FINANCE LAW UPDATE: BREAKTHROUGH ATTORNEYS’ OVERVIEW OF THE TANZANIA’S BUDGET FOR THE FINANCIAL YEAR 2022/2023.
- Performance evaluation of the 2021/2022 budget
- Priority areas of the budget
- Proposed changes to improve the Agriculture Sector.
- The Government proposes amendments on tax exemptions.
- Changes on the power to remit interests and penalties.
- The government introduces the Digital Services Tax
- Changes in the levies in the communication sector.
The Government of Tanzania through the Minister for Finance and Planning Hon. Dr Mwigulu Nchemba on 14th June 2022 presented the Government’s Revenue and Expenditure Estimates for the financial year 2022/2023 before the National Assembly. This is the second budget for the sixth phase of government led by H.E Samia Suluhu Hassan.
The 2021/2022 budget goes with the theme “Realising Competitiveness and Industrialisation for Human Development” which appears to be a continuation of the 2021/2022 theme “Building a Competitive and Industrial Economy for Human Development”. Generally, the 2022/2023 budget has prioritized the improvement of the productive sectors especially agriculture, livestock, fisheries, energy, investment and trade.
Our Tax Department at Breakthrough Attorneys has prepared this general overview of the budget for the financial year 2022/2023 highlighting the estimates of the Government’s revenue and expenditure for 2022/2023.
2. Evaluation of the performance of budget implementation for the financial year 2021/2022.
In terms of revenue collection for the 2021/2022 budget, the government recorded a collection of 29.84 trillion shillings out of 37.99 trillion shillings that were projected. The said revenues include collections by the Tanzania Revenue Authority (TRA), non-tax revenue, Grants and concessional loans received, Borrowings from the domestic market including rollover for matured Government Securities, and External non-concessional loans.
In terms of expenditure, the Government planned to spend 36.33 trillion for recurrent and development expenditures. By April 2022 a total of 29.4 trillion shillings was released, of which 18.79. trillion shillings was recurrent expenditures. Further, the government in the 2021/2022 financial year used 10.61 trillion shillings for the implementation of various development projects, this is equivalent to 74.1% of the target.
The Minister submitted that Tanzania like other countries has been economically and socially affected by COVID – 19 as well as the ongoing war between Russia and Ukraine, whereas agriculture, tourism, trade, transportation, arts, and entertainment were the most affected sectors. Thus the Minister reiterated that the Government will continue to take appropriate measures to revive economic growth with more focus on these sectors.
We provided a depth analysis of the 2021/2022 budget, to read our analysis on the same please read the article through this link.
3. Priority Sectors for the 2022/2023 budget.
This year’s budget is aimed at improving the economy affected by external factors by focusing on sectors that will improve the welfare of a large number of people. Priority areas in this budget align to a great extent with the priority addressed by the President in her first address to the National Assembly in April 2021 where she addressed her priorities including agriculture, industrialization, mining sector, and trade and investment. Read our Article highlighting the said speech. Hence, the Government has in this budget prioritized the following sectors among others;
This year’s budget is pro-agriculture in a way that the agriculture sector is expected to enjoy the attention of the government due to funds allocated to improve this sector as well as other notable incentives. Among the notable decisions on agriculture is the government’s proposal for a zero-rated VAT for locally produced fertilizers specifically for fertilizer producers and the reduction of royalty charges on minerals used in fertilizers production in industries. From a VAT perspective, zero-rating of products is better than VAT exemption because the businesses which supply zero-rated supplies will be entitled to claim the VAT incurred on purchases as input tax in their VAT returns. VAT exemption limits the amount of input tax that can be claimed in the VAT returns and consequently increase the operation costs of the company/business.The government proposes to exempt, to zero rate or to reduce VAT for various agricultural equipment and products including exemption of VAT charged on moisture meters, Agro-nets (used for greenhouses), and exemption of VAT on equipment various pieces of equipment used for soil testing. Further, the government has increased the budget for agriculture from last year’s 294 billion shillings to 954 billion shillings aiming at increasing the export of agricultural produce from USD 1.2 billion to more than USD 5 billion by the year 2030. In addition, the government proposes to abolish impoundment fees of Tsh 200 charged on each square meter of irrigation dams.
Breakthrough Attorneys commends these changes proposed by the government, especially the focus being to increase the value export of agricultural products. Tanzania is strategically located to feed its neighbours in the East Africa Community and the Southern Africa Development Community and further through the Africa Continental Free Trade Area. There has not been a better time to feed the world than now considering the negative impact of the Russia and Ukraine war on the supply of food. We are of the view that further to the incentives aiming at increasing productivity, the government should also invest in technology and business know-how of farmers for the majority to be able to enjoy the incentives. This can be fast tracked through Private and Public Partnerships between the government and relevant private entities such as banks, mobile money companies and mobile network operators.
