CONTENTS PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(i) 1.0 ART OF ENTERPRENEURSHIP AND STARTING A NEW BUSINESS . . . . . . . . . . . . . . . . .1 2.

0 DEVELOPING YOUR BUSINESS WITH CUSTOMER FOCUS . . . . . . . . . . . . . . . . . . . . . . . . .8 3.0 DEVELOPING A SUCCESSFUL BUSINESS STRATEGY . . . . . . . . . . . . . . . . . . . . . .10 4.0 EFFECTIVE SALESMANSHIP . . . . . . . . . . . . . . . .14 5.0 PILLARS OF YOUR BUSINESS . . . . . . . . . . . . . . .19 6.0 BUSINESS RECORDS . . . . . . . . . . . . . . . . . . . . . .21 7.0 TYPES OF TAXES AND HOW TO CALCULATE THEM . . . . . . . . . . . . . . . . . . . . . . . . .23 8.0 CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

PREFACE
Tanzania Revenue Authority (TRA) in collaboration with the Zanzibar Revenue Board (ZRB) has decided to introduce seminars on entrepreneurship skills to small and medium taxpayers. The main objective of conducting seminars in entrepreneurship is to create awareness among entrepreneurs and future entrepreneurs as a prerequisites for starting and managing a sustainable business enterprise. This move has been triggered by the fact that the taxpayer is the main player in mobilizing revenue for the two governments of the United Republic of Tanzania and that of the Revolutionary Government of Zanzibar. On this note, seminars in entrepreneurship will be conducted to involve small and medium taxpayers and stakeholders in tax management. Small and medium size entrepreneurs contribute greatly to the Government efforts towards economic growth and poverty eradication under MKUKUTA, for Mainland Tanzania and MKUZA for Zanzibar. It is therefore important for TRA and ZRB to observe their role as partners in revenue collection and provide training to other stakeholders on how to effectively manage business, increase sales and sustain in business environment. This publication for small and medium taxpayers has been released at a time when the fourth phase Government of United Republic of Tanzania is determined to improve the livelihood of Tanzanians through various strategies. The book gives a brief explanation on the art of entrepreneurship, advantages of entrepreneurship education such as; expanding businesses, how to increase income that ultimately leads to poverty alleviation in our communities, creating employment opportunities, widening of the tax base of collection and increasing government revenue. During various seminars regularly conducted by revenue authorities on the tax laws, regulations and payment of tax, the need for entrepreneurship education to the taxpayers has clearly been noted. Many taxpayers do not know much about entrepreneurship and its role in business promotion. They lack tactics of business

ii

administration, management skills with a customer focus and knowledge of effective salesmanship. They cannot meet the challenges of competition; and they are not exposed to the art of records keeping. It is our sincere hope that this book will be useful to all stakeholders as it has focused on entrepreneurs specific goals such as: How to assist an entrepreneur in developing his/her business, how to impart skills in record keeping in order to monitor business transactions, ways of increasing openness in tax collection and disperse fear from Small and Medium Enterprisers, (SMEs). The book also attempts to create better business expectations of business operations; and how to create a healthy relationship between taxpayers and tax authorities as an important component towards success in business. The preparation and publication of this book was made possible through the co-operation and the assistance of Gtz through their tax consultant Mr. Bernd Nuedling which supports TRA both materially and financially. Appreciation also goes to Mr. Paul T. Chizi MD of Customer Support Systems Ltd. for their valuable advice as consultants on the adequacy and quality of the materials in this publications.

iii

PART ONE
1.0 ART OF ENTREPRENEURSHIP STARTING A NEW BUSINESS ART OF ENTEPRENEURSHIP The word entrepreneurship comes from the word enterprise and means: Determination to look for and eagerness to get wealth The ability to identify existing opportunities and courage to exploit emerging opportunities The ability to overcome obstacles that may hinder business operations. Therefore an entrepreneur is a person who is able to identify and exploit existing opportunities to establish and manage viable enterprises by applying the main pillars of business, which are; manpower resources and working capital. He is a planner with a vision and mission who is dedicated to run his/her business with success. He is also confident, selfdriven ready to work for long hours; a person who is quick to realize his/her mistakes and take remedial measures; and one who is willing to spot out other talents and use them to accomplish business plans 1.2 MEANING OF BUSINESS Business is an act of buying and selling property, goods and/or delivering services, with the aim of earning profit. The national policy of 2003 of developing small and medium size entrepreneurs divides businesses into four main categories by considering the number of employees and operating capital as follows:-

1.1

SN 1. 2. 3. 4.

BUSINESS TYPE Minor enterprise Small enterprise Medium enterprise Large Enterprise

NO. OF EMPLOYEES 1 to 4 5 to 49 50 to 99 Over 100

BUSINESS CAPITAL Under TZS 5,000,000/= From TZS 5,000,000/= To TZS 200,000,000/= From TZS 200,000,000/= To TZS 800,000,000/= Over TZS 800,000,000/=

Table no 1: CATEGORIES OF BUSINESS Other criteria used by Tanzania Revenue Authority to determine categories of taxpayers are the yearly net-capital sales or the magnitude of taxes one pays per year. As business location has a great influence on the performance of an enterprise, you should therefore: Make sure that your business site is legally recognized in terms of land registration and building permits Identify existing institutions, resource people, and government departments which can play a role in strengthening your business Make sure that there exists the necessary business infrastructure (roads, water, electrical supply, etc.)

