face to face contacts with tax payers. It is also very easy to collect. Nevertheless, local authorities are complaining that many times the central government does not give them their due share of petrol levy. Thus, the performance of the petrol levy has been erratic and unpredictable, contributing a tiny 1.05 per cent of the total DCC revenue during the 1992-95 period. Mwanza has not benefitted from the petrol levy. However, projections show that local authorities could benefit a lot if sharing arrangements could be adhered to by the government (Table 20). The government has stated that in future, the sharing arrangements will be 70:30 in favour of local authorities. This is likely to boost up their ability to maintain their roads.

The rate of taxation of petrol levy can easily be adjusted without problems. It was Tshs. 0.15 per litre when the levy was started in 1985. It is now Tshs. 60.00 per litre. Fuel consumption is also growing, so this fund should grow naturally as the years go by. The tax is easy to administer, since collection is usually made at source, provided the government adheres to the sharing arrangements. The levy also appears to be well tolerated by the public, perhaps because they do not feel its incidence directly.

Table 20. Road toll projections and potentials, Tanzania

Sharing Arrangements


Volume in Litres

Road Toll Levy Collected

Road Toll Fund
(80 per cent)

Payable to Local Governments
(20 per cent)
















Source: ESRF (1997) p. 32.

Tax on the sale of services: hotel levy

The hotel levy is paid under the Hotel Levy Act of 1972 by hotel owners to the TRA in respect of accommodation. If the hotel in question has less than ten rooms and does not provide regular meals, the levy is payable to the respective local authorities. The rate is 20 per cent of the cost of hotel accommodation per day.

The levy has not been collected consistently since 1984. Earnest collection only started in 1991 in the case of Dar es Salaam and from 1994 in the case of Mwanza. The amount collected is low both absolutely and as a proportion of total revenue for the two local authorities (4.6 per cent for Dar es Salaam and 1.9 per cent for Mwanza in 1996), despite the fact that hotels and guesthouses have been increasing. Low collection is attributable to low tax compliance resulting from weak administration.

The potential for hotel levy is very high. For Dar es Salaam, it has been estimated that even if the rate of taxation was lowered to 10 per cent (from 20 per cent), and assuming a modest average occupancy rate, some Tshs. 730 million could have been collected in 1995, compared to only Tshs. 80.5 million that was collected in that year.

One problem with administering this tax is that it is shared with the central government. Sharing arrangements are still a problem. Monitoring the use of hotel/guest house accommodation is difficult, since many rooms are occupied for short times and attendants have a penchant to pocket a lot of money which is unrecorded. Many of these guest houses are in unplanned areas and may have been erected without permit.

Tax on production: produce cess/industrial cess/city service levy

Local taxes that can be listed as being based on production include produce cess levied in Mwanza and industrial cess and city service levy administered in Dar es Salaam. Forestry products fees is another relevant tax, but its yield is extremely low, yielding, in the case of Dar es Salaam 0.0 per cent in 1990 and 1.17 per cent in 1995, of total DCC revenue.

Produce, industrial and city service levy are discussed further because of their high potential to yield revenue.

Produce cess is administered under the Local Government Finance Act of 1982. The cess has in the past been levied by District Councils on the sale of major crops such as cotton, coffee, tea, sisal, rice, maize oil seeds, and livestock. In Dar es Salaam, a revenue known as industrial cess was introduced in 1993 and was for a few years levied on the unit cost of finished goods of certain industries, namely aluminium products, cigarettes, beer, Konyagi (a local gin), soft drinks, cement and wall tiles. In Mwanza, both industrial and produce cess started getting levied in 1994.

In the case of Dar es Salaam, industrial cess was an important revenue earner contributing 3.1 per cent of total revenue in 1995. Nevertheless, it could not be established why this tax is limited to only a few industries. This makes this tax arbitrary and discriminatory, attributes which discourage investors who would like to operate on a 'level playing field'.

Recently the DCC introduced a city service levy based on the gross turnover of all business entities in the City. The levy therefore includes the industrial cess. The current levy is 0.3 per cent of gross turnover.

The estimated and actual revenue from produce/industrial cess/city service levy vary wildly, suggesting that not sufficient information is in hand concerning the would-be payers of this tax. In the case of Dar es Salaam, this tax has been fluctuating, but tending to increase with time, jumping from 0.9 per cent of the total revenue in 1993 to 11.7 per cent in 1996. As for Mwanza, the actual amount collected, as well as the proportion of the collected amount compared to total revenue, has gone down drastically over the past three years.

It has been conservatively estimated in the case of Dar es Salaam that the city service levy can raise nearly Tshs. 3.8 billion (compared to Tshs. 191.4 million actually collected in 1995). Again, in Mwanza, adequate revenue can be collected from this type of tax since Mwanza too has a number of industries, or, like Dar es Salaam, could consider introducing a municipal service levy.

This tax is elastic, since both the tax base and the rate of tax can be increased without much problem. Nevertheless, it must be pointed out that a lot of business is still being run informally, thus escaping the net of paying city/municipal service levy.

