Could VAT withholding be the budgetary silver bullet?

Two days ago I published an article in this paper suggesting that it is high time for the Value Added Tax (VAT) ACT of 2014 to be reformed so as to be in line with our current economic conditions.

This afternoon, the Minister for Finance and Planning, Dr Philip Mpango, will table the government’s 2018/2019 budget in the National Assembly in Dodoma, and it is our hope that among the measures to be introduced will be on VAT reforms.

VAT is a tax on consumption of goods and services supplied or imported into a country. It is an efficient means for governments to collect revenues as opposed to other forms of taxation such as income tax.

VAT legislation imposes a duty on a VAT registered supplier of goods or services who is required to collect and remit the tax to the Tanzania Revenue Authority (TRA) by the 20th day of the following month.

Essentially it turns the companies that are VAT registered to be collection agents of the government. Currently, registered companies are required to remit this tax to the TRA even before they are paid for goods or services which they have supplied, a situation that is burdensome and unfair on the taxpayer. My recommended reform idea could be an introduction of withholding on VAT.

Assuming that the VAT legislation is amended as I had suggested in my earlier article two days ago it would 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.

Introduction of withholding VAT at a certain percentage of the taxable value would give the government advance collections while at the same time lessening the burden of compliance on the businesses (supplier of goods or services).

Here I propose a hybrid model where the withheld amount would be payable by the recipient of goods or service when an invoice is raised or a supply is received and the difference to be paid by the supplier of goods or service after receiving payment.

For example, let’s assume withholding VAT is introduced at 5 per cent with the current VAT rate of 18 per cent in place. And let’s use an example of a contractor building a road for the government while at the same time buying cement from a cement company.

A problem arises when the cement company raises an invoice for the cement sold to the contractor.

The contractor may not be able to pay the cement company on time if it hasn’t been paid by the government. With my proposal, when the cement company raises an invoice, it would remit 5 per cent of the invoice value to the TRA by the 20th day of the month after raising the invoice and it would issue a withholding VAT certificate, which would entitle the contractor to a credit for the amount withheld.

The cement company will remit the VAT balance after receiving payment from the contractor. This way, the government will collect 5 per cent in advance without burdening the cement company with remission of VAT before collecting the tax.

It is important to note that the VAT withholding that I am suggesting should not result in collection of additional VAT but rather help the government in collecting a chunk of the tax earlier while at the same time helping businesses remain with adequate cash flow in allowing them to remit the balance after receiving payment.

Furthermore, VAT withholding should also help the TRA with monitoring and enhancing compliance. It will put the responsibility of declaring supply of goods or services on the shoulders of both suppliers as well as buyers of the goods or services.

It is quite possible that unfaithful suppliers could receive full payment for goods or services and under declare or omit VAT altogether. Unless audited by the TRA, some of them might manage to get away with it. Withholding VAT will indeed make it easier for the TRA to track transactions on an ongoing basis.

It is my hope that today’s budget speech will propose this and other types of tax measures that will yield win-win results for the government and the tax payers, while keeping in mind the crucial need to induce taxpayer compliance, which will in effect lead to more taxes to the government in the future.

Mr Godfrey Mramba is the Managing Partner at Basil & Alred. The views expressed here do not necessarily represent those of Basil & Alred. Email: [email protected]