1.3

CONSIDERATIONS FOR DETERMINING THE RIGHT BUSINESS Before you engage in business, you should decide what type of enterprise you would operate by considering the following parameters: The availability of raw materials, goods or services, you want to sell or offer Competitors against your business Market for your goods, and interests of the customers Running cost of your business Procedures of paying taxes and various fees

The climate of your business location Living environment of the people around (peace and tranquility, wars, peoples income, etc)

1.4

THE RIGHT BUSINESS PARTNER Having confirmed your business location and the necessary infrastructure in terms of human resources, related institutions, and relevant government departments, you should look into other criteria of selecting the right business partner. Do you have the capacity to effectively run your own business? If yes, do you have the necessary skills to manage your enterprise? Is it logical to manage the business alone or there is a need to form partnership with other people? Here you should take into account how you can run your enterprise during times of sickness, emergency, etc. Have you observed all legal measures of establishing your partnership or cooperation?

In looking for the right business partner, consider the following: 1.5 The partner should be ready to take business risks. Should have appropriate education and relevant skills to run the business. Should have a vision and ambition of sustaining the business. Should be willing to commit dedication, time, resources, and energy in order to develop the business.

DETERMINING THE BUSINESS STRUCTURE Knowledge of different forms of business will enable you to choose the appropriate structure for your new enterprise. The following are some of the forms of business.

Sole proprietorship Partnership Private/Public company

(a) Sole Proprietorship This type of business is solely owned by a person assisted by his/her children or spouse. The owner, may employ a manager but he/she remains the final decision maker and responsible for debt obligations of the company. In case of bankruptcy, the owner of the company will meet all obligations, profit and liabilities. This type of business structure has no requirement other than working capital, business license, and company registration and enterprise management. Its disadvantage is that everything lays on the owners shoulders. When his/her falls sick or entangled in problems, your business will certainly fall. Its advantage is that the owner has the freedom to plan and develop his business at a desired pace. (b) Partnership Partnership is made of two or more people (not more than 20) who have decided to join hands in business. The advantages of this structure are as follows: Develops working capital Diversified skills as partners complement their business knowledge and experiences Lowers tax rates in comparison to a sole trade (look at the example in section seven). Each partner is bonded to the business; and all of them are liable to the business debts.

(c) Company Companies fall into two categories namely: the private and

public company. This type of companies is bonded to the enterprise and its debts and the business transactions have no relationship to the individual property of its owners. In case of bankruptcy, and if the debts exceed the company property, the liquidator will have no mandate to seize individual property of the directors or shareholders. Before one determines the structure of his/her intended business, it is better to ask the following questions. Which structure is suitable for your capital? Which structure has less legislative conditions? Which structure will incur less taxes and fees? Which structure offers a better flexibility? 1.6 BUSINESS REGISTRATION Any business has to be legally registered. You should register your business with relevant institutions, and related government departments in order to legalize your enterprise. In the cause of registration, make sure you get all receipts and necessary documents. Abide by Legislative procedures to avoid unnecessary future disturbances. The conditions that are listed at the backside of a trading licence are as follows: The Licensee in not allowed to put any conditions to the buyer The Licensee shall issue receipt for each sale he makes The Licensee shall adhere to the provisions of the Trade License Act (No. 25) of 1972 together with its amendments (No.9) of 1980 The Licensee shall not provide services or goods, which are substandard as per recognized institutions that control quality standards. The trading license may be impounded any time if found to be illegally obtained or violation of conditions of the license. The act of doing business without a trading license is an

offence and upon conviction the licensee is liable to a fine of TZS 50,000 but not more than TZS 100,000 or imprisonment for a term of not more than two (2) years or both fine and imprisonment. In order to be considered for issuance of trading license must posses the following qualifications: Your age should be not less than 18 years old Ensure that you have an authorized place of business Should be sane Should be a good citizen without criminal offences and if not a citizen you must have Class A permit from Immigration Department. 1.7 RAISING CAPITAL FOR YOUR BUSINESS Business capital can be raised from your own saving or funds from your colleagues. You can obtain loans from financial institutions such as Banks, Pride, Finca, Poverty Africa, etc. You can also take advantage of the government strategies such as MKUKUTA, MKUZA, MKURABITA, etc. Make sure you fully exploit these opportunities to raise and develop your business. Other opportunities at hand are SACCOS, and the special funds allocated to each region by the Government. 1.8 APPOINTING THE MANAGEMENT FOR YOUR BUSINESS You should assess your own potential and the potentials of your partners and workforce to meet the goals of your business. After identifying the strengths and weaknesses of everyone who is part of the business, appoint competent managers who will lay out plans and strategies to develop the business. Without qualified managers, it shall be difficult to achieve the set objectives. If you do not have among yourselves, a person with the desired qualities, you should employ an expert to run your

business. 1.9 BUSINESS FAILURE/SUCCESS Business is started to become sustainable. Nobody who establishes a business would like to see it dying eventually. The question to ask ourselves is Why do businesses fail? According to surveys conducted in America in 1981, it was established that, out of 100 enterprises that were started, 65 died within three years, and 17 out of the remaining business died in the following two years. This means that only 18% of the enterprises exist beyond the first 5 years. What is the status in Tanzania? In Tanzania some of the businesses once established are not sustainable due to the following reasons: 1.10 Insufficient capital Inadequate business knowledge and skills Poor business management (selfishness, low integrity etc) Wrong business location Unexpected business competition Unfriendly laws Bankruptcy Lack of customer focus Hazards and calamities