The industrial cess was inequitable in that it covered only a few industries. The city service levy aims at covering all small and big companies dealing with any business. It is moreover based on the gross turnover of the business, thus adequately addressing the question of equity.

Capacity to administer this tax will have to be increased, particularly in the area of building-up comprehensive information bases on all businesses. Moreover, many small businesses do not keep proper accounts, and all businesses in general have a penchant for understating their turnover to minimise tax liabilities.

The business community is not opposed to this tax, although they are arguing for a lower rate, net of other central government taxes (such as customs duties, sales tax, corporation tax and so on). Negotiation and clear understanding between the authorities and the business community is a necessary ingredient for the success of this tax.

Tax on vehicles

A number of "vehicle based taxes" are levied by local authorities in the United Republic of Tanzania. These include road licence fees, taxi/pick-up/lorry fees, motor vehicle parking fees, and bus stand fees.

Road licence fees yielded considerable revenue for both the DCC and Mwanza (8.1 per cent of total revenues for DCC and 3.8 per cent for Mwanza in 1994), but was abolished in 1995. No logic could be found for their abolition since the revenue yield was considerable. It may well be that there were administrative problems between the central government and local government over this tax. Moreover, it appeared to overlap with other taxes, such as the petrol levy and Tanzania Licensing Board fees. The latter provides licences for commercial vehicles and lorries.

Taxi/pick-up/lorry fees has a great potential for yielding revenue in a city like Dar es Salaam where there are many vehicles. It appears to have generated very little for Mwanza. In Dar es Salaam this tax is also known as 'city plying fees'.

The data base for this form of tax is extremely deficient, since there is a very wide variation between estimates and actual collection, especially in the case of Dar es Salaam. Also the amount collected varies wildly from one year to the next. For Dar es Salaam, the highest collection was in 1991 (4.1 per cent of total revenue), although there are signs of collection picking up again in 1996 (3.1 per cent of total revenue). The collection for Mwanza is, however, very low (always below 1 per cent of total revenue) and is showing signs of declining.

This tax, if well administered, can yield substantial revenue for urban authorities. The Dar es Salaam City Commission has recently announced new rates for vehicles plying within the city. However, maximum cooperation is required between the traffic police, the licensing authorities, and vehicle registration authorities. All of these are under the central government. Such cooperation could be difficult to achieve. Also, since vehicles move between areas with different local authorities, it is not clear to which authority the tax should be paid. Such a situation could make the tax difficult to administer.

Other vehicle related taxes

Parking fees, bus stand fees and taxi registration fees have all yielded relatively little for the local authorities. Proposals have been made to privatise parking fees. This has been implemented in Dar es Salaam, although it does not appear to be working well.

Bus stand fees are on the low side (TShs. 10,000.00 to TShs. 15,000.00 per year in Dar es Salaam). It has been suggested that they be put up tenfold (to between TShs. 100,000.00 and TShs. 150,000.00). If this was to be adopted, then TShs. 136 million could be raised for the DCC. This may not work well since the local authorities themselves, particularly Dar es Salaam, have not invested in adequate bus stand facilities. Most bus stands are unplanned and scattered in the city.

There are very many taxis in the two local authorities. Unfortunately, most of them are unregistered. The registration system is unduly tortuous while many vehicles may not even qualify for registration. Pirate taxis have now and again been pounced on by the authorities, only for them to resurface later. For the moment, taxi registration fees is difficult to administer unless there is maximum cooperation between the traffic police, the local authorities, the licensing authorities and vehicle registration authorities.

Business licences

Local authorities in the United Republic of Tanzania are empowered to levy a number of licences and fees. The most important of these is probably business licences. Under the Business Licensing Act of 1972, all traders and professionals are required to have a business trading licence for each year as a precondition for trading. The Minister for Trade has powers to appoint any authority to be a licensing authority. The issuance of Trade licences in the United Republic of Tanzania is shared among three authorities: The Ministry of Trade for business of a national or international character; Regional Trade Officer with respect to cooperatives, wholesale and manufacturing businesses and building contractors; and local authorities, in the case of retail business, insurance agents, hotels, restaurants, guest houses, auctioneers, itinerant traders and any business not covered under business licensed by the central government.

The performance of business licensing as a source of revenue for urban authorities has been erratic. In the case of Dar es Salaam, business licensing contributed 15.9 per cent of total revenue in 1996 (up from 2.2 per cent in 1995) and in Mwanza, 14.7 per cent of total revenue in 1995 (plunging down to 6.2 per cent in 1996). Estimation appears to be a matter of guesswork and collection efficiency is generally low.

Business licensing has a great potential to yield considerable revenue for urban local authorities. With trade liberalisation, as well as shrinking employment in the public sector, many businesses are establishing themselves or expanding. Nevertheless, it must be pointed out that many lucrative business licences are issued by the central government, although the Mtei Commission had suggested in 1987 that all business licensing be carried out by local authorities.

