The paradox: Calculating social security contributions
The government - with a view to harmonise the social security funds in Tanzania - established the Social Security Regulatory Authority (SSRA) in 2008 to regulate the social security sector in the country.
SSRA has powers to exercise and perform supervisory and regulatory functions over all pension funds in Tanzania.
Also, SSRA has the mandate to issue guidelines for the efficient and effective operation of the social security sector in Tanzania.
In the light of the above, it was the expectation of employers that the SSRA Act would be the principal legislation for the different Funds - and, in cases of contradiction, SSRA would supersede, as it is the principle of law that in case of ambiguity, the principal legislation would override.
It was also employers’ expectation that any amendments that would be introduced by the Social Security Laws, the same amendments would apply to all pension funds as opposed to applying the amendments in isolation.
However, that has not been the case on how the pension contributions are calculated.
In 2012, the Social Security Laws (Amendments) Act issued various amendments in relation to the social security laws, and among other amendments was the definition of the word “salary.”
The Social Security Laws (Amendments) Act, 2012 defines the word ‘salary’ to mean “gross salary of the member payable to an employee in consideration of the service rendered under the contract of service or apprenticeship or any other form of office of call, excluding bonus, commission, cost of living allowance, overtime payment, director’s fees or any other additional emoluments”.
Employers were of the view that the amendments would cut across all the Funds. However, in 2015, the Employment and Labour Laws (Miscellaneous Amendments 2015) was issued, which deleted the previous definition of the word “wage”, and substituted it with a new definition of the word “wage” in the NSSF Act, which now includes any allowance paid by the employer to the employee whether directly or indirectly in respect of cost of living and a wage in lieu of notice of termination of employment.
You will note that the Social Security (Amendments) Act, 2012 uses the term ‘salary,’ while the Employment and Labour Laws (Miscellaneous Amendment 2015) uses the term ‘wage.’ The definition of the word salary as per the Social Security (Amendments) Act, 2012, excludes some of the employees’ benefits, but some pension funds consider that their legislations do not have the term ‘salary,’ but the term ‘wage,’ Hence, their base for calculating the pension contributions from employers and employees includes all benefits earned by the employee for a particular month.
The use of terms ‘salary’ and ‘wage’ in various pension funds is clearly confusing the employers as to which legislations to rely on computing pension contributions.
Also, the above confusion on the use of the terms salary and wages in different legislations has tax implication.
It is clear that, when the pension contribution is calculated on the income which is inclusive of all benefits, the tax on employment income is reduced.
The Income Tax Act provides exemption on social security contribution on the actual contribution made or the statutory amount required, whichever is lesser. The question that arise here is, what is the correct statutory amount required, in an instance where two laws are in contradiction to each other.
On assessment of income tax by the Revenue Authority, their reliance has always been on the specific legislations of the retirement funds (such as PSSSF Act, NSSF Act). However, their definitions of the word “salary” differs from each other.
These differences at the end of the day, leave two employees in different organisations earning the same pay with a difference in their tax burdens just because they are registered under different pension schemes.
This situation is against the principle of horizontal equity in taxation, which demands that, different taxpayers earning the same level of income should be taxed equally at the same rate and should have the same tax burden.
Therefore, I am of the considered view that it is high time for the legislations to be aligned in order to have common understanding -- and, thus, make compliance of social security contributions stress-free.
Mellania Mhuwa is a Senior Tax advisor at KPMG in Tanzania ([email protected]). The views expressed herein are those of the author and do not necessarily represent the views of KPMG.
