Value Added Tax

4/20/2009

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TAXATION

AC 321B

Value Added Tax

4/20/2009 1© Sando, James Mahanga

Value Added Tax (VAT)

• Introduction

• Advantages of VAT

• Shortcomings of VAT

• Basic principles of VAT in

Tanzania

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• Introduction

– VAT was introduced on July 1, 1998.

– It partially replaces sales tax, stamp duty, hotel levy and entertainment tax

– Value Added Tax is a broad-based consumption tax

– It is charged on a wide range of goods and services and on imports (taxable supplies)

– Unlike sale tax it is levied at every stage in the production and distribution chain.

– The tax base is the value added (incremental value) to goods and services.

– The rate of tax is 20% standard rate or zero rate.

– The tax is collected and paid by VAT registered traders who remit it to the revenue authorities monthly.


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– VAT has been introduced as a tax reform measure.

– The tax has several advantages over sale tax from the point of

view of the government, business and the consumer.

– Broad tax base

1) In view of the broad tax base revenue yield is generally

higher and stable and is less susceptible to fluctuations.

Increased revenues are the major goal of VAT.

2) The tax has some elements of self-checking mechanism to

minimize evasion. One person’s out tax becomes the input

tax of another. VAT facilitates cross checking of sales

between traders.




– Broad tax base

3) As the tax paid on purchases of inputs if fully creditable it does not form part of the cost of business. Consequently, the tax does to some extent not influence business decisions. It creates a conducive climate for investors.

4) Zero rating provision encourages exports because the tax on exports is refundable in a transparent and simple manner. Zero rating ensures that exports enter the international market free of tax to make them more competitive.




– Broad tax base

5) Administrative advantages: VAT is relatively less complex than sale tax. There is no multiplicity of tax rates. The registration threshold eliminates small business to minimize administration costs. Culture of maintaining business records is encouraged for proper assessment of the tax.

6) Because of the wider tax base rates are likely to be generally lower

7) Lower tax may be payable by consumers as “no tax on the tax” effect is possible with VAT (cascading effect)


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– Broad tax base

8) VAT partly eliminates attempts by businessmen to split up

their businesses below the threshold in order to avoid the

tax because the tax paid on inputs is still payable and it can

not be claimed.


1) Regressivity:

• Like all other indirect taxes VAT is regressive. Regressivity

is partially minimized by exempting most essential

consumer items like food and health supplies and the

continued use of the more progressive direct taxation.




2) Inflationary

• If sufficient precaution is not taken during the

introduction of VAT inflation is likely to occur as prices

and wage rise.

• Because some goods and services will be taxed at the

lower or higher VAT rate than the previous sales tax

rate inflation may not necessarily follow the

introduction of VAT.

• Some of the precautionary measures against possible

inflation following the introduction of VAT are:




2) Inflationary



– Sales tax paid on business stocks at

commencement of VAT is set off against VAT

payable in the first month of VAT regime. The set

off removes double taxation on opening business

stocks at the commencement of VAT.


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2) Inflationary



– Conduct intensive public educational programme

to inform businesses and consumers the expected

effects of VAT on the general price level.

3) Business records keeping

• The claim that small business may find it difficult to

maintain the required VAT records may be

exaggerated.




3) Business records keeping

• Proper business records are necessary for all

businesses.

• Adequate records are required for other taxes too

such as income tax

• It is more important to note that only businesses

with Tshs.20 million or more turnover are required to

register for VAT.

• This threshold excludes most of the small businesses

from registration.



• Basic Principles of VAT in Tanzania

– Scope of VAT

• VAT is charged on:

– The supply of goods and services in Mainland Tanzania

made by any taxable person in the course of or furtherance

of his business. The supply of goods and/or services must

qualify as a “Taxable supply”

– The importation of goods and services by any person into

Mainland Tanzania. The importer need not be registered

for VAT purposes.


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– VAT Rate Structure

• VAT is charged at either 20% standard rate or zero

rate.