PRODUCT STANDARDS AND CERTIFICATION For a successful business the entrepreneur should ensure that the product that is trading with must have a certification of its specifications approved by a recognized government institution or authority. This is purely for healthy/safety, social, and economic and for security reasons. For example locally produced products should be certified with the Tanzania Bureau of Standards. For exports of agricultural products they should conform with the Sanitary and Python-Sanitary Standards, or should have Product Certification/Quality Standards such as ISO, Organic Product Certification

Schemes.

PART TWO
2.0 DEVELOPING YOUR BUSINESS WITH CUSTOMER FOCUS Who is a customer? Customer is a person, company, institution, or group of people who buy goods or services from you. He/she can come from within or outside the business entity. 2.1 Customer Care Philosophy A customer is the boss and a pillar of business success. The aim of any business be it production, trading or provision of service, is to realize profit to satisfy the needs of the owner. Customer care is the main approach that will consolidate your business and increase your income. You will develop your business if you offer good services that will satisfy customer demand and attract other customers to come and buy or get services from you. 2.2 Factors that may lead to business growth To raise prices on goods or services. This approach may not be successful and could drive away customers. To lower or retain prices thereby increasing the number of customers and sales of goods or services. To know customer expectations and satisfy their demand. A customer who is not satisfied by your goods or services will discourage others not to come and buy from you. The philosophy of customer care is alpha and omega of your business. This means that the customer will contribute to the development of your business by praising it such that other people will be tempted to come and buy/get services from you. A customer may send away other customers by

negatively publicizing your business. 2.3 IMPORTANT POINTS TO NOTE ON CUSTOMER CARE The entrepreneur should be aware of various factors in caring his/her customers. To view the customer as the essence of your business by recognizing his/her values. No customers no business To develop the culture of valuing your workers. It is the worker who meets the customers and may build the reputation of your business or destroy it. To see things from the customers viewpoint. 2.4 BUILDING A SUSTAINABLE BUSINESS Factors that make businesses sustainable will be discussed in depth in their respective sections; however some of these factors are: Select the appropriate model for your business after partnership, company, cooperatives and corporation. Appoint competent leadership and skilled labour with customer focus. Place your business in proper location. Develop appropriate strategies to address business competition. Prepare and maintain a proper balance sheet.

PART THREE
3.0 DEVELOPING A SUCCESSFUL BUSINESS STRATEGY

3.1 STRATEGY VIS--VIS BUSINESS VISION AND MISSION It is important to match the vision and mission of your business. This will mean that you have to evolve strategies that will focus on the mission of the business vision. 3.2 BUSINESS STRATEGIES In order to succeed in trading or service delivery, one should ask the following questions: What type of goods or services do you want to offer, now and in future? What kind of customers do you intend to serve, now and in future? In which areas (e.g. within Tanzania, East Africa, Africa or Overseas) should you expand your business and why? How do you distinguish yourself from your business competitors, now and in future? What competitive strategies do you deploy in order to thrive and reach your business targets? What commitments do you make to the society? What benefits are your employees deriving from your business?

Answer to these questions will determine your customers, future customers, ways of reaching them, competitive strategies, financial rewards and the expected contribution of your business to the socio economic growth of your community. After laying out the strategies, you can now workout yearly

10

plans to achieve the mission of your business. It is therefore important to make regular evaluation of the business trend to ensure conformity with your business plan. 3.3 EVALUATE BUSINESS ENVIRONMENT A serious entrepreneur who is looking for a success in business will initially carry out an environmental assessment. This is because the environment may boost your business, stagnate it or kill it. Your evaluation should take into account the internal and external features of your enterprise. 3.3.1 Internal environment of your business

In order for your business to thrive, it is recommended to make thorough assessment of the internal factors. (a) Capacity Determine your ability, understanding and the scope of your vision for the business you aspire to undertake by evaluating:Your capital. Make sure you have enough capital to effectively run your business. Quality of your goods and services Knowledge of your customers and their customs Understand your business competitors Knowledge and skill of the business. (b) Weaknesses It is important to understand the weaknesses that may affect the growth of your business, for example: 3.3.2 Lack of customer focus Lack of techniques for overcoming competition Supply of goods and services not timely delivered External environment of the business

Determine the opportunities and threats of your enterprise so as to lay out viable strategies for developing your business.

11

(b) Opportunities External capital, for example, aid, grants, loans, etc. A conducive business environment will attract investors to enter into partnership with local entrepreneur e.g. Tanzania Certificate of Incentive to investors. The establishment of the East African Common Market that will expand the scope of business undertaking. (b) Threats Internal competition External competition from multinational companies which invest in our country Change in legislations, which do not favour local industries or business enterprises Business environment in Tanzania can be difficult for SMEs to conduct effective business due to multiple licenses or permits, contract enforcement. However the government is trying to streamline and simplify the procedures with a view to facilitate business.

