Apt Financial Consultant CPA Reviews

INTRODUCTION TO VAT

VAT is the Value Added Tax. It is the tax which is charged on the value added of goods or services at
each stage of a business transaction and it is also collected on imports. The business transactions
involve the supplies of goods or services. The VAT standard rate is 20% there is VAT at “0”%, Zero
rated. The VAT registration threshold is where the taxable turnover exceeds or is likely to exceed- Forty
million shillings in a period of twelve consecutive months and, or Ten million shillings in any period of
three consecutive months

The VAT is paid by the final consumer. It is the consumer who bears the tax burden .The taxable
person deducts what he/she has paid as VAT when he / she was purchasing the taxable supplies for
the furtherance of his /her business. The tax paid by consumer is the money of the government since
the day or time she purchases goods or services. The tax on purchases is Input tax. Output tax is the
tax on sales. The difference between the two i.e. out put tax and input tax is what is payable to TRA or
refundable to taxpayer.

TYPES OF VAT
There are three types of VAT namely:
(i) Consumption type
(ii) Income type
(iii) Gross produced
(i) Consumption type:
Capital goods purchased are treated like any other purchases of input i.e. Full credit of input tax
are given. This type of VAT is practiced in Kenya, Uganda, Tanzania, Singapore and South Africa.
(ii) Income type:
Input tax paid on the purchases of capital a goods is spread over the life span of the products or
Assets. The input tax credit with capital purchases against the liability in a particular tax period will
take into account the depreciation portion only. This type of VAT is practiced in Argentina and Peru.
(iii) Gross product type:
Completely denies input tax deduction on capital goods against the firm VAT liability. VAT is
computed by subtracting from the firms sales only purchases apart from capita goods. This type of
VAT is practiced in Finland, Morocco and Senegal.

METHODS OF CALCULATING THE CONSUMPTION TYPE OF VAT

There are three methods of calculating the consumption type of VAT
(i) Credit (invoiced based) method.
(ii) Subtraction (accounts based) method.
(iii) Additional (account based) method.

(i) Credit Method:

This is the most favored method where by the net VAT liability is computed by deducting the tax on
purchases (input tax) from tax on sales (output tax) for each tax period. The tax on sales must be
shown separately on all invoices to provide documentary evidence for credit claim by registered
traders.
(ii) Subtraction method:
Under this method net liability is obtained by deducting the aggregate value of purchases from the
aggregate value of sales and applies a VAT rate to the difference obtained. Figure of sales and
purchases are obtained from final accounts.
iii) Additional method:
Value added is obtained by summing up the factors of production rewards like wages, interest,
depreciation and net profit within the specified tax period. The tax rate is then applied to the
summed value to establish the tax liability of the firm in the given period.
Experience in Tanzania – Tanzania is using consumption type of VAT with credit (Income method) of
calculation.
Why Credit (invoiced based) method is most favored?
Apt Financial Consultant CPA Reviews

(i) Tax liability is attached to the transaction and invoices become a crucial document.
(ii) It creates a good audit trail
(iii) It allows easy application of multiple rates of tax.
(iv) VAT can be collected on monthly basis or any tax period.
(v) Goods and services can be easily identified.
(vi) Zero rated supplies can easily be applied.
(vii) Credit methods have self-enforcing features.
- Non-business transaction (e.g. private use and goods imported for private purposes).
- Exempt transactions.
- Outside the scope transactions (e.g. non-supplies, passive investment activities).

VAT incurred on certain categories of expenditure is never eligible for deduction even if the expenditure
is for business purposes. Value added tax shall in no circumstances be deductible on expenditure
which is not strictly business expenditure such as that on luxuries, amusements or entertainment.

Motor Cars: VAT on the supply, requisition or importation of a motor car is not deductible unless
certain conditions are met. In general terms, VAT is not deductible unless the car cannot be available
for any non-business use. VAT on the M/C is deductible if the car is to be use exclusively for business
purposes and will not be available for private use. It is available for private use and not actual use for
private use purposes that determines whether or not the VAT will be deductible.
VAT on the supply acquisition as importation of M/C is also deductible if the M/C is to be used for
specified purposes, namely:
 As stock in trade
 For letting
 As a mini-cab.
The black on deduction of input VAT applies to the VAT on the car and also any accessories fitted at
the time of purchase. In put tax on accessories fitted subsequently may be deductible if they are for
business purpose.
The blocking provisions do not apply to other types of vehicles e.g. a company van. In respect of such
vehicles, if there is any private use the business can either disallow a proportion of VAT on the
purchase of the motor vehicle as representing the VAT on private use.
Business entertainment. If deduction is not allowed on goods or services on which VAT is incurred if
the goods and services are used for the purposes of business entertainment? Business entertainment
is defined as entertainment including hospitality of any kind provided by a taxable person on by him.
Example of what has been held to be business entertainment includes:-
 A customer or perspective customer of any form of beverages, tobacco, accommodation,
amusement, recreation, transportation or hospitality an employee of any form of alcoholic
beverage, tobacco, amusement, recreation, or hospitality.
Business gifts: Gifts of goods or service are not in principle subject to VAT because they are not
provided for consideration. Samples or gifts of small value provided by a taxable person for the
purposes of his business are not to be treated as made for consideration. Otherwise if VAT is
chargeable on the gifts or sample the recipient can deduct that VAT as input tax subject to the
normal rules.

Advantage of VAT: it is a broad based tax which yields more revenue to the Government. It is charged
on local as well as imported products which are not exempted. It a tax which is paid by the final
consumer and therefore the business community does not bear the tax burden as they use to recover
what they have paid on their purchases as input tax. It is a self administered tax and therefore it
promotes voluntary compliance.

Disadvantage of VAT
Is VAT “regressive?
(A tax is regressive if it affects all levels of income equally by a flat rate A progressive tax affects high
income earners more, and is accepted as a better system in that the better off part of the population
bears a greater proportion of the tax burden).
Governments can reduce the effect of regressive ness by having the social security and the exemption
2
 Apt Financial Consultant CPA Reviews

in the tax system.

Is VAT “inflationary”?
o Yes-if prices increase, the value of money decreases.
Does VAT involved complicated book keeping?
o The regulations prescribe a number of books, which must be kept by all registered traders as a
minimum.
o These are probably more than those kept by most small businesses.
o Keeping basic records is good practice for any business, and can promote efficiency and
profitability by providing a trader with more information about how the business is performing.

REGISTRATION AND DEREGISTRATION FOR VAT

INTRODUCTION:
The tax authority needs to know who is going to pay the tax and whom it can pursue in the event of
non-payment. Basing on that, the authority is assured of tax payments by obliging traders to register
for the tax.
Purposes of Registration:
The purposes of registration are to:
(a) Record the particulars of taxable persons for the purpose of control and collection of tax.
(b) Enable them to take credit of input tax on their purchases of taxable supplies; and
(c) Allow them charge output tax on their taxable supplies and to issue tax invoices.
Interpretation of the main legal provisions
The under mentioned guidelines, covering significance and meaning, are provided for each of the legal
provisions listed above:
a) Section 18 of the VAT Act 1997
This section requires the Commissioner to maintain a register of taxable persons. It does not
stipulate the type of register to be maintained or the details to be recorded. In practical terms the
register is computerized and is compiled from the information provided by registered taxable
persons on their application forms Form VAT 101.

b) Section 19(1) to (4) of the VAT Act 1997

i) Sub-Section 1
This sub-section defines those persons who are required to apply for registration and the time limit
for doing so. A taxable person is a person WHO MAKES or who has reasonable grounds for
believing, he WILL MAKE or HAS MADE taxable supplies in excess of the turnover figures
prescribed in the Regulations made under this Act. The fact that such a person is liable to register
under this sub-section means that such a person must account for VAT on any taxable supplies he
makes from the date he becomes liable for registration. Any person who exceeds the taxable
turnover figures prescribed in the Regulations must apply for registration. Taxable supplies means
any supply of goods or services made by a taxable person in the course of or in furtherance of his
business and includes zero rated supplies. The taxable turnover of all businesses under one legal
entity must be added together to determined whether the person should be registered.
ii) Sub-Section 2:
This sub-section requires all taxable persons to apply for registration in the manner and form
prescribed by the regulations.

