MANAGING TAX RISKS: Tanzania VAT in a nutshell

This article focuses on the value added tax (VAT). This is the third in the series of articles on main taxes administered by the Tanzania Revenue Authority (TRA).

Last two articles explored income tax and excise tax. Basic knowledge of how the various aspects of the VAT laws work can save your business from penalties and interest.

At the outset, it is important to emphasize that Mainland Tanzania and Zanzibar, for VAT purposes, are two different jurisdictions. The VAT Act, 2014 (the VAT law) applies only in Mainland Tanzania and is administered by the TRA. So, the VAT law in Zanzibar is beyond the scope of this article.

What is VAT?

VAT is a tax on the value added at each stage of the production process. Since the value of the final product is the total of the value added at each stage of production, the tax base (‘total value added’) equals the value of final supply of goods and services destined for consumption within a jurisdiction. It applies to both wholesale and retail but allows registered traders to deduct VAT charged on their inputs. Consequently, VAT is in effect imposed on the value of the final product but is collected in small chunks from each link in the supply chain. VAT taxes only final consumption and leaves production decisions undistorted. VAT charged on sales of goods and services to registered traders for re-sell or use it in production can be reclaimed by the purchaser. VAT on retail sales cannot be reclaimed.

VAT is a broad-based consumption tax. Imports and local supply of taxable goods and services that are not specifically listed as exempt in the VAT law are generally subject to VAT. Unprocessed basic food items, some petroleum products, some financial services and educational services are few examples of exempt supplies.

VAT rates

Most taxable goods and services are taxed at the standard VAT rate of 18 percent. Exports of goods and services are generally zero-rated. No VAT is charged on the supply of goods and services that are specifically exempt under the VAT law. But what is the difference between zero-rating and exemption? Zero-rating allows registered traders to recover the VAT on any inputs used in the production process. Goods and services that are exempt are not subject to VAT when sold, but the producer of an exempt product cannot recover the VAT paid on purchases of inputs. Consequently, unlike in the exempt products, there is no tax hidden in the final price of a product that is zero-rated.

If the importer meets certain prescribed conditions, it is possible to defer payment of VAT on the import of taxable capital goods. TRA can also relieve VAT on a certain category of persons on the purchase of taxable goods and services.

Compliance obligations

As a final consumer, after paying for the taxable goods or services, your biggest obligation is probably only to demand and take an EFD receipt from the seller. The price of taxable goods or services you have purchased already includes VAT. So, to you, the VAT is just an expense.

However, traders who use purchased goods and services as inputs in their production chain (“taxable persons”), there are several compliance obligations. I will only mention three. First is VAT registration. If your annual turnover exceeds or is likely to exceed 100 million shillings, you are obliged to register for VAT at TRA. The use of EFD devices in the issuance of receipts or invoices is another obligation. There is also monthly VAT returns and payment (if any). The VAT return and payment for a particular month are due by the 20th of the following month.