MANAGING TAX RISKS: Skills tax and how it works

Are you an employer in Tanzania? Do you have four or more employees? If your answer to both questions is in affirmative, then it is likely that you are obliged to pay 4.5 percent of your monthly pay bill as a ‘tax on skills’.

Skills and Development Levy (SDL) is one of the few taxes that are collected for a specific purpose in Tanzania. Originally, it was intended fund the vocational education training. But, the scope was later expanded into funding higher education.

SDL is collected by the Tanzania Revenue Authority (TRA) under the Vocational Education Training Act, Chapter 82 (“SDL law”).

The tax kicks in when your number of employees reaches four or more. Unlike PAYE which is essentially borne by employees, SDL is meant to be borne by the employer. SDL is charged based gross emoluments made by the employer to his employees in the particular period.

Generally, on monthly basis. The SDL law defines gross emoluments as a sum of the amount from salaries, wages, payments in lieu of leave, fees, commissions, bonuses, gratuity, any subsistence travelling, entertainment or other allowance received by an employee in respect of employment or service rendered. So, SDL is payable by the employer at 4.5 percent of gross monthly emoluments.

Exemptions

You may have four employees or more. But SDL may still not apply to you. How? The SDL law exempts some persons.

The exemption list include the following (i) a Government department or a public institution which is non-profit making and wholly financed by the Government; (ii) Diplomatic Missions;(iii) The United Nations and its organizations; (iv) International and other foreign institutions dealing with aid or technical assistance; (v) Religious institutions whose employees are solely employed to administer places of worship or give religious instructions or generally to administer religion; (vi) Charitable organizations; (vii) Local government authority (viii) farms employers whose employees directly and solely are engaged in farming except for those engaged in the management of the farm or processing of farming products; and (ix) registered educational institutions (nursery, primary and secondary schools; VETA schools; Universities and Higher Learning Institutions).

You will notice that not all the exemptions are blanket. Some exemptions are conditional. Public institutions, for example, sometimes overlook the criteria for exemption. That is how their budget is financed.

Also, charitable organizations need to have their status vetted and recognized by TRA. Farming business needs a good control to identify and separate employees directly engaged in farming.

Compliance obligations

As an employer, you are obliged to accurately calculate the monthly amount of SDL and pay the amount to TRA by the 7th day of the month following the month of payroll.

You are also required to prepare a monthly return and submit to the TRA by the 7th day of the month following the month of payroll.

You are also expected to prepare and submit to TRA half year certificate which tally with the monthly returns submitted during the period (bi-annual SDL returns).

A call for reforms

There have been several concerns on SDL from employers. Some see the SDL rate as too high.

And some see little benefits, if any, coming back to their businesses. Their argument is that in additional to SDL, they still incur a great deal to train and develop their employees.

And yet some argue that SDL discourages employment. The question is how can SDL be reformed to encourage employment rather than discourage it.

Very few countries operate SDL most of them at a rate 2 percent or below. But let’s pack this these for another day.