Taxation Policy

One of the key issues for the business community in Tanzania — not only American companies investing and working here but across the board — are issues relating to tax policy. As members of the Tanzanian Private Sector Foundation, we fully support the analysis and recommendations that follow:

ANALYSIS OF THE VAT BILL 2014 BY THE PRIVATE SECTOR

PART I: GENERAL COMMENTS

• More time needed for wider consultations. The most appropriate commencement date should be 1 July 2015.
• There is a requirement in the Bill for Government entities to be registered for VAT (Section 31 (2)). This implies that all fees, charges, levies and taxes payable to Government entities e.g. BRELA, TCRA, TFDA, TBS, TCAA etc will now be subject to VAT. This will add cost of doing business. This proposal should be excluded from the Bill.
• Exclusion of special economic schemes such as TIC, EPZ/SEZ. Also all past agreements, arrangement, and exemptions are not mentioned in the exemption Schedule. Are they now taxable? (Section 6 of the VAT Bill 2014)
• Complex rules on capital goods acquisition (Section 11 of the VAT Bill 2014).
• VAT registration threshold not stated.
• The provision on export of goods is not clear (Section 58).
• There is no proper link on transactions between Mainland Tanzania and Tanzania Zanzibar for VAT purposes (is Zanzibar treated as foreign country for VAT purposes?)
• Refund period have been extended from 30 to 90 days under Section 87 of the VAT Bill 2014. The time period should be reduced to 30 days as it is in the existing VAT Act given the fact the Bill provides for special arrangements i.e. Commissioner General to have an account for payment of refunds.
• Removal of price discounts (Section 13(3)) at the time of determining the consideration for supply is not appropriate
• In the exemption schedule, it must be clarified whether Part I applies to both locally and imported supplies since there is Part II which specifically exempt imports.

PART II: SECTOR ANALYSIS
1. AGRICULTURE
a. Tanzania Horticulture Association (TAHA) Issues

• The proposed exemption list under item 3 of part I to the exemption Schedule (page 81) contains only 27 agricultural inputs. Some important items have been left out – such as irrigation equipments. Excluding these important inputs from exemptions will require farmers to import these inputs at very high costs which will be reflected in the prices of their products hence making the Tanzania horticultural products less competitive in the global markets and even less affordable in the local markets

Recommendations:

• Include the following items in the exemption Schedule
• Irrigation and water harvesting equipment and other high tech inputs
• Special planting material tools including plastic bags and seed trays
• Materials for construction and expansion of farm infrastructures including greenhouses
• Packaging materials of all kinds
• Planting materials to include seeds for sowing.

b. Tanzania Milk Processors Association (TAMPA) Issues

• Milk processing in Tanzania is lagging behind compared to other EAC countries
• The Government had promised to support the dairy sector and announced a number of VAT exemptions in 2008, 2009, 2010 for equipment and machinery. In 2012 the Government decided to zero rate milk and milk related products produced by local producers from locally produced milk.
• As a result of this decision, the industry managed to increase milk processing from 112,500 litres to 155,000 per day (an increase of 20% by June 2014).
  The VAT Bill 2014 does not recognize the exemptions earlier granted and the zero rating status which will discourage production of processed milk.

Recommendations:

• The definition of a zero rate in the new VAT Bill 2014 should include milk and milk related products produced by local producers from locally produced milk.
• Milk processing equipment and machinery should be added in the list of exempted items.

c. Tanzania Grain Millers Association Issues

• The proposed exemption list under item 3 of Part I to the exemption Schedule have left out some basic food stuffs.
• All type of milled flour be maize and wheat as well as rice.
• Introduction of VAT on food stuffs (rice, maize flour and wheat flour) will drive inflation and cost of living.

Recommendation

• Maintain the status quo by including the following items in the schedule:
  • Rice HS Code 10.06
  • Grain sorghum 10.07
  • Maize flour HS Code 11.02
  • Wheat flour HS Code 1101.0000
  • Millet and other cereals 10.08

 

2. FINANCIAL SERVICES

a. Tanzania Bankers Association (TBA)

Issues

• Narrow Definition of Financial Services
  Definition of financial services has only included traditional banking products e.g Loans, Letter of Credit etc. Effectively, this will narrow the exemption given to financial services. We also note that the definition does not explicitly mention “foreign exchange” which is a significant portion of banking services income. We would like to see this mentioned categorically to remove any ambiguity during TRA inspections. Banking services have evolved to include mobile transactions e.g Banks act as agents to Mobile companies to sell air time and receive commission. This is not seen in the definition and will mean that we have to raise invoices and load VAT. This may not be practical. The Bill also provides for banking fees and commissions to be subjected to VAT. This will make the bank services even more expensive thus kill the Financial Inclusion Spirit. Finance leases and sale of property as security are also proposed to be vatable.

• Insurance services
  Insurance services (other than life) are no longer exempt. If this is not clarified then all the money that banks charge on insuring personal loans may mean that VAT could be applicable. Insurance services (houses, vehicles etc) are necessities thus loading VAT will make them un‐affordable.

Recommendations:

• Expand the definition of Financial Services to make all of them exempt for VAT purposes. This will be consistent with practice in a number of other jurisdictions (ref Part II of the exemption Schedule in the VAT Act of Kenya). In case the aim is to charge VAT on some of the financial services then should consider removal of excise duty on money transfer. Charging Excise Duty and VAT on the same bank charges will discourage use of banks to transfer money. In addition, we also request that exchange of currency to be included under financial services definition.
• Include other insurance services (other than life) in the definition of financial services.

