Skip to main content
Submitted by Web Master on 7 November 2014

A coalition of civil society organisations in Tanzania has commended the government for drafting the Value Added Tax (VAT) Bill of 2014 and Tax Administration Bill of 2014 which aim to administer VAT and create modern and effective tax administration, respectively.

The two bills, expected to be read for the second time in the November 2014 Parliament session, have been analyzed by the coalition which believes the laws will help government reduce tax incentives in Tanzania as well as simplify, and harmonize tax procedures from various tax laws with a view to promoting voluntary tax compliance, fair tax governance and increasing tax revenue. A synopsis of the analyses follows:

Value Added Tax (VAT) Bill of 2014

Eligibility:In comparison to the current regime, the number and categories of entities eligible for tax exemptions has been reduced under the 2014 VAT Bill where investors with TIC certificate of incentives, investors in EPZs and SEZ as well as those with strategic investors status will no longer enjoy tax exemptions. The Bill, therefore, aims to reduce tax incentives.

Criteria:The coalition takes note of the criteria to be used to grant tax incentives. Part II of the Bill (imposition of value added tax) outlines those eligible for tax exemptions such as diplomatic or consular missions of a foreign country established in Mainland Tanzania with a criterion such as “transactions concluded for the official purposes of such mission”. However, for exemptions for essentials such as education, health and agriculture, there are no criteria specified for granting such exemptions. This may pose as an avenue through which revenues from VAT may be lost due to lack of specific criteria.

Transparency:  Although the Bill outlines those who will be eligible for exemption, it does not indicate how transparent the process and its outcomes ought to be. In the 2014/15 budget speech, the Minister of Finance stated there would be high level of transparency in granting exemptions. Among the transparency measures stated in the budget speech was public announcement (through the Ministry’s website and newspaper for example) of all those enjoying exemptions on a quarterly basis. The Bill is silent on this.

Limitations of the Powers of the Minister to Grant Incentives:Under “Objects and Reason”, the Bill provides for among other things, limitations of the powers of the Minister to grant incentives. It states that “… the Bill seeks to do away with powers of the Minister to grant exemptions on payment of value added tax”. This is in line with what was stated by the Minister in the 2014/15 budget speech. Part II of the Bill, inter alia, “proposes to remove powers of the Minister to grant tax exemption. This, like other measures is intended to bring about predictability in revenue yield and to maintain stable tax base.”

Deferral of payments:There is no stipulated deferral period for deferral of payments in the Bill. This may afford a loophole for businesses to defer from paying taxes for a long period of time thus exposing the risk of such revenues being lost. It would add more value and reduce possibilities of revenue loss if the Bill stipulated the length and number of times VAT payment may be deferred.

Incorporation in the Bill of Domestic Stakeholders’ views on best ways of reducing exemptions: Generally, the Bill has incorporated most views from domestic stakeholders with regard to reducing exemptions. Such views have included but not limited to reducing or removing unproductive tax exemptions such as the views against tax competition within the East African region that accelerates what is commonly known as “the race to the bottom”. It has also incorporated views of exempting VAT on essentials such as food, education, agriculture and residential houses and views of reducing the powers of the Minister in granting exemptions. It has not, however, incorporated the views of making the exemption process and results transparent by way of putting in the public space the names of those who have enjoyed exemptions.

Tax Administration Bill of 2014

 

Tax laws for consequential changes

1

Tanzania Revenue Authority Act, CAP 399

2.

Tax Revenue App Act,  CAP 408

3

Income Tax Act, CAP 332

4

Road and Fuel Toll Act, CAP 220

5

Foreign Vehicle Registration Act, CAP 84

6

Airport Service Charges Act, CAP 365

7

Port Service Charges Act,  CAP 274

8

Vocational and Training Act, CAP 82

9

Motor Vehicle ( Reg. & Transfer) Act, CAP. 124

10

Gamming Act, CAP 41

11

Stamp Duty Act, CAP. 189

12

Excise (Manag’nt and Tariff) Act, CAP. 147

If enacted, this will be the first single piece of legislation for the administration of various tax laws that fall under the current remit of the Tanzania Revenue Authority (TRA) since its establishment in 1995.  Currently, Tax administration is being performed under several provisions dispersed in 12 different tax laws. It must be noted that this has potential to complicate the administration, may add cost of compliance and confusion to the taxpayers, especially those whose operations are integrated and therefore fall under different tax laws.

Tax incentives:                The bill is silent about many aspects of the tax incentives that are critically important for revenue transparency, accountability and fairness.  The administrative discretion in the management of tax incentives seriously increases the risk of corruption and rent-seeking. As part of tax administration, the bill could make provisions for identification, quantification and publicizing the revenue cost of preferential tax treatments (tax exemptions) which are a key element of fiscal transparency.

Discretionary Powers of the Commissioner:The bill contains a number of provisions that exert discretionary and or unchallenged powers to the Commissioner General. Without effective checks and balances (which is the case) may create loopholes for abuse. For example:

Powers of the Commissioner General to Issue Practice Notice

9.-(1) The Commissioner General may, issue practice notes with a view to ensuring consistency in the administration of tax laws and to provide guidance to persons affected by such laws.

The bill does not prescribe circumstances that may lead to issuance of a practice note and therefore, may excessively empower the commissioner to use his/her discretionary powers to issues a practice note for the purposes that may undermine enforcement of other provisions of the applicable laws. It would be useful to provide broader description of such circumstance/ environment.

Conflict of Interest:Subsections 5-6 empowers any person to inform the Authority of potential conflict interest and expected actions from the Tax Authority, however, it is silent about what should happen when allegation is proved to be true. A new subsection could be introduced to provide further qualifications.

Assessment and self-assessment:The Self-Assessment system was introduced in Tanzania in 2004 as part of the tax reforms and is an acknowledgement of the universal reality that no tax administration has or will ever have sufficient resources to determine the correct tax liability of every tax payer.  Section 46.-(1), therefore, provides for self-assessment in filing tax returns. While this may be convenient to taxpayers, it may reward dishonest ones, a phenomenon that is not unusual in Tanzania. Furthermore, the bill seems to suggest that self-assessment is applied universally (without targeting specific categories of taxpayers). While this may be convenient to taxpayers, it may fail revenue generation test.

To complicate the matter, Section 46 (2), empowers no person other than the Commissioner General to adjust any assessment. There are emerging concerns about this provision:

-          This provision may create ambiguity in its implementation as it refers to the Commissioner General as the only person with powers to adjust assessments and may contradict the provisions of  section 16.-(1) regarding the powers of the Commissioner General to delegate. The section could be improved by inserting a subsection that provides for delegation of such powers of the commissioner to a tax officer.

-          It does not qualify application of the term “adjustment” to indicate whether it means upward, downward or both which may create a loophole to be exploited by unscrupulous taxpayers. For tax revenue maximization, such powers should apply to downward adjustment to discourage tax officers from soliciting a cut for downward adjustment which reduces tax liability at the expense of tax revenues.