THE PERSPECTIVE OF “VAT CONCESSIONS REGIME” IN TANZANIA

Dr Handley Mpoki Mafwenga Jr

(ADTM ( Hons) , PGDTM, MSc (in finance) , PhD)
(Financial and Tax Analyst -Treasury)

Abstract.

This paper bestows the historical amendments to the VAT Act, 1997 up to July,

2004 with specific focus on VAT concessions. The VAT Act has to be used in tandem in

order to consistently track the flow of changes and to know the reasons and revenue

implications regarding tax concessions. It touches economic and social impacts of these

amendments.

The VAT base is primarily eroded by Zero rating system under section 9 which

preserves room for the First Schedule, Pure exemption Scheme under section 10 which

intrinsically has partial concessions in nature and preserves room for the Second

Schedule and VAT special relief under section 11 which mentions the relieved persons

with associated goods and services in the Third Schedule.

Section 12 of the VAT Act, gives powers to the Minister for Finance to amend,

vary, add to or replace the Schedules by Government Notice published in the Gazette

after consulting the TRA which will recommend in line with the section 13 of the TRA
Act, N0 11 of 1995 the criteria or factors by reference to which exemption may be

granted.

Introduction

In Tanzania, we use the Consumption type VAT which allows each firm to deduct

the VAT paid on both capital and intermediate inputs from the gross VAT liability on its

sales to other firms or ultimate consumers. There is no adjustments required regarding

depreciation on capital goods in the following years, hence, it grants 100 per cent

accelerated depreciation which is equivalent to zero rating. Indeed, there is no tax

imposed on value added in capital goods and accumulated inventory because they do not

form part of the turnover threshold components.

Exemptions are caused by the discretionary changes in the existing tax laws or

persistence of Lag-cycle between the time when policy is needed and when policy is

recognized, when need is recognized and when need is instituted, and the time when

policy is adopted and when its impact is felt. This enforces the government to adjust its

policy and amend the VAT Law.

The VAT is based on the Normative Tax Structure, and reformed in accordance

with the Norms and Benchmark such as tax rates, tax base, legal structure etc. Evaluation

on the impact of tax policies brought about by exemptions and interactions and changes

of different parameters including compliance level using Micro-Simulation Models is

very essential as these deviate from the Normative Tax Structure.

2
 Currently, VAT base accounts for about 40% of the total tax revenue or around

5.2% of the country’s GDP. The revenue productivity is very low but steadily improving,

in 1998/99 accounted for 0.20 while in 2003/04 accounted for 0.26.

However, administrative dimensions of exemption, economic efficiency,

improved capacity in refund administration and revenue adequacy are the determinants

for exemption endowment.

FIRST SCHEDULE

This Schedule is a focal point for the taxable exports so as to promote and create

sustainable balance of trade and foster the productive and competitive capacity to local

producers who intends to export taxable supplies. This has positive impacts on Consumer

Price Index since it reduces costs of living for families on social welfare.

Because of the large and uneven distortions that can result from the exemptions

Zero rating is an alternative and its economic impacts are much more over than

exemption. Zero rating before the retail stage does not impact total liability of a final

product because the next taxable stage makes the entire amount of tax lost at the zero-

rated intermediate stage and zero rating at the retail stage results in complete exemption

of the product.

3
 *
The shortcomings of zero rating are fourfold;

1. (other than on exports) It increases compliance costs for businesses,

particularly small businesses that deal with different rates if sells zero

rates along with standard rated supplies because they should keep separate

accounts. In the literature of Agha and Haughton (1996) empirical work

indicates that by adding another VAT rate, the compliance rate is lowered

by 7% points.

2. Increases administrative costs; The number of voluntary registrants

increases because they are anxious to obtain VAT refunds which must be

monitored even though no revenue is realized thereby slaying

administrative resources.

3. Increases tax evasion; requests of taxpayers for zero rating may

constitutes tax evasion

4. Causes inefficiency in income distribution, and revenue rising prospective

is very significance in absence of zero rates.

However, if zero rate increases surplus in export market there is a little doubt that

zero rating is the sine qua non for revenue maximization.

^
Under Invoice –based credit method, Where; R P =VAT paid to the portfolio revenue

(TRA), R1, R2 , R3 =VAT paid in the chain,   error term that is zero rate in the last stage

and 1,  2,  3 = Beta of the portfolio revenue which is the price of goods or services. It

measures the sensitivity of VAT-portfolio revenue. Therefore, zero rating the tax liability

is calculated as follows;

4
 ^
Manufacturer: R P = R2  2  [ R3  3  R2  2 ]  R3  3 …………………………………… (1)

Manufacturing as first stage does not change the effective tax revenues

^
Wholesaler: R P = R1 1  [ 2  R1 1 ]  [ R3  3     2 ]  R3  3 ………… …………….(2)

Wholesaling as second stage does not change the VAT revenues

^
Retailer: R P  R1 1  [ R2  2  R1 1 ]  [   3  R2  2 ]    0 ……………………….. (3)

Tax revenues for the whole chain become zero if the last stage is zero rated.

In its fundamental nature, zero rated supplies help the taxpayer to be competitive

as there is no imputed VAT in the cost charged to the customer and taxpayer can reclaim

input tax. This becomes a real advantage when making exports under competition with

other countries.

Amendments

On July, 1997, First Schedule encompassed three items to conform to the main

principle for designing VAT †law which advocates “few exemptions”.

The exportations are zero rated upon delivery of evidence which satisfies the

Commissioner in line with the Item No 1 of the First Schedule. On July, 1998, this Item

changed the term “Taxable Services” to incorporate all services whether taxable or

exempt. However, exempt supplies are cognately not zero rated though may be

transformed to zero rated upon exportation.

