Tanzania Budget Insight 2015 Diving deep · 2015-06-14 · Budget Insight 2015 | 5 Financial sector...

Tanzania Budget Insight 2015Diving deep

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Budget Insight 2015 | 3

Introduction

In what might be Hon. Saada Makuya Salum last budget as Minster for Finance in the present Government, there is no doubt that her Budget 2015 speech was prepared and presented with the much anticipated constitutional referendum as well as the upcoming general election in mind.

AfDB reports that Tanzania has managed a 7% economic growth rate in 2014 and 2015 driven mainly by the transport, communications, manufacturing, construction and agriculture sectors. All these have been made possible by the renewed impetus in infrastructure investment by the Government and the projected good weather conditions. Even though there has been a slump in global oil and gas prices during this period, the continued investment in offshore discoveries of natural gas and the construction of a gas pipeline from Mtwara to Dar es Salaam have been a shot in the arm for economy and have offered some form of stability for power generation in the country. Tanzania remains a major FDI destination in this part of Africa, with mostly Greenfield investments in the extractive and tourism sectors.

Unfortunately revenue collections for the fiscal year 2014/2015 were not positive. Against a target of Tshs 12.638 trillion, the Government collected Tshs 8.924 trillion, a performance of 71%. With the tax measures that the Minister introduced in her Budget Speech, the enactment of a new VAT law coupled with the removal of exemptions, the target for 2015/2016 is Tshs 13.475 trillion. Considering the shortfall in revenue collection this fiscal year, the Tshs 13.475 trillion sounds ambitious. This Budget marked the final part of the CCM’s five year plan for the country. The anticipated elections and the fact that there will be a new Government in the second half of this fiscal year could upset the economy. Nevertheless, Tanzanian’s continued attractiveness as an investment destination is not expected to wane.

There are a number of challenges that the Government will however need to address. First there is the ballooning recurrent expenditure which seems to be draining Government pockets. Secondly, there is a dire need to diversify revenue streams to generate more revenue for the Government. This is because dependence on donor funding is proving to be unreliable and often comes with pre-conditions. The challenge for the next Minister will be to wean the country off donor funding and finance the Budget from tax revenue. While this may seem like a tall order, it might be very achievable considering the tax administrative measures that Hon. Saada Makuya Salum has initiated.

Key drivers for the economy in the coming medium term will be transport, communications, manufacturing, construction and agriculture. The oil and gas sector is still growing and with the legislative reforms that are taking place at the moment revolving around the sector, it is anticipated that it will soon become the driving sector for the country.

Overall, this is a positive Budget following a year in which the economy has performed well. It is hoped that this position is built on over the next year, growth is maintained and the benefits are widely felt by Tanzanians.

4 | Budget Insight 2015

Sectoral perspectives


Financial sectorAccording to the National Board of Statistics, the financial services sector in Tanzania grew by 7.3% in Q3 of 2014 compared to 6.8% in Q3 of 2013. The growth was primarily driven by increased financial inclusion in the country. The use of electronic payment systems, especially the Mobile Payment Systems, has grown significantly and contributed towards wider outreach of financial services to unbanked population.

The total number of financial institutions regulated by the Bank of Tanzania increased from 57 as at June 2014 to 59 as at April 2015. In recognition of the importance of agriculture to the country’s economy, the Government set up the Agricultural Development Bank in 2014 with a view to enhance growth in the sector by offering loans and credit finance deals to farmers, many of whom do not have access to financial services.

However, the financial services sector was adversely affected in the period as a result of the currency depreciation. The Tanzanian shilling fell by 12% against the US dollar in first four months of 2015. As such, the Bank of Tanzania is left with a big task of stablising the shilling. Experts relate the recent slide in the currency as partly due to a reflection of general dollar strength, which has led to a weakening of a number of other emerging market currencies. Other recorded reasons for the fall were the low exports as well as an increased demand of dollars by local investors.

To reverse the fall, the Central Bank has envoked new regulations which have introduced additional obligations on banks and financial institutions requiring that foreign exchange policies submitted to the Bank of Tanzania for frequent reviews and requiring that intra-day foreign exchange exposure limits be set and observed. We expect managing of the exchange rate to remain a key issue through 2015/2016.

Additionally Bank of Tanzania also revised the capital adequacy requirements in the Banking & Financial Institutions Regulations 2014

to ensure that a certain level of capital can be maintained by banks and financial institutions in the event that losses arise out of their business activities. It remains to be observed if the introduced measures will manage to curb the depreciation.

The Bank of Tanzania has given a 3-year moratorium to banks and financial institutions to comply with the new requirements under the Capital Adequacy Regulations. The new regulations are already causing a wave of change within the financial services industry of Tanzania including banks listing in the Dar es Salaam Stock Exchange to raise capital from the public. We expect this wave to continue through 2015/2016 given the increased efficiency in operation of the Dar es Salaam Stock Exchange and good performance of listed companies.

Technology, Media & Telecommunications (TMT)The telecommunications sector has over the years developed into a key sector in terms of contribution to the government coffers. The sector has overseen a number of mergers/acquisitions recently which is expected given the growth it is witnessing.

Growth in Tanzania’s mobile market has rebounded impressively in 2014 following a contraction in 2013. The sector has seen mobile subscription increase by 16.1%, with tele density at 67% (compared to 61% last year) as well as Average Revenue Per User (ARPU) per month moving up to Tshs 35.276, an increase of 5.1% compared to Tshs 33.557 a year before.

Competition has also intensified price wars between the country’s six mobile operators. We expect positive growth to continue throughout the coming year, as Viettel’s planned entry into the market in 2015 will ensure further expansion in the sector.


Public sectorEducationIn February 2015 the President launched the New Education Policy of 2014 in which basic education is expected to be free, with single textbooks for all schools. The policy aims at providing quality education recognisable across the region and the world. The Government is also working together with other stakeholders to modernize curricula at all levels and make sure that it meets education requirements, provide equipment, materials and tools needed for teaching and facilitating advancement of science and technology. Additionally, in the policy’s basic education will now run from Standard One to Form Four and all schools will shift to using a single textbook for each subject.The BRN Education NKRA has prioritized high impact initiatives for the past three years, with a focus on improving the quality of education in four focus areas: creating performance transparency, motivating through incentives, providing support where needed most and improving teacher conditions with the goal of achieving a pass rate of 80% for both Primary and Secondary levels by 2015/2016. Key BRN highlights in the past year:

• School incentive schemes – Aims to provide both monetary and non-monetary incentives to schools identified as high performing through official school ranking scheme. During the Education Week in Dodoma in May 2014, 3,044 schools were recognized and rewarded and received a considerable about of coverage and public interest.

• School improvement toolkit – These kits are an orientation programme and evaluation mechanism to ensure that Heads of School and administrators have the knowledge and tools required to improve the quality of their schools. In 2014, 15,525 primary head teachers and 3,150 secondary school heads of school were trained in the use of the toolkit. By the end of 2015, 100% of heads of schools are expected to have received copies of the toolkit.

