VAT has been in Tanzania since 1998 and has been making up between 20 and 30 per cent of gross tax revenue on average. This, prima facie, seems to be a good performance. But if you measure the VAT collections to GDP and compare that metric with other VAT jurisdictions, this performance is not impressive.
Conceptually, the VAT is an “in rem” tax on domestic consumption. The word “in rem” is a Latin which literally means “against the thing”. So, an ideal VAT is in rem in the sense that it leaves out considerations of personal circumstances. It is a tax on things, not persons. You consume, you get taxed. Regardless of your status. The effectiveness of VAT system is highly affected by exemptions or exempt supplies.
The term “exempt supplies” is used in most VAT systems to describe supplies that do not bear VAT. Exempt supplies and “zero-rated supplies” are two different VAT concepts with different implications.
The World Bank’s Tanzania Economic Update publication (Issue 7 of July 2015 titled “Why Should Tanzanians Pay Taxes? The unavoidable need to finance economic development”), the author, quite convincingly, claims that “Tanzania’s performance in the area of the collection of VAT is one of the worst in the world”.
The VAT revenues are equivalent to less than three per cent of GDP. The biggest chunk of VAT collection come from imports, telecommunications, beverages, and cigarettes. This suggests that, for some reasons, many key contributors to national GDP have been left out of the VAT base (i.e. exempted).
New Zealand’s VAT (called ‘Goods and Services Tax’, or simply “GST”) is one of the best performing VAT systems in terms of collections as measured against GDP. New Zealand’s VAT model gets its prominence from the very limited exemptions. The “Tanzania PER Tax Exemptions Study” in 2013 identified the unusually wide range of exemptions and domestic zero-rating as the most distinctive feature of the Tanzanian VAT. In 2015 when the new VAT law was enacted, Tanzania managed to get away from domestic zero-rating and reduced some exemptions.
Generally, tax exemptions may be provided for several good reasons. To attract investments, to drive economic growth and job creation in general or in certain areas or sectors. To promote social service delivery and enhancing food security. Or to honor contractual or international obligations. And for practical reasons such as VAT exemptions on financial services. It is notoriously difficult to apply VAT on financial products.
Like other tax exemptions, VAT exemption is a public expenditure. Cognizant of this, the “Tanzania PER Tax Exemptions Study” proposed five criteria that must all be met for any tax exemption to be granted.
1. Consistency: The intended and real effect of an exemption must be consistent with the government’s public policy commitments and objectives.
2. Simplicity: Reasonably easy for the tax authority to manage and eligible taxpayer to understand, comply with and benefit from it.
3. Transparency: Policy objective clearly defined, needs to be legislated, and the cost of exemption assessed and periodically reported.
4. Fairness: Not discretional and has to serve public policy objectives and commitments for which the government has been elected.
5. Efficiency: Should not create undesirable economic distortions or inefficiencies and that the cost of an exemption has to be reasonable compared to real benefits to the country as a whole.
Mr Maurus is a Partner with Auditax International