5
 Item No 2 zero rates Food and Beverages for consumption or duty free sale on

aircraft or ships on Journeys to destinations outside Tanzania. On July 1998 this Item was

amended to elucidate the term “Tanzania” as to mean “United Republic of Tanzania”

which includes local Authorities in Mainland Tanzania but excludes Local Authorities for

Tanzania Zanzibar.

In 1997, Item 2 contained sub-items (a) and (b) which portrays the meaning of

export. On July, 1998 they appeared as a Note which has two paragraphs, a) if goods and

services are delivered to or made available at an address outside URT and b) when

services are supplied for use or consumption outside the URT in both cases when it has

been evidenced by ‡documentary proof acceptable to the Commissioner exports shall

subsequently be deemed to have been taken place.

However, Note to Item 2 changed with effect from July 2003, with sub-item (a)

and (b) which mention types of services that are zero rate in two categories (aa) and (bb).

Sub-item (a) has not changed §except Sub-item (b) that reckons export to have been taken
**
place if the supplier belongs to Mainland Tanzania in line with Section 7 subsection (4)

of the VAT Act 1997. The aim is to increase export earnings, ensure effective use of

regional and global trade fairs, and increasing Tanzania’s participation in existing

regional integration Schemes.

‡ ‡
VAT Performance Measures
The tax buoyancy and elasticity can generally be used to evaluate the performance of the VAT. The tax
buoyancy is defined as the ratio between the real growth rate of tax revenues and the real growth rate of
GDP or GNP. The data on revenue collection used in estimating tax buoyancy incorporates the impact of
any discretionary changes in the tax rate or base or both during the reporting period.
Tax elasticity is defined in the same way as tax buoyancy. However, the data on revenue collection used in
estimating elasticity excludes the impact of any discretionary changes during the reporting period. Thus,
tax buoyancy measures the efficiency of both underlying tax structure and discretionary changes whereas;
tax elasticity measures the efficiency of the fundamental tax structure.

6
 The paragraph (aa) to Item 2 defines “export of services”, that shall be deemed to

have been taken place if services are rendered in Mainland Tanzania in respect of the

Land outside the URT. Sub-item (bb) gives zero rate to services relating to i) cultural,

sporting, scientific, education or entertainment services ii) exhibitions, conferences or

meetings iii) services ancillary to the above mentioned services including services of

organizing the supply of the services and iv) the valuation of goods or any work carried

out on any goods when such services are physically carried outside the URT.

The zero rated scope was expanded on July 1998 with three sub-items i.e. (3), (4),

and (5). Sub-item (3) gives zero rate to services such as transport of or any ancillary

transport services of loading, unloading, wharfage, shore handling, storage, warehousing

and handling supplied in connection with goods exported or in transit through the URT

whether such services are supplied directly or through the agent to a person who is not a

resident of the URT. Sub-item (4) zero rates services relating to handling, parking,

pilotage, salvage or towage of any foreign going ship or aircraft. Sub-item (5) zero rates

services comprising of the repair, maintenance, insuring, broking or management of any

foreign going ship or aircraft.

Sixth Directive under European Union refers the place of supply of services to be

where the supplier is located and then exceptions are listed for different types of services

for which the place of supply is said to be where the customer is located or where

services are actually consumed the disadvantage of this approach is to update the place of

supply list as new types of services appear. Under OECD the taxation of E-commerce is

purely taxation of services. However paragraph 32 gives another approach of taxing

7
services where they are performed but when they are performed in more than one place,

the location of the supplier would be deemed to be place of taxation.

However, the Consultant PriceWaterHouse Coopers in their analytical views (that

had to be incorporated in the budget proposals) argues that new definition of export of

services makes exports of services more or less impossible without charging VAT. This

has left Tanzania uncompetitive against other countries. For example in Uganda a

Tanzanian Consultant would have to charge USD 12,000(Cost 10,000  VAT 2,000)

whilst a counterpart in Kenya can charge just the cost of USD 10,000 as the definition of

export of services is based on where the ultimate consumer is based rather than where the

supplier belongs. Consequently, the customer in Uganda will opt for the Consultant in

Kenya.

On July, 2000, First Schedule added Item 6 which zero rates Cooperative Unions

and Community based Societies that deal with Agricultural produce. Under properly-
††
working destination-based VAT, exports receive refunds equal to the amount of VAT

paid in the course of producing the export item. Therefore, processing and packaging

materials for export crops are zero rated to enable farmers to reclaim input tax. Yet

agricultural productivity is very low on account of low levels of economy associated with

unsupportive infrastructure and an increased competition from imported manufactured

goods under Liberalization. In order for the farmers to achieve this goal, they are required

and are ipso facto to be members of the Cooperative Unions and Community based

The VAT performance is considered to be satisfactory if the buoyancy or elasticity is greater than equal to
one; in this case, the VAT collection keeps up with the growth of the economy. Other diagnostic tool for
the VAT performance include efficiency ratio and C-efficiency ratio Efficiency ratio (E) is defined as the
share of the VAT in GDP divided by the standard VAT rate. An efficiency ratio of say 30% implies that if
the standard VAT rate is increased by 15 point, the shares of the VAT revenues in GDP is expected to
increase by 0.3% point. In general the higher the ratio E the better the performance of the VAT

8
societies because in their individual capacity they cannot be registered for VAT because

their turnovers are always below ‡‡Threshold.