• STEP (Student Teacher Enrichment Programme) – This initiative is designed to provide primary and secondary school teachers with the skills identify low-performing students and bring them to the expected competency levels. To date, the STEP

Secondary programme has successfully implemented the first round where 4,103 teachers have received training to date and 1,325 secondary schools have conducted STEP classes for low-performing students.

• 3R assessment & 3R teacher training – The objective of this training is to provide a mechanism for monitoring Standard Two students particularly in reading, writing and calculating arithmetic. The idea is to support teachers in identifying struggling students and provide timely support to support their educational performance. In 2014/2015 3R basements were expanded to 140 councils in mainland Tanzania.

Infrastructure and TransportAccording to the World Bank, Tanzanian infrastructure contributed 1.3% to Tanzania’s annual per capital GDP growth during the 2000s. However, the country has made great progress in improving the road network quality. The port of Dar es Salaam also suffers from performance problems as rapid traffic growth has increasingly exposed deficiencies in storage and access to the port.

The government in conjunction with a Chinese company is set to construct a 2,561 km standard gauge railway at a cost of US$ 7.6 billion. There are further projections to spend US$ 14.2 billion in the next five years on the construction of new railway lines and upgrading of existing roads and railways with a view of becoming a regional transport hub and significant conduit for the growing economies in the land-locked countries of the continent. Construction of the new railway line is expected to commence in June 2015.

The government of Tanzania, the Government of Oman together with China Merchant Holdings International Limited (CMHI), expect to partner for the development of the Bagamoyo port. The preliminary agreement between the parties involved in this project was signed in October 2014. The agreement placed various strategies to ensure that this project is implemented. One of these strategies is to create a Tripartite Committee (Tripartite Joint High Level Task Force). This committee was given the task of managing the preparation of key


documents including the project Joint Venture Agreement and documents relating to the technical, financial, economic and social aspects. The committee began work in December, 2014, operates under the Chairmanship of Secretary in the Office of the Prime Minister. In addition, the valuation exercise of the port area was completed in October 2014 and procedures for compensation are ongoingAdditional infrastructure projects being carried out by the government are as follows:

• Rail projects: Work to transfer some assets from RAHCO to TRL so as to improve rail services is progressing well. An analysis exercise of property that will be transferred as well as a discussion between stakeholders is completed. The Government Notice for the transfer of assets from RAHCO go TRL was released by the Government on 22 January, 2015. Assets include the heads of 79 trains, 101 passenger cars and 1,294 freight cars.

• Road projects: In fiscal year 2014/15, a total of 504.4 km of highway roads were tarmacked by April, 2015 as compared to the planned 539 km. In addition, 87.75 km of the planned 165 km slated to undergo rehabilitation to the level of pitch, were completed. In terms of regional roads, 40.5 of the planned 94 km was built at the rate of pitch. Similarly, 450 of the planned 1,350 km underwent rehabilitation at a rate of gravel in the period. Furthermore, a total of 11,453.7 km of roads and 1,364 bridges were planned to undergo major repairs. 1,440 bridges and 25,284.2 km of regional roads are currently undergoing planned maintenance. By April, 2015, highway maintenance has been conducted over a total of 5968.5 km and 772 bridges. On the regional road maintenance front, a total of 8111.2 km and 537 bridges have been completed.

EnergyDespite the usual power cuts and blackouts, statistics indicates that electricity production has increased by 4.8% thanks to the increased capacity of power generation and electricity distribution network. However, high energy costs and unreliable supply of electricity have still been cited as the biggest concern to industrialists in Tanzania. This, coupled with the government’s inability to wipe out corruption in the energy sector is setting a bad precedent in the wake of massive discoveries of natural gas resources. Reports indicate that as a result, donors have frozen most of their contributions pledged for the 2015/16 budget, pending a satisfactory outcome to investigations over corruption in the energy sector.

Much of the future of energy sector in Tanzania relies on proper legislation and enactment of laws which govern extraction and production of the natural gas, implementation of the projects set out in budget for 2015/2016 and ensuring political, economic and legislative stability in the country. Moreover, as Tanzania’s investors keep exploring for oil and gas, it is imperative that the government of Tanzania establish the necessary technical, political and legislative infrastructure to fully absorb the benefits that can be reaped from the industry. Moreover, implementation of budget plans, prudent spending, execution of key energy projects and reliable energy supply have also been noted as key to propelling Tanzania to reach its goal of becoming a middle-income economy status by 2025.

WaterSignificant progress has been made with regards to water particularly within the BRN water NKRA. In March 2015, the Indian Government pledged to finance two major water projects in Tanzania worth $380 million in loans. $100 million would be set aside to improve water supply in the commercial capital Dar es Salaam and $280 million is set aside to help supply water from Lake Victoria to Tabora, Nzega and Lgunga towns.


The BRN water NKRA aims to provide rural Tanzanians will access to clean water by 2015/2016 and reached an overall coverage of 67% of the rural population from a baseline of only 40%. The current 2014 aim was to reach 54% coverage. The following BRN projects are currently underway:

• Extend coverage of existing infrastructure – Connecting villages to underutilized dams and tee-offs of Lake Victoria pipelines with the target of 6,336 by July 2016.

• Rehabilitate degrading infrastructure – Rehabilitate or replace absolute, leaked and dysfunctional pipes and water pumps with the target of 16,483 water points by July 2016.

• New infrastructure projects – Completion of rural WSDP projects and other new water schemes of which the target is 35,163 water points by July 2013.

Health sectorAs of April 2015, the Ministry of Health and Social Welfare has collected a total of Tshs 80,629,245,000 compared to the estimated Tshs 78,671,519,016 authorized in 2014/2015. The industry, however, still struggles with a shortage of qualified human capital. Most recent figures from 2011/2012 highlight that there is a 58% shortage of staff in the health sector. From 2011 to 2015, the Ministry implemented different strategies to target this such as enrolling students in health related education degrees. 35,973 students have been enrolled to date. Once they graduated, the government took it upon themselves to employ 35,574 of them. Over this past year the Ministry has also implemented the social community score card in order to target transparency and accountability and to improve the delivery of services to citizens.

In May 2015, Tanzania received 50,829 refugees from Burundi and with this, the country saw an outbreak of cholera. 510 people were reportedly found with the disease of which 31 deaths have been accounted thus far. Other diseases such as malaria have seen a decline by 18% in 2008 to 9.2% most recently calculated in 2012. The Ministry’s target is to reach 5% by 2016. In 2014/2015 the Ministry distributed 12,911,100 doses of hybrid medicine treatment for malaria

across the country. Similarly 500,000 nets were disseminated across primary and secondary schools in Mtwara, Lindi and Ruvuma region. AgricultureIn 2014, agriculture contributed 28.8% to GDP compared to 31.2% in 2013. Annual average growth in agriculture is estimated at 5%, owing to continued dependence on rain fed agriculture and limited use of modern farming techniques. In 2014, agriculture projects that were implemented for development of the sector were in accordance to the objectives of:

• The Agricultural Sector Development Programme (ASDP).• Eastern Africa Agricultural Productivity Programme (EAAPP).• Southern Agricultural Growth Corridor of Tanzania (SAGCOT).• Tanzania’s 5-year Development Plan.• Big Results Now (BRN).• The CCM Manifesto.