• Tanzania has opted for the single rate of 20%

standard rate because a multiple rate structure

complicates the administration of the tax leading to

extra compliance cost.

• The government has elected the use of exemptions

against the multiple rate structure in order to realize

specific social objectives





• A single rate structure keeps the tax system simple

• It has the following advantages:

1) A single tax rate system minimizes compliance costs, as tax

administration is kept simple. The more the tax rates the

higher the compliance costs and lower revenue yield.

2) The choice of consumer items and production inputs is

neutral because the effective rate of tax is the same for all

taxable supplies. As a result there is no incentive for

substituting the high tax supplies in favor of lower taxed

supplies.





• It has the following advantages:

3) A single rate structure avoids taxpayer attempts to forge tax

returns and misclassify supplies in order to evade tax

because all supplies are taxed at an uniform rate of tax.

4) It reduces the number of refund claims as inputs are taxed

at the same rate as outputs. Where inputs are taxed at a

lower rate than outputs many refund claims are likely to

arise. Such as a situation will tie up tax management

resources administering the refunds instead of

concentrating on resources to increase revenue collection.


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• Where VAT has been paid in Zanzibar and the rate is

equal to the rate in Mainland Tanzania tax shall be

deemed to have been fully paid on the affected

taxable supplies of goods and services.

• However, if the VAT rate in Zanzibar is lower than that

in Mainland Tanzania the difference has to be paid to

Mainland Tanzania at the point of entry of the goods

into Mainland Tanzania.





• This provision means that goods and services

imported from Zanzibar into Mainland Tanzania are

subjected to VAT. Zanzibar is thus treated as a foreign

country.

– Application of VAT

• VAT is a multi-stage indirect tax.

• It is levied by taxable persons on their taxable

supplied made out and deduct the amount of VAT

charged on inputs (supplies received by the business)





• The balance is then paid or repaid to or from the

revenue authority.

• In other words the VAT agent pays the tax on his

purchases and charges or collects tax on his sales and

pays or remits the net amount to the government.

• The tax charged on sales is called “Output tax” while

tax charged on purchases including imports is

referred to as “Input tax”


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• These two concepts are fundamental features of the

VAT system

• The netting off mechanism ensures that cascading or

the phenomenon of “Tax on tax” is avoided because

the value added only at each stage of production and

distribution is taxed only once.

• Therefore, the value of goods and services at the

point of supply to the final consumer represents the

aggregate of all incremental values added by

successive businessmen





• Similarly, the tax paid by the final consumer also

represents the aggregate VAT paid by successive

businessmen

• The final consumer bears the full tax as he has no

opportunity to sell to another person.

• The tax on the supply of goods and /or services is

generally the liability of the person making the

supply.

• The tax is normally payable at the time of supply.





• When an agent supplies the goods and/or services he

is liable to pay the tax on behalf of his principal.

• Where a taxable person in Mainland Tanzania makes

a taxable supply directly to a person in Zanzibar the

Mainland’s tax authority will collect the output tax

from the supplier in the Mainland and remit in

Mainland Tanzania will deal with the Mainland tax

authorities only.

• Please note that Zanzibar and Mainland Tanzania

have separate VAT legislations


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– Supplies

• A taxable supply is a supply of goods and/or services

made in Tanzania other than an exempt supply.

• Zero rated supplies are taxable supplies.

• A “supply” is generally anything done for a

consideration i.e. whether supply of physical goods or

services rendered.

• The most common type of supply is a sale of goods or

services made in the course of carrying on a business.




– Supplies

• Although there is no clear distinction between a

supply of goods and a supply of services the law

makes it clear that anything that does not constitute a

supply of goods but is done for a consideration is a

supply of services.

• There are three major types of supplies

– Taxable supplies including zero rated supplies and special

relieve.

– Exempt supplies

– Supplies which are outside the scope of VAT.




– Taxable Supplies:

• Taxable supplies are defined as “any supply of goods

and or services made by a taxable person in the

course of or in the furtherance of his business.”

