FINANCE AND TAX LAW UPDATE: OVERVIEW OF THE THE FINANCE ACT, 2022 AMENDMENTS AND ITS IMPLICATION TO BUSINESS AND INVESTMENT IN TANZANIA.
- Introduction of Digital Services Tax
- Exemption of withholding tax from interest paid to holders of corporate and municipal bonds
- Tax credit for business or investment operating in both Mainland Tanzania and Zanzibar
- Introduction of a standard rate of tax on presumptive income
- Introduction of amicable settlement in tax disputes
- Introduction of mandatory issuance of taxpayer identification number
- VAT reliefs on agricultural imports and supplies
On the 30th June 2022, the Parliament enacted and published in the Government Gazette, the Finance Act, No. 3 of 2021. The Act amends several laws reflecting what was tabled down in the Government’s Revenue and Expenditure Estimates for the financial year 2022/2023 (the budget) presented by the Minister of Finance and Planning Hon. Dr Mwigulu Nchemba before the National Assembly.
Hence, the Finance Act, of 2022 complements what is in the 2022/2023 budget which goes with the theme of “Realising Competitiveness and Industrialisation for Human Development.”
Our Tax Department at Breakthrough Attorneys has prepared this Article highlighting the changes in various tax laws which came into operation on the 1st day of July 2022. This article is a continuation of our recent analysis of the Government’s Revenue and Expenditure Estimates for the financial year 2022/2023 found here.
2. Amendment of the Income Tax Act CAP 332 R.E 2019.
The Finance Act amends the Income Tax Act CAP 332 R.E 2019 (“the Income Tax Act”) by introducing the following changes;
- Introduction of Digital Services Tax.
As proposed by the Government, the Finance Act has introduced a new source of tax taxable on income from digital services commonly known globally as digital service tax. Section 3 of the Act is amended accordingly by including a transaction or activity carried out through the internet or an electronic means in the definition of business as well as adding new terms to the provision i.e digital marketplace, and electronic service.
Further, section 90A is added to the Act imposing a tax on income realized by non-residents from payments made by individuals in Tanzania in a digital marketplace. This tax is to be paid at the rate of two percent (2%) of the gross payment received by the person in a calendar month. The law provides that the person responsible will be required to file returns to the Commissioner-General on such income by each seventh day of a calendar month.
The imposition of this tax is a great step towards widening the tax base especially because it is imposed against non-resident companies who currently don’t pay income tax from the income they get in Tanzania. However, the implementation of this tax may be a challenge to the Revenue Authority especially when it comes to filing returns. Currently, for a person to be able to file returns, he/she must be recognized as a taxpayer with a Tax Identification Number which is not the case with non-residents. Thus, we advise in the process of prescribing the procedures for the collection of this tax, the Regulations should be able to attend to the above concerns including a close engagement with the non-resident service providers. We are emphasizing on engagement because different countries around the world have previously enforced a similar tax but with little success during the implementation phase.
- Exemption of withholding Tax from Interest paid to holders of corporate and municipal bonds.
In an attempt to attract investment in securities, the Finance Act has amended section 82(2) of the Income Tax Act by granting exemption of withholding tax on securities transactions involving payment of interest to holders of corporate bonds and municipal bonds issued and listed at the Darr es Salaam Stock Exchange (DSE). Before this amendment exemption applied to interest paid to holders of government securities only.
This is one of the commendable amendments as it is expected to attract more investment in corporate bonds and municipal bonds which are not common in the country. This will also provide an alternative source of finance to municipal authorities and corporations at the DSE.
- Tax credit for business or investment operating in both Mainland Tanzania and Zanzibar.
The Finance Act has amended the law on Foreign Tax credits by adding section 77A to the Income Tax Act allowing an income tax credit for business operation in both Tanzania Mainland and Zanzibar. With this amendment, a person who has paid income tax in Zanzibar for income activity (business or investment) operated in Zanzibar may claim income tax liability against his income tax credit claim in Mainland Tanzania and vice versa.
With this amendment, businesses operating in Zanzibar and Tanzania Mainland have an avenue to expand to the other part of the union without the risk of being taxed twice on the same income.
Unlike VAT and excise duty, Income Tax Act is a union tax, and therefore there is a need to relook at the implementation of the above change. For instance, some businesses may be rendering services in Zanzibar but they do not have a physical presence or ways to apportion the income or revenue between mainland Tanzania and Zanzibar. In addition to the union tax implications, there are also other regulatory obligations such as licenses that are union matters and might create similar practical challenges.
- Imposition of Standard rate of tax on presumptive income.
Before the amendment, tax on presumptive income was not charged at one standard rate i.e presumptive income in which the turnover range between 14,000,000/= and 100,000,000/= was taxed at Tanzanian Shillings 450,000/= plus 3.5% of turnover exceeding 14,000,000/=. The Finance Act has amended this system by setting a standard rate of 3.5 for the said range of turnover. However other turnover ranges below 14,000,000 will still have the old calculations involving both standard amount and percentage of turnover.
In our view, the whole presumptive income regime should be taxed based on percentage to avoid complex calculations. Further, considering the importance of nurturing Startups and SMEs the government should consider lowering the said tax i.e taxing the net income instead of the turnover and at much lower rates.
