TOPIC: VALUE ADDED TAX (VAT) Reference VAT Act, 2014

Nature of Value Added Tax (VAT)

VAT is such that it follows supply chains of taxable goods and services. Means each party in a supply
chain of taxable goods or services pays VAT on his/her purchases; and when the person is a taxable
person, collects VAT on his or her taxable sales. These taxable sales include sales and purchases of
most goods and services.

VAT is the Value Added Tax. It is the tax which is charged on the value added of goods or
services at each stage of a business transaction and it is also collected on imports. The
business transactions involve the supplies of goods or services.
The VAT is paid by the final consumer. It is the consumer who bears the tax burden .The
taxable person deducts what he/she has paid as VAT when he / she was purchasing the
taxable supplies for the furtherance of his /her business. The tax paid by consumer is the
money of the government since the day or time she purchases goods or services. The tax on
purchases is Input tax. Output tax is the tax on sales. The difference between the two i.e.
output tax and input tax is what is payable to TRA or refundable to taxpayer.
For example a supply chain of mobile phones might include wholesale importers, other wholesaler
who buy from the importers, retailers and finally, the final users. At the stage of importation, the
importers pay VAT on imported mobile phones; The VAT is known as input tax as part of customs
taxes. But upon selling the mobile phone to other wholesaler’s importers charges VAT on sales
known as output taxes. The output taxes collected by the wholesaler importers are the input taxes paid
by the other wholesalers. However, the other wholesalers charge VAT when selling the mobiles to the
retailers, who also collect the output taxes from the final users.
The Taxable person in the chain of supply is required personally to remit the value added taxes
liability in a particular month to a revenue authority. The amount paid to the authority is the
difference between the output tax and input tax in that month.
Alternatively, the amount can be computed by applying the VAT rate on the difference between the
selling price before VAT and the purchases price before the VAT.Nevertheless, the total VAT paid by
all taxable persons in the chain of supply is equal to the input taxes paid by the final users.
Important Definitions

“Value Added Tax” means the tax imposed on taxable supplies or taxable imports, and
includes an interest, fine or penalty payable in accordance with the provisions of this Act ;(As
per Sec 2 of VAT Act, 2014)

‘’Taxable person’’ are traders either individual, partnerships, corporations or branches

registered to collect and pay VAT to the Tanzania Revenue Authority.
(As per Sec 2 of VAT Act, 2014)
means a registered person or a person who is required to be registered for value added tax
under this Act

“Input tax” Is the tax paid by taxable person when buying goods and services from the other
taxable person.
(As per Sec 2 of VAT Act, 2014)
in relation to a taxable person, means-
(a) value added tax imposed on a taxable supply made to the person, including value
 added tax payable by the person on a taxable supply of imported services; and
(b) value added tax imposed on a taxable import of goods by the person; and
(c) input tax charged under the law governing administration of value added tax applicable in
Tanzania Zanzibar; (Sec 2 of VAT Act, 2014)

“Input tax credit”

in relation to a taxable person, means a credit allowed for input tax incurred by the person;
(This happen for the case the input tax charged to a person become higher compared to the
output tax)

“Output tax” Is the tax collected by taxable person when selling taxable goods and services or
the tax chargeable on taxable supply
(As per Sec 2 of VAT Act, 2014)
in relation to a taxable person, means value added tax payable by the person in respect of-
(a) a taxable supply made; and
(b) a taxable supply of imported services acquired;

“Taxable supply” means-

Everything which is not exempt or outside the scope of VAT
(As per Sec 2 of VAT Act, 2014)
(a) a supply, other than an exempt supply, that is made in Mainland Tanzania by a taxable
person in the course or furtherance of an economic activity carried out by that person; or

(b) a supply of imported services to a taxable person who is the purchaser and acquires the
services in the course of an economic activity if had the supply been made in Mainland
Tanzania by a taxable person in the course of furtherance of an economic activity-
(i) it would have been taxable at a rate other than zero; and
(ii) the purchaser would not have been entitled to a credit for ninety percent or more
of the value added tax that would have been imposed on the supply;

‘’Economic activity’’ includes any activity of producers, traders and persons supplying
services including mining and agricultural activities and activities of professions, also the
exploitation of tangible or intangible property for the purpose of obtaining income there from
on a continuing basis.

“Zero-rated” in relation to a supply or import, means:

(a) a supply or import that is specified as zero rated under this Act; or
(b) a supply of a right or option to receive a supply that shall be zero-rated pursuant to the
provisions of this Act.

Example:
Consider the following table with missing values. The table traces a supply chain of tobacco
from farmer in Tabora to the retailers of Cigarettes in Mwanza.

