In Summary
  • This article will focus on Tanzania’s Value Added Tax (VAT) Act of 2014, which arguably needs to be reformed to be in line with the current economic conditions.

World over, there are on-going discussions on tax reforms as a mechanism to inspire economic growth of countries and its citizens.

This article will focus on Tanzania’s Value Added Tax (VAT) Act of 2014, which arguably needs to be reformed to be in line with the current economic conditions.

VAT is a tax on consumption of goods and services supplied or imported into a country and it is an efficient means for governments to collect revenues as opposed to other forms of taxation such as income tax. VAT law imposes a duty on the supplier of goods or services who is registered for VAT to collect and remit the tax to the Tanzania Revenue Authority (TRA) by the 20th day of the following month. Essentially it makes the companies that are VAT registered to be collection agents of the government. Currently, VAT registration requires a turnover of Tanzanian shillings 100 million per year.

Recent experience shows that the VAT legislation has led into unintended consequences by the requirement that companies remit the tax to the TRA even before the tax is collected by them. In other words, companies are required to remit VAT to the government even before they are paid for the goods or services which they have supplied. This is burdensome and unfair on the taxpayer. Ironically, this is also the case for those that supply to the government and who generally get paid long after they have provided a service to the same government to whom they are remitting the tax.

The situation is worse for small and medium enterprises (SMEs) whose cash flows are often erratic and limited. To comply, most of these companies end up financing VAT payments with bank loans or from other sources, which are often expensive thus imposing unnecessary burden to the businesses and so potentially limiting their growth.

The reality on the ground is increasingly proving that things are not working as smoothly as envisaged in the law because most companies are facing liquidity crunches caused by the current economic situation.

For example a pharmaceutical company may supply a government entity with pharmaceuticals while at the same time engage a consultant to look into an aspect of its operations. The consultant could be an auditor who’s hired for a statutory audit. A problem arises when the consultant raises an invoice for his services. The pharmaceutical company may not be able to pay the consultant on time if it hasn’t been paid by the government, thus forcing the consultant to find an alternative source for paying the tax in order to comply with the law. This is one example among many that one could give.

The VAT Act 2014 provides that VAT is payable at the earlier of the time when the invoice of the supply is issued by the supplier or the time when the consideration for the supply is received, in whole or in part or at the time of supply of goods or services.

It is therefore necessary for the VAT law to be reformed to allow for VAT to be accounted for once consideration (payment) is received as opposed to when an invoice is raised or a supply is made. With such reform, cash flow constraints will be minimised and companies will be free to reinvest available cash in the companies towards growth, which will in effect lead to more taxes to the government in the future. I believe that such a measure will remove the current pain to the VAT agent of the taxman and be friendly, empowering and enabling to businesses.

Hopefully VAT reforms and others will be addressed this year by the Minister for Finance and Planning, Dr Philip Mpango (MP) when he tables his 2018/2019 budget at the National Assembly this Thursday in Dodoma.

Mr. Godfrey Mramba is Managing Partner at Basil & Alred. The views expressed do not necessarily represent those of Basil & Alred. Email: gmramba@basilalred.com