iii) Sub-Section 3:
This sub-section compels the Commissioner to register every applicant who is eligible to register
under sub-section 1 (that is, whose taxable turnover exceeds the threshold limits set in the
regulations).

iv) Sub-Section 4
This is a wide-ranging sub-section which gives the Commissioner the power to register a business
whether or not an application has been made. This could be where he has reasonable grounds for
knowing that the person has exceeded the turnover figures prescribed in the regulations but has
failed to register. It could also cover the case of someone trading below the threshold who applies

3
Apt Financial Consultant CPA Reviews

to register on a voluntary basis. The reasons for taking action under this sub-section are stipulated
as being on the grounds of national economic interest or protection of the revenue. In both cases
the Commissioner should notify the business in writing of his actions and the reasons why they have
been taken.
c) Section 20(1) to (4) of the VAT Act 1977
i) Sub-Section 1 & 2
These sub-sections require the Commissioner to notify the taxable person when he has been
registered for VAT purposes and issue a certificate of registration showing the taxpayer’s name,
principal place of business, the effective date of registration (EDR) and the Taxpayer
Identification Number (TIN) and VAT Registration Number (VRN).
ii) Sub-section 3 & 4
These sub-sections require the registered taxable person to use the unique VRN TIN allocated on
all documentation including returns and tax invoices and to display the registration certificate in a
prominent place at the principal place of business. Sub-section 4 also requires the Commissioner to
issue copies of the registration certificates for display at any additional business premises
(branches).

d) Section 21(1) to (3) of the VAT Act 1997

These sub-sections are concerned with deregistration for VAT purposes and places an obligation on
the taxable person to notify the Commissioner within a thirty day period if he is no longer register
able. Sub-section 2 requires the Commissioner, if he is satisfied, to notify the taxable person in
writing of the effective date of deregistration (EDD). Sub-section 3 provides some relief on the
treatment of stock on hand at the EDD. It allows relief on any stock transferred as part of a going
concern to another taxable person and also provides a limit for administrative convenience. No tax
would be chargeable on any stock if the amount of VAT does not exceed five thousand (5000)
T. shillings.
e) Section 22(1) to (5) of the VAT Act 1997
i) Sub-section 1
This sub-section allows a business to register its divisions or branches separately rather
than as one single legal entity. It is aimed primarily at facilitating existing business
structure/practice but is can also be advantageous for revenue control purposes. The
provision is a concession and does not allow any applicant to register in branches/divisions
by right. It is only allowed if the Commissioner is satisfied and it could not be used as a
means of avoiding registration.
ii) Sub-section 2 and 3 provide the Minister with power to make regulations defining the
responsibilities of organizations like clubs managed by members or by committee. Similarly
under sub-sections 4 and 5 the Minister may make regulations covering the bankruptcy and
companies in liquidation/ receivership.

f) Section 23(1) and (2)

These sub-sections provide the Minister with the power to make regulations covering the type of
changes in circumstances that a taxable person must notify in writing to the Commissioner and the
time limit for doing so.
g) Section 44(1) to (3)
Sub-sections 1 and 2: Sub-section 1 makes it an offence where a person fails to register within
thirty days after qualifying. If convicted of an offence he is liable to imprisonment for a term not less
than two months and not exceeding one year, or a fine not exceeding two hundred thousand
shillings, or to both fine and imprisonment. Sub-section 2 means that any person who fails to
register will also be liable for any arrears of tax and interest in addition to any penalty imposed.
i) Sub-section 3
This sub-section extends the offence situation to those taxable persons who are registered but who
fail to notify the Commissioner of any changes in business circumstances within the thirty-day
period allowed. This is considered to be a less serious offence and if convicted the person will be
liable to a fine not exceeding one hundred thousand shillings.

2.0. Persons liable to Register:

4
Apt Financial Consultant CPA Reviews

The meaning of “Taxable Person” Taxable person means a person registered or required to be
registered under the provisions of the Value Added Tax Act 1997.
“Taxable Persons” to be registered are as follows:
(a) Sole Proprietorships: The proprietor should be registered and the registration of a sole
proprietorship should cover all the business activities of the proprietor unless a specific request for
a separate branch registration is received (see Part 6). Where a sole proprietor has more than
one business and uses trading styles, the registration should be affected in his natural name. All
application forms for registration (VAT 101) in respect of Sole Proprietors must be signed by the
Sole Proprietor. A single registration does not affect any separate accounting arrangements for
the business and the totals in the accounts of all the businesses should be aggregated at the end
of each tax period for the purpose of making only one VAT return.
(b) Partnerships: The registration of partnerships can be in the natural names of the partners or a
trading name, if certified. The names of the Senior Partners should be entered on the Form VAT
105 “Advice of Additional Trader Particulars” which should be signed by the Senior Partner.
Partnerships in Tanzania must be registered under Business Names (Registration) Ordinance
Chapter 213 if they use a business name. A business name certificate is issued by the Registrar
of Companies from the date of registration. (Only when a partnership is dissolved should it be
necessary to cancel the registration. Changes can be made to an existing partnership agreement
but the legal entity remains the same).

c) Companies incorporated under the Companies Ordinance. All such companies are required by the
Companies Ordinance Chapter 212 to register with the Registrar of Companies and a certificate of
incorporation is issued. The registration of a company for VAT will be in the name by which it is
registered as a company. The names of all the Directors and Company Secretary will be obtained
as “Additional Trader Particulars” on the first visit by using the form VAT 105 (see also Part 4,
Paragraph 7). The application for registration (VAT 101) must be signed by one of the Directors or
the Company Secretary.
d) Other bodies (groups, associations, clubs, and cooperatives). In the event of an application for
registration received from a cooperative, the body concerned is to be consulted to ascertain who is
authorized to act on behalf of the organization. Other groups or associations use their constitutions
to determine a person authorized to act on behalf of the organization. The application for
registration, VAT 101, should be signed by a responsible person and in general terms the VAT
registration will be in the name of the organization specified in the Act.
Eligibility to register
Before a person can be registered for VAT purposes he must satisfy the following conditions:
a) He must be making or intending to make taxable supplies of goods and/or services in
excess of the turnover figures prescribed in the Value Added Tax (Registration) Regulations; and
b) The taxable supplies must be made or intended to be made in the course of, or furtherance of, a
business carried on by that person.
Each trader should be issued with only one copy of the application form.
Form VAT 101 – “Application for Registration”
All applications for VAT registration must be made on an original Form VAT 101. .The Form VAT 101 is
designed to help the registration process (both business community and the tax administration) by
seeking the minimum information to effect registration. Once a properly completed and acceptable
Form VAT 101 is received, it is not intended to subject the applicant to any further enquiry, at this
stage, unless it is absolutely necessary. No other documents will be required to accompany the VAT
101. (See also Paragraph 7 below).

TYPES OF REGISTRATION
Normal Registrations
For many traders there is nothing optional about registering for VAT. Their turnover is above the
threshold so they have no choice in the matter. For some traders, however, things are not quite so
straightforward. In this session we shall be looking at how these traders are dealt with.
There are six registration categories to consider:-
o Voluntary (V)
o Intending trader’ (I)
5
Apt Financial Consultant CPA Reviews

o Compulsory’ (C)
o Branch registration (B)
o Divisional registration (D)
Voluntary Registration
Applications to register may be received from persons who do not fulfill the registration requirements
e.g. their annual taxable turnover is below the threshold.
This type of application is not normally encouraged but you are already aware that the Commissioner
has the power to register any person on the grounds of “National Economic Interest”.
The trader should be told that:
1. Registration brings with it obligations as well as
benefits.
2. It will involve accounting for Vat on taxable goods and
services supplied by him.
3. It will be necessary to keep proper accounts and
records.
4. It will be necessary to furnish monthly returns with
any tax due.