The Government has continued to finance various activities and achievements have been made in several areas including, increasing agricultural implements subsidies; increased access to improved seeds; increased use of fertilizer to farmers; increased agricultural extension and livestock. There is also an increase in the purchase of food stocks from farmers; investment in the fields through the SAGCOT program and improvement of infrastructure and market.

As agriculture provides employment to approximately three quarters of all Tanzanian workers, the sector remains a critical area for the Government in 2015/2016. Significant achievements can be made with even small undertakings.


TourismThe tourism sector continues to play a major role in growth and development of Tanzania. In the financial year 2014/2015 tourism generated 17% of the Tanzania GDP and according to the statistics, it was the highest contributing sector to the foreign exchange reserves, contributing 22% of the of total forex earnings.

During the year, this sector has enjoyed its contributing role in the economy largely as a result of increased inflows of tourists (4% increase since 2013), increase in earnings from hunting as a result of the improved hunting-licensing system and efforts of Ministry of Tourism in attracting airline companies to select Tanzania as among their international destinations.

Nonetheless, the tourism sector has had its own bumps and setbacks in the past months. With the outbreak of Ebola in West Africa, tourism sector revenues in Africa has been subdued with the fear from potential visitors of contracting the disease on visiting the continent. The effects of the global economic depression of 2008 still lingers in the tourism sector especially since Western economies are yet to get back on the pre-depression levels on consumption and production. Tour operators have also aired their concerns on the “nuisance taxes” and park fees on the tourism sector, which significantly hurts the capacity of the sector to generate optimal revenues for Tanzania. There was also bad publicity as a result of the increased poaching activities where it is claimed that the elephant population has decreased by 60% over a 5 year period.

Notwithstanding concerns raised by tour operators and different players in the tourism industry, the Ministry has indicated increased efforts in collecting revenue from different levies and fees which the ministry administers, however, a report issued by World Bank has indicated that this strategic industry can grow and create more high-paying jobs, and closer linkages with businesses and local communities. To realize this opportunity, the government should simplify its system of taxes and fees and make its revenue allocations more transparent. Whether or not this recommendation will be followed by the government is a matter only the future can tell.

Consumer Business & ManufacturingThe government plans to harmonise a series of taxes in the manufacturing sector which have been an obstacle for operators and reduced the sector’s contribution to the economy. Studies carried out on the sector have established the presence of high costs of compliance for manufacturers. The Confederation of Tanzania Industries (CTI) has been pushing for the implementation of measures that will boost competitiveness of local manufacturing and value addition as well as generally reduce the cost of doing business. This would be through reviewing various levies and duties imposed on industries. The sector is regulated by 15 regulators and covered by 25 pieces of legislation. Some of the regulators in this sector are the Tanzania Food and Drugs Authority, the Tanzania Bureau of Standards, the Tanzania Dairy Board and the Occupational Safety and Health Authority.

EntrepreneurshipThere has been considerable effort by the Government to build a cadre of entrepreneurs who are effective and sustainable, in the year 2014/2015. The Ministry facilitated a total of 1,711 entrepreneurs to access loans worth Tshs 1.776 billion through the National Fund for Entrepreneurship Development (National Entrepreneurship Development Fund - NEDF). Out of these loans, 45% (by number) and 38% (by value) were given to projects in rural areas, and 52% (by number) and 46% (by value) were given to women. In addition, through these loans, a total of 2,876 jobs were created and 51% of those jobs went to women.


Oil and gasThe plunging of global oil prices (and consequently gas) has resulted in scaling back of most of the operations in explored areas. Moreover legislative uncertainty continues to force investors to tip-toe in their exploration activities. Notwithstanding, such news, there have been developments worth mentioning; the 532 km gas pipeline from Mtwara has been completed and is expected to be operational in July 2015. Moreover in line with the pipeline, gas processing plants at Ubungo and Somanga are 96% complete to date.

Plans are also underway to purchase land for the envisioned LNG plant. USD $ 6 million is expected to be spent as compensation for the 450 residents who will be displaced. The final investment decision is set to be made in 2016/2017. A new fund, Oil and Gas Fund, has been proposed in the National Gas Revenue Policy. The fund’s main purpose is to ensure long lasting benefits and the welfare of Tanzanians. The Gas Fund will also control the use of the funds to bring sustainable returns beyond the exhaustion of the resource. The draft bill that will govern the gas fund is scheduled to be discussed in the parliament in the coming days.

A report from Protection Group International (PGI) has indicated that despite significant investment opportunities present in Tanzania; regulatory ambiguity and the potential for increased political interference present compliance, reputational and business continuity risks to potential and concurrent investors in the oil and gas sector.The sector has seen a declined growth in the period, however there have been notable mergers and acquisitions in the sector.


Tax Measures


Decrease of the minimum tax rate chargeable on individual employment income

The measureThe minimum tax rate chargeable on the income of a resident individual has been reducedfrom 12% to 11%, and the tax rate on each band has been adjusted.

Who will be affectedResident individuals who are taxed using the individual income tax rates.

When1 July 2015.

Our viewWhilst the intention is to provide relief to employees, the relief is too small to have any significant impact on the taxpayer’s pocket.

Decrease in presumptive income tax

The measureThe Minister has proposed to reduce the presumptive income tax which applies to small businesses by 25%.

Who will be affectedResident sole traders.

When1 July 2015.

Our viewThis is a positive measure which will encourage voluntary compliance by small traders. The measure may also encourage self employment which will increase the tax base.

Income tax


Removal of tax exemption on government projects

The measureTax exemption has been removed on government projects where the agreements between the government and various institutions involve commercial loans (non-concessional loans). This measure will not affect projects whose agreements were signed before 1 July 2015.

Who will be affectedInstitutions / contractors who were undertaking the projects.

When1 July 2015.

Our viewRemoval of tax exemptions will increase project costs. Given that the government budget is fixed, the increase on project costs will reduce the number of projects the government can fund in a particular period. The effect will be a slow growth of economy.

Exemption of income arising from bonds issued by the East African Development Bank

The measureIncome arising from bonds issued in the Tanzania domestic capital market by East African Development Bank will be exempted from tax.

Who will be affectedHolders of bonds issued by East African Development Bank.

When1 July 2015.

Our viewSimilar exemption was introduced last year in relation to the bonds issued by African Development Bank. The exemption will make East African Development Bank bonds more attractive in the market, and the money collected should be loaned out at a low interest rate to finance various development projects, which will stimulate economic growth.


Duty reduction on imported wheat

The measureA reduction on import duty rate on hard wheat from 35% to 10% under HS code 1001.99.10 and HS code 1001.99.90.

Who will be affectedManufacturers of food and other products as well as consumers.

When1 July 2015.

Our viewThe change is intended to provide relief for manufacturers of goods and foods using wheat grain as raw materials. According to the Minister, the measure is expected to stabilize prices of wheat related products.

Increase duty rate on plastic tubes

The measureAn increase of tariffs on plastic tubes used for packing of toothpaste, cosmetics and similar products from 10% to 25% recognised in HS code 3923.90.20.