- Energy Sector
In his speech, the Minister of Finance expressed the government’s commitment to continue with the ongoing energy projects such as the National Grid Stabilization Project as well as other projects including Ruhudji (358 MW), Kinyerezi I – Extension (185 MW), Rusumo (80 MW) and Kikonge (300 MW) and other power line projects and electrical infrastructure for Standard Gauge Railway (SGR). These and other continued are according to the Minister aimed at strengthening access to reliable electricity in the country.The country needs electricity to implement its development agenda, but the government has only focused on fuel energy. We call for the attention of the government on renewable and clean energy as well which is much more accessible and cheap compared to fuel energy resources. We commend the plan to connect remote regions to the national grid, however, the government should in the future support the provision of Mini-grid electricity, especially for those using clean energy, and incentivize the same, especially in rural and remote areas. This is in line with the sentiments made by the Minister for Energy, Mr Makamba during the signing of the LNG Project on 11 June 2022. Mr Makamba noted that properties of natural gas in terms of lower carbon intensity as well as lower pollutant compared to oil and coal and its portability of LNG for transport over long distances makes gas an exceptionally good replacement energy source for the low carbon future.
On the same footing, emphasis should be given to the use of compressed natural gas (CNG) for vehicles as an alternative to imported oil. This will create a local demand for gas and reduce the use of foreign currency to import oil whose price is controlled by external factors and improve the transportation sector on the other hand. Since few CNG vehicles already operate in the country, the government should attempt to attract motor vehicle manufacturers to invest in CNG trucks and cars in Tanzania due to the readily available fuel and need for such technology.
- The Mining Sector
The government has expressed its commitment to the development of the mining sector to ensure this sector contributes to ten percent (10%) of the country’s GDP by the year 2025 in line with National Development Vision 2025. The government intends to invest more in geological surveys to ensure the development of the mining sector as well as the establishment of other industries that rely on the availability of mineral raw materials including cement, fertilizer, and marble industries.Tanzania is rich in mineral resources and the sector has not substantially been contributing to the government, thus, the government’s plan to ensure that the mining sector contributes up to 10% to the GDP is a commendable stance. We call upon the government to also ensure that the development of this sector is advantageous to local mining businesses as well as other sectors that crosscut with the mining sector such as construction and trade.
Further, it is important for the government to concentrate on specific minerals especially those used in manufacturing industries such as Cobalt which is an important material for making batteries for electric cars. The government should focus on attracting investors to invest in this industry instead of just raw cobalt, we believe this will in turn contribute to the country’s economy and technology transfer.
- Strategic Economic Partnerships and Engagement
As one of the strategic measures to improve trade and investment in areas of the economy which have been affected as a result of the ongoing war in Europe ( Russia-Ukraine), the government has resorted to seeking funds to ensure this is achieved. According to the Minister, in his speech, the government is negotiating to secure a concessional loan from the World Bank worth USD 500 million. Further, the government is attempting to secure a concessional loan of USD 1.1 billion through the Extended Credit Facility (ECF) under the International Monetary Fund (IMF) to be disbursed in seven tranches over a period of 40 months from July 2022 to July 2025.These loans, if well implemented will improve trade and investment, it is our call that the said to be directed to sectors of the economy that have the potential to benefit a large number of people such as agriculture and technology.
4. Notable proposals for reform of tax laws;
As part of the Budget speech the Minister highlighted several areas of tax law that the government intends to amend through the Finance Bill, we will publish our special analysis on the Finance Bill, however, at this point, the following changes are worth noting;
- Introduction of the Digital Services Tax (The Income Tax Act)
The government has proposed to introduce a Digital Service Tax (DST) to be charged on the turnover of the non-resident service providers at the rate of 2 percent (2%) as a measure intended to expand the tax base and uphold equity principles of taxation. DST is imposed as a measure to counter the loopholes of the digital economy in which multinational companies may operate and receive income from Tanzania but not pay taxes since the multinational company does not have a physical presence in Tanzania.Therefore the imposition of DST will ensure that such companies pay tax on the profits whose source is from Tanzania. In order to ensure compliance with this tax, the law should state the manner of payment, the frequency of filing returns for the same as well as the responsibilities of the local representative of companies in compliance with this tax. The VAT requirement to appoint a representative for suppliers of digital services for VAT compliance in addition to the 2% tax compliance, creates an administrative burden and this should be relooked for easy compliance.
