QUESTION
VAT is defined to be “ a broad-based tax levied on sales up to and including, at least the manufacturing stage, with systematic offsetting of tax charged on inputs except perhaps on capital goods against that due on outputs’’.
James,K (2015) The Rise Of The Value Added Tax, New Your Cambridge University Press at p.82
Critically discuss how this assertion is reflected in the Value Added Tax Act Cap 148.
ANSWERS
INTRODUCTION
VAT stands for Value Added Tax. It
is a consumption tax charged on taxable goods, services, immovable property of
any economic activity whenever value is added at each stage of production and
at the final stage of sale. VAT is charged on both locally produced goods and
services and on imports. Value Added Tax is charged by persons registered
for VAT only[1]
Value Added Tax is
a consumption tax charged on taxable goods and services whenever value is added
at each stage of production and at the final stage of sale[2].
It is named a consumption tax because it is borne ultimately by the final
consumer. In the language of tax law, it is a multistage tax levied only on
value added at each stage in the chain of production of goods and services.
Value added is simply the difference between value of the goods and services
sold and value of the goods and services purchased as intermediate inputs.
In Tanzania, each registered person in
the chain between the first supplier and the final purchaser or user is charged
tax on taxable supplies made to him (input tax) and charges tax on taxable
supplies made by him (output tax). A registered person for VAT, pays to
the Tanzania Revenue Authority the excess of output tax over input tax, or
recovers the excess of input tax over output tax from the Authority. The broad
effect of the scheme is that businesses are not affected by VAT except in so
far as they are required to administer it, and the burden of the tax falls to
the final consumer[3].
The
value-added tax (VAT) is a relatively new tax. It was designed by two people,
independently, in the early 20th century. To Wilhelm Von Siemens, a German
businessman, the VAT was a way to resolve the cascading problems that arose in
implementing gross turnover taxes and sales taxes. To Thomas S. Adams, an
American, the VAT was a better version of the corporate income tax[4].
In practice,
governments have implemented the VAT largely as an improved sales tax. European
countries, for example, have largely used the VAT to reduce or eliminate other
sales taxes. The countries continue to maintain separate corporate income
taxes.
Many European
countries enacted a VAT in the 1960s and 1970s. Other countries followed in the
1980s and thereafter. Sijbren Cnossen, a leading VAT expert from Maastricht
University in the Netherlands, called its spread “the most important event in
the evolution of tax structure in the last half of the 20th century[5]”
US policymakers
have found it tempting to consider the VAT, but no one seems to be able to master
the courage to call it by its real name. The “destination-based
cash flow” tax that House Speaker Paul Ryan and Ways and Means Committee Chair
Kevin Brady proposed in the 2016 Republican “blueprint” is just a VAT with a
wage deduction. VATs are embedded in Ryan’s “business consumption tax,”
libertarian Kentucky Senator Rand Paul’s “Fair and Flat Tax,” 2012 Republican
presidential candidate Herman Cain’s “9-9-9” proposal, and Republican Senator
Ted Cruz’s “Business Flat Tax.” VATs have also been proposed (and renamed) in
Senate Finance Committee Democrat Ben Cardin’s “progressive consumption tax”
and the Bipartisan Policy Center’s 2010 Domenici-Rivlin commission report,
which called it a “deficit reduction sales tax.”
Although these
leading policymakers proposed to use the resulting revenues differently, they
all viewed the VAT favorably for three reasons: it raises lots of money, it
creates few negative economic incentives, and it’s administratively feasible[6]
HISTORICAL BACKGROUND OF VAT IN
TANZANIA
The United
Republic of Tanzania is the merger of Tanganyika and Zanzibar which existed
since the landmark year 1964. Literatures assert that, for some time, Tanzania
relied on custom duties, excises and income taxation which had enormously high
marginal rates and after 1969 Tanzania adopted sales tax. The Tanzania sales tax
was modeled from Uganda, the first East African Country to move into the sales
tax field of operation.
With the sales
and excise taxes on domestic goods and services being the major source of
revenue, in December 1991 the Tax commission appointed by the Government of
Tanzania offered a proposal for reform of the Tanzania tax system. Tax reform
commenced in the year 1989 with the appointment of the President Commission of
Enquiry into Public Revenues, Taxation and Expenditure.
The
appointment was compelled by the serious economic and financial problems that
the Tanzania Government faced at the time. To liberate the situation, the
alternate of sales tax by VAT was the commission’s central recommendation in the
sphere of indirect taxation. The basic rationale behind the replacement of sales
tax with VAT was to widen the tax base and increase revenue collection of which
sales tax did not sufficiently achieve[7].
Furthermore,
VAT was favored because it was assumed that it had a relatively high tax
elasticity and buoyancy compared to sales tax.
Before the VAT
under the Value Added Tax Act was assented by his excellence president, Benjamin
W. Mkapa (as he then was) on October 21,1977 and came into operation on July 1,
1998 Tanzania had sales tax which operated under the Sales Tax Act[8]
Due to the recommendations made by the President Commission on tax reform, Tanzania
introduced VAT in the significant year 1998 under the provisions of the Value
Added Tax Act, 1977 as amended time to time.
SCOPE OF VAT IN TANZANIA
Section
4(1),(2), and (3) of The Value Added Tax Act[9]
provides on the scope of valued added tax in Tanzania.
Section
4(1) provides that, “VAT
shall be charged on any supply of goods and services in Mainland Tanzania where
it is a taxable supply made by a taxable person in the course of any business
carried on by him”. A taxable person do no stand in the same foot as tax
payer in the operation of VAT. The VAT Act adopted the use of taxable person as
person indebted or being given duty to collect VAT from the tax payers
(consumers) and remit the same to the Tanzania Revenue Authority. Scholars in
the field of taxation contend that, the jurisprudence behind the use of the term
“taxable person” is to avoid confusion of naming such persons “tax payers.” In
real sense, taxable persons are not tax payers, as pointed out earlier, this
unique tax lies in the hands of ultimate consumers who are the tax payers in the
operation of VAT[10].
