This is the fifth and final part of our mini-series on the Tanzanian import taxation regime.
Maria Maswi, a Tanzanian entrepreneur and a small and medium enterprise (SME) owner, tells me that she often thinks of value added tax (VAT) deferment in the context of purchasing and importing capital goods from a foreign vendor.
Ms. Maswi couldn’t be more correct. Although there is no definition of the term “VAT deferment” in the Value Added Tax Act, 2014 (the “VAT Act”) of Tanzania, in practice, the term refers to a temporary postponement of the payment of VAT on capital goods imports to Tanzania.
Capital goods are tangible assets that are purchased and used by a business to produce consumer goods or services. Buildings, machinery, equipment, vehicles, furniture are examples of capital goods.
A key point to note is that only importers of plant and machinery, which should be for use in the business of the applicant importer, are eligible for VAT deferment. Spare parts are ineligible for VAT deferment.
An item will be regarded as plant and machinery if it is an item with a lifespan of more than 12 months that is deployed in the production of taxable goods or supplies.
For anyone unfamiliar with the VAT Act and the regulations made thereunder, VAT deferment might seem to be complicated and difficult to understand.
The aim of VAT deferment is to avail a more convenient and cash-flow friendly mechanism to businesses in Tanzania and, in particular, regular importers of plant and machinery.
A deposit of security in the form of a bank guarantee for the amount to be deferred may be required. The good news is that an experienced lawyer can always help importers to navigate the intricacies of VAT deferment.
Under the VAT Act, there is no exemption for VAT except as otherwise provided for under the Act. However, an importer may apply to the Commissioner General of the Tanzania Revenue Authority (TRA) to defer the payment of VAT in respect of the plant and machinery destined for Tanzania as imports. But VAT deferment is not automatic.
It is granted upon a successful application by the importer to the Commissioner General of the TRA, who scrutinizes and approves the application.
Before granting the VAT deferment application, the importer has to satisfy the statutory conditions, one of which concerns the threshold for deferment of VAT.
In accordance with the Value Added Tax (General) (Amendment) Regulations 2018 published on 19 October 2018, the threshold for VAT deferment on imported capital goods was reduced and can be applied for if the VAT payable for each unit of the capital goods is Sh10 million or more.
Previously, approval could only be granted if the VAT payable was at least Sh20 million.
Capital goods imported whose VAT is less than the threshold limit shall be treated as normal and, consequently, follow normal rules of calculation of taxes under customs laws and procedures.
The duration of VAT deferment is 10 years and when the period of deferment extinguishes, the VAT on capital goods shall be payable.
This is also the position when the importer sells the plant and machinery at any time during the deferment period, or if the Commissioner General terminates the incentive.
Termination of VAT deferment may be the result of failure by the applicant importer to install or utilize the imported plant and machinery for the specified purpose.
It is not uncommon for the Commissioner General to inspect plant and machinery in respect of which VAT deferment has been granted in order to satisfy himself that the same have been installed and are being utilized for the specified purpose.
The exercise of inspection powers by the Commissioner General is discretionary.
Other conditions include: registration by the importer for VAT with the TRA; the plant and machinery should be for use in the business of the applicant; the applicant should be up to date with the filing of VAT returns for the business; and a deposit of security for the amount to be deferred if required by the Commissioner General under his discretion.
It is prudent for importers to apply for VAT deferment before shipping the capital goods to Tanzania. This helps to avoid unexpected costs and expenses that may arise from the rejection of the VAT deferment application by the TRA.
Importers should also remember the deferment of VAT granted must be for the purpose of producing taxable goods or supplies, and not exempt supplies.
Paul Kibuuka (<firstname.lastname@example.org>) is the tax director and chief executive of Isidora & Co. The views expressed here do not neces-sarily reflect those of Isidora & Co.