FINANCE AND TAX LAW UPDATE: BREAKTHROUGH ATTORNEYS’ HIGHLIGHT OF THE FINANCE ACT, 2021 AND ITS IMPACT TO TAX LAWS IN TANZANIA.

• Widening the scope of Income Tax exemption.
• Granting power to the Minister to grant Exemption on strategic projects without Approval of the Cabinet for specified threshold.
• Reduction of the minimum Pay As You Earn rate for employees.
• Enabling depreciation costs calculation on the cost of assets used in international pipelines.
• Exemption of Skills Development Levy for religious health institutions.
• Introduction of new Levies on mobile money transactions and airtime purchases.
  

1.0 Introduction

On the 30^th June 2021, the Parliament enacted and published in the Government Gazette, the Finance Act, No. 3 of 2021. This follows the presentation of the Government’s Revenue and Expenditure Estimates for the financial year 2021/2022 (the budget) by the Minister of Finance and Planning Hon. Dr. Mwigulu Nchemba on 10^th June 2021 before the National Assembly. Following the presentation of the budget, the Finance Bill, 2021 was submitted, discussed and passed by the parliament.

The Finance Act, No. 3 of 2021 amends various laws whereby most amendments are on tax laws. For every fiscal year, the Parliament enacts the Finance Act which is the budgetary legislation containing multiple provisions relating to taxes and related issues. Hence, the Finance Act, 2021 complements what is in the budget.

Our Corporate Commercial Department at Breakthrough Attorneys has prepared this Article highlighting the changes in various tax laws which came into operation on the 1^st day of July 2021. This article is a continuation of our previous analysis of the  Government’s Revenue and Expenditure Estimates for the financial year 2021/2022. (Read our analysis of the budget)

 

2.0 The Income Tax Act CAP 332 R.E 2019

The Finance Act amends the Income Tax Act CAP 332 R.E 2019 (“the Income Tax Act”) by introducing the following changes;

1. 1. Widening the scope of Income Tax exemption
      In what may be seen as an attempt to increase the scope of government financing, the Finance Act amends in Paragraph 1(1) of the Second Schedule to the Income Tax Act which provides for exempted incomes. The schedule now includes interest derived from government bonds issued and listed on the Dar es Salaam Stock Exchange from 1st July 2021 as one of the exempted incomes.This will, in the long term, attract more investors in turn finance Government projects. Before the amendment, government bonds were subject to income tax, except for those with a maturity of more than 3 years. See our Article discussing Investment in Government Securities.
   2. Granting power of the Minister to grant Exemption on strategic projects without Approval of the Cabinet

      Before the amendment, the Minister for Finance could not grant tax exemption on strategic projects and other public interest agreements signed by the government without the approval of the cabinet. Section 21 of the Finance Act, 2021 now amends the Income Tax Act by adding Section 10(4) of the Income Tax Act which provides that the Cabinet’s approval will not be needed in some circumstances. 

      The first circumstance is that, following the amendment, the Minister has the power to grant exemption without the approval of the cabinet in a strategic project with a total tax payable not exceeding one billion shillings for the entire project period. Before the amendment the approval was required regardless of the amount of tax payable. Also, another circumstance is that, the approval shall not be needed for grant agreement or concessional loan agreement between the Government and a donor or lender where such agreement provides for income tax exemption. Before the amendment, the approval was required regardless of whether the agreement provided for income tax exemption or not.  

   3. Reduction of the minimum PAYE rate

      The table under paragraph 1(1) of the First Schedule of the Income Tax Act is amended by Section 25 of the Finance Act, reducing the minimum Pay As You Earn from 9 percent (9%) to eight percent (8%) for individuals whose income exceed TZS 3,240,000/= but does not exceed TZS 6,240,000/= per annum. On the same footing, individuals whose income does not exceed TZS 3,240,000/= per annum shall not pay income tax according to the amendment. 

      We are positive that this will improve employees’ welfare considering the fact that employees contribute to the economy both in terms of monetary contribution in form of taxes and in form of expertise and considering the fact that the government, being the largest employer, has not done salary increments for over five years with the lowest income employees, suffering the worst, in the wake of economic crunch and inflation.

   4. Enabling depreciation costs calculation at a rate of 5% on the cost of assets used in international pipelines

      Section 65N (1) of the Income Tax Act has been amended to include assets employed in an international pipeline to be treated as depreciable assets calculated at the rate of five percent (5%). The term international pipeline referred here is defined under section 65N(1A) as 

      “a cross border pipeline for transportation of crude oil from a foreign country to a port facility in the United Republic in which such crude oil is exported to another foreign country.”  

       The above definition is general and may accommodate any international pipeline of such desciprion, however, according to the Minister for Finance, this harmonization has been specifically designed to cover the cost of assets under the East African Crude Oil Pipeline (EACOP) crossing between Tanzania and Uganda. 

      We commend this amendment considering that the EACOP project is projected to result in over a sixty percent (60%) increase in Foreign Direct Investment (FDI) in Tanzania during the construction phase.

   5. The Vocational Education and Training Act, CAP. 82 R.E 2019 (“the Vocational Education and Training Act”)

      The Finance Act, 2021 has amended two sections of the Vocational Education and Training Act, Sections 14 and 19 in the following manner;

      1. 1. 1. Increasing the minimum number of employees required to account for Skills Development Levy (SDL) to 10.
               

               Before the amendment, the number of employees needed for an employer to be liable for SDL was four employees. Section 14 of the Vocational  Education and Training Act has now been amended and employers shall only be required to pay SDL when he employs 10 or more employees. 

