Value Added Tax (VAT) Deferment
- A massive boost on foreign investment in Tanzania
- Criteria for eligibility and related issues enunciated
Attracting the inflow of foreign investment has assumed a prominent place in the strategies of economic growth of many countries, Tanzania included.
Tanzania like many other countries across the globe has resolved to build and maintain an attractive and friendly investment climate through several initiatives which seek to promote and facilitate investment in various sectors. These sectors include agriculture and livestock, natural resources, tourism, manufacturing, (back up services for petroleum and mining sectors), commercial building, transportation, services, financial institutions, telecommunication, energy, human resources, economic infrastructure and broadcasting sector.
The strategies employed by Tanzania include setting up of investment-friendly laws and attractive investment climate so as to command and encourage an increasing number of both Foreign Direct Investment (FDI) and domestic investment that are registered by the Tanzania Investment Centre (TIC).
Projects which are registered and those not registered with TIC are availed with attractive incentives which among them include Value Added Tax (VAT) Deferment.
What is VAT Deferment?
VAT Deferment means a postponement of payment of the value added tax in respect of capital goods.
Generally, capital goods are goods purchased and used to help a company produce consumer goods or provide services. Examples of capital goods include buildings, machines, equipment, furniture and fixtures.
It should be noted that, for the sake of VAT deferment, the items that fall under the wing of VAT deferment are plant and machinery only. Spare parts and other decorative items are not eligible for VAT deferment.
Plant and machinery is not defined in any statute but according to practice, for an item to qualify as a plant or machinery the Tanzania Revenue Authority (TRA) usually tests whether the same is a machine that is issued for production of taxable goods or supplies that has a lifespan of more than 12 months.
The essence of VAT Deferment is to give the importer a relief from the expenses that he may incur in making payment for VAT during the importation of the plant and machinery.
In Tanzania, Section 6(1)(b) of the Value Added Tax Act, No.5 of 2014 states that VAT is not exempted unless provided for in the Act. Nevertheless, an importer may apply to the Commissioner General of TRA for VAT deferment in respect of the plant and machinery that are to be imported to Tanzania.
Who is eligible for VAT Deferment?
Any person who imports plant and machinery for use in the production of taxable supplies can apply for the VAT Deferment.
How do you apply for VAT Deferment?
An importer of capital goods lodges an application to the Commissioner General of TRA, who upon satisfying the conditions prescribed in the regulations is allowed to import plant and machinery without paying any VAT thereon.
Conditions for VAT Deferment:
The following are the conditions that must be fulfilled by the person who needs VAT deferment:
- The applicant should be registered for VAT with the TRA.
- The plant and machinery should be for the use in the business of the applicant.
- The amount of VAT payable in respect of each unit of the capital goods is Tanzanian shillings Twenty million (Tshs. 20,000,000) and above. Goods imported whose VAT is less than Tshs. 20,000,000 shall be treated as normal and shall follow normal rules of calculation of taxes by Customs laws and procedures.
- The applicant should be up to date with filing his VAT returns. A taxable person is required to file VAT returns of a previous month with the Commissioner General on or before the 20th day of each month.
- The applicant’s turnover is, or is expected to be made up of at least 90% of taxable supplies.
Duration of VAT Deferment:
The period in which the VAT deferment shall be operational is ten (10) years. It should be noted that, once the period of deferment lapses, the VAT on capital goods shall not be payable.
Other matters to note:
The Commissioner General of TRA at any time during the period of deferment may inspect the plant and machinery (capital goods) that are subject to deferment to confirm that they are installed and being utilized for the intended purpose specified in the application.
When the Commissioner General is satisfied after the inspection, then the taxable person can account for the deferred VAT in their VAT returns as output tax and input tax. Inspection is at the discretion of the Commissioner General.
Can the deferment facility be terminated?
Yes, when the Commissioner General ascertains the following;
- Plant and machinery have not been installed or utilized for the specified purpose.
- The applicant has failed to account for deferral import VAT.
- Period of deferment has ended.
Can one sell the plant and machinery during the deferment period?
Whenever you sell, re-export or dispose plant and machinery which was cleared under the deferment facility, you will be required to pay the outstanding VAT as well as interest thereon.
What happens when the VAT deferment period lapses?
When the period of deferment expires, then the taxable person will not be required to pay VAT on the capital goods.
The TRA procedure for VAT deferment is investor friendly as the procedure is transparent from the initial stage. Breakthrough Attorneys’ experience in the matter, while attending to our Clients, have observed that the authorities are willing to discuss at the preliminary stage with entities that intend to import such capital goods into the country. In our assessment, such early communication allows companies to present/explain their specific situations and ascertain whether deferment is acceptable to the Tanzanian tax authorities upfront, as opposed to being exposed to costly assessments at a later stage.
Therefore, it is always wise for an investor to make such application for VAT deferment prior to the capital goods being shipped to Tanzania to avoid inconveniences and unexpected expenses when the application is resorted negatively.
On the business investment view, Breakthrough Attorneys reckons and argues that the investor is warranted an ample time to stay stable with cash flow as he seeks to deploy funds in stabilizing his investment in the country, which would have otherwise been used to pay VAT.
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.