In his literature Ebrill et al (2001) argues that low income countries encounter

more practical difficulties than do others in rebating taxes on exports and exhibit the

greatest reliance on taxing traded goods under their VATs. Fortunately, In Tanzania

payment-lag for refund is outsmarted by an improved administration while one of the

measures undertaken includes the opening of special account at the Bank of Tanzania in

order to ease cash flow management.

On July, 2004, First Schedule was expanded with five Items i.e (7), (8), (9), (10)

and (11). Item 7 gives zero rate to the local manufacturers (who would export agricultural

products) in the supply of tractors for agricultural use, planters, harrows, combine

harvesters, etc (see the list in the VAT Act, 1997) and other tools of kinds used in

agriculture, horticulture or forestry. This is because the sector is slowly growing

attributed to low labour and land productivity due to the use of rudimentary tools and

ineffective extensions services. Nevertheless, exchange rate adjusts to undo effects of

VAT’s on incentives given to farmers on exports, this would foster the local

manufacturers’ capacity to hold agricultural capital items, acquire goods at a lower price

and configure them in the global economy.

The fertilizers, pesticides, insecticides, fungicides, rodenticides, herbicides,

antispounting products and plant growth regulators and similar products which ought to

‡‡
. The C-efficiency ratio is defined as the share of the VAT in consumption divided by the standard VAT
rate. This statistic –based on assumption rather than GDP-is a more reliable diagnostic tool than the
efficiency ratio E. The index may be higher or lower than 100%. Some caution should be noted. A tool
high ratio E especially the one far above 100%- that may be derived from multiple exemptions in the
middle stage or inclusion of investment costs in the base (eg GNP –type VAT)-does not necessarily mean
the VAT is efficient but may instead indicate probable cascading problem. In general the further the index
deviates from100% (either lower or higher the 100% benchmark) the less efficient the VAT system is.

9
be used in agriculture are zero rated under Item 8 so as to enable farmers to reclaim input

tax and acquire these products at a lower price. Yet, fertilizers are sold at a high price due

to the associated hidden costs.

The Fishing nets and accessories and out boat engines for fishing are also given

relief whereby Item 9 gives zero rate in favor of fish farming to be able to reclaim input

tax because this sub-sector creates employment opportunities, foreign exchange earnings

and it is a source of protein for nearly 1/3 of the country. The industry consists of artisan

fishermen using traditional methods with 1% using modern gear. Again, products were

VAT exempt which created import anomaly in favour of imports because fishnets and

accessories have 0% import duty while there is tax component locally.

Item 10 zero rates to the local manufacturers for all veterinary medicines, drugs

and equipment which have been approved by the Minister of Health upon

recommendation by the Tanzania Food and Drugs Authority previously “Pharmacy

Board”. The approval also includes human medicines, drugs and equipment and articles

designed for the use by the blind or disabled as provided under Item 11. The aim is to

foster the provision of adequate and quality veterinary services and livestock

development infrastructure including high quality of healthy services. However, in 2005

Mosquito Coils and Sanitary pads were included under zero rate in order to enable

dealers be able to reclaim input tax and facilitating malaria eradication campaign and

treating pads as essential products for women.

10
 §§
The Government has been expanding the scope of zero rates without any

expedition fraught with loss of revenue because countries relying on VAT have fewer

exports and fewer imports as a fraction of GDP than do countries relying on taxes other

than VAT; the basic issue is the capacity to control income and various geographic

attributes.

SECOND SCHEDULE

This Schedule gives concessions in order to foster social, economic and political

development. When an industry is exempt from VAT, consumers do not pay VAT on its

taxable service it is therefore unable to recover the VAT paid to its suppliers and services

providers.

Exemptions obscure administration, erode tax base, distort input-choice decisions

and breaks the VAT chain thereby induce cascading problem on the other and generates

technical problems in compliance and administration, especially when a firm produces

§§

List for the taxpayers under TVCs

 Import duty on public employees’ vehicles - under GN 595 of 1986, GN 520 of 1995, GN 98 of
1999 and GN 128 of 2001.
 Excise duty on public employees’ vehicles – under GN 522 of 1995, GN 93 of 1999 and GN 127
of 2001.
 Non-religious charitable, community based or non-profit institutions exempt from excise duty (on
local goods or imports) through GN 197 of 2001.
 Non-religious charitable, community based or non-profit institutions exempt from import duty
through GN 200 of 2001 (now in Part A item 11 of Third Schedule of Customs Tariff Act).
 Non-religious charitable, community based or non-profit institutions with special relief from VAT
through article 13 of the third schedule of the VAT Act (imports or domestic supply).
 Non-religious charitable organizations with special relief from VAT through agreement with the
Government under article 12 of the third schedule of the VAT Act (imports or domestic supply).

11
both exempt and taxable supplies because advantage of the invoice-based credit VAT in

dealing with multiple rate structure disappears due to the apportionment of input tax

associated with exempt supplies and those associated with taxable supplies. In short

exemption creates numerous inefficiency and ineffectiveness problems, and erodes the

integrity and sustainability of the VAT system.

Initiatives to downsize and streamline exemptions, improve its administration and

joystick are being put in place, including the application of Treasury Vouchers System

(TVCs) which is a control mechanism enabling exempt taxpayers to receive cheque from

the Treasury equal to the amount exempted and pay to TRA. This mechanism does not

involve real resource transfers as it is a proxy for tax expenditure.

Effectiveness of exemption is hard to quantify because to lower the tax burden on

the equity grounds through exemptions requires exemption to be permissible at a final

stage where poor consume goods otherwise tax burden is even higher than that in non-

exempt situation due to cascading effects.