• The list of taxable supplies includes the following:

– Gaming and betting of any kind such as gaming machines,

lotteries, bingo, horses racing etc.

– Gifts or loans of goods

– Appropriation of goods for personal use or consumption

– Barter trade and exchange of goods

– Processing or treating of another person’s goods


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• The list of taxable supplies includes the following:

– Supply of power, heat or ventilation

– Leasing or letting of goods on hire

– Anything done for a consideration

• A zero rated supply is a taxable supply but it is

chargeable at zero rate





• The tax on the registered businessman’s transaction is

zero (nil output tax) but he is entitled to a refund

claim of his tax paid on his purchases (input tax)

unlike exemptions which provide a partial relief of

tax, zero rating offers a complete




– The time of Supply

• The time of supply or tax point is when the supply of

goods or services is treated as having taken place.

• It is the date on which the tax on the taxable supply

(ies) becomes chargeable or due and payable.

• A taxable person must account for VAT in the

prescribed accounting period in which the supply

occurs.


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– Place of Supply

• The place of supply determines where the VAT

liability arises.

• Goods are deemed to be supplied in Mainland

Tanzania if they are supplied within the country or if

they are assembled or installed within the country.




– Place of Supply

• Services are deemed to be supplied in Mainland

Tanzania if the supplier has a place of business within

Mainland Tanzania and nowhere else or the supplier

is normally resident in Tanzania or the supplier has

several places of business Mainland Tanzania and

elsewhere but the place of business most concerned

with the supply of the service is in fact Mainland

Tanzania.


Value Added Tax (VAT)• Basic Principles of VAT in Tanzania

– Value of Supply

• The value of a supply depends on whether or not it is

for monetary consideration.

• Where the consideration is not monetary or is partly

for monetary and partly non-monetary value the

open market value constitutes the taxable value.

• The “open market value” is deemed to be:

– The value at which the goods or services would fetch in the

ordinary course of business where the supplier and the

purchaser are not related (independent of each other) the

law sets out specific assumptions in the determination of

market value.


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– Value of Supply

• The “open market value” is deemed to be:

– The supply is treated as delivered to the recipient at the

supplier’s place of business

– The recipient will bear freight, insurance and other costs

incidental to the supply and delivery of the goods.

– The supplier will bear any duty or tax (except VAT) and the

value covers the right to use the patent, design or

trademark in respect of the supply.



– Exempt Supplies

• Where a supply of goods or services is exempt from VAT

no tax is chargeable on it.

• The supplier of an exempt good or service can not charge

VAT on these supplies to his customers.

• Exemption from VAT means that VAT incurred on business

purchases used in the production of the exempt supplies

can not be reclaimed.

• Exemption also means that where all output supplies are

exempt from VAT the businessmen can not register for VAT

and therefore no reclaim of VAT on inputs may be made.



– Exempt Supplies

1. Food, crops and livestock supplies

2. Pesticides , fertilizers etc

3. Health supplies

4. Educational supplies

5. Veterinary supplies

6. Books and newspapers

7. Transport services

8. Housing and land

9. Finance and insurance


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– Exempt Supplies

10. Water

11. Funeral services

12. Crude oil and petroleum products

13. Agricultural implementations

14. Tourist services and tourist charter services

15. postal supplies

16. Aircraft maintenance



– Supplies which are outside the scope of VAT

• Unlike zero rated and exempt supplies there is no

comprehensive or statutory list of supplies that is

outside the scope of VAT.

– The sale of a business as a going concern

• Where the assets of a business are sold or transferred

the transaction generally constitutes a taxable supply

for VAT purposes



– Special Reliefs

• The list of special reliefs is in the Third Schedule.

• The supplies eligible for the special reliefs are taxable

but the tax is remitted because of the social or

economic status of the individuals or organization

concerned.

– Taxable Persons and VAT Registration

• A taxable person is one making taxable supplies or

intending to make taxable supplies


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– VAT registration and de-registration

• A person is required to register for VAT if his annual

taxable turnover exceeds Tshs.20 millions in a year.