3.4

ENVIRONMENTAL SCANNING: CURRENT AND FUTURE The PESTL analysis: (a) Political The political trend may negatively or positively affect your business. (b) Economic A health economic environment will empower the people to buy your goods or services. How much does the government play its part in improving the business environment for the local entrepreneur? (Consider the necessary social infrastructures of law and order, means of transport, road network, health facilities, etc.)

12

(c)

Social How does: The community gains from the sales of your goods or services? How does your business protect the environment? Technological Ho do you intend to take your business beyond the borders. Taking advantages of opportunities that exist in East African Customs Union and SADC. Do your working equipment conform to the everchanging technology? Legal How does the legal framework protect the local entrepreneur?

(d)

(e)

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PART FOUR
4.0 EFFECTIVE SALESMANSHIP The purpose of a business is to generate income. Expertise in salesmanship will develop your business, deliver necessary requirements, and improve your well being. 4.1 DEPLOY GOOD SALESMEN /WOMEN In the cause of selling goods/services, lay sound strategies in promoting your business. These strategies include:(a) Ways of reaching the customers (i) Advertise you business using the media such as TV, radio, placards, publications, etc. (ii) Buy the idea that, Business advertised is business delivered. If necessary, take your goods to the customers door Where possible employ agents. Visit your customers to promote your goods and get their feeling about your business. Use questionnaires to explore market demand for your goods or services. (b) Differentiate yourself from your competitors Your business will thrive if you display your goods through different ways from that of your competitors Offer competitive prices to your main customers. Decrease prices beyond those of your competitors to attract customers. Introduce psychological reductions of price and business trade mark. Announce grand price deductions for out fashioned

14

products. Employ attractive salesmen/women who offer better customer care than your competitors (smiling, receptive, presentable, etc). Make good display of your goods in your shop.

(c) Identify your customers Considering the social diversity of our communities, a businessman has an opportunity to dispose of his/her goods or services if he capitalizes on the social groupings. The society falls into different categories in conformity with their cultures traditions, social norms, economic status, behavior etc. In that case you can sell your goods or services in line with the aforesaid divisions. Identify areas where you can sell products of a certain quality. Determine the economic status of your customers. Observe the culture and social behavior of the society in relation to the quality of your goods. Determine the needs and expectations of each group of customers.

4.2 OVERCOMING YOUR COMPETITION Address the following basic issues: Do your actions, goods and services attract customers? Do you understand the needs of your customers? Of what benefit are your goods and services to the customers? Constantly compare your prices to those of your competitors. 4.3 NORMS OF SALESMANSHIP When selling goods, observe the followings:-

15

Attract customers to buy at first sight. Create good impression to your customers. Make sure you use the initial few words to sell your goods. Keep records of important elements of your customers to be able to mention their names when they come to buy from you. Develop courage to look straight into the faces of your customers when you are doing business with them.

4.4 COST CONTROL You should be cost conscious in order to reduce running cost of the business. The following ways will guide you in reducing or avoiding unnecessary costs and making profit. Cutting down costs of procurement and business administration will enable to expand your enterprise. You may categorize these costs in three groups (a) Procurement and storage of goods Before you indulge in procurement of goods, ask yourself the following questions: Are the goods you want to buy easy to sell? Does the market need them? (in terms of quality, price, environment, etc). Is the source of supply to acceptable standard? (in terms of distribution, price, processing, etc) Management of goods Procurement of goods contributes greatly to the over all cost of business and should therefore be monitored very closely. Ways to restrict cost in procurement and improve business performance are: Lead time The businessman/women should have a timetable to lead him/her in making procurements from the time of ordering to the
16

(b)

securing of goods, before available goods are obsolete or get to minimum stock level. If new supply is delayed current stock may get finished and disturb the flow of business. Economic Order quantity Before you decide how much you want to order you have to underscore the cost implications of buying large quantities and storing part thereof or ordering more than once. If the costs of making a single order are greater than that of several orders or vice versa, that kind of order is not beneficial to you. An economic order is achieved when the cost of a single order is equal to that of storage; for further explanation, refer to the diagram below: CHANGES IN STORAGE, PROCUREMENT AND SALES OF
______ _____________________ _

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _

17

GOODS (c) Running Cost Avoiding unnecessary costs by reducing family expenditure and ensuring you do not spend more than you can afford. Reduce administrative cost (such as water bills, electricity, telephones, etc). Do not buy unnecessarily expensive furniture. 4.5 Other operating costs Avoid penalties for non-compliance with statutory payments (Taxes for TRA /ZRB, City/Municipal/Town Councils, Licence, etc)

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PART FIVE
5.0 PILLARS OF YOUR BUSINESS It is important to realize that whenever you engage in business there is a silent partner in business engaged in creating the right environment for your business. This silent partner is the government as it ensures that roads, hospitals, utilities schools are in good condition for the conveniences running of your business. It is therefore imperative that part of the profit that accrues is paid to your silent partner. This type of dividend is generically called tax. It is therefore important to operate your business in a transparent manner so that each party in the business (also the tax administration) can have access to the information and be satisfied. 5.1 DISTRIBUTION OF DIVIDEND 5.2 Government Dividend The government dividend forms the expenditure of her yearly budget. This dividend is known as tax, a name that is misinterpreted and given a negative connotation, making its collection difficult. Training in tax management is meant to make you aware of your responsibility of paying government taxes voluntarily and educate your neighbours who are yet to receive this education, of their duty of paying their respective fees and taxes.