The exemptions and analysis of revenue implications under invoice-based credit

method can be shown as follows;

^
Manufacturing: R P = R2  2  [ R3  3  R2  2 ]  R3  3 ………………………………… (4)

Tax revenues are the same in both non-exemption and first-stage exemption cases.

^
Wholesaler: R P = R1 1  R3  3 ……………………………………………….. ……..(5)

***
With the middle stage exemption tax revenues are higher than the ones without

exemption, because exemption of the middle stage effectively eliminates the stage from

 Non-religious NGOs with special Government Notices

12
the whole chain. The second firm cannot reclaim for refund of its input tax- the tax

burden hence carries on. This generates “Cascading effects” which is typical in turnover

taxation.

^
Retailer: R P = R1 1  [ R2  2  R1 1 ]  R2  2 ………………………… (6)

The tax revenues are less than the ones collected in the non-exemption case. As

the last stage is out of the tax net the value burden could be reduced by exempting the last

stage.

In its fundamental nature exempt supplies adds costs to the taxpayer as he/she

cannot reclaim input tax which does not make much difference to the cost that falls to the

ultimate consumer.

Amendments

On July, 1997, Item 1 gave exemptions to Food and Livestock supplies which

have five categories (refer to the VAT Act, 1997; the list of supplies on those categories

because have not been changed)

 Non-religious NGOs listed as exempt from import duty in Part A of the Third Schedule of the
Customs Tariff Act.
 Non religious non governmental educational institutions exempted from import duty on school
stationary (excluding exercise books), instruments, appliances and similar requisites including
furniture used in the classroom, workshop or laboratory under Part A of the Third Schedule of the
Customs Tariff Act.
 Non religious non governmental educational institutions exempted from import duty on education
books under GN 145 of 1996.
 Non religious non governmental educational institutions exempted from import duty on
cinematograph, film strip and slide projectors and educational films under Part B of the Third
Schedule of the Customs Tariff Act.

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 †††
Sub-item No 4 which exempt Fish i.e Unprocessed fish except selfish and

vegetables, fruits and nuts etc has a Note which clarifies “Unprocessed goods” as to mean

goods that have undergone only simple processes of preparations or preservations such as

freezing, chilling, drying, salting, smoking, stripping or polishing. Goods when supplied

for catering by a restaurant, cafeteria, and canteen or like establishment are not exempted.

Though these Items were exempted on technical and administrative grounds hitherto

exempting Foodstuffs is the most widely used approach in the world to mitigate

regressive impact.

On July, 1998, Item 1 added the term “crops”the title then read “Food, Crops and

Livestock supplies”. Sub-item (3) of Item (1) was deleted, clarified that exemption should

only be on Unprocessed daily products i.e for Cow or Goats’ milk, and sub-item (5)

added other new products such as tobacco, cashew nuts, coffee, tea, pyrethrum, cotton,

sisal, sugarcanes, and seeds so as to maintain egalitarianism standard and the term “fresh

edible vegetables” changed to read “Edible vegetables” so as to incorporate all vegetables

that could be geared up for catering.

On July, 1999, sub-item (5) changed the term “agricultural products” for

“Unprocessed agricultural products” so as to reduce exemptions. The exemptions aim at

‡‡‡
helping the Agricultural sector(including livestock and fishing) and manufacturing

sector especially food, drinks and beverages etc. over the operational constraints such that

prices would not increase the consumer welfare, distort nutritional status, reduce

14
production, affect employment and reduce income. Currently, agriculture constitutes 45%

of GDP while manufacturing sector is around 8% of GDP.

On July 1997 Item 2 exempted pesticides, Fertilizers, insecticides, fungicides,

rodenticides, herbicides, anti-sprouting products and plant growth regulations and similar

products, on July, 1998, this Item was amended by adding after the word “similar

products” the words “which are necessary for the use in agricultural process” so as to

make good for the legal deficiency.

Item 3 has three sub-items which exempts Health supplies i.e 1) supply of Health

or Medical services by a registered medical practitioner; optician, dentist, hospital or

clinic, 2) Medicines and drugs listed in the National Essential Drugs List issued by the

Ministry of Health or Regulations made by the Minister 3) supply to registered medical

practitioner, optician, dentist, hospital or clinic or to patient or equipment designed for

use by blind or disabled on the grounds of being essential consumer goods or services so

as to have improved quality life and social welfare.

On July, 1999, Item 3 was amended, sub-item 2 included the term “equipment”

and later on July, 2003 the condition that required list of essential drugs to be exemption-

base was strengthened while approval by the Minister of Health was acclaimed but upon

recommendation of the Pharmacy Board. It is used to guide the Minister of Health,

Commissioner for the TRA in exemption administration and maintains consistency and

transparency. In 2005, Item 3 built-in Mosquito coils and Sanitary pads in exemption

because they are deemed as pills.

Exemptions to educational services provided by an establishment registered by

the Government are given in Item 4 because the quality and supply of education services

15
is less than the demand. This relief does not extend to the educational supply relating to

goods. The equity rationale for this exemption is to reduce Regressivity of the VAT. This

Item has not changed.

Item 5 deals with veterinary supplies. On July, 1997 there were three sub-items i.e

1) supply of veterinary services by a registered veterinary practitioner 2) supply of

medicines and drugs by a registered veterinary practitioner in the course of his

professional work and 3) supply to a registered veterinary practitioner of equipment

designed solely for veterinary use. On July, 1998, sub-item 2 was deleted the reason is to

give concession for a registered medical practitioner for the medicines, drugs and

veterinary services. These goods and services were exempted because are not subject to

negative protection quandary and their importation may not be feasible.

