2019/20 Tanzania Government Budget Commentary on Tax Changes

General Budget Overview

Following the release and reading of the Government budget on 13 June 2019, we set out our commentary highlighting key areas with a particular focus on proposed tax changes and how these changes support the Government’s development vision.

The budget projects a positive growth trajectory aligned with objectives to widen the tax base intended to support Government’s drive to reduce foreign borrowings with emphasis on internal tax revenues. To achieve this, the

Government has set out policies and strategic measures covering the following specific areas:

  • Improving business environment to attract investments and broaden tax base for an inclusive tax environment
  • Reviewing tax rates to improve production and to protect local industries
  • Encouraging voluntary tax payments with emphasis on the use of ICT in tax administration and revenue collections
  • Harmonizing and adjusting various levies and fees to reduce multiplicity of unnecessary levies and fees
Law changes – in brief

To implement Government revenue strategies, the budget proposes a few changes to some of existing laws as follows:

Relevant Law Proposed Changes Commentary
Tax Administration Extension of tax amnesty period for another 6 months to December 2019. This applies to existing applications for TRA to have more time to process and taxpayers to have more time to settle agreed tax liabilities. Applicable to taxpayers who applied for tax amnesty but are unable to make payments of conceded liabilities by 30 June 2019. Additional remission opportunities would always be the best so any chance for Ministry of Finance to grant another tax amnesty would help generate additional tax revenues to the Government.
VAT
  • VAT exemption on (i) imported refrigeration boxes for horticultural use (ii) Grain Drying Equipment (iii) aircraft lubricants including on airline tickets, flyers, calendars, diaries, labels and employees uniforms with the names of the Airline operator.
  • Zero rating supply of electricity to Zanzibar
  • Removal of VAT exemption on Sanitary Pads.
  • Removal of restriction on exports of raw agricultural products
  • Proposed VAT exemptions will assist to promote local industries. The move will help improve the quality of local products in meeting international market standards.
  • Zero rating electricity supplies to Zanzibar is good news for Zanzibar. Looking forward to more reforms and harmonization of the VAT laws between Mainland and Zanzibar to reduce trade compliance challenges between the two parties.
  • VAT exemption in the airline industry is likely to come up with reduced operational costs given the relatively low margins in the airline industry.
Income Tax Reduction of corporate income tax rate from 30 percent to 25 percent for new investors in the production of sanitary pads for two years up to 2020/21 (subject to Performance Agreements with Government. Tax rate reduction will generate new employment. However, intended purpose may not be achieved given the first few years of operation are usually capital intensive with inevitable tax losses. A period of at least 10 years tax holiday can bring in a positive impact.
Withholding tax exemption on various fees charged to Government on loans received from foreign institutions. This measure reduces borrowing costs, making Government project cost effective.
Increase of threshold for individual income tax (presumptive tax regime) from TZS 20 M to TZS 100M with revenue of more than TZS 14 Million being taxed at maximum rate of 3.5%.
  • Praiseworthy move and best way to broaden tax base. This reduces significantly the cost of compliance at affordable tax rates for individuals (i.e. up to 3.5%). This measure also encourages self-employment.
  • Individuals to use this opportunity, acquire and effectively use EFD Machines to support Government move. This increases transparency and ease of doing business.
 
Other budget focus areas

Blueprint for Regulatory Reforms to Improve the Business Environment

The Government is implementing efforts to drive reforms with a view to achieve a vibrant economy by resolving a number of policy and regulatory challenges which have persisted over time. The challenges that the blueprint is keen to resolve include conflicting or duplicative policies and laws at central and local government levels relating to taxes, levies, licensing and other charges and these have had a negative impact on the growth of the private sector with a weakening effect of the foundation of industrialization initiative.

Against this, the government is determined to improve and strengthen the business enabling environment (BEE) and the government is also aware that BEE is a prerequisite to ensuring that both local and foreign potential investors are attracted to enter and participate in different sectors of the economy to accelerate industrial transformation.

Against this initiative, the Government has boldly decided to implement this through budget proposals as follows:

  • Scrapping off about 54 type of fees and levies charged by various government agencies mainly
  • Proposal to establish an ‘Office of Tax Ombudsman’ – proposed independent office for tax payers to lodge their complaints relating to general tax administration matters handled by TRA
  • Dedicated desk at TRA to receive tax payer’s complaints relating to unrealistic assessments
  • Increase in validity of drivers’ license period to 5 years from the current 3 years. To supplement the loss in licensing revenue, the budget proposes to increase in vehicles registration fees
  • Six months initial business operational period with relief from payment of instalment taxes from date of TIN registration
Stakeholder Expectations

The budget has truly set a tone to achieve growth objectives. We appreciate that the Government still needs tax revenues in its expansion strategies. We can see that, the Government is heavily relying on a relatively higher income tax rate (for both corporates and individuals) so a reason the expectations of tax reliefs at corporates including employment income remain unattended.

We are aware that higher tax rates are not the best in growing economies. Companies continue to pay taxes at 30% on their profits. After considering other direct costs such as social security contributions (10% of wages – cost to employer), 4.5% SDL on cash cost of employment, 1% workers compensation fund, royalties (for extractive industry), etc., there is little left for shareholders to realize their investments (before any re-investment of returns. This makes investments in Tanzania to remain expensive.

Our proposals

We believe it is not too late to propose desirable changes with the aim of creating affordable investments in the country:

  • Reduction of corporate income tax rates for corporate entities from historical 30% to 25% – this will stimulate additional investments and increased employment. This will increase tax revenue due to multiplier effect.
  • Reduction of employment income tax rates from the highest rate currently at 30% to 25% – this will increase employment and Government revenues. To align with other East African States, abolish SDL currently at 4.5% on cash cost of employment.
  • Providing100% VAT exemption on all Government Projects through Government Notices (GNs) to reduce the costs to the Government, with the effect of reducing borrowing costs to the Government
  • More education on the use of EFD Machines for all individuals and the private sector.

We propose a reduction in WHT rate on individuals from the current 5% to 3.5% to align with the maximum tax on presumptive income tax regime. This will eliminate possible tax refund disputes with TRA at individual level.

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This publication is intended to provide you with a general compliance guide and does not constitute a professional tax advice. Do contact us in case of any questions requiring a formal advice or position of the law.

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