Intending Traders
The regulations require any person who has grounds for
believing he will qualify for registration must apply for
registration.
Traders who intend to start trading fall into this category and
may seek registration in order to recover any input tax incurred
in setting up the business (e.g. equipment, office machinery,
lawyers, and architects fees).

1. Full information about the nature and size of the

business; and
2. Firm evidence of the stage reached in the development
of the business such as contracts to supply, procurement
of stock and or services and the degree of financial
commitment.

6
Apt Financial Consultant CPA Reviews

Branch Registration
Many businesses operate from more than one set of premises,
and it is important on any visit to the trader that details of all
branches etc. should be obtained and recorded in trader’s folder.
Normally all branch activities are part of one legal entity and all
figures (turnover, VAT etc.) are amalgamated for completion of a
single VAT return, but some businesses may with to have
branches registered separately, and Sec.22 of the VAT Act gives
Commissioner authority to allow such applications.
The trader must apply in writing giving details and legal entity
involved and breakdown of branches e.g.
location/turnover/activity, and reason for requiring separate
registrations.
A separate VAT 101 must be completed for each branch.
Divisional Registration
Limited Companies may structure their organization and create
autonomous units within same legal entity-and describe them as
divisions. These can be separately registered in the same way
as branches.
The procedure is the same except that box 21 of the VAT 101s
is codes ‘D’

5.0 Changes in trader’s Particulars

A trader’s particulars/circumstances often change after registration. Quite often these changes can
affect the ‘legal entity’ of the business and action needs to be taken by the trader and by the VAT
Department.

Section 23 of the VAT Act and Regulations 13 and 14 deals with this situation. Under section 23 a
taxable person must notify in writing any changes that take place within the business-within 30 days.
Regulation 13 lists the changes that must be notified within 30 days of the change, as follows:
1. Taxable person ceases to trader of taxable turnover falls below the threshold.
2. Change of business address
3. Change on business name
4. Ownership of business changes in part or whole.
5. Major change in nature or conduct of business.

7
Apt Financial Consultant CPA Reviews

Notification of changes
Changes in a registered trader’s particulars will be notified to the VAT officer by:
1. A registered trader contacting the VAT office by letters or telephone.
2. A VAT officer, following a visit to the trader (traders will not always inform the VAT office of
changes in particulars despite being required to do so by the legislation).
Two situations can arise:
1. Changes which result in a change of legal entity, and
2. Minor changes which require amendment to the registered trader’s particulars but which do not
change the legal entity of the business.
There are different procedures for dealing with these two different circumstances.

Changes affecting the legal entity

When the changes in a trader’s particulars affect the legal entity of the registered person it will be
necessary to deregister (cancel) the old business and register the new legal entity.
(The procedure for deregistering a trader is covered later).
Changes not affecting legal entity
If the changes are in registration details which do not affect the legal entity (e.g. change of address or
change of a director) it is only necessary to amend the particulars of the person on the registration file.
Changes caused by death or Insolvency
Changes in a registered trader’s particulars may occur due to death of a sole proprietor or a partner
and deregistration will need to be considered. The death of a director in a limited Company would
normally only lead to a variation to the trader’s registration file.

Deregistration
Section 21 of the VAT Act deals with deregistration and gives the Commissioner the power to
deregister a business.
Information Required
The following information will be checked: -
1. Name, VRN & TIN
2. Address-present and/or future contact address
3. Date of cessation of trading
4. Reasons for deregistration
5. If business sold-name, address of purchaser
6. Period covered by the last VAT return submitted
7. Estimated tax-free stock and assets on hand – value and amount of VAT.

OUTPUT TAX AND INPUT TAX

Points on Output Tax
The transactions on which output tax is charged must fall within the scope of Tanzania Mainland VAT.
The scope of the tax is provided in section 4 of the Value Added Tax Act, 1997, (VATA).
For the transaction to be within the scope of Mainland Tanzania VAT it must fulfill all of the following
conditions:
 It must be a supply of goods or services
 It must be supplied in Mainland Tanzania

8
Apt Financial Consultant CPA Reviews

 It must be supplied by a taxable person

 It must be done in the course or furtherance of business
 It should not be exempt (sec. 10 Second Schedule to the VATA)
If any of the above conditions is not met then the transaction does not fall within the scope of Mainland
Tanzania VAT.

Supply of goods or services: The term “supply” is not defined in the VATA. For VAT purposes the
term is taken to mean “to provide”, “to furnish or to serve”. The supply can be of goods or
services and it is important to make the identification because the time of supply (sec.6)
and place of supply (sec.7) varies between goods and services.
In most cases the supply is made for a consideration. It rarely occurs without consideration e.g. in the
case of self-supply of goods or provision of gifts.
Supplied in Mainland Tanzania: In case of goods they should be situated in Tanzania at the time of
supply and in case of services the provider should belong in Mainland Tanzania.
Supplied by a Taxable Person: The provider of either goods or services must be either registered by
the Commissioner or is required to be registered (sec. 2)

In the course of furtherance of business: The term “business” is defined in section 2 as, “include all
form of trade or commercial activity”.

Furtherance of business
It is not defined in the VATA.
New Zealand Case N43 (1991) 13 NZTC, Bath gate DJ said at p3366: “An act done for the purpose
or object of furthering the (business), or achieving its goals, can be to help, or advance, and thus a
‘furtherance’ of a taxable activity, although it may not necessarily be always in the course of that
taxable activity”.

RETAIL SCHEME
The purpose of retail scheme is to allow traders who are unable to issue tax invoices for every sale, to
estimate their output tax by calculation, rather than by addition of tax charged on each transaction.

The traders are retailers selling to the general public, who do not normally require a tax invoice.
Generally, they have high volume of low volume transactions. There is no formal definition of retailer in
the Law or notice. Retail scheme is under General Regulation 14.

What is the purpose of retail schemes?

To allow traders who are unable to issue tax invoices for every sale, to estimate their output tax by
calculation, rather than by the addition of tax charged on each transactions.

The traders are retailers selling to the general public, who do not normally require a tax invoice.
Generally, they have high volume of low value transactions. They are mostly known as the Retailers.
No formal definition of retailer in the law or notice. Retail scheme have been described under
Regulation 14 of the VAT General Regulation 1998. Definition as per the dictionary- the sale of goods
to the public for use or consumption rather than for resale.

What are record keeping requirement? Regulation 12, drawing attention to concession allowed in
12(C) - no requirement to keep ‘record of value of each supply made’). Retailers are not relieved of the
requirement to issue ‘receipts’ (see sec. 29 of the VAT Act.) Is it feasible or Desirable that retailers
issue receipts? Or Keep records?

Yes. The Primary record retailers must keep is the record of daily gross takings - this is the record,
which forms the starting point for the scheme calculations.
Must keep a record of payments as they are received Must not reduce gross takings by amounts taken
out of till Cheques treated as cash on day received Must include deposits if advance payments Non-
retail supplies e.g. sale of assets, sales to other registered traders must be excluded from the scheme
calculations.
9
Apt Financial Consultant CPA Reviews

What are the schemes?