Item 6 gives exemption to Books, and Newspapers in two sub-items (see the

categories in VAT Act, 1997) in order to foster development in educational sector as it

provides widespread access to the education at a lower price.

Exemptions to transport services for the transportation of persons by any means of

conveyance is given under Item 7 excluding taxi, cabs, rental cars, boats and air Charter

because these are private goods, exempting them may distort the market stability in

transport sector, increase costs and reduce productivity. This Item has not changed

because supply of transport services in the country does not suffice the demand and it is

associated with high risk of annihilated infrastructure.

Item 8 gives exemption on technical and equity grounds to Housing and Land, it

has two sub- items i.e 1) the sale or lease of an interest in land and 2) the sale of used or

lease of residential buildings excluding buildings from the definition of land. However,

16
office buildings are fully taxed. Technically, it is hard to input rent values for owner

occupation; therefore, extensive information and subjective valuation are required.

Cnossen (1995) offers some broad guidelines for the treatment of the housing sector: He

argues that the consistent and neutral application of the VAT to real estates (i.e all

building activities, forms of leasing and sales are to be taxed at the standard rates) would

be superior – on both efficiency and equity grounds – to widespread exemption or

application of preferential rates.

Taxing business buildings is a clear-cut case. Firms get credit as the rent or

building service is regarded as an input. Exempting business buildings would be

troublesome; the VAT chain would be broken and cascading problems would occur. This

Item has not been changed.

On July, 1997, Item 9 which gives exemptions to Financial and Insurance services

had two sub-items i.e 1) provisions of Insurance services and 2) the issue, transfer,

receipt of or other dealing with money (including foreign exchange) or any note or order

for the payment of money. The VAT should apply to resources devoted to financial

transactions in the same manner that it does in other sectors. Therefore, appropriate

treatment of financial services under VAT is to make full use of the theoretical

equivalence between a labor income tax and a proportional value-added tax. Harry,

Glubert, and James Mackie (1999) argue that only final consumption goods should be

taxed under a VAT, while intermediate goods are not subject to tax –any such tax distorts

production. They then argue that financial services are an intermediate good and not

something that provides utility in and of itself, so should be exempt from tax.

17
 Jack (1999) and Chia and Whalley (1999) argue that if financial services require

no real resources, then all prices for financial services should be proportional to general

price level, and no further tax needs to be collected from the financial sector. On July,

1998, six sub-items were added to Item 9 (For access to six items see VAT Act, 1997

because this Item has not changed)

Item 10 gives exemptions to water except bottled or canned or similarly presented

drinking water which do not undergo simple process of preparations or preservations and

transformed from the purely social goods to semi-public goods for the profit motive in

the market.

Item 11 gives exemption to Funeral services; it has two sub-items i.e 1)

transportation and disposal of human remains and 2) the arrangements for disposal of the

remains of the dead. This is a hard-to-tax sector and hard to administer as they are

deemed immoral to tax.

On July, 1998, the Second Schedule was expanded with four Items thereby

containing fifteen Items i.e 12, 13, 14, and 15. Item 12 gave exemption to petroleum

products (see the list in the VAT Act, 1997) and illuminating kerosene in order to sustain

economic stability because any extensive price increase in the petroleum products affect

the movement of price levels in the economy. On July, 2003 this Item deleted all

products in order to strengthen and simplify administration in exemption except aviation

spirit whose competitiveness is virtually exports. In 2005, this Item was amended it deals

with Petroleum products that covers Aviation spirit, spirit type Jet fuel and kerosene type

Jet fuel (JetA-1) .

18
 Agricultural implements (see lists in VAT Act1997) have been exempted in Item

1 because agriculture is classified as a hard-to tax sector for numerous technical, social

and political reasons. From the social perspective agriculture merits certain Special tax

relief as most of the poor are active in the sector which hosts most of the political

constituents hence need to be treated more favorably in taxation. However, on July, 2000

this Item included other tools for a kind used in agriculture, horticulture or forestry while

manure spreader was deleted because it is part and parcel of fertilizer distributors.

The tourist services are given exemption in Item 14, on July 1998 encompassed

tourist guiding, game driving, water, safaris, animal or bird watching and pack fees in

order to encourage and foster development in tourism sector. On July, 2003 tourist

charter services and ground transport were added because are exclusively intended to

facilitate tourist to access potential areas.

The Postal supplies such as supply of Postage Stamps are exempted under Item 15

since July 1997, in order to ease tax administration and reduce transactions costs (if any)

for stamp users. However, there is no hidden tax that passes onto the customers, and if

you apply VAT to all supplies of postal services there will be an elimination of

competitive distortions that prevails between exempt competitors and taxable competitors

who have to charge VAT. However, liberalization of the postal services markets is likely

to increase competitive distortions.

On July, 2000, there was an addition of two Items i.e 16 which gives exemption to

Aircraft, Aircraft engines, parts and maintenance in order to revitalize the gloomy Air

transport industry and Item 17 which gives exemptions to Fishing gears such as fishing

19
nets and accessories and out boat engines for fishing which enhance the growth of fishing

industry.

On July, 2001, the Second Schedule added four Items i.e 18, 19, 20, and 21; Item

18 gives exemption to Game of chance by means of private lottery, casinos or slot or

gaming machines because the Gaming tax Act was introduced.

Item 19 gives exemption to computers, printers, and other accessories connected

thereto and specified cash register in order to adopt technological changes and induce

Youth to use computers in Schools, Colleges etc moreover, Specified Cash Registers

Scheme intended to require retailers who sale goods in small quantities without issuing

receipt to record their daily sales and issue receipts through Electronic Cash Registers

with effect from July 2002.

