TANZANIA REVENUE AUTHORITY TRA

1
TANZANIA REVENUE AUTHORITY(TRA)

• APPLICATION OF VAT TO SMALL AND MEDIUM SIZE
  BUSINESSES IN TANZANIA
  

2
COVERAGE OF THE PAPER

• INTRODUCTION
• DEFINITION OF SMALL, MEDIUM AND LARGE BUSINESSES
• REFORMS OF THE TAX SYSTEM FOR SMALL AND MEDIUM
  SIZE BUSINESSES
  
• VAT REVENUE COLLECTIONS FROM SMALL AND MEDIUM
  SIZE BUSINESSES
  
• SPECIFIC NEEDS FOR SMALL MEDIUM SIZE
  BUSINESSES
  
• ADMINISTRATIVE AND COMPLIANCE PROBLEMS
• THE IMPACT OF ELECTRONIC CASH REGISTERS
• CONCLUDING REMARKS

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INTRODUCTION

• The Value Added Tax (VAT) was introduced in
  Mainland Tanzania on 1st July, 1998 .
  
• In Tanzania Zanzibar, the system became
  operational from 1st January, 1999

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INTRODUCTION (Contd)

• There are two applicable VAT rates in Tanzania
• Standard rate of 20
• Zero rate (0) which is mostly applicable to
  exports

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INTRODUCTION (Contd )

• Main reasons for introducing VAT
• To broaden the tax base
• To attain economic neutrality
• To promote exports, and
• To attain its administrative advantages

6
INTRODUCTION (Contd)

• VAT was mainly introduced to replace the Sales
  Tax, which was
  
• Unable to generate sufficient revenue as it was
  narrow based

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INTRODUCTION (Contd)

• VAT is more advantageous than Sales Tax as
• It is charged on all goods and services except
  those which are specifically exempt
  
• It is economically neutral
• It encourages exports
• It is simple to administer

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DEFINITION OF SMALL, MEDIUM AND LARGE BUSINESSES

• Small businesses
• TRA recognizes small businesses as those with the
  annual taxable turnover below T.shs.40
  million(equivalent to about US 40,000.00 or
  Euro 30,700.00)
• By 31st December, 2004 the number of small size
  businesses was 355,750
  
• Small Traders contributed about 0.44 to the
  domestic revenue collections by TRA

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DEFINITION OF SMALL, MEDIUM AND LARGE BUSINESSES
(Contd)

• Medium size businesses
• TRA recognizes the medium size businesses as
  those with the annual taxable turnover above
  T.shs.40 million (equivalent to about Euro
  30,700.00 or US 40,000.00 ) but whose annual
  total domestic tax payments to TRA do not exceed
  T.shs.400 million (equivalent to about
  US.400,000.00 Euro 307,000.00 )
• As at 31/12/04 the medium size businesses
  registered for VAT were 6,815 and VAT
  contribution was 13.2 to TRA total domestic
  revenue collections

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DEFINITION OF SMALL, MEDIUM AND LARGE BUSINESSES
(Contd)

• Large taxpayers
• Traders whose annual aggregate tax payments to
  TRA is in excess of T.Shs.400 million (equivalent
  to about US.400,000.00 or Euro 307,000.00 ) are
  classified as Large Taxpayers. Include non VAT
  registered traders e.g Banks and Insurance
  companies purely rendering VAT exempt services.
• TRA has registered 200 traders as Large Taxpayers
  
  
• VAT payment by these traders accounted for 18 of
  total domestic revenue collections by TRA

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REFORMS OF THE TAX SYSTEM FOR SMEs

• Abolition of stamp duty on receipts for business
  income w.e.f 1/7/2004
  
• Raise VAT registration threshold for compulsory
  registration to T.Shs.40 million per annum (about
  US 40,000.00 or Euro 30,700.00) w.e.f 1/7/2004

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REFORMS OF THE TAX SYSTEM FOR SMEs (Contd)

• The VAT registration threshold was raised so as
  
  
• To have a manageable population of VAT traders
  (Effective Audits)
  
• To reduce compliance and administrative costs
• To modernise the operations of VAT and Income Tax
  through integration
  
• To put special focus on traders below the VAT
  registration threshold through presumptive
  assessment under special business unit
  arrangements (SBTU)
• Largest traders representing 9 of total traders
  accounted for 82 of gross revenue
  
• 65 of traders accounted for only 5-with many
  non-filers
  
• TRA believes that Administrative capacity of
  Authority as well as traders compliance costs
  should be the criteria for setting an ideal VAT
  registered threshold.