Method 1
 Separation of standard and exempt goods at ‘point of sale’ - or can be used if standard rated
goods only are sold.
 Would normally expect separation to be achieved by using a cash register with separate
‘department’ keys, or by using different till for each class of goods.
 Could also be achieved by writing down cash sale as it takes place. (Reg. 12 states that a
record must be kept of each supply as it takes place, and each payment received.)
 At the end of the period, the takings applicable to standard rated goods are totaled,
Steps as per Reg. 14
Step 1: Separate gross takings at the point of sale between taxable and exempt supplies
Step 2: Each day at the close of business total the records of gross takings
Step 3: At the end of the prescribed accounting period, from the records of taxable daily gross takings,
calculate the tax using the tax fraction for the rate of tax in force and include the amount on the VAT
return for that period. VAT fraction applied; to give the output tax due.
Method 1

Standard Rated Taking X 1/6= Output Tax

Method 2
Where trader is unable or unwilling to separate at point of sale. .Sales of standard rates and exempt
goods are apportioned in the same ratio as taxable and exempt purchases made in the period. All
taxable and exempt purchases are included, not just goods purchased for resale, expenses and
overheads are also included, which can have a very distortive effect

Step as per Regulation 14

• Step 1: Record total gross taking for each day
• Step 2 : At the end of each prescribed accounting period total daily gross taking for that period
• Step 3: Allocate those gross takings to taxable supplies in the same proportion that the value
taxable purchases made in the period bears to the value of total purchases in that period.
• Step 4 : From the gross takings allocated to taxable supplies calculate the tax for the prescribed
accounting period using the tax fraction in force and include the amount on the VAT return for the
period.

Taxable purchases x DGT Total x VAT Fraction

Total Purchases

= Output tax
• (Output figure for box 02 of the VAT return can be calculated by multiplying output tax x 5).

The trader must carry out on annual adjustment similar to that required for partial exemption, by
recalculating at the end of the tax year, using the whole year’s figures. If the annual adjustment reveals
any over or underpayment, an appropriate entry is made in the VAT account in the first period after the
end of the tax year. The trader is allowed to choose which method he wishes to use; having chosen his
method, he must use it for one full ‘accounting’ year.

Risk Involving Retail Schemes

What are the risks involving retail schemes
1. Suppression of sales,
2. Suppression of both sales and purchases
3. Method 1 - Miskeying/misdescription
4. Method 2 - Inclusion of services or ineligible transactions

How might these be detected and combated?

10
Apt Financial Consultant CPA Reviews

1. Suppression of sales will depress the mark up achieved of both standard and exempt goods.
2. Suppression of both sales and purchases will not affect mark up.
3. Miskeying or miss-description of standard goods as exempt will depress standard rates mark up
but inflate exempt mark up.
4. Inclusion of ineligible items in method 2 will increase standard rated mark up, but the wrongly
included items will not be fully taxed.

How can these problems be dealt with? By examination of mark ups achieved, and comparison with
mark up calculated from stock challenge .Extended challenge of stock to detect suppressed purchases
Questioning of trader and staff to determine knowledge and practice in liability/keying errors
Examinations of records and interview with trader to discover any services or ineligible supplies
provided Substantial suppression will probably be best dealt with by mark up exercise.

METHOD 2:
TAXABLE PURCHASES
TOTAL PURCHASES X DGTX 1/6 = OUTPUT TAX
INPUT TAX
CONDITIONS GOVERNING INPUT TAX DEDUCTION
Taxable persons may reclaim the VAT they incur on their purchases of goods and services subject to
the conditions (rules) mentioned below: The law is provided under sect.16 of the VATA 1997 and
General Regulations 1998 , Reg 3-8 of the Value Added Tax.
 The amount to be claimed must actually be VAT properly charged by another taxable person or
relate to a taxable importation.
It is important to establish whether there was an actual supply to the business?
The existence of a tax invoice is not conclusive evidence that a supply has occurred. Firstly,
invoices are often issued in advance. Secondly, the invoice could be fraudulent.
 The supplies on which the tax was charged must be made to the person seeking to claim the
input tax. The supplies must be to the taxable person not to someone else. Check if the supply was
made to the taxable person or to a third party?
For example, payments made by a clearing and forwarding agent to third parties such as Customs,
DAHACO, THA etc. on behalf of his principal is an input tax of the principal, whether the receipt is
issued in the name of the agent or importer.
 The supplies must have been incurred for the purpose of the business. Is the expenditure for
the purpose of the business of the taxable person? Goods or services must be used or to be used
for the purpose of the business. Refer cases
 The supplies must normally be received in the accounting period on which the claim is to be
made.
 The person seeking to claim input tax must hold satisfactory documentary evidence of the
supplies in support of his/her claim.
 The supplies received must not be subject to input tax restriction i.e. non-deductible i.e.
motorcars, entertainment.
(i) In case goods, the goods were in the ownership and possession of the taxable person at the
date of registration and the same were received not more than six months prior to
registration.
(ii) In case of services, the services were received not more than six months prior to
registration. Note: The services should relate to the goods in ownership and possession by
the taxable person at the date of registration.
(iii) There is documentary evidence to support purchases and utilization of the goods or
services on which input tax is claimed.
PARTIAL EXEMPTION
If a trader makes only exempts supplies he is not liable to register for VAT. If he makes a mixture of
exempt and taxable supplies, he must register if the value of taxable supplies exceeds the registration
threshold. Such a trader is a partially exempt .The major disadvantage for traders making exempt
supplies is that they cannot register and therefore they can not reclaim the tax they are charged by
their suppliers if it relates to their exempt supplies.

11
Apt Financial Consultant CPA Reviews

What attributes to partially exempt trader? Types of Supplies these are Standard rated, zero rated,
Exempt

What makes exempt supplies different from the others? Input tax incurred in making exempt supplies
cannot be reclaimed

The registration position of trader who makes only exempt supplies cannot register for VAT purpose. If
a trader makes a mixture of taxable and exempt supplies he must register if taxable supplies
exceed the threshold. Trader is then faced with problem of apportioning the input tax between
exempt supplies (not claimable) and taxable supplies.
Method1:

Advantages
– simple to operate
– No complicated bookkeeping required

Disadvantages
– Crude method
– Recovery of input tax not related to use - may be significant amount of input tax not recovered.
More suitable for smaller traders where books are simple, amount of tax not significant;
Traders where taxable outputs are low compared to exempt outputs.

Method 2:
Advantages
– Better recovery of input tax
– Recovery related to use (attribution)
Disadvantages
– Need better records (to analyze input tax into the three categories)
– More difficult calculation
– Suitable for use by larger traders with better bookkeeping systems.
The trader is entitled to choose whichever method he/she wishes.
First Method
Step 1: Calculate the value of taxable supplies made in the prescribed accounting period.
Step 2: Calculate the value of all supplies made in that period.
Step 3: Calculate the amount of tax payable on supplies made to the registered person in that period.
(Total input tax)
Step 4: Divide the amount obtained in step 1 for the period by the amount obtained in step 2 (the
value of all total supplies made in the period)
Step 5: The amount of input tax to be claimed as a deduction or credit in the prescribed
accounting period is the product obtained by multiplying the amount obtained in
step 3 by the amount obtained in step 4.
METHOD 1: FORMULAR
Taxable supplies x Total Input Tax = Deductible Input Tax
Total supplies

Second Method
Step 1: Divide input tax for the prescribed accounting period into categories:-
Category A: input tax that is directly attributable to taxable supplies
Category B: Input tax that is directly attributable to exempt supplies
Category C: Input tax that is paid for the purposes of the business but is not directly attributable
to either taxable supplies or exempt supplies.
Step 2: Calculate the value of taxable supplies made in the prescribed accounting period.
Step 3: Calculate the value of all supplies made in that period.
Step 4: Divide the amount obtained in step 2 for the period by the amount obtained in step 3 (the
value of all total supplies made in the period)
12
Apt Financial Consultant CPA Reviews

Step 5: The amount of input tax to be claimed as deduction or credit in the prescribed accounting
period is the product obtained by multiplying the amount obtained in step 4 by the amount obtained in
category C( found in step 1) and then add the input tax attributable to taxable supplies ( category A
found under step 1)