Item 20 gives exemptions to the local processed yarn so as to reduce costs and

promote employment to the hand looms. This Item was deleted on July 2004 on

administrative grounds.

Item 21 gives exemptions for the supply of parking materials to the registered

milk processor or manufacturer. On July 1998 it was deleted because of the thorny to

control exemptions over apportionment of input and output tax. This was transferred to

Third Schedule where dealers get direct relief.

THIRD SCHEDULE

This Schedule gives Special relief to the taxpayers who deal with taxable supplies

due to their social, economic and political reputations and their interrelationship with

20
national interests to the country. Taxpayers are liable to pay VAT at a standard rate but

due to their reputation the government has to indirectly pay tax on their behalf passing

through tax expenditure

Amendments

On July, 1997 this Schedule contained five items, Item 1 gives Special relief to

Diplomatic mission accredited by the Republic of Tanzania for the official purposes of

that mission in respect of goods imported by them only if the foreign Country provides

reciprocal treatment to diplomatic mission of Tanzania in that Country. This is inline with

the Vienna Convention of 1961 Article 36 which gives exemptions to the receiving State

in accordance with the Laws and Regulations adopted by her.

Special relief for the all supplies or importation of goods or services under

technical aid Agreement is given in Item 2 with effect from July 1997 as far as that

Agreement provides for relief from Tanzanian taxation (This covers Tanzania Zanzibar

in line with “Tanzania Double Taxation Agreement Model”) . On July 1998 this Item was

substituted with a new Item 2 which includes Donor funded Agreement.

Item No 3 gives Special relief to Travelers’ personal effects i.e imported goods in

respect of which relief of duty is available under Customs Laws. On July 2001, this Item

was expanded so as to include deceased personal effects; the words “or deceased”

between the words “travelers” and “personal” was inserted because they do not differ and

undeniably immoral to tax them.

21
 Item No 4 has been giving Special relief to the President of the United Republic

of Tanzania in respect of the supplies or importation of goods or services for the use by

him and Special relief to the Government or its Agencies in respect of supplies to them or

importation of goods or services by them to be used in the performance of their statutory

functions is given in Item No 5. On July 2001 these items were deleted as a move by the

Government to demonstrate fortitude of paying taxes.

Following the deletion of Item No 4 and Item 5, the new item 4 gives relief to the

Armed Forces in respect of the specified goods while the new Item 5 that read as Item 6

gave relief to a registered medical practitioners, optician, dentist, hospital, or clinic or to

patient, for the supply of the equipment designed solely for medical or prosthetic use. On

July 2003 Item 6 was amended by including Ambulance as it is regarded to be medical

and healthy equipment used exclusively for the treatment purposes. However, due to the

outcry that mobile health clinics do not fit in the definition of ambulance, on 2005 they

were added to create neutrality.

There was an additional of seven items in 1998, i.e Item 7,8,9,10,11, 12, and 13.

Item 7 gave relief to the registered Veterinary practitioner in respect of the supply of

equipment designed solely for veterinary use because Item 4 and 5 were deleted this item

reads as Item No 6

Item 8 which was later rearranged as Item 7 gave relief to the registered

manufacturer of pharmaceutical products in respect of the supply of raw and packing

materials which are designed solely for packing Pharmaceutical products so as to reduce

difficulties in dealing with Partial exemption methods associated with the declaration of

fictitious input tax which augmented heavy-task in auditing. This Item was deleted later.

22
 Item 9 gave relief to registered licensed drilling, mining exploration or

prospecting companies in respect of the importation of equipment to be used solely for

drilling, mining exploration or prospecting activities in order to reduce costs of operation

as its value addition contributes a minimal profitable margin, and the sector creates

sustainable employment though labor package has been out cried to be very low. This

Item was changed to be Item No7 because Item 8 i.e new Item 7 was deleted.

Then, it was reworded, exemption was given for the importation by or supply to a

registered licensed exploration, prospecting, mineral assaying, drilling or mining

company, of imported goods eligible for relief from duty under Customs Laws, and

services for exclusive use in exploration, prospecting, drilling or mining activities. The

aim is to increase mineral output, attract investment in mineral exploitation, extraction

and processing by having the lower capital costs.

Item 10 gave Special relief to the Tanzania Defense Force in respect of the supply

of specified goods for sale in the TPDF duty free shops in order to enhance incentive

schemes to Militias. This Item reads as Item no 8.

Item 11 gave Special relief to the registered religious organization in respect of

the importation or supply of goods to be used solely for a) relieving persons from the

effects of natural calamities, hazards or disasters or b) the development of projects

relating to health, education, water supply and infrastructure or c) advancement of the

religion. This read as Item No 9 which thereafter due to re arrangement reads as Item No

10.

On July, 2001 the contents of Item 10 were changed with four sub-items; Sub-

item (1) gives Special relief for the importation or local purchase by or on behalf of a

23
registered religious, Charitable Community based or other non-profit driven organization

or institution of goods and services intended to be used solely by the organization or

institution. It specifies which and for what the Special relief should be given in paragraph

(a), (b), and (c) i.e a) For the religious Organization for the advancement of the religion,

b) For the other Organization or Institution in the execution of its functions and for the

effects of natural calamities, hazards or disaster and c) For the projects relating to health,

education, training, water supply, infrastructure or any projects relating for the

advancement of the Community.

Sub-item 2 requires the Organization or Institution before obtaining the relief to

submit to the TRA a letter confirming existence of the projects from the District

Commissioner in its area or from the Umbrella Organization, if any.