3. ENERGY, MINING, OIL and GAS Issues

• No special relief or VAT exemption available other than on goods that are imported for exclusive use in oil and gas exploration.
• Provisions on acquisition of capital goods are complex and not clear.
• Conflict with terms of Mining Development Agreements (MDAs) and Production Sharing Agreements (PSAs).
• The time stipulated for VAT refunds under the Bill is now ninety days (90), this is too long.

Recommendation

• This sector is capital intensive and exemptions should be considered on both goods and services for mining and oil and gas.
• Acquisition of capital goods for this sector should be made easy.
• Agreements entered by the Government such as MDAs and PSAs should be recognized in the Bill so as to give them effect.
• The refund time should be reduced to 30 days as it is in the existing VAT Act given the fact the Bill provides for special arrangements i.e. Commissioner General to have an account for payment of refunds.
• Item 10 of Part II of the exemption Schedule should include services as a core activity of exploration. This should also include mining exploration.

4. HEALTH SECTOR
Association of Private Health Facilities in Tanzania

• The exemption on medical services has excluded services provided by funeral homes and registered ambulance service providers. We recommend this to be included.

5. TELECOMMUNICATIONS Issues

• Mobile Financial Services are not included in the definition of telecommunication services under the Bill.
• There is still some confusion on supply between telecommunication providers that registered in Mainland Tanzania or in Tanzania Zanzibar (Inter‐carrier telecommunication services‐section 66)
• The Bill is proposing to charge VAT on computers. This may affect demand for internet services. Recommendation
• Definition of telecommunication services to be expanded to include Mobile Financial Services (e.g. MPESA, TIGOPESA, AIRTELMONEY e.t.c.)
• Supplies between telecommunication providers should be zero‐rated to remove the current confusion involving Mainland Tanzania and Tanzania Zanzibar
• Computers should be added to the exemption Schedule

6. MANUFACTURING AND OIL MARKETING Issues

• No relief on capital goods – contradiction with TIC and EPZ / SEZ? (See General Observations above)
• Removal of price discounts and rebates (Section 13(3)) at the time of determining the consideration for supply is not appropriate

Recommendation

• This sector is capital intensive and exemptions should be considered on capital goods. Alternatively, acquisition of capital goods for this sector should be made easy (section 11 makes it very complex).
• Price discount should be recognised. This is important to allow businesses to compete and therefore thrive.

7. TOURISM AND HOSPITALITY Issues

• The exemptions on tourism services provided in the current VAT Act are proposed to be removed in the VAT Bill.
• Multiple fees, charges and levies currently payable by the tourism sector will also be subjected to VAT (32 different taxes, levies, licences etc)
• Due to the dynamics of the industry, sufficient time is needed to introduce any price change (minimum 24 months).

Recommendation

• Charging VAT on top of the multiple fees charges and levies e.g. Park entry fees will significantly add to the cost of doing business. This proposal should be excluded from the Bill.
• Tourism services (tourist guiding, game driving, water safaris, tourist hunting, animal or bird watching, park fees, tourist charter services and ground transport) should continue to be exempted from VAT. Making them subject to VAT will result into becoming uncompetitive. We should learn from Kenya and Uganda experiences.

8. TRANSPORT (LAND AND AIR) Issues

• The exemptions on Aircraft, Aircraft engines, parts and maintenance and lease of aircrafts provided in the current VAT Act are proposed to be removed in the VAT Bill.
• Lease of aircrafts is now being proposed to be subjected to VAT.
• The Bill proposes to charge VAT on rental transportation such as aircraft charter, boat charter, taxi cabs etc regardless of the purpose e.g. tourism, emergencies, medical etc
• Multiple fees, charges and levies currently payable by the aviation sector will also be subjected to VAT (150 different taxes, levies, licences etc)

Recommendation

• Aircrafts, aircraft engine and aircraft parts should qualify for exemption. These are high value items and charging VAT in addition to purchase cost will not be manageable.
• Lease of aircraft should continue to be exempt from VAT as most leases will be from outside the country and imposing VAT (to be charged at the time of importation) will increase the lease costs. Given the fact that currently there is also excise duty of 20% on the importation of aircraft and withholding tax of 15% on lease of aircrafts from outside the country.
• Transportation of persons whether scheduled or on‐hire (charter, taxi cabs etc) are necessities and therefore should generally be exempted from VAT.
• We propose that item 16 of Part I to the exemption Schedule to read as “The transportation of persons, by any means of conveyance”.

9. CONSTRUCTION INDUSTRY Issue

• Contractors and service providers in the construction sector find it very difficult to manage VAT payments after completion of their projects. VAT payments have to be made under the current VAT Law by the contractors one month after the issuance of certificates in order to avoid penalties, but delays in payment by the Government make it difficult to meet the required payments.
• Sections 69 and 70 of the VAT Bill 2014 contain the same requirements that contractors will have to submit VAT returns and pay tax within 30 days from the end of the months in which certificates will be issued even if no payments are received from the Government.

Recommendation

• Contractors and service providers should be required to pay VAT within 30 days from the date on which they receive payments from the Government.