Second Method:
Taxable Supplies x C+ A = Deductible input tax
Total Supplies

EXAMPLE:
PARTIAL EXEMPT TRADER
The taxable person indicates through his records that during the month of October 2006, VAT was paid
on his purchases as follows:
TABLE
Value VAT VAT
(Tshs) (Tshs) (Inclusive)
aSugar 50,000 10,000 60,000
bCooking oil 75,000 15,000 90,000
c Laundry Soap 60,000 12,000 72,000
dTransportation of wheat flower and maize 10,000 2,000 12,000
eBags for re-packing wheat 12,500 2,500 15,000
f Tax invoice books 37,500 7,500 45,000
gElectricity 10,000 2,000 12,000
hTelephone 12,500 2,500 15,000
Total 267,500 53,500 321,000

Also during the same months, the taxable person supplies goods with the value indicated below:-
Value VAT VAT
(Tshs) (Tshs) Inclusive
aSugar 60,000 12,000 72,000
bCooking oil 90,000 18,000 108,000
c Laundry soap 80,000 16,000 96,000
dToilet Soap 100,000 20,000 120,000
eWheat flour 40,000 Exempt 40,000
f Maize 30,000 Exempt 30,000

APPORTION OF INPUT TAX

FIRST METHOD
Step 1: The value of taxable supplies made is:
Tshs
a Sugar 60,000
b Cooking oil 90,000
c Laundry soap 80,000
d Toilet soap 100,000
Total 330,000

Step 2: Value of all supplies made is:

Tshs
eSale of wheat flour 40,000
f Sale of maize 30,000
13
Apt Financial Consultant CPA Reviews

gSale of taxable supplies 330,000

( refer the total at step 1 above)
Total 400,000

Step 3: Tax paid to supplies made to the registered person:-

Tshs
a Sugar 10,000
b Cooking oil 15,000
CLaundry soap 12,000
d Transportation of wheat flour and maize 2,000
e Bags for re-packing wheat flour 2,500
f Tax invoice books 7,500
g Electricity 2,000
h Telephone 2,500
Total 53,500

Step 4: 330,000 ÷ 400,000 = 0.825

Step 5: the amount of input tax to be claimed is:

53,500 × 0.825 = 44,200/=

SECOND METHOD
Step 1: Category A: a) Input tax directly attributable to taxable supplies:-

Tshs
a Sugar 10,000
b Cooking oil 15,000
c Laundry soap 12,000
Total 37,000

Category B

b) Input tax directly attributable to exempt supplies:

d Transportation of wheat flour 2,000
e Bags for re-packing wheat flour 2,500
Total 4,500

Category C
Input tax paid for the purposes of business but is not directly attributable to either taxable supplies or
exempt supplies:

f Tax invoice books 7,500

g Electricity 2,000
h Telephone 2,500
Total 12,000

Step 2
Calculate the value of taxable supplies made in the prescribed accounting period

14
Apt Financial Consultant CPA Reviews

a Sugar 60,000
b Cooking oil 90,000
c Laundry soap 80,000
d Toilet soap 100,000
Total 330,000

Step 3
Calculate the value of all supplies made in that period = 400,000
aSale of wheat flour 40,000
bSale of maize 30,000
cSale of taxable supplies ( refer the total at step 1 above) 330,000
Total 400,000

Step 4
Divide the amount obtained in step 2 for the period by the amount obtained in step 3 ( the value of all
total supplies made in the period)

330,000 ÷ 400,000 = 0.825

Deductible input tax:

 Ratio obtained in step 4 of the first method is 0.825
 Multiply the ratio by input tax in category C
 12,000 x 0.825 = 9,900/=
 The amount to be claimed is
 Tshs 37,000 + 9,900 = 46,900/=

RECORD TO BE KEPT BY THE VAT REGISTERED TRADERS

1) A VAT account, recording for each prescribed accounting period total VAT on outputs and inputs
together with the net difference to be paid to or reclaimed from the Commissioner;
2) A record of each supply made related to the appropriate tax invoice or any other invoice;
3) A record of the value of each supply made excluding VAT, together with the VAT charged on each
supply unless the taxable person is using one of the methods described in Regulation 13 in which
case, the taxable person shall keep the records required under that regulation;
4) A record of each supply received related to the appropriate tax invoice, any other invoice or import
document;
5) A record of the value of each supply received excluding VAT and the VAT charged;
6) a record of the total VAT recorded in paragraphs © and (e) for each prescribed accounting period;
7) a record of each payment made or received showing the date, amount and the person making or
receiving the payment;
8) a record of all goods appropriate or taken into personal use or into the use of others, the date of
appropriation or taking into use, the description of the goods, the value of goods excluding VAT,
and the VAT calculated on the goods.

Tax Invoices
(i) A Tax invoice shall prominently bear the words “tax invoice” on its face.
(ii) A tax invoice for the supply of goods or services shall include the following particulars, namely: -
(a) The taxable person’s name, address, TIN and VAT registration number;
(b) The date of supply;
(c) The number of the invoice taken from a consecutive series;
(d) The customer’s name, address, TIN and his VAT registration number;
(e) A description sufficient to identify the goods or services supplied which includes the quantity
of goods or the extent of services supplied, tax exclusive price for each description of goods

15
Apt Financial Consultant CPA Reviews

or services supplied, rate of tax; and The credit note mentioned under sub regulation (1)
shall contain:
(f) The particulars prescribed for tax invoices;
(g) The amount of credit;
(h) A statement of the reason for credit.
(i) The rate of any discount.
(j) A tax invoice shall indicate: -
(k) The total charge exclusive of tax;
(l) The total tax charged; and
(m) The total charge inclusive of tax.
A registered taxable person shall issue a tax invoice. To a customer who is a taxable person in respect
to any taxable supply of goods or services to that customer; Upon request by a customer who is not a
taxable person; in respect of any taxable supply, at the time of supply or not later than fourteen days
after the time of supply. A registered taxable person who has issued a tax invoice in respect of a
taxable supply shall, unless the Commissioner otherwise allows, issue a credit note if –
(a) The supply is cancelled;
(b) The goods are returned to the registered taxable person;
(c) The value of the supply is reduced;
The credit note mentioned under sub regulation (1) shall contain:
(a) The particulars prescribed for tax invoices;
(b) The amount of credit;
(c) A statement of the reason for credit.
SCOPE AND COVERAGE OF VAT

INTRODUCTION
VAT is a tax on transaction, it is therefore important for an
officer to be able to determine the Place of supply, Time of
supply and Value of supply of goods and services. It is also
important to know four categories of untaxed goods and
services that is zero rated supplies exempt supplies special
relief supplies, and outside the scope.
Section 4 of the VAT Act states that; “VAT shall be charged on
any supply of goods or services in mainland Tanzania where
it is a taxable supply made by a taxable person in the course
or furtherance of any business carried on by him”.
There is lots of scope for argument over the terms used in
this definition – some words and phrases are specifically
defined – and we also need assistance in considering.
 Time of supply – Section 6
 Place of supply of goods and services - Sec. 7
 Values of a supply – Section 13 & 14

Time of supply – Section 6

6.-(1) For the purposes of this Act the time goods or services
are supplied, shall be when –
(a) Goods are removed from the premises of the
supplier or from other premises where the goods are
under his control to the person to whom they are
supplied, or goods are made available to the person
to whom they are supplied;
(b) a tax invoice is issued in respect of the supply; or
(c) Payment is received for all or part of the supply,
(d) Service is rendered or performed.
Whichever time shall be the earliest.
(2) Where, in respect of any supply referred to in subsection
(1), payment is received or a tax invoice is issued in
16
Apt Financial Consultant CPA Reviews

respect of part of a supply, paragraph (b) or (c) of that

subsection shall apply to that part of the supply, and the
tax on it shall be paid accordingly.
(3) Where supplies are measured by meter the time of supply
shall be the date of the first meter reading following the
introduction of VAT and subsequently at the time of each
meter reading, except to the extent that a tax invoice is
issued or payment is made in respect of the supply.
(4) VAT on imported goods shall be charged and payable at
the time custom duty, tax or levy is payable in
accordance with the Customs Law unless prescribed
otherwise in the regulations made by the Minister.
(5) Notwithstanding the provisions of subsections (1), (2) and
(3), the Minister may, after consultation with the
Authority and by order published in the Gazette, make
provisions in respect of the time at which a supply is to
be treated as taking place.

