TANZANIA REVENUE AUTHORITY (TRA)

APPLICATION OF VAT TO SMALL AND MEDIUM SIZE BUSINESSES IN TANZANIA

2. COVERAGE OF THE PAPER

INTRODUCTION DEFINITION OF SMALL, MEDIUM AND LARGE BUSINESSES REFORMS OF THE TAX SYSTEM FOR SMALL AND MEDIUM SIZE BUSINESSES VAT REVENUE COLLECTIONS FROM SMALL AND MEDIUM SIZE BUSINESSES SPECIFIC NEEDS FOR SMALL & MEDIUM SIZE BUSINESSES ADMINISTRATIVE AND COMPLIANCE PROBLEMS THE IMPACT OF ELECTRONIC CASH REGISTERS CONCLUDING REMARKS

3. INTRODUCTION
The Value Added Tax (VAT) was introduced in Mainland Tanzania on 1st July, 1998 .
In Tanzania Zanzibar, the system became operational from 1st January, 1999

4. INTRODUCTION (Contd)

There are two applicable VAT rates in Tanzania

Standard rate of 20% Zero rate (0%) which is mostly applicable to exports

5. INTRODUCTION (Contd )
Main reasons for introducing VAT:
To broaden the tax base To attain economic neutrality To promote exports, and To attain its administrative advantages

6. INTRODUCTION (Contd)

VAT was mainly introduced to replace the Sales Tax, which was
Unable to generate sufficient revenue as it was narrow based

7. INTRODUCTION (Contd)
VAT is more advantageous than Sales Tax as:
It is charged on all goods and services except those which are specifically exempt It is economically neutral It encourages exports It is simple to administer

8. DEFINITION OF SMALL, MEDIUM AND LARGE BUSINESSES

Small businesses
TRA recognizes small businesses as those with the annual taxable turnover below T.shs.40 million(equivalent to about US $ 40,000.00 or Euro 30,700.00) By 31st December, 2004 the number of small size businesses was 355,750 Small Traders contributed about 0.44% to the domestic revenue collections by TRA

9. DEFINITION OF SMALL, MEDIUM AND LARGE BUSINESSES (Contd) Medium size businesses
TRA recognizes the medium size businesses as those with the annual taxable turnover above T.shs.40 million (equivalent to about Euro 30,700.00 or US$ 40,000.00 ) but whose annual total domestic tax payments to TRA do not exceed T.shs.400 million (equivalent to about US$.400,000.00 Euro 307,000.00 ) As at 31/12/04 the medium size businesses registered for VAT were 6,815 and VAT contribution was 13.2% to TRA total domestic revenue collections

10. DEFINITION OF SMALL, MEDIUM AND LARGE BUSINESSES (Contd)

Large taxpayers
Traders whose annual aggregate tax payments to TRA is in excess of T.Shs.400 million (equivalent to about US$.400,000.00 or Euro 307,000.00 ) are classified as Large Taxpayers. Include non VAT registered traders e.g Banks and Insurance companies purely rendering VAT exempt services. TRA has registered 200 traders as Large Taxpayers VAT payment by these traders accounted for 18% of total domestic revenue collections by TRA

11. REFORMS OF THE TAX SYSTEM FOR SMEs

Abolition of stamp duty on receipts for business income w.e.f 1/7/2004 Raise VAT registration threshold for compulsory registration to T.Shs.40 million per annum (about US $ 40,000.00 or Euro 30,700.00) w.e.f 1/7/2004

12. REFORMS OF THE TAX SYSTEM FOR SMEs (Contd)

The VAT registration threshold was raised so as:
To have a manageable population of VAT traders (Effective Audits) To reduce compliance and administrative costs To modernise the operations of VAT and Income Tax through integration To put special focus on traders below the VAT registration threshold through presumptive assessment under special business unit arrangements (SBTU) Largest traders representing 9% of total traders accounted for 82% of gross revenue 65% of traders accounted for only 5%-with many non-filers TRA believes that Administrative capacity of Authority as well as traders compliance costs should be the criteria for setting an ideal VAT registered threshold.