Who will be affectedManufacturers and producers of toothpastes, cosmetics and similar products.

When1 July 2015.

Our viewLocal manufacturing has been an area of focus for the past decade for all East Africa member states. This measure is expected to encourage more investment in the sector and to protect producers of the packaging materials within East Africa.

Duty remission on spaghetti raw materials

The measureReduction of import duty rate from 25% to 0% on raw materials used for making spaghetti under HS Code 1103.11.00 for one year.

Who will be affectedFood manufacturers and wheat farmers.

When1 July 2015.

Our viewThis is good news for wheat farmers and promotion of “kilimo kwanza” at the same time. The change is expected to stimulate large scale wheat farming and provide opportunity for investors investing local food manufacturing.

Custom & Excise duties


Stay duty remission on soap raw materials (LABSA)

The measureDuty remission will continue to be granted to soap manufacturers using LABSA raw materials from 10% to 0% under HS Code 3402.11.00; HS Code 3402.12.00 and HS Code 3402.19.00 for a period of one year.

Who will be affectedSoap manufacturers and consumers.

When1 July 2015.

Our viewThis is intended to encourage growth in small and medium scale soap manufacturers in the country by making the end products affordable to consumers in comparison to imports. The intended growth of these manufacturers is expected to create job opportunities for locals.

Duty reduction on imported wheat

The measureA reduction on import duty rate on hard wheat from 35% to 10% under HS code 1001.99.10 and HS code 1001.99.90.

Who will be affectedManufacturers of food and other products as well as consumers.

When1 July 2015.

Our viewThe change is intended to provide relief for manufacturers of goods and foods using wheat grain as raw materials. According to the Minister, the measure is expected to stabilize prices of wheat related products.

Import duty charge on metal products used in construction

The measureImposition of import duty of 25% on metal products used in construction (bars, rods, angles, shapes, and sections) under HS code 7213.10.00 and 7213.20.00.

Who will be affectedMetal products industries / manufacturers and the construction sector.

When1 July 2015.

Our viewThe change is aimed to promote local producers of these products who are able to satisfy market demand and create more employment. Also, this measure aims at reducing competition in the market against cheap imports.


Import duty reduction on imported sticks for manufacturing of matches

The measureDuty reduction to be granted on sticks used for manufacturing matches from 25% to 10% under HS Code 4421.90.10 for a period of one year.

Who will be affectedMatch box manufacturers and the customers.

When1 July 2015.

Our viewThis aims at promoting local manufacturing of matches and creation of more jobs. This will also discourage importation of ready-made matches. The common “mwananchi” is expected to benefit from the cost reduction.

Duty remission on glucose syrup

The measureRemission of duty on glucose syrup used for manufacturing sweets under HS Code 1702.30.00 from 10% to 0%.

Who will be affectedSweets manufacturers.

When1 July 2015.

Our viewThe Minister indicated in her speech that this product is not manufactured within the member states. Therefore this will reduce the cost of manufacturing sweets and promote local industries. The local community especially the young is expected to benefit from this although there may well be health concerns that need to considered.

Duty remission on fish nets inputs

The measureRemission of duty on raw materials used for manufacturing of fish nets under HS Code 5402.61.00 from 10% to 0%.

Who will be affectedFish nets manufacturers and the fishermen.

When1 July 2015.

Our viewThe purpose of the change is to bring balance between locally manufactured and the imported fish nets which currently enjoy 0% duty. The measure is also expected to promote local production of fish nets and encourage investment in the fish nets production.


Increase of specific duty on imported sugar

The measureIncrease of specific duty on sugar from US$ 200 per metric tonne or 100% of CIF value to US$ 460 per ton or 100% of the CIF value whichever is higher.

Who will be affectedSugar manufacturers, sugar importers and sugarcane farmers.

When1 July 2015.

Our viewLocal sugar manufacturers and sugarcane farmers who for the past year have been complaining about imported sugar that has been flooding the local market have had their prayers answered. The measure is expected to promote local production by sugarcane farmers.

Increase of specific duty on imported rice

The measureIncrease of specific duty on rice from US$ 200 per metric tonne or 75% of CIF value to US$ 345 per ton or 75% of the CIF value whichever is higher.

Who will be affectedRice farmers and the rice importers.

When1 July 2015.

Our viewThe change is expected to encourage local rice farming and increase local production of rice. On the other hand, the measure is expected to discourage the importation of cheap rice.

Stay of duty reduction on buses to be used in the DRT project

The measureReduction of duty on buses which can carry more than 25 passengers from 25% to 10% under HS Code 8702.10.99 for another one year.

Who will be affectedBus operators and commuters.

When1 July 2015.

Our viewThe change is intended to ease public transport woes in the country by reducing the cost of purchase for passenger vehicles. In Tanzania the change will subsidize the cost of buses to be used in the expected Bus Rapid Transit (BRT) project expected to be launched this year.


Prisons to be included in the duty exemption list

The measureThe Fifth Schedule of the EAC Customs Management Act 2004 is to be amended to include prisons services department in the duty exemption on products for office use only.

Who will be affectedPrisons Services Department.

When1 July 2015.

Our viewThis change harmonises the prisons services department with the other armed forces wgo enjoy a similar exemption. The change is expected to reduce the cost of running the prisons in the country.

Stay of duty exemption in the armed forces canteens

The measureDuty exemption will continue to armed forces canteens for another one year.

Who will be affectedArmed Forces.

When1 July 2015.

Our viewThe measure is intended to reduce the cost of living for soldiers and other armed forces personnel.

Introduction of infrastructure levy on imports

The measureInfrastructure levy of 1.5% on CIF value of all imports other than the goods exempted from duty under the EAC Customs Management Act.

Who will be affectedAll importations into the country.

When1 July 2015.

Our viewThis levy was introduced by the other East African countries last year but Tanzania opted to stay its application by one year. The revenue from this levy will be used to fund infrastructure development. Both Kenya and Uganda have this levy already in place.


Introduction of rebate mechanism for industrial sugar

The measureThrough the special procedures which has been proposed, industrial sugar importers will pay import duty of 50% and after production, 40% will be refunded upon demonstrating the sugar has been properly utilized.

Who will be affectedSoft drinks manufacturers and brewers.

When1 July 2015.

Our viewAccording to the Minister, this measure is intended to control usage of sugar that is used as a raw material and prevent revenue loss to the government which could arise from diverting it from its intended use.


Miscellaneous


Vocational Education and Training Act, Cap 82

The measureThe agricultural sector will once again enjoy exemption from Skills and Development Levy.

Who will be affectedAgriculture stakeholders in farms.

When1 July 2015.

Our viewThis move is aimed at encouraging investment in the agriculture sector as it signifies a reduction of costs for employers in this sector. This may also see the sector creating more employment opportunities for Tanzanians.

Tanzania Investment Act, Cap 38

The measureIntroduction of a new class of strategic investors (“special strategic investors”) under the Tanzania Investment Center for envisaged investments of at least US$ 300 million.