• In determining the taxable turnover he must

aggregate the taxable turnovers of all his businesses

carried out under the same legal entity including both

standard rated and zero rated supplies.

• Registration must be completed within 30 days after

incorporation and becoming liable for registration.




• The certificate of registration and his taxpayer

identification number (TIN) and VAT business, the

date of registration number.

• The certificate must be displayed conspicuously at

the principal place of business.

• TIN and VAT registration numbers must be quoted in

all returns

• Registration is required where a person is eligible for

registration




• There is no provision for group registration of

companies.

• Each company within the group must register

separately.

• Registration is a statutory requirements

• It is not voluntary or contingent upon realization of

taxable turnover in excess of the registration

threshold.


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• Where an investor is registered for VAT purposes the

VAT payable on any capital goods imported or

purchased locally is deferred to the date of

commencement of production.

• The VAT deferral is applicable whether or not the

investor holds a certificate of investment under the

Tanzania Investment Act, 1997




• De-registration: Section 21 provides that any person

who ceases to be liable for VAT registration is

required to notify the Commissioner for VAT (C-VAT)

within 30 days after ceasing to be liable.

• Failure to do so is an offence which is liable to a fine

of Tshs.50,000 upon conviction by a competent court

of law.

• If the C-VAT is satisfied that a person is no longer

required to be registered he may cancel the

registration and notify the taxpayer accordingly.




• Obviously the C-VAT will only cancel the registration

after ensuring that any outstanding VAT on supplies

or closing stocks is fully paid.

– Disclosure and Accounting for VAT

• VAT must be accounted for at the time of supply.

• In order to account for the tax appropriate accounting

records must be maintained for at least five years.

• The return must be filed on or by the last day of the

month following the end of a prescribed period.


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– Disclosure and Accounting for VAT

• The return must contain information on the supply of

goods and services made by him or to him, imports,

tax deductions or credits and clearly show the net tax

payable or repayable.

– The Tax Invoices

• When a person supplies goods or services to another

person he must issue a tax invoice.

• This is a document containing information on what is

sold, the output VAT, TIN, and VAT registration

numbers of both the supplier and customers etc.



– The Tax Invoices

• The tax invoice must be supplied within 14 days of

making the supply

• Where the output tax exceeds the input tax payment

must be made to the Commissioner.

• In the case of a repayment i.e. the input tax exceeds

the output tax on supplies for the prescribed period

the Commissioner will refund the amount.



– Calculation of VAT

• Output tax is VAT charged to customers on all taxable

supplies during the prescribed period of one month.

• The tax is not necessarily collected immediately in

cash because some of the sales are on credit

• Input tax is VAT paid on all goods and services

supplied to a taxable person during a prescribed

period of one month.


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– Calculation of VAT

• It may include input tax paid in Zanzibar if the goods

are imported into Mainland Tanzania for use in

business as well as the input tax on goods or services

imported from overseas other than Zanzibar.

• The VAT claimed must be evidenced by a tax invoice

which must not be more than twelve months old.

• The input tax can only be fully claimed if all the

supplies are taxable supplies i.e. all the supplies are

standard or zero-rated

• If this is not the case the input tax requires

apportionment



– Input Tax Restrictions

• The input tax may be restricted in relation to sales or

purchases.

• Input tax can not generally be claimed on motor

vehicles constructed for over one up to 12

passengers, under 3 tons and not considered a special

purpose vehicle and on entertainment expenses.

• Where the business has exempt supplies as well as

taxable supplies the input VAT reclaims will be

restricted in relation to the sales.

• A business with wholly exempt supplies can not claim

any input tax




– Documentary proof required to support deduction

of input tax

• A deduction of input tax can be made in respect of

supply only if:

– Tax invoice has been provided in relation to the supply and

has been retained as a record by the recipient as at the time

the VAT return is furnished

– In the case of the input tax on the importation of goods a

customs single bill of entry is produced as the documentary

proof and the extend of how it applies to the taxable supplies.


