Value Added Tax

1. VAT was introduced in Tanzania Mainland through the Value Added Tax Act of 1997.
2. It started operating on 1st July 1997.
3. Initially, the standard VAT rate was 20%, but it was reduced to 18% in 2009.
4. The law was improved in 2014 to exempt some agricultural, education, and health-related goods and services.

VAT works using two types of taxes:

1. Input Tax – This is the VAT paid on purchases of goods and services used to make other products or provide services.
2. Output Tax – This is the VAT charged on sales of goods or services to customers.

VAT Payable = Output Tax − Input Tax

1. If Output Tax > Input Tax, the difference is paid to TRA.
2. If Output Tax < Input Tax, the excess is refunded to the taxpayer.
3. VAT returns must be filed monthly, even if the amount payable is zero.

Registration is the process where a taxable person applies to be recognized by the TRA as someone responsible for collecting and remitting VAT.

Purposes of VAT registration

1. To record and monitor the taxpayer's business.
2. To allow the taxpayer to claim input tax.
3. To give permission to charge VAT (output tax) and issue tax invoices.

Eligibility for VAT registration

To be eligible for VAT registration, a person must:

1. Be making or intending to make taxable supplies of goods/services.
2. Be doing so in the course of business.
3. Have turnover exceeding the amount set in VAT regulations.

Types of VAT registration

1. Normal Registration: For businesses that must register because they exceed the turnover threshold.
2. Voluntary Registration: For businesses with turnover below the threshold, but allowed by TRA under national interest.
3. Intending Trader Registration: For those planning to start a business who want to claim input tax on setup costs.
4. Branch Registration: Businesses with several branches may register branches separately if approved.
5. Divisional Registration: For large businesses that divide operations into autonomous units (divisions) under one company.

Once registered, a person receives a VAT certificate, which contains:

1. Taxpayer Identification Number (TIN)
2. VAT Registration Number (VRN)
3. Effective date of registration
4. Business location

A business may be deregistered from VAT if:

1. It ceases operations
2. It is sold
3. It no longer meets registration conditions

VAT is charged on:

1. Goods and services
2. Immovable property (e.g. land or buildings)
3. Any economic activity

Exempt supplies

These are not subject to VAT at all.

Characteristics:

1. No VAT charged.
2. Trader cannot claim input tax.

Examples:

• Fertilizers, pesticides
• Beekeeping tools
• Fishing boats
• Educational materials like textbooks and charts

Zero-rated supplies

These are taxable but charged at 0% VAT.

Characteristics:

1. Trader charges 0% VAT
2. Can claim input tax refund
3. Provides full relief from VAT

Examples:

1. Exports of goods and services
2. Property or goods supplied outside Tanzania

Standard-rated supplies

These are taxed at the standard rate (18%).

Characteristics:

1. VAT is charged at 18%
2. Trader can deduct input tax

Examples:

1. Cooking oil, sugar
2. Mobile services, electricity, water

1. Provision of Revenue: VAT provides a stable and consistent source of income for the government. Since it is applied at every stage of production and distribution, it captures more revenue from a wide range of goods and services.
2. Revenue Security: VAT reduces the impact of tax evasion. Even if one stage in the supply chain avoids tax, the government still collects VAT from earlier stages. Hence, total revenue loss is minimized.
3. Claim of Input Tax: Registered businesses can claim back VAT paid on purchases (input tax), reducing their cost of doing business and avoiding double taxation.
4. Administrative Simplicity: VAT has a simple structure that makes it easier to administer compared to older tax systems like sales tax. It promotes better compliance due to clearer processes and rules.
5. Self-Policing Nature: VAT encourages both sellers and buyers to be honest. Buyers want proper invoices to claim VAT, which forces sellers to report true sales, thus reducing tax fraud.
6. Promotes Exports: VAT encourages export growth because exports are zero-rated, meaning they are free of VAT, while allowing exporters to reclaim VAT paid on inputs, making their goods more competitive in global markets.

1. Simple to Administer: VAT has a simple structure compared to other consumption or turnover taxes like sales tax. Its simplicity reduces the risk of tax evasion and corruption, which are more likely in systems with complex structures.
2. Self-Pricing Mechanism: VAT is self-pricing, meaning that the price of the goods or services includes VAT, making it harder for businesses to evade taxes. For example, if a seller underreports sales to reduce VAT, the buyer will receive a smaller tax credit, thus indirectly preventing the seller from evading VAT.
3. Record-Keeping and Tax Invoices: Registered traders are required to keep tax invoices, sales receipts, and other accounting records. This allows for easy cross-checking of documents, and invoices can be matched between purchasers and sellers, facilitating tax audits.
4. Minimal Loss in Case of Default: If a trader defaults on VAT claims, the only portion of VAT lost is the one related to the transaction. This ensures that the entire product tax is not lost in case of default.

1. Regressive in Nature: VAT affects low-income earners more, since they spend a larger proportion of their income on taxed goods, making the system unfair to the poor.
2. Encourages Inflation: VAT can lead to higher prices for goods and services, especially if businesses pass the tax to consumers, potentially increasing the cost of living and inflation.
3. Costly Compliance for Small Businesses: Small businesses may face high costs of keeping records, submitting returns, and meeting regulatory requirements, which can be burdensome.
4. Complex for Unregistered Traders: Unregistered traders cannot claim input tax, so they may face higher costs compared to registered businesses, making them less competitive.
5. Risk of Tax Fraud: Despite its strengths, VAT can still be exposed to fraud through fake invoices or misreporting, especially if audits and enforcement are weak.
6. Public Unawareness: In many developing countries, the general public may not fully understand how VAT works, leading to misunderstanding and resistance to tax payment.