Who will be affectedInvestors who meet the specified conditions.

When1 July 2015.

Our viewThis measure is aimed at encouraging large capital investments and investing in strategic projects. This should contribute to economic growth, employment and income generation for the people of Tanzania. However, what remains to be seen is the extra benefit the special status has over the current strategic investor status.

Tanzania Investment Act, Cap 38

The measurePVC and HDPE pipes and transportation trailers will no longer enjoy exemption under the Tanzania Investment Centre.

Who will be affectedImporters of PVC and HDPE pipes, and transportation trailers.

When1 July 2015.

Our viewThe aim is to protect local manufacturers of such items. However there remains a question as to whether local producers will be able meet the demand from the market and maintain the required standards.


Petroleum Act, Cap 392

The measure• Increase in petroleum levy on petrol, diesel and kerosene levy by Tshs 50, Tshs 50 and

Tshs 100 respectively.• Increase in fuel levy by Tshs 50 to Tshs 313 per litre.

Who will be affectedConsumers, importers of fuel.

When1 July 2015

Our viewThe increase in these levies will have a marginal impact on fuel prices and transport costs. It is however an opportunity for retailers to increase their margins as well.It is expected that the higher increase in taxing kerosene will reduce adulteration which has been rampant. However, this also stands to negatively affect the people in rural areas who are major consumers of kerosene for their daily household activities.The additional tax revenue for this change will be directed towards rural electrification.

Gaming Act Cap 41

The measureImposition of 18% gaming tax on prizes offered to winners as well as imposition of a principal license fee of US$ 30,000 and US$ 10,000 or their Tshs equivalent for the operation of sport betting business and slot machines respectively.

Who will be affectedPersons involved in betting / gambling activities as well as gaming business in general.

When1 July 2015.

Our viewThese measures are meant to generate additional tax revenue from the growing gaming sector.It will be interesting to see how the 18% tax on winnings will be operationalized especially where the prizes are goods (e.g. cars) rather than cash.On the introduction of a license fee, it is likely that the companies will increase the prices of the games, thus passing the cost on to customers.


Export Tax Act, Cap 196

The measureIncrease of the export levy on raw hides and skins from 60% or Tshs 600 per kilogram to 80% or US$ 0.52 per kilogram, whichever is higher and introduction of 10% export levy on wet blue leather.

Who will be affectedExporters of raw and semi-processed leather products.

When1 July 2015.

Our viewThis aims to discourage exportation of these products as raw materials and local value addition. This would also encourage local investment in the industry and thus make the local products more competitive. However, whether this will result in creation of more jobs for Tanzanians remains to be seen.


The new VAT Act


A case of new wine in old wineskinsIntroductionThough there has been little taxpayer education on the new VAT legislation, VAT Act No. 5 of 2014, which was gazetted on 19 December 2014, it is anticipated that it will start applying on date to be determined by the Minister for Finance. The Act indicates that this will be done by a notice published in the Gazette, even though in her 2015 Budget Speech, the Minister for Finance indicated that the new Act will take effect from 1 July 2015.

While the VAT rate has been retained at 18%, one obvious change is the legislation itself. The new law has more substantive provisions, the different schedules which were there in the previous Act have been reduced from three to only one which has two parts catering for exempt supplies. The ‘zero-rating’ First Schedule and the ‘VAT relief’ Third Schedule have both been abolished. Taxpayers will now be required to make reference to the substantive provisions in the main legislation to justify ‘zero-rating’ and ‘VAT relief’.

While this is not a new tax strictly speaking, initial compliance might be a challenge as it might take a while for taxpayers to go through the Act, analyse it for any changes and take the necessary step in their business to ensure compliance.

We have analysed here the proposed new legislation and compared it with the VAT Act that is to be repealed. In the process we have highlighted existing differences and more importantly what you as the taxpayer need to do to ensure compliance.

A non-resident person who carries on an economic activity in Tanzania and makes a taxable supply for which he is required to account for VAT is required to appoint a Tanzanian VAT representative who will be responsible for his VAT obligations in Tanzania. Under this system, the VAT representative is required to register the non-resident person that he will be representing under the non-resident person’s own name and meet his VAT compliance obligations on a monthly basis.

VAT registration – More people in the VAT netFrom reading the new legislation, it appears that there will be four triggers for registration; VAT registration based on taxable supplies turnover, VAT registration for designated services irrespective of turnover and VAT registration of intended traders where the new Act gives the TRA discretion to register intending traders who will be required to provided certain information about their intended business before being registered. The new Act now requires non-residents who carry on business in Tanzania to register by appointing VAT representatives. Previously, VAT registration for this category could only be initiated by the Commissioner.

With regards to the turnover, the registration threshold shall be prescribed in the Regulations to the new Act which are yet to be published. It is likely that the registration threshold will be changed from the current TShs 40m. One is required to include amounts relating to their taxable supplies and imported taxable services. The following amounts will be excluded from when determining a person’s turnover for purposes of VAT registration:• The value of a non-taxable supply• The value from the sale of a capital asset• The value of a supply made solely from the sale or transfer of a

going concern• The value of supplies made solely as a result of ceasing business

For the designated supplies, the following category of persons are required to register for VAT irrespective of their taxable supplies turnover:• Persons providing professional services in Mainland Tanzania

where such a person and the services are regulated by licensed and regulated by a professional body

• Government institutions that carry on economic activities


A non-resident person who carries on an economic activity in Tanzania (widely defined – includes one-off transactions but exclude directorship and employment relationship) and makes a taxable supply for which he is required to account for VAT is required to appoint a Tanzanian VAT representative who will be responsible for his VAT obligations in Tanzania. Under this system, the VAT representative is required to register the non-resident person that he will be representing under the non-resident person’s own name and meet his VAT compliance obligations on a monthly basis.

The new law requires the TRA to register a person for VAT within 14 days of him making an application. Where the TRA fails to process the application by a person who has applied for registration within the 14 days, then the provisions of the new VAT law shall not apply to such a person until he is registered.

VAT exemptions – Limiting exemptions to curb abuseIn a move that aimed at increasing VAT revenue, the new VAT legislation has introduced limitations on VAT exemptions. When the new law takes effect exemption and zero-rating for VAT purposes will be limited to only those that are available in the Act. Any addition zero- rating and exemptions will be limited to goods and services which are solely to be used in the event of natural calamity or disasters.

VAT exemption will be limited to the following in the new Act:• Part I of the Schedule which caters for ‘Supplies and Imports

Exempt from Value Added Tax’. These are supplies that inherently exempt from VAT irrespective of whether they are supplied locally or imported into the country (and it is a legacy of the Second Schedule to the current VAT Act);

• Part II of the Schedule which covers ‘Imports Exempt from Value Added Tax’. These are supplies that will only enjoy exemption when imported (which is a carry-over of the Third Schedule (VAT relief) of the current Act).

• The exemption that is provided for in existing Production Sharing Agreement (PSAs) and Mining Development Agreements (MDAs); and

• The exemption that is provided for in under the Export Processing Zone Act and Special Economic Zone Act.