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–Methods of apportionment of input tax

• Where goods or services are acquired partly for

consumption, use or supply in the course of making

taxable supplies and partly for other purposes, it will be

necessary for a taxable person to apportion the full

amount of VAT charged to him on the acquisition of the

goods or services in order to determine what portion of

the full amount of VAT qualifies as deductible input tax.





• There are two methods of apportioning input tax

however, a taxable person may choose to use either

method, but once a method has been used in any

lodged return, the same method must be used

thereafter in any return lodged in the same accounting

year.





• First Method

1) Calculate the value of taxable supplies made in the

prescribed accounting period

2) Calculate the value of all supplies made in that period

3) Calculate the amount of tax payable on supplies made to

the registered person in that period. (Total Input Tax)

4) Divide the amount (obtained in step 1 for the period) by the

amount obtained in step 2 (the value of all total supplies

made in the period)


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• First Method

5) The amount of input tax to be claimed as a deduction or

credit in the prescribed accounting period is the product

obtained by multiplying the amount obtained in step 3 by

the amount obtained in step 4





• Second Method

1) Divided input tax for the prescribed accounting period into

categories viza . C a t e g o r y A : I n p u t t a x t h a t i s d i r e c t l y a t t r i b u t a b l e t ot a x a b l e s u p p l i e sb . C a t e g o r y B : I n p u t t a x t h a t i s d i r e c t l y a t t r i b u t a b l e t oe x e m p t s u p p l i e s ( t h i s h a s b e e n a m e n d e d i n 2 0 0 0 )c . C a t e g o r y C : I n p u t t a x t h a t i s p a i d f o r t h e p u r p o s e s o ft h e b u s i n e s s b u t i s n o t d i r e c t l y a t t r i b u t a b l e e i t h e r t ot a x a b l e o r e x e m p t s u p p l i e s4/20/2009 © Sando, James Mahanga 53

Value Added Tax (VAT)T h e T a x a b l e p e r s o n i n d i c a t e s t h r o u g h h i s r e c o r d s t h a t d u r i n g t h e m o n t h o f J u n e 2 0 0 5 , V A T w a s p a i d o n h i sp u r c h a s e s a s f o l l o w s :NO ITEM VALUE VAT TSHS. VAT INCLUSIVE TSHS.

a Sugar 50,000 10,000 60,000

b Cooking Oil 75,000 15,000 90,000

c Laundry Soap 60,000 12,000 72,000

d Transportation of whet Flour & Maize 10,000 2,000 12,000

e Bags of re-packing wheat 12,500 2,500 15,000

f Tax invoice books 37,500 7,500 45,000

g Electricity 10,000 2,000 12,000

h Telephone 12,500 2,500 15,000


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Value Added Tax (VAT)A l s o d u r i n g t h e s a m e m o n t h s , , t h e t a x a b l e p e r s o n s u p p l i e d g o o d s w i t h t h e v a l u e s i n d i c a t e d b e l o wNO ITEM VALUE VAT TSHS. VAT INCLUSIVE TSHS.

a Sugar 60,000 12,000 72,000

b Cooking Oil 90,000 18,000 108,000

c Laundry Soap 80,000 16,000 96,000

d Toilet Soap 100,000 20,000 120,000

e Wheat Flour 40,000 Exempt 40,000

f Maize Flour 30,000 Exempt 30,000

Use the two methods to compute the VAT Amount to be paid or claimed


Value Added Tax (VAT)F i r s t M e t h o dStep 1 : The Value of Taxable supplies made is

a sugar 60,000

b Cooking oil 90,000

c Laundry soap 80,000

d Toilet soap 100,000T o t a l 3 3 0 , 0 0 0Step 2: Value of all supplies made is

e Sale of wheat flour 40,000

f Sale of maize flour 30,000T o t a l ( S t e p 1 a n d 2 ) 4 0 0 , 0 0 04/20/2009 © Sando, James Mahanga 56