13. REFORMS OF THE TAX SYSTEM FOR SMEs (Contd)

Traders with taxable turnover below the VAT registration threshold are allowed to apply for VAT registration voluntarily. The conditions are:
Fixed place of business Proper accounting records Bank account for the purpose of business Previous compliance in the performance of statutory obligations under the tax statutes National Economic interest and protection of revenue

14. REFORMS OF THE TAX SYSTEM FOR SMEs (Contd)

Majority of the small businesses in Mainland Tanzania are not registered for VAT.
They pay VAT on their purchases of taxable supplies Such VAT becomes part of their costs Do not claim input tax because they are

not registered for VAT

15. REVENUE COLLECTIONS FROM SMALL AND MEDIUM SIZE BUSINESSES

Revenue collections from small size businesses
From July to Dec 2004 Tshs 2,015.2 million (about US$ 2 million or Euro 1.5 million) of presumptive tax was collected from small businesses The target was to collect 2,887.3 million (about US$ 2.8 million or Euro 2.2 million) The performance rate was 70% The administrative difficulty of following-up the traders under the informal sector who are also not keeping records was the main reason for not attaining the target The collections represent 0.44% to gross domestic revenue collections (Tshs 456,478.3 million about US$ 456 million or Euro 351 million) by TRA

16. REVENUE COLLECTIONS FROM SMALL AND MEDIUM SIZE BUSINESSES (Contd)
VAT collected from medium size businesses
During the first half of the financial year 2004/05 VAT (local) collected was T.Shs.60,084.8 million (about US$ 60 million or Euro 46 million) This represents 13.2% to the gross domestic revenue collections by TRA The target was T.Shs.59,212.0 million (about US$ 59 million or Euro 45.5 million) The performance rate was 101%

17. REVENUE COLLECTIONS FROM SMALL AND MEDIUM SIZE BUSINESSES (Contd)
Reasons for the good performance Close monitoring of monthly collections (normal flows) in which the expected collections are confirmed by 15th of every month Recovery of tax arrears Effective audits

18. REVENUE COLLECTIONS FROM SMALL AND MEDIUM SIZE BUSINESSES (Contd)
Reasons for the good performance (Contd)
Close follow up of non-filers Tight controls over special reliefs and VAT refunds Training conducted to staff Assurance management programmes Implementation of the Departmental Action Plans

19. SPECIFIC NEEDS FOR SMALL AND MEDIUM SIZE BUSINESSES

Tax forms, Returns and Information
Availability of Tax Forms, Returns and Information written in clearly understood language Complete, simple and accurate tax information provided through the print and electronic media such as newspapers, pamphlets, leaflets, website, radio and television

20. SPECIFIC NEEDS FOR SMALL AND MEDIUM SIZE BUSINESSES (Contd) Impartial treatment impartial application of the tax laws when determining tax liabilities The Tax Authority is obliged to collect only the correct amount of tax, no more no less

21. SPECIFIC NEEDS FOR SMALL AND MEDIUM SIZE BUSINESSES (Contd)
Courtesy and fairness Courteous and fair treatment in all their dealings with the Tax Authority

22. SPECIFIC NEEDS FOR SMALL AND MEDIUM SIZE BUSINESSES (Contd)
Privacy and confidentiality Personal and financial information provided by businesses to the Tax Authority should be treated confidentially and should be used only for purposes allowed by law.

23. SPECIFIC NEEDS FOR SMALL AND MEDIUM SIZE BUSINESSES (Contd)

Presumption of honesty Businesses require to be presumed honest unless there is evidence to the contrary

24. SPECIFIC NEEDS FOR SMALL AND MEDIUM SIZE BUSINESSES (Contd)
Impartial review of assessments
Businesses need to be allowed to object to an assessment or decision made by the Revenue Authority if they believe to have been treated unfairly The Revenue Authority is required to conduct an impartial review of their cases expeditiously Tanzania has an effective Tax Revenue Appeals Board which sits regularly to deliberate on tax disputes between TRA and Taxpayers

25. SPECIFIC NEEDS FOR SMALL AND MEDIUM SIZE BUSINESSES (Contd)
Tax benefits under the revenue laws Businesses need to be informed on the benefits allowed under revenue laws like entitlement to VAT special reliefs and deferment of VAT on capital goods.