Suppliers/Buyers Purchase or Selling price without VAT

Production Cost VAT Liabilities(Output
without VAT tax less Input tax)
Tshs Million Tshs Million Tshs Million
Farmers 200 200 0
 Manufacturers 200 600 108
Wholesalers 600 a 108
Retailers b 1,500 c
Smokers d e f

i. The farmer are to be exempted from VAT as unprocessed tobacco is exempt supply;
so no VAT liability.

ii. The manufacturer pays no input tax to the farmers but finished goods.i.e cigarette are
taxable supplies hence they collect output tax of Tshs 600 mill x 18% = Tshs 108
mill.

iii. The wholesaler of the cigarettes pay input tax of Tshs 108 mill to the manufacturer. If
they paid Tshs 108 mill to TRA from the VAT liabilities equals to output taxes less
input taxes, their output taxes will be Tshs mill so their selling price without VAT
‘’a’’ would be Tshs 1,200 mill (Calculated as Tshs 2016 mill divide by 18%)

iv. The selling price of the wholesalers are the purchase prices of the retailers so ‘’b’’ is
Tshs 1,200 million

v. The output taxes of retailers is Tshs 270 mill(Calculated as Tshs 1,500/18%) while its
input taxes is Tshs 216, therefore ‘’c’’ is Tshs 54 mill (Tshs 270 mill – Tshs 216
mill).

vi. Purchase price of smokers is Tsh 1,500 mill i.e ‘’d’’.The smokers do not sell
cigarettes to anyone else, so no VAT liability i.e ‘e’ and no VAT liabilities i.e ‘’f’’ as
they are not taxable persons.

vii. But the VAT paid by smokers to the retailers i.e Tshs 270 mill is equal to the taxes
paid by others I the supply chain i.e. Tshs 108 mill + Tshs 108 mill + Tshs 54 mill =
Tshs 270 mill

Classification of supplies
Supplies are grouped into taxable, exempt and supplies that are outside the scope of Value
Added Taxes.
The calculation of input taxes deductible depends significantly on these classifications
Moreover ,determination on when the trader qualifies for the registration or deregistration
depends on reaching a threshold of taxable supplies (i.e. Turnover above 100 mill).

i. Taxable supplies
Everything which is not exempt or outside the scope of VAT
These supplies include taxable sales, gift, loans of goods, importation of taxable goods and
services. Furthermore the taxable supplies are subdivided into standard rated supplies and
zero rated supplies.

Standard rated supplies (18%)

Refers to all those supplies which are taxed at the rate of 18% or at a reduced rate. And
technically it include all those supplies which are not zero rated supplies, exempted supplies,
nor those outside the VAT system. Take in to your minds that the list of standard rated
supplies is very huge.
Zero rated supplies (0%)
Refers to the situation in which the rate of tax applied onto supplies is zero.
Are the second type of taxable supplies which differ from the standard rated supplies on tax
rates; As said above that zero rated supplies are taxed at 0%. Consequently, zero rated
supplies bear no value added taxes.

List of Zero rated supplies (Some of them are as follows) Schedule of the VAT Act
 Exportation of goods and services from URT (United Republic of Tanzania) provided
that there is evidence of production of goods exported in URT upon the satisfaction of
the commissioner.
 Supply of goods, including food and beverages, for consumption or duty free sale on
air craft or ships on journeys to destinations outside the URT
 The supply of services which comprises of repair, maintenance, insuring, broking or
management of any foreign going ships or aircraft. etc
 The supply by local manufacturer of fishing nets and accessories and out boat engines
for fishing.

Example:
A newly established pharmacy was concerned with the classification of medicines as
it is keen to claim input taxes that they incurs every day. The pharmacy is buying its
products from a manufacturer at Pugu area. The Manager of the company quickly
downloaded the VAT Act, 2014 and went on the first schedule. Then he decided to
include sales drugs in determining VAT threshold. Comment on this treatment.
Answer:
The treatment was incorrect as only supplies of local manufacture of drugs are
classified as zero rated supplies.

Example:
A farmer was struggling with classification of his famous animal feedings ‘Majani
Makavu’ as known is Swahili or ‘Hay’. Advised by his friends he is convinced that
hay is unprocessed agriculture produce, therefore exempt supplies. Was the
classification right?
Answer:
No he was wrong, hay is specifically mentioned in the first schedule as zero rated
supplies to allow farmers to recover their input taxes.

Class review (Make sure you take you time to check these out)
Determine whether the following supplies are zero rated supplies or not
a) Supplies of Tanga fresh (processed milk)
b) Supplies of imported fertilizers to farmers

ii. Exempt supplies

Certain supplies of goods and services are exempt from value added taxes. Thus they
are supplied without taxes. Yet any input related to exempted supplies made are not
deductible while inputs incurred on purchasing zero rated goods are deductible.
Note: When a taxable person sells only exempt supplies, he is not required to register
for VAT even if the registration threshold limit is reached. Unlike for the sellers of
 Zero rated supplies who must register when their supplies exceed the VAT threshold
registration limit.