Place of supply of goods and services - Sec. 7

7.-(1) This section shall apply for determining whether goods
or services are supplied in Mainland Tanzania.
(2) Goods shall be regarded –
(a) As supplied in Mainland Tanzania if their supply
does not involve their removal from or to Mainland
Tanzania;
(b) as supplied in Mainland Tanzania if their supply
involves their installation or assembly at a place in
Mainland Tanzania to which they are removed; and
(c) as supplied outside Mainland Tanzania if their
supply involves their installation or assembly at a
place outside Mainland Tanzania to which they are
removed.
(3) For the purposes of subsection (2) where goods, in the
course of their removal from a place in Mainland Tanzania
to another place in Mainland Tanzania, leave and re-enter
Mainland Tanzania, the removal shall not be regarded as
a removal from Mainland Tanzania.
(4) Services shall be regarded as supplied in Mainland
Tanzania if the supplier of the services
(a) has a place of business in Mainland Tanzania and no
place of business elsewhere;
(b) Has no place of business in Mainland Tanzania or
elsewhere but his usual place of residence is in
Mainland Tanzania; or
(c) has places of business in Mainland Tanzania and
elsewhere but the place of business most concerned
with the supply of the services is the place of business
in Mainland Tanzania.
(5) The Minister may, by order published in the Gazette and
after consultation with the Authority, in relation to goods and
service generally or in specific goods or services, vary
the rules for determining where a supply of such goods and
service is made.

Reasons for certain supplies to be relieved of tax:

Nowhere in the world is there a “pure” VAT system, where all
17
Apt Financial Consultant CPA Reviews

transactions are taxed.

Why not? Why are certain supplies or transactions relieved of
tax?
 Government policy – to improve economy; encourage
investment, exports or infrastructure.
 Social and economic reasons – by relieving items like
food, healthcare and education.
 Difficulty in administration – It is costly to trace the
small traders and tax the financial services.

Four categories of untaxed goods and services

There are four categories of untaxed goods and services:
 Zero rate (1st Schedule)
 Exempt (2nd Schedule)
 Special relief (3rd Schedule)
 Outside the Scope.
Zero Rate:
These goods and services are taxed, but at a rate of 0%.
There are very few zero rated supplies in the Tanzania VAT
system. Zero rating has a great advantage over exemption in
that traders who make zero rated supplies can deduct the
VAT they have been charged, because the supplies they are
making are taxable – but at a rate of 0%.
Exemption – Exempt goods and services never bear tax.
Why do we have exemptions?
In areas where the tax is difficult to administer, e.g. finance; or
for social and economic reasons. In Tanzania, basic
foodstuffs are exempt, as are domestic rents, public transport
and agricultural implements, so the low earning people are
relatively unencumbered by VAT.
Special reliefs are largely conditional on the status of the
consumer and the use to which the goods and services are
put, rather than the nature of the goods and services
supplied. The goods and services involved normally bear tax,
but in certain circumstances are relieved of tax, relief is
granted only after the appropriate procedures have been
followed.
There is also a fourth type of supply:
Outside the scope
These are transactions, which are not covered by section 4.
Possibly because there is no supply, no consideration, or the
supply is not by way of business.
Examples are insurance claims, licenses, compensation
payments, and fines.

1.0 Partially exempt trader:

If a trader makes only exempt supplies, he cannot register for
VAT. If he makes a mixture of exempt and taxable supplies,
he must register if the value of taxable supplies exceeds the
threshold. These traders are “partially exempt”
The major disadvantage for traders making exempt suppliers
is that although they do not account for tax on their sales,
they cannot reclaim the tax they are charged by their
suppliers if it relates to their exempt supplies.
For example a shop owner who buys a freezer to keep meat
in, or a mill to grind maize, which is sold as flour.
18
Apt Financial Consultant CPA Reviews

How we deal with these ‘partially exempt’ traders is covered

in more detail on later courses).

VAT RETURN AND OTHER FORMS

Since VAT is a self-assessment tax, the taxable person is responsible for computing his own tax
liability and filling returns. All registered traders are required under the law to submit returns for each
tax period even when no trading has taken place.

2. Interpretation of the main legal provisions

The under mentioned guidelines, covering the significance and meaning, are provided for each of the
legal provisions listed in paragraph 1:-
. a) Section 26(1)
This section requires returns to be submitted monthly in arrears – i.e. the July 1998 return must be
submitted at the latest, by 31 st August 1998. In other words VAT collected at the beginning of a month
can remain with the trader until the end of the following month. Submissions of returns and money will
probably be delayed until the very last minute unless the return is for a repayment when, obviously, the
trader will have an incentive to send in the return at the earliest possible date.
b) Section 26(2)
Traders may be allowed to have a different prescribed accounting period other than the calendar
month but only with the written authority of the Commissioner – e.g. a firm which closes its books
monthly, say on the last Friday in each month, might want that date to be the end of the prescribed
accounting period. This provision allows the business community to link their VAT tax periods to their
existing accounting arrangements. It is more likely to be used by the large multi-national organizations
with standard accounting periods.

c) Section 26(3)
In terms of Section 17(1) and 26(3) of the VAT Act, every taxable person must, by the last working day
of the month after the end of the prescribed accounting period or such other time as the Commissioner
may determine, pay the tax payable by him.

d) Section 27(1)
In terms of section 27(1) a person who fails to submit a return or pay tax for a specific period, becomes
liable:
(a) To pay a penalty of T.shs. 50,000 or 1% of the tax shown as payable in respect of the
prescribed accounting period covered by the return, whichever is greater; and
(ii) A further penalty of T.shs. 100,000 or 2% of the tax shown as payable in respect of the prescribed
accounting period covered by the return, whichever is greater, shall be payable for each month or
part month thereafter.
e) Section 28(1) to (5)
This section covers the charging of interest, the rate of interest to be applied, compounding of interest
and the interest to be paid to registered traders on tax, which has not been refunded by the due date.
(i) Interest is levied on any unpaid amount of tax (including penalties and any unpaid interest)
each month or part thereof.
(ii) The rate of interest shall be the bank-lending rate of Central Bank plus 5%.
(iii) Interest shall be paid to traders where any tax due to be repaid by the Commissioner
remains un-refunded after the due date in accordance with the provision of section 17(2) and (4).
The Commissioner shall pay interest to the taxable person at the commercial bank lending rate
for the time being determined by the Central Bank.

Calculation of Interest
I = P (1 + R/12)n - 1)

Where: I= interest
P= Principal plus any penalty
19
Apt Financial Consultant CPA Reviews

R=bank lending rate of the central bank Plus 5%

n=period for VAT i.e. months e.g. three months etc
Tax Period
The period covered by a tax return is known as the tax period. In the Tanzanian system this is one
calendar month.

3.0 Particulars of Return form (VAT 201)

The VAT Return Form (VAT 201)
The VAT return form has been designed to be “user friendly”. That means it should require the
minimum amount of information from a registered trader and should, with some familiarization, be
reasonably easy to complete.
The VAT return form is intended to cover only a trader’s tax liability, based on the normal supplies
made and received (outputs and inputs) for a specific period. It does not make provision for the
adjustment of any over/under payments or over/under declarations of tax. Any errors discovered by
the trader should be notified in writing and adjusted in the VAT account for the next tax period.