Sub-item 3 requires non-transfer of relief, instead it empowers VAT to become due

and payable when the relieved person transfer, sold or dispose of goods in any way to

non-relieved person. On July, 2003 Item 10(1) paragraph (a) extended relief for the

religious Organization with limitation of 3000cc to the motor vehicles described in Tariff

heading number 87.03 and HS Codes 8702.20.10 and 8702.90.20 under the First

Schedule of the Customs Tariff Act, 1976.”

On July, 2003 the new sub-item (4) waived reliefs for NGOs and Organization or

Institution dealing with the activities mentioned in paragraph (a) and (b) on motor

vehicles. However, on July 2004 this item 10 was amended by deleting this sub-item (1)

(a) and substituting for it the new 9(1) (a) which says “in the case of a religious

organization for the advancement of religion” in order to remove limitation of 3000cc to

the religious organization who may need heavy vehicles in rural areas.

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 Item 12 gave Special relief to the Charitable Organizations holding special

Agreement with the Government of the URT, in respect of the importation or supply of

goods and services specified in that Agreement providing for a relief from taxation. This

Item reads as Item No 10.

Item 13 gives Special relief to the non-profit making Community based,

educational organization or institutions in respect of the importation by them or supply to

them only if the Permanent Secretary to the Treasury certifies that such goods and

services are to be used solely for the purpose of the advancement of the Community,

education or similar project related to that Organization or Institution. Following the

rearrangement this Item read as Item No 11. On July, 2003 Item No 11 which gave

special relief to non-government organizations or institutions was deleted because item 9

gives special relief to them. In this case items 12,13,14,15,16,17,18 and 19 were

renumbered as 11,12,13,14,15,16,17, and 18.

Item No 12 gives relief for the importation by or supply to the Red Cross society

of Tanganyika of goods or services which are solely to be used in the performance of its

statutory functions on exceptional grounds. This reads as Item No 11.

Item No 13 gives relief for the importation by or supply of goods or services to

any institution or organization holding a special Agreement with the Government of the

URT or established under an Agreement to which the Government of the URT is a party

so long as that Agreement provides for relief from taxation. This Item reads as Item 12.

Any agreement must be countersigned by the Permanent Secretary because they involve

tax matters.

25
 Item No 14 gives relief for the importation by or supply to any water and

sewerage authority of goods or services which are solely to be used in the performance of

its statutory functions. However, On July, 2002, this item was reworded as new Item 15

which gives relief for the importation by or supply to any water and sewerage authority

or scheme or agent or concessionaire thereof contracted to provide water and sewerage

services for Public in the urban and rural areas of goods or services which are used solely

in the performance of its statutory functions in order to foster development in water

supply and environment conservation. This reads as Item No 13.

On July 2001, Item 15 was substituted by the new Item 15 which gives relief to

the Public Institutions or Organizations other than Government Agencies which get

subventions from the Government only if their statutes provide for the exemption. This

read as Item 13 after rearrangement. However, in 2005 this Item was deleted as a move to

reduce size of exemptions.

The new Item 15 gives relief for the importation by or supply of capital goods to

an educational establishment registered by the Government. However, in 2005, due to the

difficulty in administration of capital goods locally and on imports this item was changed

to incorporate any person dealing with capital goods in order to create neutrality.

Item 16 gives relief for the importation by or supply to AES Tanzania Services

Limited, Ocelot International Tanzania Ltd, Pan African Energy Tanzania Limited and

Songas Limited of goods and services required for the Songo Songo Project because this

is a growing sector that inflict enhancement in energy diversification, availability of

commercial energy at an affordable price and encourage private sector participation in

energy generation.

26
 There was an addition of new Item 17 which gives relief to the educational

establishment registered by the Government in respect of the importation by them or

supply of capital goods to them. This Item up to July 2004 due to rearrangement reads as

Item 15.

On July, 2002, relief were given to the registered manufacturer of Pharmaceutical

products and of spectacle lenses so as to enable them have a cash flow advantage by

reclaiming or offsetting input tax against output tax. In 1997, spectacle lenses were

taxable, optical services were exempted but manufacturers of lenses were relieved

therefore Special relief is given in order to create equal treatment.

Item 18 gives Special relief for the supply to the investor licensed under the EPZ

Act, 2002 of goods and services for the use as raw materials, equipment, machinery

including all goods and services directly related to the manufacturing in the EPZ except

motor vehicles, spare parts and consumables in order to promote EPZs because it is a

sub-optimal and second best solution for export promotion and creates sound market

based-policy for employment.

On July, 2003 Items No 19, 20, and 21 were put in place after Item 18. Item No

19 gives relief to the registered milk processor or manufacturer for the supply of packing

materials to them in order to reduce production costs so that milk can be sold at a least

cost. However, this was sort of a transfer from Second Schedule to Third Schedule to

rescue them from irreclaimable input costs.

Item No 20 gives relief to the registered water drilling Company in respect of the

importation by them or supply to them goods to be used solely for water drilling in order

to foster water service delivery.

27
 Item No 21 gives relief to the registered Pharmaceutical manufacturing Company

for the importation by them or supply to them of goods to be used solely in the

manufacturing of human medicines in order to promote productivity of locally

manufactured medicines and healthy services. Likewise, new Items 22 and 23 were

added. Item 22 gives relief to the Duly Licensed duty free shops in respect of the goods

for resale so as to incorporate other Duty Free Shops in the Schedule.