The supplies which fall in Part I will enjoy automatic exemption but it is likely that for supplies that fall in Part II, the taxpayers will probably have the administrative burden of first seeking approval from the TRA before they can enjoy exemption. VAT exemptions which are provided for in agreements between the Tanzania Government and other foreign Governments that or international agencies which continue to be honored but it seems likely that the manner in which the exemption is granted will change. Exemption on imported goods will be automatically granted while it seems that for locally procured supplies the entitled persons will required to first pay the VAT and subsequently seek refunds from the Government. Obviously this change has cash-flow implications and also comes with an administrative burden due to the paper-work that will be involved and following up VAT refunds.

Oil and Gas, Mining - VAT relief on exploration activitiesVAT relief for the extractive industry has often been misinterpreted as an exemption from paying tax. This is not the case. The VAT relief mechanism appreciates how VAT operates and spares the taxpayers who are still in the investment stage the negative cash-flow implications arising from delays in the payment of VAT refund claims as well the administrative burden associated with lodging these claims.The VAT Act that is to be repealed recognised the need to grant VAT relief to targeted categories of investors. It granted the extractive industry VAT relief on both goods and services (locally procured or imported) which were purchased for exploration and prospecting activities. The new VAT legislation has continued with this relief.Under the new Act the extractive industry will continue enjoying VAT relief on goods but this is now linked to import duty exemption. VAT relief on goods imported by licensed oil and gas entities and mining companies will be limited to goods that would qualify for import duty relief under the EAC Customs Management Act 2004. Strangely, and perhaps through an inadvertent omission, this limits exemption to imported goods, locally purchased goods will not qualify for VAT relief.The position in regard to VAT relief on services has also changed slightly.


Unlike the position in the current VAT Act which provided explicitly for VAT relief on services procured by licensed oil and gas entities and mining companies for exploration activities, the new VAT Act recognizes VAT exemptions in the existing PSAs and MDAs once the current Act is repealed. The new Act provides that where there is an existing PSA or MDA ‘before the commencement of this Act, the provisions of the repealed Act relating to value added tax relief shall continue to apply to the extent provided for in the agreement’. This means that VAT exemption in relation to services will depend on what the PSAs and MDAs provide.

We applaud this move which recognizes the legitimacy of the PSAs especially as far as taxes are concerned. However this grandfathering provision seems to only apply to existing PSAs and MDAs. Due to the zero-rating and exemption limitation, oil and gas entities and mining companies that sign PSAs and MDAs after this new VAT Act becomes law will be only enjoy VAT exemption on goods (since that is what will be expressly provided for in the new VAT Act).

Oil and Gas - Farm-out transactions and Joint venture operationsUnder the current VAT law the TRA had confirmed that farm-out transactions, though subject to VAT at 18%, would qualify to be treated as a transfer of part of a business under the transfer of going concern (TOGC) provisions and would therefore not be subject to VAT. However through a letter which was circulated to the oil and gas entities operating in Tanzania through the Tanzania Petroleum Development Corporation (TPDC) in early 2015, TRA revised their position despite losing in the Wentworth Case before the TRAB which ruled that farm-out transactions qualify for VAT-free treatment under the transfer of going concern provisions. In their letter they indicated that farm-out transactions will no longer be considered as a transfer of part of a business entitled to a VAT free treatment under the TOGC provisions.

In their letter TRA indicated that a “…transfer of going concern occurs only when the assigned interest or business is managed by the transferee as a separate business….under farm out agreements the

Blocks are shared and are run concurrently by both the farmor and the farmee. In fact, the working partner is invited to run the business jointly after paying consideration hence there is no transfer of business as a separate entity. The consideration paid by the invited party give right to him to participate in future income (profit). We are therefore of the view that farm out arrangements do not qualify to be deemed as transfer of business as a going concern…”

Instead of using the words ‘transfer of a business or part of a business’, the new VAT Act adopts a broader interpretation and uses the words ‘economic activity’, which should make more transactions eligible for VAT free under the transfer of going concern provisions. Ideally this broader definition should cover farm-out transactions. However the TOGC provisions in the new Act has introduced the requirement that to qualify, ‘…part of an economic activity shall be an economic activity if it is capable of being operated separately’. This means that a party farming out will now be required to account for 18% which the party farming in should be able to claim as part of his input VAT.

On a positive note however the new Act has explicitly address joint venture operations. Even though the TRA continue to recognise joint venture operations and appreciate nature of transactions that take place in such an arrangement in the context of the oil and gas industry such as cash-calls, the VAT Act that is to be repealed did not expressly recognise joint venture arrangements. The new VAT legislation now expressly recognises these arrangements and acknowledges that such transactions will not be subject to VAT. Transactions in a joint venture arrangement are often a reimbursement of costs whereby the operator incurs costs on-behalf of the non-operator, for which he gets reimbursed later on. The explicitly recognition should offer some level of comfort throughout the value chain and not just the upstream operations that they will not be subject to VAT.


Zero rating of goods and services – Another spanner in the works?VAT works by exception: all supplies are subject to VAT at 18% unless the law says that they are not. Supplies that are not subject to VAT are either exempt supplies or zero-rated supplies - there is a world of difference on how these two categories of supplies are treated for VAT purposes. The VAT Act that is to be repealed had two categories of supplies that qualified to be treated as zero-rated for VAT purposes: supplies that were intrinsically subject to VAT at 0% based on the First Schedule.

The First Schedule of the old Act will be repealed (together with the Act) and most of the items that were previously listed as inherently zero-rated will change their character and will now be treated as exempt for VAT purposes under the new Part I of the Schedule to the new Act. These were mostly supplies revolving around the agricultural industry and transportation sector. Since both zero-rated and exempt supplies are not subject to VAT, taxpayers who procure these supplies should not witness any changes on face of the invoices that they will receive when they make purchases after the new law takes effect. However, the exempt status will require those making these supplies to restrict the amount of VAT paid on their purchases that they can recover and they will might revise their prices upwards to pass on the VAT cost that they will no longer be allowed to claim. It will therefore be important for taxpayers who made supplies that fell under the First Schedule to plan their tax affairs to ensure compliance.

The Tanzanian service industry will continue to be aggrieved. Under the new Act, services will only be considered to have been exported (and therefore eligible to be treated as zero-rated) if they relate to land located outside Tanzania or if the services are physically performed outside the country. The services will not qualify for zero-rating if they are performed in Tanzania or if the recipient of the services being performed receives the services in Tanzania. The new Act borrows from the ‘place of supply’ provision in the VAT Act that is to be replaced and seems to shut the narrow window that allowed for zero-rating of services in the face of the Tanzanian service industry.

This interpretation and application of the law remains puzzling and contradictory. The position adopted by the Government means that while it is possible for non-resident service provides to export services to Tanzania, Tanzanian service providers are not capable of exporting their services. If on the one hand a Tanzanian service provider cannot export services (because his services are performed where he is located), using the same logic it follows that a Tanzanian entity should be able to import services because the services are rendered outside the country where the non-resident service provider is located under the place of supply concept. It would therefore not possible to import services into Tanzania.