5.3 Dividend of the Entrepreneur Your dividend is the remaining part of the profit of your business after you have paid government taxes. You can use it for your current and development expenditures and even boost the capital of your business or start a new business out of the education, knowledge and skills you

19

have obtained from this training. Your dividend is part of the profit, an attractive name in the ears of everyone, who hears it. If you do not have these pillars, your business will tend to fall, changing the profit into a loss. This publication reminds you of your noble responsibility registering your business and obtaining the Taxpayer Identification Number (TIN). Future expectation is to see your business records showing the progression of your business for your sake, community and the nation at large.

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PART SIX
6.0 BUSINESS RECORDS In the last section we underscored the need for transparency in managing your business. This essentially emphasizes the need of keeping proper records. This section shall dwell much more deeply on record keeping. 6.2 WHAT ARE RECORDS? A record is anything that contains information for one to remember. In business, records refer to documents for remembrance/reference. Documents for remembrance are written specifically to enable the stakeholder remember or create in his/her mind the real picture of the flow of the business.

6.2

THE NEED FOR BUSINESS RECORDS Proper records will reveal the actual profit of the business. Records assist in tracing the flow of business and its corresponding income. Records assist in confirming or giving testimony to a business transaction, for example, procurement of good without receipts, or buying illegal property. Proper records enable the business stakeholder to know his real income and determine the actual taxes he/she has to pay. Records enable the entrepreneur to determine his/ her needs from business investors, from within or outside the country. For example, getting loans or business skills from various institutions.

Every business man/woman is required to keep records and books of accounts of his/ her business. Records should be kept within the prescribed time frame. Failure to keep proper records is illegal.
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6.3

TYPE OF RECORDS There are many business records that are grouped according to the size of the enterprises. Some of them are: Receipts of sales and purchases Copies of tax invoice which were issued showing VAT that was collected Copies of tax invoice which were received during purchases showing VAT payments Debit and Credit Notes VAT account Purchase day book Sales day book Production records of industrial goods and how they are distributed Accounts showing yearly income and expenditure and the final accounts of business Cashbook, petty cash, and other books of accounts Business communications Bank statement Records stored in a computer.

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PART SEVEN
7.0 7.1 TYPES OF TAXES AND HOW TO CALCULATE THEM VALUE ADDED TAX (VAT) VAT is a consumption tax charged by VAT registered traders on all taxable goods and services at a standard rate of 20%. The VAT is a multistage tax levied at each stage of production and distribution up to the retail stage. The tax is also levied on taxable imports made by persons whether or not registered for VAT. All traders whose taxable turnover exceeds TZS 40 million per annum (for Tanzanian Mainland) and TZS 20,000,000 (for Zanzibar) are obliged to apply for VAT registration to the respective Commissioners in their respective Tax Authority. They are also required by law to keep records and books of accounts of their business. (a) VAT ACCOUNT This shows, on one hand, a brief report of tax collection on sales and any changes in tax collection and on the other hand a brief report of taxes paid on purchases and any changes made in taxes, which were paid. Thus the actual VAT paid or remitted shall be realized. You are supposed to keep VAT brief reports within the period of VAT returns. Add the columns of VAT in your books of account regularly, say weekly, and the sum should be written in briefs under the following headings:Table no: 2 VAT ACCOUNT
S/N 1. 2. 3. VAT ON PURCHASES Internal purchases Imports of goods Errors of previous returns Total VAT ON SALES Sales Goods for personal use Errors on previous returns Total

23

At the end of each tax period add the figures on each heading and insert them on your VAT returns. (b) HOW TO CALCULATE VAT ON SALES If VAT is inclusive in the sales of goods or services, the result is a price that includes VAT. The VAT fraction is , where r = tax rate. r (r + 100)

Using VAT tax rate of 20%, VAT on sale and purchase can be obtained by using the VAT fraction 20/120 of the VAT included price. Example 1 BAHATI bought goods worthy TZS 1,200/=, VAT included. The value of VAT can be determined as follows: By using the VAT fraction x 1,200 = TZS 200/= 20 120 The actual value of goods shall be obtained by subtracting VAT from the gross values of goods, i.e. VAT : Actual Value of goods = Value inclusive of VAT VAT = TZS 1,200 TZS 200 = TZS 1,000 Therefore: VAT on goods shall be TZS 200 Actual value of goods is TZS 1,000

Example 2 How to calculate VAT on goods or services that are VAT exclusive . BAHATI is an entrepreneur of a whole sale shop, who is VAT

24

registered for the tax period of November, 2006; she has bought and sold goods as follows: Value of goods bought (VAT excluded) VAT on purchases (20%) Value of goods with VAT Profit on sales is as follows: Value of goods without VAT Profit and expenses Selling price without VAT Add VAT on sales (20%x 120,000/=) Selling price with VAT TZS 100,000.00 TZS 20,000.00 TZS 120,000.00 TZS 24,000 TZS 144,000.00 TZS 100,000.00 TZS 20,000.00 TZS 120,000.00