3. Amicable Settlement under the Tax Revenue Appeals Act, CAP. 408 R.E 2019 (“the Tax Revenue Appeals Act”)
When the Finance Act of 2021 came out it amended the Tax Revenue Appeals Act to allow Alternative Dispute Resolution(ADR) by allowing any party to a tax dispute before the Tax Revenue Appeals Board and Tax Revenue Appeals Tribunal to make an application for the matter to be decided through Mediation. We wrote an Article analyzing this amendment in detail as brought by the Finance Act, 2021. The amendment however allowed only mediation and not other ADR methods. In what may be termed as a complete change of attitude by the government towards the settlement of tax disputes and the relationship between the TRA and taxpayers the Finance Act has once amended the same provision by allowing parties to apply to settle any matter through amicable settlement.
As we advised on the consideration of other methods than mediation in our 2021 review, we commend this change considering that in the current practice, many disputes between taxpayers and the TRA are handled through negotiations as opposed to mediation. This amendment officiates the existing practice hence making it more effective and efficient.
4. The Tax Administration Act
The Finance Act, 2022 has amended several positions and provisions of the Tax Administration Act. These are as follows;
- Introduction of Mandatory Issuance of Taxpayer Identification Number
The Act as amended now requires the Commissioner General to issue a Taxpayer Identification Number (TIN) to any person who holds a National Identification Number (NIDA). According to his budget speech, this is aimed at motivating tax paying culture in the country. With this amendment, every TIN will be connected to a NIN. This requirement will start operating on 1st January 2023.
- Electronic filing of filing tax returns.
The Tax Administration Act has been amended by adding section 37A which directs all tax returns to be filed electronically. This amendment cements the existing practice whereas returns i.e VAT and WHT are filed through the electronic filing system. Taxpayers are required to file returns on the respective days for filing respective returns failure of which attracts a penalty.
Much attention must however be given to the maintenance of the electronic filing system which is known to have technical failures.
- Requirement for registration of storage facilities.
The Act is amended on section 45 by introducing section 45A requiring every storage facility of goods for goods to be registered with the Commissioner General. The owner of the storage facility is required to keep records of the storage and give monthly reports to the Commissioner General failure of which will attract a penalty.
Failure to register or to keep and report record is punishable by payment of a loss of revenue as may be determined by the Commissioner General, this is regardless of whether the goods are owned by the store owner or not.
5. The Electronic and Postal Communications Act, (CAP. 306) (“the Electronic and Postal Communications Act”) and the National Payment Systems Act CAP 437 (“The National Payment System Act”).
In 2021, the Act was amended to introduce mobile money transactions levy which included money withdrawal and mobile to mobile or mobile to bank transfers, this has now been amended again to include all other electronic money transfers, i.e. transfers and withdraws done via mobile and non-mobile devices/platforms. The Finance Act has also reduced the maximum amount that was charged as a mobile money transfer levy from TZS 10,000/= to TZS 4000/=. This reduction is equal to 43 percent of the current maximum amount (TZS 7,000).
Considering, that mobile money services are crucial to financial inclusion, this move is in line with the government’s plan to increase financial inclusion and will increase the revenue collection for the government as a result of the growth in the number of transactions that is expected.
Further, the government has introduced a fee to be charged on television decoder transactions, this ranges between TZS 500 to TZS 2000 on each subscription fee paid for a television decoder.
6. Amendment of the Value Added Tax
The government has decided to prioritize agriculture in the 2022/2023 budget, thus various tax reliefs have been introduced in the Value Added Tax Act including exemption, and zero rating of vatable supplies. Among the notable changes is allowing the Minister of Finance to exempt VAT on goods or services for implementation of special strategic investments provided that the same is approved by the National Investment Steering Committee.
There are many exempted imports and supplies under the Value Added Tax following the amendment, these include importation of Dairy packaging materials, supply of double refined edible oil from locally grown seeds by local manufacturers, supply of packaging materials to be solely and directly used by local manufacturers of double refine edible oil from locally grown seeds, import of raw materials, equipment and machinery of to be solely and directly used in the manufacturing of fertilizers, import of agro net, cold rooms, soil testing equipment, etc.
All these are aimed at reducing the cost of conducting agriculture, enhancing mechanization, and value addition to agricultural products. Breakthrough Attorneys commends this move as this will motivate an increase in investment in agriculture and the creation of investment and employment opportunities throughout the value chain.
At Breakthrough Attorneys, we are generally positive as to the amendments, especially on matters concerning tax exemptions on agricultural imports and supplies. We, however, call upon the government to invest more in agriculture technology, agricultural inputs and knowledge for farmers especially small ones in order to enable them to increase productivity especially now that there is a shortage of supply of food.
Further on the introduction of digital service tax, the imposition is commendable as it is imposed on non-residents as opposed to other countries such as Kenya that imposed the same on both residents and non-residents. This will protect local companies providing digital services. However, it is important for the government to monitor the value of transactions and outward income based on digital services and consider whether the percent imposed is correct, and adjust the same based on the results. This is to avoid the unlikely effect of such digital service providers deciding to leave the market which will affect both big and small businesses using their services for the marketing of their products.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.