To ensure effective revenue collection via the implementation of this new tax in the country, we call on the government to make close engagements with major suppliers of digital services and leverage on practices from other countries which have imposed DST such as Kenya in order to understand the complexities and challenges of the DST.
- Reinstatement of the Finance Minister’s power to remit interest and penalty (The Tax Administration Act)
Another notable proposal is to reinstate the power of the Minister to remit interest and penalties instead of the Commissioner-General of the Tanzania Revenue Authority under the current law. In 2020 the Tax Administration Act was amended to shift this power from the Minister to the Commissioner-General two years later the government proposes to reinstate this power to the Minister responsible for Finance the reason being to simplify the process of accessing remission.We believe this decision will not simplify the procedure but rather make it longer and more bureaucratic. It is so because the Minister being on top of the Ministry of Finance and Planning has a lot of responsibilities, thus adding a process that could be handled by the Revenue Authority will not make such a process simple. The volume of tax disputes from both large taxpayers, customs and domestic revenue departments of TRA might require the Minister to consider additional resources to handle remission and waiver requests and hence increasing additional costs to the government and taxpayers.
It is our view that even if there are challenges in the process of accessing remissions being handled by the Commissioner-General, the proper cure is to recheck the procedure and make the same simpler than transferring the same to the Minister.
- Setting a standard rate of tax on presumptive income (The Income Tax Act)
The government is proposing to amend the law and introduce a standard rate of income tax to be charged for individual businessmen whose turnover is between exceeding 11,000,000 million shillings and one hundred million shillings (TZS 100,000,000/=). The proposed rate is set to 3.5 percent (3.5%) of a person’s taxable income.As intended, this measure will surely simplify tax assessment and compliance on part of the individual taxpayers. Breakthrough Attorneys calls upon the government to go further to create a tax-friendly environment for SMEs and Startups by increasing the threshold for payment of Value Added Tax from one hundred million shillings to at least three hundred million shillings. This will reduce the burden on SMEs and Startups to comply with VAT and income tax at the same time which is costly to most SMEs and Startups.
- Exemption of withholding tax on coupons for municipal and corporate bonds (The Income Tax Act)
As a measure to enhance alternative financing for the implementation of development projects, the government proposes to exempt withholding tax on interest paid for corporate and municipal bonds. Currently, payments made on interest payments are subject to withholding tax at the rate of ten percent (10%) for residents and non-residents respectively.This means interest paid to a holder of corporate or municipal bonds issued and listed at the Dar es Salaam Stock Exchange (DSE) will be tax-free if this is passed. This is a positive stance toward achieving alternative financing for local government authorities as well as companies. We expect that this will attract more investors in these types of securities which will, in turn, have an impact on the development of the capital and securities market in Tanzania.
- Reduction of the maximum mobile money transaction levy (The National Payment Systems Act)
The 2021/2022 budget and its respective Finance Act 2021 introduced a levy transaction on mobile money transactions on sending and withdrawing mobile money through an amendment of the National Payment Systems Act to that effect. The maximum levy on each transaction as per the current position of the law is 7,000 shillings only. Following the claims of the public on this levy, the government has in this year’s budget decided to reduce the maximum levy on one transaction to 4,000 shillings which is a reduction of about forty-three percent (43%). However, this measure goes along with the extension of the base to include all electronic transactions including those which were not subject to the levy.According to the Minister, the changes are aimed at reducing the cost of living and therefore we expect that the Mobile Money Regulations Schedule of tariffs will be amended to reduce all the bands below the maximum rate. This move is in line with the government’s plan to grow the financial inclusion and will increase the revenue collection to the government as a result of the growth in the number of transactions.
Our Tax Department at Breakthrough Attorneys has prepared an in-depth analysis of the Finance Bill to be shared soon. Please stay abreast of our forthcoming articles discussing the same as well as the Finance Act upon approval by the Parliament.
Our general overview of the budget is that it has reflected the current economic state characterized by rising prices of goods and services. The proposed amendments especially tax laws on exemption of VAT and income tax are positive towards implementing the priority areas highlighted in the budget.
However, some of the proposed amendments need to be rethought, for example, the reinstatement of the Minister of Finance in granting the remission of interest and penalties. Although according to the budget speech it is a measure to increase efficiency, the government could come up with better options that would make the process more efficient and less bureaucratic. Also as our proposal for future budgets, the government should consider the possibility of flexing taxes for startups in form of reductions and exemptions, and other tax incentives. Lastly, since the tourism industry was negatively impacted by Covid 19, the government should discuss with stakeholders and find ways to expedite the recovery of this industry. This may go hand in hand with extension of the measures to cushion the pandemic introduced by the Bank of Tanzania in 2020. Read our Article discussing the said measures.
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