The registered trader should not use the VAT return to account for any interest or penalties payable.
These will be calculated by the computer system and by vetting officers and the amounts due notified
by use of penalty and/or interest notice

All VAT forms, including the VAT returns, are available free of charge.
Completion of the Return Form (VAT 201)
The taxable person must complete his return form using the information extracted from his accounting
records. The form should reflect the summary totals of input tax, output tax and the difference
between the two as contained in the trader’s VAT Account.

REFUND AND REPAYMENTS

In the normal VAT system at the end of tax period the registered traders deducts input tax from output
tax and pays the difference to TRA. In other circumstances input tax may exceed output tax. In this
case repayment situation occurs – whereby the credit amount has to be refunded according to the
provisions under section 17 of the VAT Act.

INTERPRETATION OF THE MAIN LEGAL PROVISIONS

(a) Section 17(2) of the VAT Act, 1997
This section requires the Commissioner General to remit to the taxable person the amount of tax to
which the taxable person stands in credit by reason of excessive input tax over the output tax in
respect a particular prescribed accounting period.

The provision also spells out the time limit during which repayment should be effected.

(b) Section 17(3) of the VAT Act, 1997

This provision puts an option to the taxable person to apply to the Commissioner for refunds to be
made on monthly basis. This implies that unless the taxable person applies for refunds to be made
on monthly basis, repayments will be made on half yearly basis.
(c) Section 17(4) of the VAT Act, 1997
This section requires the Commissioner General to remit to the taxable person approved to be
repaid on monthly basis the amount of tax to which the taxable person stands in credit. It also
spells the time limit of repayment to be within thirty days after the due date for lodging the return for
the prescribed accounting period, or the date of receipt of the return, whichever is later.
(d) Section 17(5) of the VAT Act, 1997
This section authorizes the Commissioner General to reduce the amount of repayment by any sum
owing to the TRA by the taxable person before making repayment. Upon doing this, the taxable
person must accordingly be informed in writing.
(e) Section 17(6) of the VAT Act, 1997
This provision defines the “half-year” to imply any successive period of six calendar months
commencing in the month for which a repayment return is first submitted.
20
Apt Financial Consultant CPA Reviews

(f) Section 17(7) of the VAT Act, 1997

This provision defines the “regularly results in excess credits” to apply to a situation where over
a six month period the total input tax credit for the prescribed accounting periods exceeds the
total tax charged and paid on supplies.
(g) Section 28(5) of the VAT Act, 1997
This provision gives warning to the Tax Authority to expedite verification of repayment cases
and effect refunds within the time spelt out under section 17(2) and (4) of the same Act,
otherwise the Authority will be subjected to pay interest to the taxable person on any un-
refunded amount.
(h) Section 35 of the VAT Act, 1997
This section allows the Commissioner to impose some security measures (where he believes
there is a risk to the revenue) before repaying the tax. The security measures may range from
requiring the taxable person to produce documents relating to input tax or financial bond
(guarantee).
(i) Section 69 of the VAT Act, 1997
This section gives the Commissioner General a leeway to repay or remit the VAT, which is paid
to the Tax Authority, or VAT due which is not charged and paid by the taxable person because of
misunderstanding arising from incorrect or misleading advice by an officer.

1.0 REPAYMENT CLAIMS CAN ARISE:

 On exportation of goods and taxable services by a taxable person (exports are zero rated).
 When input tax exceeds output tax in a prescribed accounting period (e.g. when taxable goods
are bought in large quantities or when high value capital goods liable for VAT are bought).

The TRA must repay money legitimately claimed as due by registered traders promptly, otherwise
interest becomes payable. It is therefore essential that claims for, repayments are processed and
payment made within the time limits specified in the VAT Act, 1997.

2.0 TYPES OF REPAYMENTS:

Half-year repayment claims
Once half yearly repayment claims are received, the RRO should ensure that they have been
entered into a register and have been assigned to officers responsible for refunds. These officers
should make a quick but thorough verification e.g. by using the information contained in form VAT
201A or even having a quick check on taxpayers records.

Regular repayment returns

Normally the Commissioner is approving the regular repayment traders. These traders will not be
required to apply for repayment i.e. they will not be required to complete form VAT 208. Once their
returns have been submitted, they must be verified within two to three days and must also undergo
the normal channels of returns processing up to the final stage of debatching/ filling

ASSESSMENT AND ENFORCEMENT

INTRODUCTION:
The key objectives of the VAT Department are to maximize revenue collection and improve trader
compliance; efficient enforcement/debt management action has a vital role to pay in achievement of
these objectives. It is very important; therefore, that prompt action is taken each month to ensure that
trader’ debts are collected, utilizing the full range of powers available under the law.

21
Apt Financial Consultant CPA Reviews

This lesson covers the procedures to be followed when dealing with VAT debts, Non-Filers and Missing
Traders. It explains the steps to be taken to effect recovery of all tax arrears and action to be taken to
obtain returns.
The main legal provisions in the VAT Act 1997 relating to the rendering of returns, payment and
enforcement are as follows:

INTERPRETATION OF THE LAW

(a) Section 26(3) of the VAT Act, 1997.
This section requires the taxable person to lodge the VAT Return to the VAT office by the last
working day of the month following the month of business. It also requires the taxable person
to lodge his return to the VAT office within the time determined by the Commissioner by notice
in writing (in particular cases).
(b) Section 27 of the VAT Act, 1997:
This section provides for automatic penalties without recourse to the courts, if tax returns are
not lodged on time. The imposition of automatic penalties saves time, which could have been
spent in prosecuting such cases in the courts of law. It also saves time in terms of tax
administration.

(c) Section 28 of the VAT Act, 1997

(i) Sub-sections (1) & (2)
These sub-sections provide for interest to be charged automatically at the commercial bank
lending rate of the Central Bank plus 5% per annum, if payment is made after the due date.
The aim of these provisions is to discourage delay in making tax payments and returns to the
Government.
Sub-sections (3) & (4)
These provisions are also important if the Government revenue income is to be improved or
maintained. The interest payable, while it remains unpaid, attracts interest as if it forms part of
the unpaid tax.
(d) Section 31 of the VAT Act, 1997
This section provides for all monies owing to the Commissioner General to be recovered as a
civil debt. The effective enforcement of debts is essential if revenue flow is to be maintained.
(e) Section 32 of the VAT Act, 1997
This section provides for VAT debts of a taxable person to be recovered from any funds of the
taxable person held by another party. E.g. a bank or customer of the taxable person.
(f) Section 33 of the VAT Act, 1997
This provision authorizes the Commissioner to request immediate payment of tax where there
are grounds for believing the tax is at risk. It acts against taxable persons increasing their tax
liabilities before the due date for tax payment with little chance of being able to pay on the due
date, either willfully or through negligence.
(g) Section 34 of the VAT Act, 1977
This section provides for distress action on the authority of the Commissioner, for any tax or
interest due from a taxable person, which remains unpaid, or where the taxable person refuses
to pay the tax assessed by the Commissioner, Section 34 (6) makes it an offence at interfere
with items on which distress has been levied.
(h) Section 37 of the VAT Act, 1997
This provision requires anyone involved with supplies or imports, to produce books, records,
accounts, any correspondence relevant to the transactions and to furnish information about
them. The provisions also relate to records and information stored on computer. Failure to
comply with the requirements of this section is an offence. An authorized officer may take
copies of any records or documents, or remove them, providing a receipt, if he does so. The
person from whom the records or documents are taken will be provided with copies, without
charge, if they are needed for the business. Compensation will be paid if anything removed is
lost of damaged.
(i) Section 38 of the VAT Act, 1997

22
Apt Financial Consultant CPA Reviews

This section gives authority for access to records held by a Public Officer. E.g. in tracing
missing traders or verifying eligibility to special relief’s or exemptions.
(j) Section 39 of the VAT Act, 1997
This section authorizes an officer to enter business premises and examine goods and business
records thereon, including records held on computer. It also provides for search of premises
where a magistrate is satisfied that there is reason to believe there has been a tax fraud and
that the goods involved, or evidence of the fraud are on the premises.
(k) Section 43 of the VAT Act, 1997
This section authorizes assessments of tax to be made when there are grounds for believing
that a tax return is incorrect, or a tax return has not been made by the due date, or a taxable
person has not kept proper and adequate records for his business.