At the end of the month the VAT to be paid from returns of November 2006, shall be:VAT on sales Subtract VAT on purchases VAT to be paid to Tax Authority 7.2 7.2.1 7.2.2 CUSTOMS DUTY AND EXCISE DUTY Customs Duty: Customs duty is levied on imported goods Excise Duty: Excise duty is levied on certain specified imported goods like wines, spirits, cigarettes, petroleum products and non-utility cars. It is also levied on specified local produced goods and services. The duty is charged at specific or ad-valorem rates. TZS TZS TZS 24,000.00 20,000.00 4,000.00

7.2.3 Common External Tariffs for East Africa Community: Imports from East Africa Community member states are chargeable at the rates enshrined in the Common External Tariff. Anybody can import goods into the country after observing customs regulations on imports. You are supposed to know whether the goods you want to import are legally allowed into the country or not. There are goods that are prohibited to
25

enter into the country for example, intoxicating drugs, equipment for tear gas, inciting literature, abuses, etc. There are also restricted goods which law permit to enter the country with further permission from relevant government institutions, e.g. Live animals, crops, blasts and fire arms. You should know the authorities and institutions concerning the importation of such goods. According to the present system of clearing goods from customs, there are certain types of goods that are cleared immediately for security and safety reasons eg explosives or perishable items or as a way of facilitating business such as raw materials or equipment. Registered Customs Clearing Agents with TRA carry out the function of clearing imported goods. Imported goods may bear a custom clearance certificate for home consumption, or transit or bonded warehouse. Goods for home consumption have to be charged custom duty, excise duty (if any) and VAT; unless such goods are exempted or the person concerned is exempted from tax. The duty rates differ according to the type of goods and their place of origin. Goods with Certificate of Transit are not charged tax and are kept under the supervision of the Custom and Excise Department until they cross borders and reach the country of destination. Goods certified for warehousing are not charged tax until they are cleared and declared for home consumption. Warehouses can be used by anybody who, for one reason or another, cannot pay all taxes at once. Some of the goods, such as personal cars for foreigners, are given permits to allow them to use their vehicles in the country for a certain period of time. Thereafter they will be required to register the vehicles or return them to their country of origin.

26

Goods exempted from custom duty, excise duty and VAT, because of its use or credibility of the owner, are required to pay the taxes once ownership shifts to another person who does not have the exemption. It should be understood that exemptions that are given to various institutions and government departments has no relationship with the officers of those institutions. Thus an officer/ worker in those institutions/ government department is obliged to pay all taxes on goods he/ she imports into the country. The department of custom and excise has an inspection unit whose duty is to ascertain proper tax payment on imported goods and that they are used in accordance with the documents of the certificate of importation. Tanzania is among the nations that are signatory to the Article of Value Determination of imported goods. In order to avoid unnecessary costs, TRA urges importers to pay taxes and warehouse charges using the proforma invoice while waiting for the invoice of the imported goods. 7.2.3 CALCULATION OF TAX ON IMPORTED NON-UTILITY VEHICLES (a) Imported non-utility vehicle of not more than ten years from the year of manufacture. Example 3 Imported non-utility vehicle with engine capacity less than 2,000 c.c. valued at USD 3,200 on arriving in Tanzania Assume exchange rate is 1 USD = TZS 1,300

27

Computation of duty and tax will be calculated based on the applicable rates. Import Duty rate 25%, Excise Duty 20% and VAT 20%. Example 3 Calculations
Duty/Tax Type (i) Import Duty Computation Duty/Tax payable

(ii) Excise Duty

(iii) Value Added Tax (VAT)

In order to obtain import duty to be paid, take the certified customs value and multiply by the import duty rate (25%). USD 3,200 x 25% = USD 800 TZS 1,040,000 USD 800 x TZS 1,300 = TZS 1,040,000 In order to obtain excise duty value, take the certified customs value plus import duty calculated in (i). Then multiply by the excise TZS 1,040,000 duty rate (20%). USD (3,200+800) = USD 4,000 USD 4,000 x 20% = USD 800 USD 800 x TZS 1,300 = TZS 1,040,000 In order to get the value of VAT, take the certified value and add to it the customs duty and the excise duty you have calculated in (ii). Then multiply by the VAT rate (20%). TZS 1,248,000 USD (4,000+800) = USD 4,800 USD 4,800 x 20% = USD 960 USD 960 x TZS 1,300 = TZS 1,248,000 TZS 3,328,000

Total Duty & Tax Import Duty + Excise Duty + VAT Payable

Example 4 Imported non-utility vehicles with engine capacity more than 2,000 c.c with certified value of USD 3,800 on arriving in Tanzania. Duty and taxes for this type of car will be calculated basing on applicable rates. 25% import duty, (20%+10%) = 30%* Excise duty, and 20% VAT. (Assume exchange rate is USD 1 = TZS 1,300)

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Example 4 Calculations
Duty/Tax Type (i) Import Duty Computation Duty/Tax payable