In Tanzania
not every person or businessmen is the taxable person. A person can become a
taxable person in two main ways; one is by compulsion of the law and another
under involuntary arrangement. The later occurs where the Commissioner is
satisfied there is a good reason to do so, on grounds of national economic
interest or for the protection of revenue.
Under
compulsory arrangement, any person whose taxable turnover exceeds Tsh
40,000,000/= (forty million) or believe to exceed the said amount
upon registration he becomes taxable person. Every registered taxable
person acquires certificate of registration to be displayed in a conspicuous
place at the principal place of the business. Nevertheless, being a taxable
person its not a permanent agreement, under certain compelling reasons such as
the taxable turnover falls below the threshold of forty million the
commissioner can cancel the registration of the taxable person where he is notified
to that effect.
Section
4(2)provides that,
“the VAT on a taxable supply of goods or services shall be payable by a taxable
person at the end of a prescribed accounting period or at any time which the
Commissioner may prescribe”. This provision give power to tax commissioner or
tax officers together with taxable persons to make arrangement on when VAT
collected is to be remitted to Tanzania Revenue Authority.
Taxable supply
means any supply of goods or services made by a taxable person in the course or
furtherance of business and include the leasing or letting of goods on hire, the
appropriation of goods for personal use of consumption by the taxable person or
another person and barter trade and exchange of goods. The interpretation
section complement that, taxable supplies do not include exempt supplies[11].
In order to
ascertain that taxable persons has made taxable supplies and hence accrue of
VAT, the law underline two criteria, time of supply and place of supply. The
goods and services are said to have been supplied when removed from the premises
or control of the supplier to the person to whom they are supplied, a tax
invoice is issued in respect of supply, payment is received for all or party of
the supply or service is rendered or performed whichever the earliest.
Section 4(3)provides that, “the VAT on the
importation of taxable goods or services from anyplace outside Mainland
Tanzania shall be charged and payable in accordance with this Act and the
procedures applicable under the Customs Laws for imported goods shall apply in
respect of VAT imports”. For imported goods, VAT is payable at the time of
importation together with any customs and excise duties. VAT payable with
respect to capital goods imported in Tanzania may be deferred, subject to
certain procedures being followed.
For imported
services, VAT is accounted for by registered businesses through a
'reverse-charge' mechanism, and such accounting is only relevant where a
taxpayer has exempt supplies of 10% or more out of total supplies[12].
OPERATION OF VAT IN TANZANIA
On behalf of
TRA, taxable person required to charge tax on taxable goods and service
provided to consumers. From his sales, taxable person charge consumers output
tax, likewise taxable person charged tax from goods or services he purchased
from other taxable person (input tax).
The difference
between output tax and input tax is the net amount of VAT which the taxable
person is indebted to remit in the hands of TRA. Operation of value added tax
ensures that cascading is avoided as the value added at each stage of production
and distribution is taxed only once. Goods and services pass through various
stages of production and distribution process before consumed. At each stage
VAT is paid in proportion to the value added. Hence, through the mechanism of
input and output tax the final burden of VAT falls in the hands of ultimate
consumers.
CONCLUSION
The standard
rate of VAT is 18%, but the export of goods and certain services is eligible
for zero rating. Businesses with an annual taxable turnover of more than TZS
100 million must register for VAT. The Commissioner has the discretion to
register (as intending traders) investors whose projects have not commenced
production of taxable supplies but wish to be VAT-registered in order to reclaim
the tax they incur on start-up costs. A business that only makes exempt
supplies is unable to register for VAT and, consequently, unable to recover the
VAT incurred on inputs. Registered businesses must submit VAT returns, and pay
any tax due, on a monthly basis[13].
There is also mandatory registration for professional service providers (e.g. lawyers and accountants) and government entities/institutions carrying on economic activities. A non-resident who carries on an economic activity in Mainland Tanzania without a fixed place (e.g. non-resident suppliers of B2C electronic services) and makes taxable supplies in excess of the VAT registration threshold is required to appoint a VAT representative.
REFERENCE
Books
James, K.. (2015). The rise of the value-added tax.
10.1017/CBO9781107358522.
A. Schenk (et al), Value Added Tax: A comparative
Approach, Cambridge University Press 2007 at 17
O.H.Fjeldstad, Value-Added Taxation in Tanzania?, working
paper WP 1995:5
J.F.Due, Two New African Value Added Taxes-Tanzania and
Mozambique, VAT Monitor Vol.10.N0.3, May/June 1990 at pp 117
Luoga. F.D.M, The Viability of Developing Democratic
Legal Framework for Taxation in Developing Countries: Some lessons from
Tanzania Tax Reform Experiences, 2003 (2) LGD
J.F.Due, Two new African Vallue Added Taxes-Tanzania and
Mozambique , VAT monitor Vol. 10No.3, May/June 1999 at pp 117
D. Williams, Value Added Tax, Tax Law Design and
Drafting( Vol 1, IMF, 1996.
Statutes
The Value Added Tax Act, cap 148 R:E 2012. Section 4(1),(2),
and (3).
The Income Tax Act, cap 332 R:E 2009
[2]KATABARO, Jackson LL.M-Taxation (UDSM), LL.B (SAUT)
[3] Ibid
[4]Ibid
[5] 1998.399
[7] Ibid
[8]1996
[9]Cap 148 of 2012
[10]Ibid
[11] Ibid
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