Thursday, December 7, 2017

MANAGING TAX RISKS: VAT challenges to intra-Union trade

Shabu Maurus ,

Shabu Maurus ,  

By Shabu Maurus

Last week, we discussed the disparity of levying value-added tax (VAT) on financial services between Mainland Tanzania and Zanzibar.

In Mainland Tanzania, VAT only applies on fees charged on financial services whereas in Zanzibar, the law unclear. VAT guidelines are needed for smooth implementation of VAT on financial services on both sides of the Union. In this article, we focus on another VAT aspect. The timing of input tax credit.

Input tax and output tax are some of the most important VAT concepts. For VAT-registered businesses, input tax is the amount of VAT paid on purchases. Thus, for a furniture manufacturer, input tax is the VAT paid on the purchase of timber. Similarly, for a transporter, input tax is the VAT paid on lubricants or spare parts for the vehicles. Output tax is the VAT charged on sales. Again, for a furniture manufacturer, output tax is the VAT charged on the sale of furniture. Likewise, the VAT charged on transport fee is the output tax for the transporter.

Ideally, a VAT-registered business is required to pay the output tax to the tax authority on a monthly basis. But the VAT laws, normally, would allow the VAT-registered businesses credit for the input. But such input tax credit is only available if the business fulfills some prescribed conditions like having a valid tax invoice. In case input tax credit is available, the amount of tax payable to the tax authority is essentially the difference between output tax and input tax. Thus, if in November 2017 the output tax was Sh150 million and input tax is Sh100 million, then the tax payable is Sh50 million (150 less 100).

Similar conditions for tax credits

Conceptually, most conditions for input tax credits between Tanzania Mainland and Zanzibar are similar. But the time within which such input tax credit can be claimed differs. Under the VAT law applicable in Tanzania Mainland, input tax credit cannot be claimed after six months from the date of invoice. If you think this time is too short, in Zanzibar it’s even shorter! A business has a maximum of only three months to claim input tax credit under the VAT law in Zanzibar.

The difference is not economically efficient as it leaves an avenue to tax planning.

For a business operating on both sides of the Union, it may seem much safer to incur input tax in Tanzania Mainland rather than Zanzibar. This may be particularly relevant for the purchase of shared services or goods. Good tax systems would strive to make business decisions tax neutral.

Let’s keep the neutrality objective aside. With the advent of electronic fiscal devices (EFDs) that can keep records for years, the rationale for the shorter time frames (3 or six months) is very difficult to see. In fact, when the two sides of the Union adopted their VAT laws back in 1998, the timeframes for input tax credit were both 12 months. There are various very valid business reasons as to why a tax invoice can take longer than six months to accept for payment.

The invoice may be under dispute between the supplier and the customer. May the goods require replacement or services not satisfactorily completed and a supplier is given some time to rectify before a payment can be processed. And some of the disputes may take several months to resolve. I have also seen some cases where a supplier sends an invoice to a wrong address, only to realize it later and resends the invoice to the correct address. Invoices can also be internally misplaced, particularly for the big organisations.

Mr Maurus is a partner with Auditax International