VAT challenges remain firmly in place for agriculture

Thursday May 16 2019

The budget speech for the financial year 2019/20 is expected to be read by the Minister for Finance on 13 June 2019. As usual, business stakeholders will be keen to see what changes in taxes/policies are in store.

For the last two years, the theme of the budgets of all East African countries has been “to build an industrial economy that will stimulate employment and sustainable welfare”. This theme also aligns with Tanzania’s Vision 2025 (of being a semi-industrialized middle-income country) and the 2016/17 to 2020/21 National Five Year Development Plan (whose theme is “Nurturing Industrialization for Economic Transformation and Human Development”).

In the 2018/19 budget speech, the Minister for Finance highlighted numerous economic and social challenges, as well as opportunities and achievements.

Amongst the challenges highlighted were: high levels of poverty; limited employment opportunities; continued slow growth of the agricultural sector; and a narrow tax base (with a low domestic revenue to GDP ratio (almost 15 per cent) as compared with the Sub-Saharan African country average (17 per cent).

Explicit acknowledgment was made of the difficult environment for business –particularly as regards multiple taxes and regulatory levies, high tax rates and unnecessary bureaucracy –and an update was given in relation to analysis undertaken by the Government during the year to identify the relevant challenges, and in particular the “Blueprint for Regulatory Reform to Improve Business Environment for Tanzania”. I understand that the implementation of the Blueprint recommendations is currently a priority focus area for the Government.

Previous budget speeches have included proposed measures – particularly tax measures to encourage “in country” manufacturing especially targeting the processing of raw local products prior to export to foreign markets.

Typically, these measures have included export taxes for certain unprocessed products, as well as changes to the import tax regime (for example, increased taxes on imported finished goods, and at the same time exemptions on certain imported capital goods).

In 2017 changes were also made to the VAT regime to deny VAT input tax claims if attributable to exportation of certain raw products.

The restriction came into immediate effect in relation to exportation of raw minerals while the equivalent restriction for other items (raw agricultural products, raw forestry products, raw aquatic products and raw fauna products) was to be effective from July 2019 i.e. after two years.

In April I was invited to participate in a workshop organised by the East African Grain Council (EAGC) so as to explain the proposed amendment.

At the meeting several stakeholders in the agricultural sector expressed their concern on the restriction of input tax incurred after July 2019 and how this will affect their businesses going forward.

Their major concern was that most agricultural products exported to foreign countries are required in their natural state (for example avocados, tomatoes, green peas, flowers etc) and that such any disallowed input tax (which will become a cost) which would affect the competitiveness of these products in foreign markets.

Accordingly, if this law should come into force as drafted, then it will have adverse impacts for the farmers/exporters and by extension the economy as a whole.

In my view, whilst I fully support measures to encourage local processing and industrialisation, I would question the use of the VAT system to achieve this objective.

My hope therefore is that further consideration should be given to the practical challenges of the proposed restriction to consider (i) whether such restriction is appropriate, and (ii) if it does remain on the statute book then the scope of affected products should be narrowly defined.

Aside from this issue, another major VAT concern for agricultural exporters (also articulated at the EAGC meeting) related to delays in the processing of VAT refunds. It is to be hoped that the Budget will have some good news as to measure to resolve this logjam.

Jafari Mbaye is manager, Tax Services, at PwC. The views expressed do not necessarily represent those of PwC