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REFORMS OF THE TAX SYSTEM FOR SMEs (Contd)

• Traders with taxable turnover below the VAT
  registration threshold are allowed to apply for
  VAT registration voluntarily. The conditions
  are
• Fixed place of business
• Proper accounting records
• Bank account for the purpose of business
• Previous compliance in the performance of
  statutory obligations under the tax statutes
  
• National Economic interest and protection of
  revenue

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REFORMS OF THE TAX SYSTEM FOR SMEs (Contd)

• Majority of the small businesses in Mainland
  Tanzania are not registered for VAT.
  
• They pay VAT on their purchases of taxable
  supplies
  
• Such VAT becomes part of their costs
• Do not claim input tax because they are not
  registered for VAT

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REVENUE COLLECTIONS FROM SMALL AND MEDIUM SIZE
BUSINESSES

• Revenue collections from small size businesses
• From July to Dec 2004 Tshs 2,015.2 million (about
  US 2 million or Euro 1.5 million) of presumptive
  tax was collected from small businesses
  
• The target was to collect 2,887.3 million (about
  US 2.8 million or Euro 2.2 million)
  
• The performance rate was 70
• The administrative difficulty of following-up the
  traders under the informal sector who are also
  not keeping records was the main reason for not
  attaining the target
• The collections represent 0.44 to gross domestic
  revenue collections (Tshs 456,478.3 million
  about US 456 million or Euro 351 million) by TRA

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REVENUE COLLECTIONS FROM SMALL AND MEDIUM SIZE
BUSINESSES (Contd)

• VAT collected from medium size businesses
• During the first half of the financial year
  2004/05 VAT (local) collected was T.Shs.60,084.8
  million (about US 60 million or Euro 46 million)
  
• This represents 13.2 to the gross domestic
  revenue collections by TRA
  
• The target was T.Shs.59,212.0 million (about US
  59 million or Euro 45.5 million)
  
• The performance rate was 101

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REVENUE COLLECTIONS FROM SMALL AND MEDIUM SIZE
BUSINESSES (Contd)

• Reasons for the good performance
• Close monitoring of monthly collections (normal
  flows) in which the expected collections are
  confirmed by 15th of every month
  
• Recovery of tax arrears
• Effective audits

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REVENUE COLLECTIONS FROM SMALL AND MEDIUM SIZE
BUSINESSES (Contd)

• Reasons for the good performance (Contd)
• Close follow up of non-filers
• Tight controls over special reliefs and VAT
  refunds
  
• Training conducted to staff
• Assurance management programmes
• Implementation of the Departmental Action Plans

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SPECIFIC NEEDS FOR SMALL AND MEDIUM SIZE
BUSINESSES

• Tax forms, Returns and Information
• Availability of Tax Forms, Returns and
  Information written in clearly understood
  language
  
• Complete, simple and accurate tax information
  provided through the print and electronic media
  such as newspapers, pamphlets, leaflets, website,
  radio and television

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SPECIFIC NEEDS FOR SMALL AND MEDIUM SIZE
BUSINESSES (Contd)

• Impartial treatment
• impartial application of the tax laws when
  determining tax liabilities
  
• The Tax Authority is obliged to collect only the
  correct amount of tax, no more no less

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SPECIFIC NEEDS FOR SMALL AND MEDIUM SIZE
BUSINESSES (Contd)

• Courtesy and fairness
• Courteous and fair treatment in all their
  dealings with the Tax Authority

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SPECIFIC NEEDS FOR SMALL AND MEDIUM SIZE
BUSINESSES (Contd)

• Privacy and confidentiality
• Personal and financial information provided by
  businesses to the Tax Authority should be treated
  confidentially and should be used only for
  purposes allowed by law.

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SPECIFIC NEEDS FOR SMALL AND MEDIUM SIZE
BUSINESSES (Contd)

• Presumption of honesty
• Businesses require to be presumed honest unless
  there is evidence to the contrary

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SPECIFIC NEEDS FOR SMALL AND MEDIUM SIZE
BUSINESSES (Contd)

• Impartial review of assessments
• Businesses need to be allowed to object to an
  assessment or decision made by the Revenue
  Authority if they believe to have been treated
  unfairly
• The Revenue Authority is required to conduct an
  impartial review of their cases expeditiously
  
• Tanzania has an effective Tax Revenue Appeals
  Board which sits regularly to deliberate on tax
  disputes between TRA and Taxpayers
  

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SPECIFIC NEEDS FOR SMALL AND MEDIUM SIZE
BUSINESSES (Contd)

• Tax benefits under the revenue laws
• Businesses need to be informed on the benefits
  allowed under revenue laws like entitlement to
  VAT special reliefs and deferment of VAT on
  capital goods.