26. SPECIFIC NEEDS FOR SMALL AND MEDIUM SIZE BUSINESSES (Contd)

Quality taxpayer service

Businesses need to be provided with quality service (including education) by the Tax Authority

27. SPECIFIC NEEDS FOR SMALL AND MEDIUM SIZE BUSINESSES (Contd)

Complaints and enquiries

Opportunities to complain to higher officials against mistreatment TRA has put in place a special arrangement (Ethics Committee) for staff integrity matters

28. ADMINISTRATIVE AND COMPLIANCE PROBLEMS

Exemptions and VAT special reliefs are narrowing the tax base Some of the VAT registered traders are not issuing tax invoices

29. ADMINISTRATIVE AND COMPLIANCE PROBLEMS (Contd)

Some of the VAT registered traders are submitting payment returns without payments Non-accounting for VAT on branch sales Management of VAT repayment claims has been a difficult issue

30. ADMINISTRATIVE AND COMPLIANCE PROBLEMS (Contd) The administration of VAT deferment schemes on generic and deemed capital goods has not been smooth There is loss of business resulting from competition with non-VAT registered businesses

31. THE IMPACT OF ELECTRONIC CASH REGISTERS

The Law
The law requires VAT registered retailers to record their daily sales and issue receipts through Electronic Cash Registers (ECRs)

32. THE IMPACT OF ELECTRONIC CASH REGISTERS (Contd) An acceptable ECR should be capable to issue receipts for each transaction containing:
Name, Address, VAT Registration Number and TIN of the supplier Date of supply Consecutive receipt number Brief description of each category of goods or services supplied

33. THE IMPACT OF ELECTRONIC CASH REGISTERS (Contd)

Contents of ECR receipt (contd)
Tax exclusive value of each category of goods or services supplied Tax exclusive total value of supply Total tax charged Total tax inclusive value of supply

34. THE IMPACT OF ELECTRONIC CASH REGISTERS (Contd)

Other attributes of an ECR
A back-up master audit till roll A permanent store of all entries capability to store entries for up to 5 years A battery back up against power failure Read, display and print facilities

35. THE IMPACT OF ELECTRONIC CASH REGISTERS (Contd)

Reasons for introducing the scheme
Retailers pose a great risk to VAT Most of the retailers do not issue tax invoices/receipts consumers do not have the culture of asking for or demanding receipts or tax invoices

36. THE IMPACT OF ELECTRONIC CASH REGISTERS (Contd)

Experience on the use of ECRs
Resistance from the Business Community Credibility of the Scheme as loopholes still exist Expensive Goods Sold at Retail Level require proper receipts/tax invoices Training of VAT Auditors on how the ECR operates is mandatory

37. THE IMPACT OF ELECTRONIC CASH REGISTERS (Contd)

Experience on the use of ECRs (Contd)

In the first year the estimated revenue increase was 19%, in the second year it was 13%

38. THE IMPACT OF ELECTRONIC CASH REGISTERS (Contd)

Experience on the use of ECRs (Contd) Retailers operating more than one outlet must have ECR for each outlet Retailers operating mobile shops such as trucks selling soft drinks find it difficult to operate ECRs

39. THE IMPACT OF ELECTRONIC CASH REGISTERS (Contd)

Experience on the use of ECRs (Contd )
ECRs cannot be used in remote areas where there is no electricity However, may not be a serious problem in countries where electricity is available even in the rural areas. There are very few VAT registered traders in the rural areas in Tanzania.

40. THE IMPACT OF ELECTRONIC CASH REGISTERS (Contd)

Experience on the use of ECRs (Contd) Increase of VAT registration threshold has lead into massive deregistration
Most of VAT registered retailers are operating below the new VAT registration threshold of Tshs.40 million (equivalent to about US $ 40,000.00 or Euro 30,700.00)
Deregistered traders are not compelled to use ECRs although they are still required to keep proper records under Income Tax Act. 2004 It is appropriate to cause an amendment to the Income Tax Act so as to compel such traders to continue using ECRs just like what they were required to do under the VAT Act.

41. CONCLUDING REMARKS

Small and medium size businesses have a considerable role to play towards collection of Government revenue. There are administrative and compliance problems in relation to VAT by the medium size businesses Serious discussions on such issues may enable countries like Tanzania to increase its share of revenue

Thank you for your kind attention