Value Added Tax (VAT)F i r s t M e t h o dStep 3 : Tax payable on supplies made to the registered person

a sugar 10,000


c Laundry soap 12,000

d Transportation of wheat flour & maize 2,000

e Bags for re-packing wheat flour 2,500

f tax invoice books 7,500

g electricity 2,000

h telephone 2,500T o t a l 5 3 , 5 0 0S t e p 4 : 3 3 0 , 0 0 0 d i v i d e b y 4 0 0 , 0 0 0 = 0 . 8 2 5S t e p 5 : A m o u n t o f i n p u t t a x t o b e c l a i m e d i s 5 3 , 5 0 0 x 0 . 8 2 54/20/2009 © Sando, James Mahanga 57

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Value Added Tax (VAT)S e c o n d M e t h o d S t e p 1 : a . C a t e g o r y A : I n p u t t a x d i r e c t l y a t t r i b u t a b l e t o t a x a b l e s u p p l i e sa sugar 10,000


c Laundry soap 12,000T o t a l 3 7 , 0 0 0b . C a t e g o r y B . I n p u t T a x d i r e c t l y a t t r i b u t a b l e t o e x e m p t s u p p l i e sd Transportation of wheat flour and maize 2,000

e Bags for re-packing wheat flour 2,500T o t a l 4 , 5 0 0c . C a t e g o r y C : I n p u t t a x p a i d f o r t h e p u r p o s e s o f t h e b u s i n e s s b u t i s n o t d i r e c t l y a t t r i b u t a b l e e i t h e r t ot a x a b l e o r e x e m p t s u p p l i e r sf Tax invoice books 7,500

g Electricity 2,000

h Telephone 2,500T o t a l 1 2 , 0 0 04/20/2009 © Sando, James Mahanga 58

Value Added Tax (VAT)S e c o n d M e t h o d S t e p 2 :a Input tax in Category A 37,000

b Input tax in Category C 12,000T o t a l 4 9 , 0 0 0D e d u c t i b l e I n p u t T a x :•

R a t i o o b t a i n e d u n d e r s t e p 4 o f t h e f i r s t m e t h o d i s 0 . 8 2 5•

M u l t i p l y b y t h e i n p u t t a x o n c a t e g o r y “ C ” T s h s . 1 2 , 0 0 0•

0 . 8 2 5 x 1 2 , 0 0 0 = 9 , 9 0 0A m o u n t t o b e c l a i m e d i s T s h s . 3 7 , 0 0 0 + 9 , 9 0 0 = 4 6 , 9 0 0Note:

•The second method of apportionment was amended by the VAT (General Amendments) Regulations 2000

•Input tax attributable directly to exempt supplies can not be included in the calculation and is not allowed

to be claimed.



– Offences, Penalties and Interest

• As in all tax legislation’s various types of non-

compliance errors, mistakes or omissions committed

by a taxpayer attract specific penalties.

• It is therefore in the interest of the taxpayer to

comply with the law as far as possible.

• Some of the major offences and the appropriate

penalties are stated 1 . F a i l u r e t o r e g i s t e r» The penalty if a fine not exceeding 200,000 or

imprisonment for a term not less than two months but

not exceeding twelve months


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– Offences, Penalties and Interest2 . F a i l u r e t o f i l e a V A T r e t u r n o r p a y t a x» The penalty for failure to file is a fine of Tshs.50,000 or

1% of the declared tax payable which is ever the

greater.3 . F a i l u r e t o i s s u e a t a x i n v o i c e / r e c e i p t» The penalty is a fine not exceeding Tshs.200,000 or

imprisonment for a term not exceeding twelve month

or to both such fine and imprisonment.4 . P e n a l t y f o r f r a u d u l e n t r e t u r n o r t a x e v a s i o n» Upon conviction, such person shall pay the tax which would have

been paid had the offence not been committed and in addition shall

pay fine of Tshs.2,000,000 or be imprisonment for a term of 2 years

or both.



• Read about interest on tax overpaid /refund

• Appeal

• Powers of the Commissioner VAT


Value Added Tax

Documents

Transcript of Value Added Tax