Business licences are determined annually and can therefore easily be adjusted upwards without much difficulty. The possibility of many businesses avoiding licensing need to be guarded against.

Licences are linked to the types of businesses, therefore it can be argued that the element of equity is taken care of. There is also a special type of licensing called Human Resources Licence provided for under the Human Resources Act of 1984. This allows local authorities to give licences under generous terms to small enterprisers who want to set up economic undertakings. Many street traders carry such licences, although the urban authorities harass them often on the pretext that they are running their businesses on unapproved locations. A number of these who pay a daily rate pay absolutely and relatively more than those who run higher paying businesses, and who pay their licence fees annually.

Urban Local Authorities are capable of administering business licensing, although a number of ameliorative measures are required. These include multiplying the centres at which payment can be made, reducing bureaucracy and making a constant follow up. A regularly updated register of businesses is required and this can be a daunting undertaking. There are many businesses that are run without any formal licensing and these need to be taken on board, perhaps with the aid of neighbourhood leaders.

Administering business licensing suffers from interference from the central government which has reserved for itself powers to issue certain licences. Also where local authorities are empowered to issue licences, the process is interfered with by the central government, which issues income tax clearance certificates.

There is good potential for collecting considerable revenue from business licences, considering that business establishments are increasing in both Dar es Salaam and Mwanza.

Market dues/stalls rent

Many local authorities have the duty of running markets. They usually erect the market structures and regulate the way the markets are used, including ensuring a high standard of hygiene. In so doing, local authorities usually levy dues on traders who usually rent the stalls from the local authorities. Market dues ranked tenth among the major source of revenue for the DCC in 1995. In Mwanza, the potential of market dues has been realised so that the running of these markets has been privatised and the MMC is collecting comfortable revenue, as discussed later.

The collection of market dues has fluctuated over the period under review, although for Dar es Salaam, the period from 1993 has shown considerable, though inconsistent, collection. In Mwanza spectacular collection has been realised since 1992 (when an amount of TShs. 28.6 million was collected, up from 0.6 million in 1991), far exceeding the amount collected in Dar es Salaam (TShs. 19 million in 1992) and for each successive year. Although the trend in Dar es Salaam is going up, Dar es Salaam has many more markets than Mwanza and should be collecting many times more that what Mwanza is collecting. This source contributed 5.1 per cent to Mwanza's 1995 overall revenues and 1.4 per cent to DDC's 1996 overall revenues.

The rate of TShs. 300.00 per month collected in Dar es Salaam is grossly inadequate. It does not generate sufficient revenue to cover the cost of collecting the garbage generated at the markets. If rates could be raised and collection properly monitored, it is estimated that TShs. 515.00 million per year could be realised (ESRF 1997). Mwanza has privatised its two main markets and the revenue raised has greatly increased but it has many other markets where action to increase revenue is required. This form of tax has the potential of being elastic, provided that rates are raised gradually over the years.

Both local governments have major problems related to administering this tax. While the two urban areas have grown tremendously in terms of population and areal coverage, there has been very little investment in expanding or constructing new markets to cope with the needs. As such many spontaneous markets have grown up and the existing markets have overspilled into surrounding areas, without the approval of the local authorities. In these spontaneous markets traders do not pay any dues. The sanitary services of the local authorities have been most unsatisfactory. Traders who occupy city market structures are thus discouraged from paying. Follow up is also poor and there is a lot of revenue leakage. Currently, market dues are collected monthly, leading to major opportunities for default, yet collecting them daily may be administratively difficult. A number of studies have suggested privatisation, whereby the local authorities will remain with investment and regulatory functions and continue to receive revenue. Mwanza has already taken a lead in this direction.

Recent events in Dar es Salaam and in other urban areas in the country where market dues have been put up have shown that the levy is politically unpopular. There have been a number of market boycotts in the country in recent months. The unpopularity stems from the fact that these levies have not been put up for a long time, and that many traders have been conducting their business without paying the dues.

Abattoir slaughter fees

Abattoir slaughter fees are mentioned here not because they have yielded substantial revenue for local authorities, but because they have been identified as major potential sources. The TShs. 300.00 levy charged on each head of cattle slaughtered in Dar es Salaam has been found to be too low. Moreover data shows that the revenue generated implies that only 20 head are slaughtered in Dar es Salaam daily. Conservative estimates put the number of cattle slaughtered in DDC at 500 per day. At a raised rate of Tshs. 1,000.00 per head slaughtered, this could raise the revenue to TShs. 182.5 million per year, up from TShs. 2.3 million generated in 1995. Acting on this advice, the DCC increased the fees in late 1997. This led to a boycott by butchery owners, which in turn led to citywide meat shortage. However, the boycott lasted only five days and was abandoned when it was clear that pirate butcheries would soon fill in the vacuumm. This, like market dues, is an example of the problems facing local authorities in the United Republic of Tanzania. Would-be tax payers have been used either to not paying, or to paying very low rates, so that instituting dues or raising them leads to industrial action.