               It is our view that this amendment will verily reduce a tax burden to small-scale businesses (employers) and on the other side will enhance compliance and promote the formalization of informal employment. In any case, our call to the government is to formally emphasize on the objective of this levy in ensuring that the higher learning and vocational training institutions actually press on skills development for the young Tanzanians. This has been earmarked, to our knowledge, as a concern regarding onboarding employees’ lack of basic skills on top of their formal tertiary educations.

            2. Exemption of SDL for religious health institutions.
               

               The Vocational Education and Training Act is amended under Section 19(1) (e) to widen the scope for exemption of SDL. With the amendment, religious institutions that provide public health are now exempted from paying SDL. Before the amendment, the Act only exempted religious institutions whose employees were solely employed to administer places of worship, or give religious instructions or generally administer religion. 

               This is expected to reduce operational costs to such institutions, and widen the provision of such services especially in rural areas since they are crucial in providing health services in areas where the Government has not reached due to Budget constraints.

                

                

3.0  The Electronic and Postal Communications Act, (CAP. 306) (“the Electronic and Postal Communications Act”) and the National Payment Systems Act CAP 437 (“The National Payment System Act”)

1. 1. 1. Introduction of Airtime Levy.
         

         Section 8 of the Finance Act amends the Electronic and Postal Communications Act by adding Section 164A to the Act. Based on such amendment, the commonly termed “Development Levy” airtime levy will now be charged against every purchase of airtime. The rates for this levy shall be between TZS 5 to TZS 222.70 based on the recharged amounts. The manner of collection shall prescribed in the Regulations once the Minister for Finance publishes the same. 

         This means in addition to the Value Added Tax charged on airtime purchases a person will be charged an airtime levy. This is one of the most concerning areas of this amendment which has caused quite a stir as it is expected to affect a large number of users of mobile phones. Although it will increase revenue to the Government, it will also add a tax burden to users considering the reality that communication is essential to many Tanzanians and most do use the same as a basic communication tool rather than a tool of trade.

      2. Introduction of a new Levy in mobile money transactions.
         

         In addition to the Airtime Levy, the Finance Act, 2021 has also introduced a new levy that will be chargeable on every mobile money transaction. The said amendment is introduced with the introduction of a new Section 46A in the National Payment Systems Act. 

         Nonetheless, this levy will become operational once the Minister for Finance after consultation with the Minister for Communication has made regulations prescribing the manner and modality under which the levy on mobile money transfer transactions will be collected and accounted for. The said levy shall be between 10 shillings to 10,000 shillings on each mobile money transaction of sending and withdrawing. The amount of the levy varies depending on the value of each transaction sent or withdrawn.

         It is expected that this levy will increase Government revenue by shillings 1,254,406.14 million, however the same will clearly increase the tax burden to taxpayers plus mobile transaction fees. The usage of mobile money under the auspices of M-Pesa, TigoPesa, Airtel Money and so forth has grown tremendously in the past ten years in Tanzania. Tanzanians predominantly use these mobile money platforms to both send and store money. The act of the Government to introduce this levy on top of the direct tax in form of VAT is questionable and may verily cause a perverse incentive (cobra-effect) against the entire mobile money ecosystem. This is because what has started as a bid to raise more revenue, may disturb the mobile money ecosystem to the extent that even the little that the government was getting in the form of VAT on transaction (without counting the tax on the mobile money as an income to the MNOs) may be lost if the mass will stop or reduce usage of mobile money transaction due to high levies and taxation. An example shared by Mwananchi newspaper on 9^th July 2021 is that for a transaction for TZS 1 million pre and after the Finance Act 2021 is as follows; To complete the transaction, the total deduction cost is TZS 31,800 whereby TZS 14,900 is the cost of sending money from MNOs agents, and TZS 16,900 is the cost to withdraw the same amount It should be noted that the whole transaction before the amendments costed only TZS 14,000 which shows an increase of TZS 17, 800 (More than 100%).

         Breakthrough Attorneys also wishes to draw an analogy to when the government introduced a direct tax in the form of VAT on ancillary transport services related to transit goods back in 2015 which affected massively the logistics sector in the country but worse, even the importation sector to deny the country custom duties of would-be users of our ports. Admitting the wrong move, the tax was scrapped off a year later.

4.0  Conclusion

We, Breakthrough Attorneys generally are positive as to the amendments brought by the Finance Act, especially on matters concerning tax exemptions, and employment taxes. The increase in the number of employees for an employer to pay SDL will encourage small-scale employers to comply with other employment laws without the fear of increasing their tax burden.

We also call upon the Government to implement the law as amended effectively especially on exemption of taxes on strategic projects. The issue of exemption under agreements between entities and the government has been the source of many disputes currently pending, and or decided at the Tax Revenue Appeal Board, Tribunal, and the Court of Appeal. That being the case effective implementation of the amendments is required to get rid of such conflicts in the future. 

We specifically wish to urge the government to reconsider on the new levies introduced on airtime and mobile money transactions. These may suffocate the mobile money and telecommunication space and lead to under-usage of the same. As it is, the industry is growing and user ratios are growing. What would be advisable, is for the government to reduce tax in the mobile phones importation and under-regulation in the case of multiple users as far as identification and users registrations are strictly adhered to. This will definitely ensure more users, more income and ultimately, achieve the same goal on revenue collections, without suffocating and bleeding the existing users.

 

Important Notice:

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.