Analyzing the new Value Added Tax Act, 2014;
The Value Added Tax (VAT) Bill, 2014 was passed by the Parliament in December 2014. The Bill has been assented to by the President of the United Republic of Tanzania. The Act is expected to come into operation on the date the Minister may, by notice publish in the gazette.
This new enactment aims to repeal and replace the Value Added Tax Act, 1997 which came into force in July 1998. The enactment of the Act was influenced by the need to broaden the tax base and the need for efficient administration of the tax which the Value Added Tax Act, 1997 seems to have lacked.
The objectives of the new enactment are to; broaden the tax base, align value added tax law with the international best practice; reduce power of the Minister for Finance in the administration of VAT, address intra union trade issues between Mainland and Zanzibar and simplify administration and management of VAT.
We at Breakthrough Attorneys have reviewed the Act and wish to point out key areas from the Act;
- Administration and compliance
- The registration threshold shall be stipulated in the regulations.
- The Act has reduced the deadline of filing VAT returns to 21 days from 30 days.
- Input tax claim time limit remains at six months
- The VAT rates remains at 18% and 0%.
- Taxable persons will be required to account for both input and output tax in respect of imported services in the same VAT return in which tax credit is claimed.
- The administration and enforcement of the Act will reflect administration principles stipulated in the Tax Administration Act, 2014.
- Tax exemptions;
With the objective to broaden the tax base, the Act has removed the special relief schedule which over the years seemed to be ever growing. Breakthrough Attorneys’ Tax Department reckons that this move stands to impact supplies, among others, to Tanzania Defence Forces which for lengthy period enjoyed the VAT exemption. The Act has significantly minimized the list of exempt items, for example, insurance services are no longer exempted. Zero rating is imposed mostly on exported supplies.
The Act further restricts any person, government entity or employee of the government from granting exemptions or zero rating any supply or to any person under this Act. Save for the Minister responsible for finance (see 3 below for clarification).
Note: According to section 2 of the Act, a person means an individual, corporation, government entity, public international organization, non-governmental organization, foreign government and association of persons.
- Power of the Minister
The Minister responsible for finance may only grant exemptions to government imports of goods and services that are to be used solely for relief of natural calamities or disasters. The Act eradicates jurisdiction of the Minister from exempting any other person or persons from payment of the tax imposed under the Act.
The presumption is: amendment of the items listed as zero rated and exempted under the Act can only be done by the Parliament of the United Republic of Tanzania.
- Eligibility to Exemptions
Diplomats, international bodies of diplomatic nature, non-profit organizations and essential services such as education, health, agriculture and residential houses are eligible for VAT exemptions on imports transactions concluded for the official purposes of the missions.
- Deferral of Payment of Imported Capital Goods.
The new Act allows deferral of payment to VAT registered persons on capital goods. Capital goods mean goods for use in person’s economic activities which have a useful economic use of at least one year. The Act however, does not state the length of the deferment period. That is, it is not clear for how long the tax payer is allowed to defer the payments.
- Cross Boarder Supplies:
The Act recognizes the destination principle. VAT is imposed only on the imports and supplies consumed in the United Republic of Tanzania. Supplies consumed outside Tanzania are zero rated under the Act. For example supplies of telecommunication services, international transport, use of intellectual property rights outside Tanzania, transit goods etc. Breakthrough Attorneys reckons that this will further affect the booming investment sector in Tanzania since VAT exemption on imports has been one of the main incentives and drivers for setting up business with the Tanzania Investment Centre. An argument can be raised that the new provision is geared towards strengthening exports from Tanzania and expanding domestic production of goods and services.
- Treatment of Supplies to a Non-Registered Person:
If a customer (being a non-registered person) of a service performed, received, enjoyed or used in Mainland Tanzania, services such as radio and television broadcasting; or electronic services, at the time when the service is delivered; the provider will be liable to pay the value added tax. Non-resident suppliers will be required to appoint a VAT representative in making above supplies to a customer who is not VAT registered.
Electronic services include among others: television broadcasting, music, films, gaming, software, websites, web hosting etc.
- Our Tax experts believe that the Act will have a great impact in economic activities;
- Insurance services;
Insurance services will no longer be exempted as in the current tax regime. All insurance services will be taxable. This means buying car or house insurance will become a little more expensive.
- Telecommunication services;
Telecommunication services will be taxed basing on the destination principle. When a service is initiated in Tanzania Mainland, the service shall be taxable. However, use of roaming services by non-residents in Tanzania Mainland shall not be taxed. Telecommunication services exported to a non-resident provider shall be zero rated. With this position we believe that there is a likelihood that most telecom services to end users may be within the scope of VAT and hence may lead to cost hikes.
- Effect on Employment;
With the aim of broadening the tax base, benefits in kind to employees will not only be charged income tax (PAYE) but also VAT under the new Act. The employer shall be the taxable person. These are benefits that an employee receives from the employer by virtue of employment apart from his salary. For example; a loan, a car, school fees etc. According to the Act, the supply will be taxed at the market value.
Under the Income Tax Act regime, most benefits in kind to the public servants are exempt, unlike in the private sector. Hence, this will impact employees working in both private and public sector. This may be a subject of a huge employment sector outcry when the Act is operational.
- Oil, gas and mining;
As Tanzania heads into the oil and gas economy, import of goods by a registered and licensed explorer or prospector for the exclusive use in oil or gas exploration or prospection activities are exempted in this new enactment. Breakthrough Attorneys fathoms that the incentivization of investment into the oil and gas sector has necessitated this move to exempt these imports whereas the other sectors are shunned from exemption. http://breakthroughattorneys.com/practicing-areas/energy-oil-gas-and-mining/,
- Commodities market and pricing
The new enactment requires mandatory disclosure of VAT price list to include VAT amount to be displayed openly by the taxable person.
- The aftermath of repealing the VAT Act, 1997
- Regulations, rules, orders and notices.
The Act repeals the current VAT Act, 1997. However, the regulations, rules, orders and notices made or pronounced under the current Act shall remain in force until they are revoked with those made under the new Act. The Act has introduced new concepts that strictly require regulations for enforcement, for example, lay-by agreements and display of price. These new concepts require the Minister to make regulations to govern them. The current Act does not have these concepts, hence there are no regulations to govern the same. Breakthrough Attorneys is of the view that the regulations made under the current VAT law are incompetent and impractical vis-à-vis the impending Act. There is, therefore, need to enact the regulations promptly to ensure smooth administration of the tax.
- Agreements and VAT relief
VAT reliefs granted under the outgoing Act with respect to agreements entered into by the government for exploration and prospecting of mineral, oil or gas before commencement of the new Act, shall continue to apply provisions of the outgoing Act, of 1997. Furthermore, the reliefs granted to investors licensed under the Special Processing Zones Act and Economic Processing Zones Act shall continue to apply accordingly.
Breakthrough Attorneys has noted that the Act is silent on incentives granted to the investors under the Tanzania Investment Act (TIA). It is unclear whether the VAT incentives under the TIA will continue to be granted. It is also uncertain as to what will happen to the investors who already have been granted the incentives. Amendments may be required to align the legislation.
- International best practice
The Act is in alignment with the international best practice. This has been illustrated by the introduction of the destination principle, by the imposition of the tax on goods and services consumed in Tanzania. Exported supplies and goods on transit are zero rated in the Act.
Breakthrough Attorneys is of the view that the new enactment has addressed key objectives set by the Act. However, the Taxing Authority (TRA) or the Ministry of Finance may need to issue Practice Notes which may give clarity to some new provisions such as provisions on adjustment of VAT, single and multiple supplies, progressive and periodic supplies etc.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.