Manufacturing – Export Processing Zone and Special Economic Zone to continue enjoying VAT reliefThe new VAT Act has introduced a transition clause which recognises the VAT relief accorded to EPZ and SEZ entities. While the new VAT Act has abolished the VAT relief that entities under the Export Processing Zone (EPZ) and Special Economic Zone (SEZ) which was provided for under Third Schedule of the current Act, it has enacted a grand-fathering provision which recognises VAT relief that is granted under the Export Processing Zone Act and Special Economic Zone Act. VAT relief granted to an investor licensed under either of these two Acts shall continue to apply to the extent provided for under the Act that is to be repealed. Thus, new and existing EPZ and SEZ entities will continue to enjoy 100% VAT relief on the supply of:• goods and services for use as raw materials, equipment and

machinery including all goods and services directly related to manufacturing in the EPZ (for EPZ operators)

• building materials and construction services procured by an EPZ developer

• capital goods and raw materials directly related to manufacturing in the SEZ


In retaining the 100% VAT, the Government has acknowledged the negative impact that abolishing the VAT relief would have had on the EPZ and SEZ schemes. VAT should not be a cost to any business. VAT should be a wash-through tax for a fully taxable business and should not have any impact on an entity’s operations. However this is not usually the case. Many entities often find themselves directing much needed internal resources towards VAT. This will be the case for these entities since they will be in a VAT refund position. In additional to the administrative burden often associated with lodging VAT refunds, the situation is exacerbated by the fact that it takes quite a considerable amount of time for the tax authority to process and pay these VAT refund claims. This lengthy process has negative cash-flow implications. Due to this, most of the entities in VAT refund position find that they have to either reschedule undertaking planned projects or direct much needed resources towards meeting their day-to-day operational requirements.

Capital equipment - VAT relief on capital equipment abolished, a VAT deferral scheme to be adopted.The new VAT Act which restricts VAT relief on goods and equipment to upstream operations has also repealed VAT relief on capital equipment which was available to all taxpayers under the old Act. This means importers will be required to pay 18% VAT for capital equipment. However in a move that can be seen as an attempt to mitigate the negative cash-flow consequences that paying VAT upfront would have and at the same time address the challenges of the existing VAT refund mechanism, the new VAT Act has introduced a VAT deferral scheme for imported capital equipment.

Under this scheme, eligible taxpayers will be allowed to execute bank guarantees to cover the VAT on importation of capital equipment and defer payment of the VAT to a later date. To be eligible, the new Act requires a taxpayer to be making taxable supplies first before seeking to use the scheme, which in essence would mean that VAT registered entities that do not have sales yet will not be eligible.

Unfortunately, the legislation does not offer much guidance on the intricate details of how the scheme will operate – whether by using the bank guarantees the VAT on importation will be deferred indefinitely or whether the taxpayers will be required to pay the VAT at a later time (e.g. when they start making VAT-able supplies and then claim the same in their VAT returns).

Aviation industry – The devil is in the detailsUnder the Act that is to be repealed, the aviation industry value-chain had been exempted for VAT purposes. Currently, ‘aircraft, aircraft engines, parts and maintenance’ are exempt for VAT purposes. In addition, the lease payments made by local aircraft operators to both residents and non-residents for the leasing of aircraft are exempt for VAT purposes. The transportation of passengers (for both domestic and international flights) is also treated as exempt, except for air charter which is subject to VAT 18%. The new Act has sought to retain the same exempt status for the aviation industry supply-chain, but there are a few changes:• aircraft, aircraft engine or parts imported by a local operator will

remain exempt for VAT purposes; and,• while the transportation of passengers will remain exempt, air

charter services will change from being VAT-able to being exempt; and,

• the leasing of aircraft by local aircraft operators will change from being exempt and will now be subject to 18% VAT.

The change in the characterisation of aircraft leases from exempt to standard rated could be an inadvertent error. Since the entire aviation industry value-chain is exempt for VAT purposes, it only make sense that aircraft leasing should also be exempt. Making aircraft leasing subject to 18% coupled with the 10% withholding tax that was introduced in 2014 back will definitely increase the local operators’ costs. Most operators will have to go back to the drawing board to evaluate their leasing agreements and evaluate their pricing.


Lastly, the new Act has made the following supplies zero-rated for VAT purposes:• the supply of goods and services for use in repairing, maintaining,

cleaning, renovating, modifying, treating or physically affecting aircraft engaged in international transport.

• the supply of items for use by passengers or crew of an aircraft if the items are used for consumption or sale on the aircraft during a flight that constitutes international transportation.

• international transport.• insuring international transportation of goods.• handling, pilotage, salvage, towing of an aircraft service provided

to foreign airline engaged in international transport.

Insurance Industry - General insurance now subject to VATWhile the new Act continues to recognise financial services as being exempt for VAT purposes, it has gone a step further to define what constitutes financial services with one notable change being the exclusion of general insurance. When the new VAT Act takes effect, insurance companies will be required to start levying and accounting for 18% VAT on their general insurance underwriting services. Health insurance, life insurance and re-insurance in respect of such contracts will retain their exempt character for VAT purposes.

The change means that insurance companies that provided general insurance and which meet the VAT registration threshold will be required to be registered for VAT in Tanzania and they will be required to fulfil all the compliance requirements of a VAT registered person – issue tax invoices, procure and install electronic fiscal devices, determine their monthly VAT position, account for the VAT to the TRA, file monthly VAT returns etc. This administrative burden will require insurance companies to familiarise themselves with VAT compliance requirements. On the other hand other consumers will be required to dig deeper for the additional 18% VAT that will be levied on general underwriting, something they will not be too happy about.

These new changes mean that entities that offer financial services will be required to re-examine the services that they offer to determine whether these are VAT-able or exempt for VAT purposes. Once this is done, the next step will be to determine what impact the apportionment method will have on their business because the VAT that cannot be claimed will end being an operational cost. It is important to note that the exempt characterisation of the services is inherently linked to the service, their exempt characterisation will not change if they are offered by a non-financial institution.

With this change, the insurance companies engaged in general insurance business will now be eligible to claim (some of) the VAT incurred on their purchases. If an insurance company provides general insurance services, it will be allowed to claim all VAT incurred on purchases. If on the other hand the insurance company provides both general insurance and life insurance services (which are exempt for VAT purposes), it will only be eligible to claim a portion of this VAT using a formula provided for in the new Act. Even though the legislation does provide for one formula, the new Act gives the Commissioner powers to prescribe methods for suppliers of financial services to calculate the proportion of input tax that is reasonably attributable to the making of taxable supplies.

In the current legislation, there had been some confusion about the VAT treatment that should be accorded to the fees and other transaction charges that are usually levied when these core financial services are being provided. One argument was that the VAT treatment should follow the VAT treatment of the core services for which they are being charged. The new VAT Act has clarified that the ‘services of arranging for or facilitating’ any of the financial services will be subject to VAT. Since service providers who offer these financial services usually charge a fee, they will be required to register for VAT purposes especially if the turnover from these services meets the VAT registration threshold.