In order to obtain import duty to be paid, take the certified customs value and multiply by the import duty rate (25%). USD 3,800 x 25% = USD 950 TZS 1,235,000 USD 950 x TZS 1,300 = TZS 1,235,000 In order to obtain excise duty value, take the certified customs value plus import duty calculated in (i). Then multiply by the excise duty rate (30 %*). TZS 1,852,500 USD (3,800+950) = USD 4,750 USD 4,750 x 30%* = USD 1,425 USD 1,425 x TZS 1,300 = TZS 1,852,500 In order to get the value of VAT, take the certified value and add to it the import duty and the excise duty you have calculated in (ii). Then multiply by the VAT rate (20%). USD (4750+1425) = USD 6,175 TZS 1,605,500 USD 6,175 x 20% = USD 1,235 USD 1,235 x TZS1300= TZS 1,605,500 TZS 4,693,000

(ii) Excise Duty*)

(iii) Value Added Tax (VAT)

Total Duty & Tax Import Duty + Excise Duty + VAT Payable

Note: * The Excise Duty of 30%* is a sum of:(i) 10% imposed on imported saloon cars with engine capacity of more than 2,000 cc and

(ii) 20% imposed on imported saloon cars with ten or more than ten years from the year of manufacture. (b) Imported non-utility vehicles with less than ten years old from the year of manufacture. Non-utility vehicles, with engine capacity less than 2,000 c.c. valued at USD 3,200 on arriving in Tanzania. (Assuming exchange rate is 1 USD = 1,300 TZS) Computation of duty and tax will be calculated based on the applicable rate. Import Duty rate 25% and VAT 20%.

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Example 5 Calculations
Duty/Tax Type (i) Import Duty Computation Duty/Tax payable

In order to obtain import duty to be paid, take the certified customs value and multiply by the import duty rate (25%). USD 3,200 x 25% = USD 800 TZS 1,040,000 USD 800 x TZS 1,300 = TZS 1,040,000 (iii) Value Added In order to get the value of VAT, take Tax (VAT) the certified value and add to it the import duty you have calculated in (i). Then multiply by the VAT rate (20%). USD (3,200+800) = USD 4,000 TZS 1,040,000 USD 4,000 x 20% = USD 800 USD 800 x TZS 1,300 = TZS 1,040,000 Total Duty & Tax Import Duty + VAT TZS 2,080,000
Payable

Example 6 Non-utility vehicles, with engine capacity more than 2,000 c.c. valued at USD 3,800 on arriving in Tanzania. (Assuming exchange rate is 1 USD = 1,300 TZS) Computation of duty and tax will be calculated based on the applicable rate: Import Duty rate 25%, Excise Duty 10% and VAT 20%.

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Example 6 Calculations

In order to obtain import duty to be paid, take the certified customs value and multiply by the import duty rate (25%). USD 3,800 x 25% = USD 950 USD 950 x TZS 1,300 = In order to obtain excise duty value, take the certified customs value plus import duty calculated in (i). Then multiply by the excise duty rate (10 %) USD (3,800+950) = USD 4,750 USD 4,750 x 10% = USD 475 USD 475 x TZS 1,300= In order to get the value of VAT, take the certified value and add to it the import duty and the excise duty you have calculated in (ii). Then multiply by the VAT rate (20%). USD (4750+475) = USD5225 USD5225 x 20% = USD 1,045 USD 1,045 x TZS1300= TZS 1,358,500/=

Note: The Excise duty 10%*: The rate is imposed on Non- utility vehicles with engine capacity of more than 2,000 cc and with less than ten years from the year of manufacture. 7.3 INCOME TAX

7.3.1 The Income tax is a tax on gains or profits from persons income from employment, business or ownership of property and an investments in corporations and other entities Income from employment The total income of each person is determined separately. This includes salaried people who are taxed at progressive individual income tax rate that varies from the lowest marginal rate of 18.5% to the top marginal rate of 30%. Benefits in kind are also to be included in determining the taxable income of an employee.
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Income from business A persons income from business is the gain or profits from that business.

Income from Investment Income from conducting an investment includes dividends, interest and rent. The amount derived from the sale of investment assets is included in investment income.

7.3.2

Chargeability of income tax is divided into two categories:

(i) Sole Propriatorship (a) Small Enterprises These are business men/ women who possess the following qualities:(i) Their business sales are not more than twenty million shillings (ii) They should be residents in the United Republic of Tanzania (iii) They should be private enterprises who are not involved in any other activity except business. Tax rates on yearly sales (turnover) are determined as follows: -

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Table 3: TAX RATES FOR SMALL ENTERPRISES

Tax payable where unreliable records are kept TZS 35,000 TZS 95,000 Tax payable where reliable records are kept 1.1% of yearly sales TZS 33,000 + 1.3% of the sales exceeding TZS 3000,000 per year TZS 85,000 + 2.5% of sales exceeding 7,000,000 per year. TZS 260,000 + 3.3% of sales exceeding 14,000,000 per year

Yearly Sales Where sales does not exceed TZS 3,000,000 Where sales are more than TZS 3,000,000 but less than TZS 7,000,000 Where sales exceeding TZS 7,000,000 but less than TZS 14,000,000 Sales more than 14,000,000 but less than TZS 20,000,000

TZS 291,000

TZS 520,000

(b) Enterprises which prepare business records These are business with the following qualities: (i) Do not have qualities similar to those of small businesses. (ii) Keep proper records and prepare business returns. Tax rates, profit or yearly income is calculated as follows: Table 4: TAX RATE FOR THE INDIVIDUAL
Tax Band TOTAL INCOME TAX RATE

18.5% 20% 25% 30%

Before calculating the tax that you are liable to pay, it is important to examine the allowable and non-allowable costs to be considered in the calculation of tax.