List of exempt supplies (Some of them are as follows) Schedule of the VAT Act
 Food, Crops and livestock supplies
 Pesticides, fertilizers etc
 Health Supplies
 Educational supplies
 Petroleum products
 Agricultural implemets

Example:
The financial services company had a turnover of over Tshs 20 Billion but not registered for
VAT yet the incurrence of VAT on purchasing goods and services has led to the argument
between board members whether or not to apply for the registration.Particularly the company
supplies banking and insurance services. Can the company save taxes through claiming input
taxes it pays on purchasing of its goods and services?
Answer:
As both supplies of banking and insurance services are exempted, the bank cannot register
or claim taxes. So the saving taxes through this way can be possible.

 Currently all of the financial institution have to be registered with the

VAT, so the financial institution should check on the near future if it
reaches the minimum VAT threshold so as to register itself for VAT.

Class review (Make sure you take you time to check these out)
Determine whether the following supplies are zero rated supplies or not
a) Supplies of Tanga fresh (processed milk)
b) Supplies of services related to mobile phones

iii. Supplies outside the scope of VAT

A supply is outside the scope of VAT system if it results from an activity which is not
an economic activity. For instance, salaries, other government taxes, appropriation of
cash from businesses and other supplies made by non-VAT registered traders. There
is no list of supplies which are outside the scope of VAT.

‘’VAT relief’ ’is a tax relief granted to bodies and persons due to;
 Government policy to improve economy; encourage investment, exports or infrastructure.
 Social and economic reasons – by relieving items like food, healthcare and education.
 Difficulty in administration – It is costly to trace the small traders and tax the financial
services.
(Find the list of special relief supplies and imports on the Schedule of VAT Act, 2014)

Example
Examine the following transactions and decide if you, can claim VAT special relief under the
third schedule.
a) Importation of car
b) Importation of tractor trailer
c) Importation of capital goods
Answer:
a) No relief is provided on importation of car under the third schedule
b) Yes, importation of tractor trailers has 100% VAT special relief.
c) The importation of fertilizers is also exempt

TYPES OF VAT
There are three types of VAT namely:
(i) Consumption type
(ii) Income type
(iii) Gross produced

(i)Consumption type:
Under consumption VAT all supplies of goods and services including purchases of capital
goods are taxable and their input taxes are deductible in the period of acquisition.Capital
goods purchased are treated like any other purchases of input i.e. Full credit of input tax
are given. This type of VAT is practiced in Kenya, Uganda, Tanzania, Singapore and
South Africa.

(ii) Income type:

Input tax paid on the purchases of capital a goods is spread over the life span of the
products or Assets. The input tax credit with capital purchases against the liability in a
particular tax period will take into account the depreciation portion only. This type of
VAT is practiced in Argentina and Peru.

(iii) Gross product type or Production:

It recognize only revenue transactions and totally disallow input taxes deduction on
capital goods.This kind of VAT discourage investment because the VAT paid on the
purchases of fixed assets is not refundable. Completely denies input tax deduction on
capital goods against the firm VAT liability. VAT is computed by subtracting from the
firms sales only purchases apart from capital goods. This type of VAT is practiced in
Finland, Morocco and Senegal.

METHODS OF CALCULATING THE CONSUMPTION TYPE OF VAT

There are three methods of calculating the consumption type of VAT
(i) Credit (invoiced based) method.
(ii) Subtraction (accounts based) method.
(iii) Additional method.

(i) Subtraction method: This is the most favoured method where by the net VAT
liability is computed by deducting the tax on purchases (input tax) from tax on sales
(output tax) for each tax period. The tax on sales must be shown separately on all
invoices to provide documentary evidence for credit claim by registered traders.

(ii) Credit method/The invoice method: Under the tax credit method, a taxpayer is
allowed to deduct all deductible taxes paid (and payable)from all taxes collected
 (and collectible) in the respective reporting period.

(iii) Additional method: Value added is obtained by summing up the factors of

production rewards like wages, interest, depreciation and net profit within the
specified tax period. The tax rate is then applied to the summed value to establish
the tax liability of the firm in the given period

Experience in Tanzania – Tanzania is using consumption type of VAT with credit (Income
method) of calculation. Why Credit (invoiced based) method is most favoured?
(i) Tax liability is attached to the transaction and invoices become a crucial document.
(ii) It creates a good audit trail
(iii) It allows easy application of multiple rates of tax.
(iv) VAT can be collected on monthly basis or any tax period.
(v) Goods and services can be easily identified.
(vi) Zero rated supplies can easily be applied.
(vii) Credit methods have self-enforcing features.