Real estate - Leasing of residential premises no longer subject to VATIn the new VAT Act, the sale of vacant land will be treated as exempt for VAT purposes but unfortunately the law does not define what constitutes ‘vacant land’. It is likely that this few words will be subject to varied interpretation between taxpayers and the TRA. In addition, the leasing of residential premises will also be treated as exempt when the new VAT Act takes effect. Under the current VAT legislation, the leasing of residential premises is treated as VAT-able and is subject to 18% VAT. This means that landlords who lease residential premises will be required to de-register from VAT and will no longer have to bear the administrative burden that comes with VAT compliance. It is important to note that the change only impacts residential premises, the leasing of commercial premises will continue being subject to VAT.

The initial sale of a newly constructed residential premises or a subsequent sale if the premises has been occupied for less than two years will be subject to VAT. However subsequent sales of residential premises will be treated as exempt for VAT purposes. This change is counterproductive; what the new legislation has given with the right-hand, it seems to have taken with the left-hand. The 18% VAT on newly constructed residential premises will negatively impact developers like National Housing Corporation (NHC) and Tanzania Buildings Agency (TBA) who will be forced to load the 18% onto their prices and may push affordable home ownership out of reach for many would be first-time home owners. It would have been better to exempt the entire residential housing segment from VAT to make decent home ownership a reality for many more Tanzanians.

Telecommunications – A blessing in disguise?Players in the telecommunication industry in Tanzania relies heavily on key distributors or dealers to sell prepaid vouchers to mobile phone subscribers. The supply-chain starts with the licensed telecommunication operators who sell airtime vouchers to these dealers who then sell these voucher to smaller distributors or to individual mobile phone subscribers. Introducing an exempt characterization of a supply made in this chain created a trap which meant that VAT was not borne by the final consumer. This is exactly what the current Act has done.

Under the current Act, the supply of prepaid mobile phone airtime voucher from a dealer to a mobile phone subscriber is treated as exempt for VAT purposes. The value of the prepaid airtime has been taken to be the face value of the voucher excluding VAT. However under the new Act:• the taxable value of the supply shall be the intended retail price

where a licensed operator supplies a prepaid product to a dealer.• the dealer shall be treated as having not acquired the product and

his onward supply of the prepaid voucher shall not be considered to be a supply for VAT purposes.

The new Act also recognises roaming services and acknowledges that where a non-resident person who has telephone contract in his country roams in Tanzania, such a supply would not be construed to have been in Tanzania. In addition, the supply of telecommunication services by a telecommunication operator to a non-resident operator shall be zero-rated, including calls that are terminated in Tanzania and the transmission of signals through Tanzania. In the Act that is to be repealed, the supply of telecommunication only qualified to be treated as exported (zero-rated supplies) where they were enjoyed outside Tanzania, which means that the subscriber has to use and enjoy the services outside Tanzania.


No payment of VAT under reverse charge mechanism VATUnder the current VAT legislation, VAT on imported services is required to be accounted for as output VAT and should be claimed as input VAT under the ‘normal rules’. What amounts to ‘normal rules’ has been the subject of acrimonious debate between taxpayers and the TRA. In some instances the TRA have been known to argue that there was a requirement to first pay the VAT on imported services before claiming the same as input VAT, even though this was not stipulated in the law. The new VAT legislation now clarifies the position.

The new VAT Act has retained the reverse VAT mechanism and clarified that there is no requirement to first pay the VAT before being allowed to claim it back. The provision is explicit that the VAT on imported services be accounted as output and input VAT in the same return, which should not have any cash or cash-flow implications for taxpayers. The new legislation has also confirmed that when head office recharges a Tanzania branch a management fee, the VAT-able value of recharge shall not include salary and wages paid to an employee of the head office and interest incurred by the head office. This means that the value of imported services subject to VAT will be reduced by the elements relating to salary, wages and interest from the head office. This is excellent news for branches operating in Tanzania that make exempt supplies and to whom the VAT on imported services was an outright cost. The exclusion means that their VAT costs in Tanzania could be significantly reduced depending on the magnitude of what constitutes the recharges from head office.

General VAT compliance - Partial exemption calculation limited to one methodThe VAT Act that is to be repealed afforded taxpayers who make both taxable and exempt supplies two methods for determining the VAT claimable on their purchases: the direct attribution method and the apportionment method. Taxpayers could elect to use either of these methods. The new VAT Act has done away with the direct attribution methods and taxpayers will now only have the apportionment method. The direct attribution method was particularly suitable to taxpayers who were able to identify and segregate specific aspects of their business into those making VAT-able and those making exempt supplies and in the process claim all the VAT incurred in making VAT-able supplies. Although onerous, this method allowed taxpayers to claim more input VAT compared to the apportionment method. However the new Act gives the Commissioner powers to permit another method based on the taxpayer’s industry.

On a positive note, the new Act has introduced a de minimus rule which should offer some relief for persons who make both exempt and taxable supplies. Under the VAT law that is to be replaced, a person who makes exempt supplies was required to restrict the VAT on his purchases irrespective of the percentage of exempt supplies. In the new Act however, where a person’s taxable supplies exceed 90% of his total supplies, he will not be required to do partial exemption and he will be allowed a credit for his entire VAT on his purchases. However if the taxable supplies do not exceed the 90% threshold, the taxpayer will be required to account for VAT on apportionment basis.


Item Old VAT Act New VAT Act

Veterinary The veterinary services and veterinary medicine, drugs and equipment were both characterised as exempt for VAT purposes

Veterinary medicine, drugs and equipment will continue being characterised as exempt for VAT purposes

Petroleum products Heavy Furnace Oil (HFO), Industrial Diesel Oil (IDO) and AVGAS were characterised as exempt for VAT purposes

These will now be subject to VAT at 18%

IT industry Computers, printers, parts and accessories were characterised as exempt for VAT purposes

These will now be subject to VAT at 18%

Transportation Transport of persons was exempt, but air charter, taxi cabs, rental cars, boats and boat charters were subject to VAT

Transport of persons remains exempt, and taxi cabs, rental cars, boats and boat charters continue being subject to VAT. Air charter now becomes exempt

Supplies to Bank of Tanzania

The importation by or supply to the Bank of Tanzania of goods or services which are solely to be used in the performance of its statutory functions enjoyed 45% VAT relief

The 45% relief has been abolished and these will now be subject to VAT at 18%

Bad debts Claiming VAT on bad debts was not allowed The new Act allows taxpayers to make adjustments in the VAT position for the VAT element relating to bad debts, subject to certain conditions being met

Insurance proceeds A receipt of insurance compensation was not subject to VAT

Taxpayers receiving insurance compensation for VAT-able items will be required to make an adjustment in the VAT position to reflect the 18% on the proceeds

Adjustments for errors Adjustments for errors were allowed under regulations and one was required to notify the Commissioner

The Minister will make regulations allowing for the adjustments of minor errors

Summary of key VAT changes

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Tanzania Budget Insight 2015 Diving deep · 2015-06-14 · Budget Insight 2015 | 5 Financial sector...

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Transcript of Tanzania Budget Insight 2015 Diving deep · 2015-06-14 · Budget Insight 2015 | 5 Financial sector...