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SPECIFIC NEEDS FOR SMALL AND MEDIUM SIZE
BUSINESSES (Contd)

• Quality taxpayer service
• Businesses need to be provided with quality
  service (including education) by the Tax
  Authority

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SPECIFIC NEEDS FOR SMALL AND MEDIUM SIZE
BUSINESSES (Contd)

• Complaints and enquiries
• Opportunities to complain to higher officials
  against mistreatment
  
• TRA has put in place a special arrangement
  (Ethics Committee) for staff integrity matters

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ADMINISTRATIVE AND COMPLIANCE PROBLEMS

• Exemptions and VAT special reliefs are narrowing
  the tax base
  
• Some of the VAT registered traders are not
  issuing tax invoices

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ADMINISTRATIVE AND COMPLIANCE PROBLEMS (Contd)

• Some of the VAT registered traders are submitting
  payment returns without payments
  
• Non-accounting for VAT on branch sales
• Management of VAT repayment claims has been a
  difficult issue

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ADMINISTRATIVE AND COMPLIANCE PROBLEMS (Contd)

• The administration of VAT deferment schemes on
  generic and deemed capital goods has not been
  smooth
  
• There is loss of business resulting from
  competition with non-VAT registered businesses

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THE IMPACT OF ELECTRONIC CASH REGISTERS

• The Law
• The law requires VAT registered retailers to
  record their daily sales and issue receipts
  through Electronic Cash Registers (ECRs)

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THE IMPACT OF ELECTRONIC CASH REGISTERS (Contd)

• An acceptable ECR should be capable to issue
  receipts for each transaction containing
  
• Name, Address, VAT Registration Number and TIN of
  the supplier
  
• Date of supply
• Consecutive receipt number
• Brief description of each category of goods or
  services supplied

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33. THE IMPACT OF ELECTRONIC CASH REGISTERS
(Contd)

• Contents of ECR receipt (contd)
• Tax exclusive value of each category of goods or
  services supplied
  
• Tax exclusive total value of supply
• Total tax charged
• Total tax inclusive value of supply

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34. THE IMPACT OF ELECTRONIC CASH REGISTERS
(Contd)

• Other attributes of an ECR
• A back-up master audit till roll
• A permanent store of all entries
• capability to store entries for up to 5 years
• A battery back up against power failure
• Read, display and print facilities

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35. THE IMPACT OF ELECTRONIC CASH REGISTERS
(Contd)

• Reasons for introducing the scheme
• Retailers pose a great risk to VAT
• Most of the retailers do not issue tax
  invoices/receipts
  
• consumers do not have the culture of asking for
  or demanding receipts or tax invoices
  

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36. THE IMPACT OF ELECTRONIC CASH REGISTERS
(Contd)

• Experience on the use of ECRs
• Resistance from the Business Community
• Credibility of the Scheme as loopholes still
  exist
  
• Expensive Goods Sold at Retail Level require
  proper receipts/tax invoices
  
• Training of VAT Auditors on how the ECR operates
  is mandatory
  

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37. THE IMPACT OF ELECTRONIC CASH REGISTERS
(Contd)

• Experience on the use of ECRs (Contd)
• In the first year the estimated revenue increase
  was 19, in the second year it was 13

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38. THE IMPACT OF ELECTRONIC CASH REGISTERS
(Contd)

• Experience on the use of ECRs (Contd)
• Retailers operating more than one outlet must
  have ECR for each outlet
  
• Retailers operating mobile shops such as trucks
  selling soft drinks find it difficult to operate
  ECRs

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39. THE IMPACT OF ELECTRONIC CASH REGISTERS
(Contd)

• Experience on the use of ECRs (Contd )
• ECRs cannot be used in remote areas where there
  is no electricity
  
• However, may not be a serious problem in
  countries where electricity is available even in
  the rural areas. There are very few VAT
  registered traders in the rural areas in Tanzania.

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40. THE IMPACT OF ELECTRONIC CASH REGISTERS
(Contd)

• Experience on the use of ECRs (Contd)
• Increase of VAT registration threshold has lead
  into massive deregistration
  
• Most of VAT registered retailers are operating
  below the new VAT registration threshold of
  Tshs.40 million (equivalent to about US
  40,000.00 or Euro 30,700.00)
• Deregistered traders are not compelled to use
  ECRs although they are still required to keep
  proper records under Income Tax Act. 2004
  
• It is appropriate to cause an amendment to the
  Income Tax Act so as to compel such traders to
  continue using ECRs just like what they were
  required to do under the VAT Act.

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41. CONCLUDING REMARKS

• Small and medium size businesses have a
  considerable role to play towards collection of
  Government revenue.
  
• There are administrative and compliance problems
  in relation to VAT by the medium size businesses
  
  
• Serious discussions on such issues may enable
  countries like Tanzania to increase its share of
  revenue

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Thank you for your kind attention