Advantage of VAT:

It is a broad based tax which yields more revenue to the Government.
It is charged on local as well as imported products which are not exempted.
It is a self-administered tax and therefore it promotes voluntary compliance.
It encourage export by zero rating products leaving the country and allowing full credit of the
input on the exported products
It widen the tax base considerably, hence the possibility of increasing revenue

Disadvantage of VAT
 Is VAT “regressive?
(A tax is regressive if it affects all levels of income equally by a flat rate A progressive tax affects
high income earners more, and is accepted as a better system in that the better off part of the
population bears a greater proportion of the tax burden). Governments can reduce the effect of
regressive ness by having the social security and the exemption in the tax system.

 Is VAT “inflationary”?
Yes-if prices increase, the value of money decreases.

 VAT involved complicated book keeping

The regulations prescribe a number of books, which must be kept by all registered traders as a
minimum.

IMPOSITION OF AND LIABILITY TO VALUE ADDED TAX

Sec 3 of VAT Act, 2016

SCOPE OF VAT
Sec 4 (a), (b) & (c)

Registration rules and VAT registration threshold

Many taxable persons are registered after their taxable turnover exceeds the VAT threshold,
which is currently Tshs 100 Mill. The VAT tax threshold is made of taxable supplies and and
reverse changes on importation of services into mainland Tanzania and it excludes any
taxable supplies of extraordinary nature; for example disposal of fixed assets. The
extraordinary taxable supplies should be excluded from the VAT threshold because they may
not occur in the future, rendering application for de-registerion.

The VAT threshold is calculated by either totalling taxable turnover to check if taxable
turnover before VAT exceeds or likely to exceed Tshs 100 million in the period of 12
months consecutively or Tshs 25 million in a period of 3 months consecutively
(Registration requirements for VAT (Sec 28 of VAT Act, 2014)

Purposes of Registration: The purposes of registration are to:

(a) Record the particulars of taxable persons for the purpose of control and collection of tax.
(b) Enable them to take credit of input tax on their purchases of taxable supplies; and
(c) Allow them (registered persons) charge output tax on their taxable supplies and to issue tax
invoices.

Important issues to note

Registration of VAT
 Registration requirements for VAT (Sec 28 of VAT Act,2014)
 Other persons required to be registered (Sec 29 of VAT Act, 2014)
 Time of application for registration (Sec 30 of VAT Act, 2014)
 Compulsory Registration (Sec 33 of VAT Act, 2014)

Formerly
A person who fails to submit a return or pay tax for a specific period, becomes liable:
(a) To pay a penalty of T.shs. 50,000 or 1% of the tax shown as payable in respect of the prescribed
accounting period covered by the return, whichever is greater; and

(b) A further penalty of T.shs. 100,000 or 2% of the tax shown as payable in respect of the prescribed
accounting period covered by the return, whichever is greater, shall be payable for each month or part
month thereafter.

CURRENTLY AS PER SEC 78 TAA of 2016

Failure to file the Value Added Tax (VAT) Returns
For an individual
5 currency points or 2.5% of late and unpaid tax amount whichever is greater.

For a Corporate
15 Currency points
Note that 1 (one) currency point equals to Tshs 15,000
Formerly
The charging of interest, the rate of interest to be applied, compounding of interest and the interest to be
paid to registered traders on tax, which has not been refunded by the due date.
(i) Interest is levied on any unpaid amount of tax (including penalties and any unpaid interest) each
month or part thereof.
(ii) The rate of interest shall be the bank-lending rate of Central Bank plus 5%.
(iii) Interest shall be paid to traders where any tax due to be repaid by the Commissioner remains un-
refunded after the due date. The Commissioner shall pay interest to the taxable person at the commercial
bank lending rate for the time being determined by the Central Bank.

Calculation of Interest (Currently given by BOT is 9%)

 n
I = P (1 + R/12) - 1)
Where: I= interest
P= Principal plus any penalty
R=bank lending rate of the central bank Plus 5%
=period for VAT i.e. months e.g. three months

CURRENTLY AS PER SEC 76 TAA of 2016 and these amendments on this law has been
brought by Finance Act of 2017
(Currently rate given by BOT is 9%)
Note: Same formula for calculation of the interest is being used with a change on the interest rate
to be used to which as of now the 9% per annum/ year has to be used

REPAYMENT CLAIMS CAN ARISE:

On exportation of goods and taxable services by a taxable person (exports are zero rated).
When input tax exceeds output tax in a prescribed accounting period (e.g. when taxable goods
are bought in large quantities or when high value capital goods liable for VAT are bought).

The TRA must repay money legitimately claimed as due by registered traders promptly,
otherwise interest becomes payable. It is therefore essential that claims for, repayments are
processed and payment made within the time limits specified in the VAT Act,

De-registration of VAT

 Application for cancellation of registration (Sec 39 of VAT Act, 2014)

 Decision on application for cancelation of registration (Sec 40 of VAT Act, 2014)
 Power to cancel registration (Sec 41 of VAT Act, 2014)