Item 23 gives relief in respect of the supply of destination Inspection Services to

TRA in order to reduce transactions costs on imports that would inflate valuation. The

DIS deals with evaluation, quality assurance and certificate of origin.

Via Miscellaneous amendments Act, No 5 of 2005 Item 24 has been added in the

Schedule whereby importers or local purchaser of the generator or water pump for use

by a farmer in irrigation, charcor “malambo” or fishpond are relieved on condition that

such farmer submits to the TRA a confirmation from the Director of a Local Government

Authority.

Schedule was expanded with two Items i.e 26 and 27. Item 26 gives relief to a

registered Railways Company, Corporation, or authority in respect of railways

locomotives rolling stocks, parts and accessories as a move to re-incarnate railways

sector which were about to be defunct. Item 27 give relief fro the importation by or

supply of fire fighting vehicles to the Government or Government Agencies which now

are strengthening the Fire and rescue Plan within their areas.

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Conclusion

Though tax incentives to taxpayers differ in the Schedules due to their nature of

practicability, the principal objective of the Government will be to guarantee that GDP is

promoted in the incidence of tax expenditure, therefore the numerous items in the

Schedules the higher the GDP will be attained foremost to the sustainability in the

economic growth. It is a mere shift from tax revenue generation to an increase in the

production output. However, this will depend on the administration of the exemptions,

monitoring of investment and business operation as this creates buoyant sectors in future.

It is a widely held view that zero rating has a refund benefits while exemption

bears some intrinsic inputs tax which add costs to taxpayer. But exemption is better

option economically and administratively than zero rating especially on merit goods.

From the economic efficiency perspective these services generate positive externalities

hence, deserve government subsidies –They should not be taxable. For the pure

administrative perspective, it would be cost-effective to exempt hard-to-tax sectors and

group of taxpayers below certain threshold as they pose serious challenge to weak

administration in developing countries.

As depicted in Figure1, The First Schedule has been increasing at a decreasing

rate from 1998 up to 2000. However, it remained constant from year 2000 to year 2003.

From year 2003 to year 2005 there was a sharp increase which was contributed mainly by

zero rating local manufacturing industry. During the introduction of VAT there was a big

influx to exemption code up to 1999 when the government concentrated on revenue

adequacy. However, zero rating items should simultaneously be exempted in order to

create neutrality that is the reason why trends of First Schedule resemble with Second

29
Schedule. At the outset, special reliving has been increasing at an increasing rate and

remained stable from year 2001 to year 2005. How much revenue is lost from these

trends will be discussed later based on the ongoing research as it is beyond this coverage.

FIGURE 1: TRENDS OF VAT CONCESSIONS IN THE SCHEDULES

31
26
21 FIRST
ITEMS

SCHEDULE

SCHEDULES
16 SECOND
SCHEDULE
11 THIRD
SCHEDULE
6
1
2005 2004 2003 2002 2001 2000 1999 1998
FISCAL YEARS

Source: The Perspective of VAT Concessions in Tanzania.

It should bear in mind that, VAT Schedules are exclusive machinery for tax

compliance and productivity. This will depend on effective Fiscal policy which

accentuates the corrective action of the economy especially which is concerned with the

budget management that focuses on the fiscal stability, improved predictability of

resource flows and efficiency in resource use.

30
References

1. Agha, Ali and Jonathan Haughton (1996). "Designing VAT Systems: Some Efficiency
Considerations, Review of Economics and Statistics 78, 303-308”.

2. Cnossen, Sijbren (1994). "Administrative and Compliance Costs of the VAT: A Review of
the Evidence," Tax Notes International 8/25, 1649-1668

3. Cnossen Sijbren (1995) “VAT treatment of immovable property” In Tax notes

international Vol 10

4. Christine M.S. Shekidele, “The value added tax in Tanzania: Lessons from experience of
other developing countries” IFM Journal of Finance and Management ISSN 0856-4086
Vol 9 June, 1996.

5. Ebrill, Liam, Michael Keen, Jean-Paul Bodin, and Victoria Summers (2001). “The
Modern VAT”. Washington, DC: International Monetary Fund.

6. Fourie, F.C.v.N. and A. Owen (1993). "Value-Added Tax and Regressivity in South
Africa," South African Journal of Economics, 61/4.

7. Government Printer, DSM by order of the Government- “the Finance Act, 1998 Act
Supplement ISSN 0856-0331X of 6th November, 1998”

8. Government Printers, DSM by order of the Government- “the Finance Act, 2000 Act No
11 of 17th July, 2000”.

9. Government Printer, DSM by order of the Government –“the Finance Act, 2001.Act
Supplement ISSN 0856-0331X of 19th October, 2001”

10. Government Printer DSM by order of Government. “The Finance Bill 2004. Special Bill
Supplement ISSN 0856-01001X of 8th June 2004”

31
11. Harry, Grubert and James Mackie “Must financial services be taxed under a Broader-
Based Consumption Tax” National Tax Journal, December 1999, 53(1) pp 23-40.

12. Jack and Chia and Whalley “Tax treatment of Financial Intermediaries, Journal of
Money Credit and Banking”, November 1999, 31(4) pp 704-19

13. The National Assembly-“Value added Tax Act No 24 of 1997”,-25th April, 1997”.

14. The National Assembly “Value added Tax Act No 24 of 1997”, 22nd August, 1997”.

15. Tuan Minh Le, “Value added taxation mechanism, design and policy issues” Washington
D.C. April 28-May, 1, 2003 Word Bank Course.

16. William, Jack “The treatment of Financial Services under a Broad-Based

Consumption Tax” National Tax Journal, December 1999, 53 (Part I), pp 841-851

32