CIRCUMSTANCES UNDER WHICH ASSESSMENTS ARE RAISED.

The VAT system depends on traders making returns and paying the tax due on a regular basis. Why,
then should we need to issue ‘assessments’ of tax?
Because sometimes
1. Traders fail to submit their returns, or
1. Traders submit returns, which are inaccurate.
Case 1 is revealed because the computer is expecting a return from every trader.
A report is generated every month of traders whose returns have not been received by a certain date.

These traders are known as ‘non filers’.

Action is taken by the ‘enforcement section’ in the VAT office to chase up these traders and get returns
from them. If the return is not forthcoming, an assessment will be issued.
Assessments of either type are due for payment within one month of issue.

Interest can also be charged, and in the case of non-submission of returns, a penalty is also imposed -
to encourage the trader to comply in the future.

SCHEMES FOR OBTAINING UNDUE TAX BENEFITS

Where the Commissioner is satisfied that any scheme that has the effect of conferring a
Tax benefit on any person was entered into or carried out–
(a) Solely or mainly for the purpose of obtaining that benefit; and
(b) by means or in a manner that would not normally be employed for bona fide business purposes, or
by means of the creation of rights or obligations that would not normally be created between persons
dealing at arm’s length; the Commissioner may determine the liability for any tax imposed by the VAT
Act, and its amount, as if the scheme had not been entered into or carried out, or in such manner as, in
the circumstances of the case, he considers appropriate for the prevention or diminution of the tax
benefits sought to be obtained by the scheme.
(2) A determination under subsection (1) shall be deemed to be an assessment, and the provisions of
section 43 and any other provisions made by or under the VAT Act in relation to assessments, shall
apply accordingly.
(3) In this section “bona fide business purposes” does not include the obtaining of a benefit and “tax
benefit” includes –
(a) Any avoidance or reduction in the liability of any person to pay tax;
(b) Any increase in the entitlement of any taxable person to a refund of tax;
(c) Any reduction in the consideration payable by any person in respect of any supply of goods
and services or the importation of any goods; or
(d) Any other avoidance or postponement of liability for the payment of any tax.

OFFENCES AND PENALTIES

Failure to register for VAT,

Section 44
(1) Any person who –
23
Apt Financial Consultant CPA Reviews

(a) being required to apply for registration under the VAT Act fails to do so within thirty days after
becoming liable to apply; or
(b) contravenes any term or condition of his registration; or
(c) holds himself out as being a taxable person when he is not; commits an offence and upon
conviction is liable to a fine not exceeding two hundred thousand shillings or to
imprisonment for a term not less than two months not exceeding twelve months, or to both the
fine and imprisonment.
(2) Notwithstanding any penalties which may be imposed on a person failing to apply for registration,
or on any arrears of tax due to be paid, the
person shall be liable to pay interest on the arrears in accordance with section 28.
(3) A taxable person who fails to notify the Commissioner of any change in business circumstances
under section 23 of this Act within thirty
days of becoming liable to do so commit an offence and upon conviction is liable to a fine not
exceeding one hundred thousand shillings.

Failure to pay tax or Lodge Returns

Section 45.: Any taxable person who fails to submit a return or pay tax by the due date commits an
offence and upon conviction is liable to pay a fine not exceeding five hundred thousand shillings or to
imprisonment for a term not less than two months, but not more than twelve months, or to both the fine
and imprisonment.

False Returns and Statements

Section 46. : Any person who in purported compliance with any requirement under the VAT Act,
knowingly makes a return or other declaration, furnishes any document or information or makes any
statement, whether in writing or otherwise, that is false in any material particular, commits an offence
and upon conviction is liable to a fine not exceeding five hundred thousand shillings or to imprisonment
for a term not less than three months but not exceeding two years, or to both the fine and
imprisonment.

Fraudulent Evasion or Recovery

Section 47
-(1) Any person who is involved in fraud or who takes steps with a view to fraudulently evading tax
or recovering tax, commits an offence and upon conviction shall, in addition to payment of tax which
would have been paid, pay a fine twice the amount of tax involved or two million shillings,
Whichever amount is greater, or to imprisonment for a term of two years or to both.

(2) A person who deals in or accepts the supply or importation of any goods, or the supply of any
services, and having reason to believe that the proper tax has not been or will not be paid or that
any deduction or credit has been or will falsely be claimed in relation to it, commits an offence
and upon conviction is liable to a fine not exceeding one million shillings or six times the amount
of the tax evaded; whichever is greater, or to imprisonment for a term not less than six months
but not exceeding three years, or to both the fine and imprisonment.
(3) Any goods which are the subject of an offence under this section shall, if the court convicts and
so orders be forfeited.

Publication of List of Persons who Commit Offences

Section. 48
(1) The Commissioner may publish a notice in the Government Gazette or any other newspapers
circulating in Tanzania a list of persons who –
(a) fails to comply with the provisions of section 17(1);
(b) have been convicted of an offence against sections 45, 46, or 47; or
(c) have conducted himself in a manner which amount to an offence which is an offence
referred to under paragraph (b).
(2) Publication of a name of a person in pursuance of subsection (1)(b) or (c) shall be done after any
proceedings in respect of appeal or review thereof have been completed or not been instituted
within the period provided for.
24
Apt Financial Consultant CPA Reviews

(3) Every such list may specify –

(a) The name and address of the person complained of;
(b) Particulars of the conduct complained of;
(c) Tax period during which the conduct complained of occurred;
(d) The amount of the tax involved;
(e) The particulars of the fine or sentence imposed.[s. 47A]

Compounding Of Offences
Section 49
(1) If a person alleged to have committed an offence under this Act agrees in writing to pay a fine
determined by the Commissioner which does not exceed the maximum fine provided by this Act for
the offence, the
Commissioner may compound the offence and impose the fine, provided that, if criminal
proceedings have been instituted against the alleged offender for such offence, the power
conferred by this subsection shall not be exercised without the written consent of the Director of
Public Prosecutions.
(2) A person accepting a fine under subsection (1) shall be provided by the Commissioner with a
certificate setting out the nature of the offence, the
date or period of its occurrence, the fine paid, and any conditions to the compounding
agreement.
(3) If the fine imposed under subsection (1) is not paid on demand the Commissioner may institute
court proceedings or may take steps for recovery of the fine in any manner permitted by this Act for
the recovery of unpaid tax.
(4) The imposition of a fine under subsection (1) shall not be regarded as conviction for the alleged
offence and, provided the fine is paid in full, no prosecution for the alleged offence shall be
instituted or maintained.
(5) Nothing in this section shall in any way affect liability for the payment of tax or interest due under
this Act.

Detention of Goods
Section. 50
(1) Where there is reason to believe that VAT has been fraudulently evaded or claimed or deducted the
goods concerned may be taken from the possession of any person involved in the suspected
offence and detained by the Commissioner pending the outcome of his inquiries or the completion
of offence proceedings.
(2) A receipt listing any item detained shall be provided.
(3) The person from whom the goods are taken under subsection (1) may appeal against the detention
or continuing detention to an Appeals Tribunal.

Offence by Body Corporate

Section 51
Where any offence under this Act or any regulations made under it has been committed by a body of
persons, whether corporate or unincorporated, any person who, at the time of the commission of the
offence, was concerned with the management of the affairs of the body of persons as director, partner,
agent or an officer, shall be guilty of the offence.

25