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Allowable costs (i) (ii) (iii) (iv) (v) (vi) (vii) Salaries and remunerations of employee. Water and electricity used in business Rent for the business. Transport costs for business purposes. Cost for advertisement and business promotion Depreciation of property. Cost for repair and maintenance of furniture and other equipment used in business, such as computers, vehicles, etc. (viii) Loan interests for the business. Non allowable costs (i) Income tax (ii) Penalties and various interests incurred for nonobserving state laws. (iii) Personal expenditure. (iv) Bribery, inducement, entertainment, and other payments of that nature. (v) Procurement of business assets such as computer, vehicle, furniture and building construction. The cost of these assets is lowered by yearly depreciation as the law demands. Example 7 The balance sheet of income and expenditure of Madame Subira, in the year 2006, is as shown below. Sales TZS Sales income Remaining goods in year 2005 5,000,000.00 Add Purchases 70,000,000.00 Available goods for sale 75,000,000.00 Less Remaining goods in year 2006 9,000,000.00 Cost of sales Profit after sales (gross profit)
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TZS 70,000,000.00

64,000,000.00 6,000,000.00

Running Costs: Salaries Electricity Water Rent of Business Local govt levy Educations levy Property depreciation Net Profit

840,000.00 240,000.00 40,000.00 720,000.00 60,000.00 50,000.00 120,000 .00

2,075,000.00 3,925,000.00

Extra Information (i) Half of the levy income of the council comes from penalties which amount to TZS 30,000.00 (ii) Madam Subira also paid some TZS 400,000.00 in four installments, as yearly initial tax. Calculation of tax that Madame Subira is supposed to pay in the year 2006 is as follows:TZS (i) Net profit (ii) Add penalty by local government (iii) Profit liable for taxation Tax computation: (iv) Profit liable for taxation (v) Subtract (see tax band 3) (vi) Multiply by (vii) First part of tax (viii) Add (tax for tax band 3) (iX) Total tax of the year Subtract initially estimated tax Tax at the end of fiscal year 3,925,000.00 30,000.00 3,955,000.00 3,955,000.00 2,160,000.00 1,795,000.00 20% 359,000.00 224,400.00 581,400.00 400,000.00 181,400.00

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(ii) Partnership Under a partnership arrangement business profits is shared among partners in their agreed proportions. Example 8 Take into account the above returns of revenue and expenditure for Madame Subira, but consider that she had a partner known as Mr. Saburi. In their partnership they agreed to share their profit in equal proportions however Mr. Saburi got a salary of TZS 500,000. Tax will be calculated as follows: Profit previously calculated Add salary of Saburi Income for dividends and tax payment Sharing of Income Subira Partners Proportion of dividends 50% Salary Profit in books of account (4,455,000 500,000) = 3,955,000 1,977,500.00 Taxable income 1,977,500.00 Tax to each Partner TZS 188,236.00 Saburi 50% 500,000.00 TZS 3,955,000.00 500,000.00 4,455,000.00

1,977,500.00 2,477,500.00 285,900.00

Total tax for the both partners, (188,238+285,900) = TZS 474,138.00 Note: There is less tax payment in partnership compared to sole propriator. Individual income tax (propriator) TZS 581,400.00 Tax for partners TZS 474,138.00 Relief Partners get compared to Individual TZS 107,262.00

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(iii) Corporate Tax A legally registered company shall be liable for tax at the rate of 30% of the yearly taxable income. Example 9 Let us consider that the above profit of TZS 3,955,000 from the books of account is for a company. Computation of income tax payable will be as follows: Tax payable = = = Therefore income tax TZS 1,186,500 8.0 CONCLUSION It is the expectation of TRA and the government that, this publication provides a good guidance to entrepreneurs in areas of identifying business opportunities, undertake qualitative business measures and therefore increase their wealth through expanding business, employment creation, improve standard of living and hence reduce poverty. Prosperity in business will pave way for effective tax contribution to the Government as outlined under the specific tax statutes. Tanzania Revenue Authority has decided to foster a closer co-operation with stakeholders and particularly taxpayers who are customers in tax collection and development of the nation at large. Profit before tax multiply by tax rate TZS 3,955,000 x 30% TZS 1,186,500 payable by the company will be

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To pay tax voluntarily is an act of patriotism. It is possible. Simply comply

and

TOGETHER WE BUILD OUR NATION

For more information please contact: Your nearest.

TRA office or Director, Taxpayer Services and Education Department Tanzania Revenue Authority P.O.Box 11491 Dar es salaam. Tel: 255-22-2119343 Fax: 255-22-2128593 E-mail: info@tra.go.tz Website: www.tra.go.tz ZRB office or Manager, Taxpayer Education Department Zanzibar Revenue Board P.O.Box 7072 Zanzibar. Tel: 255-24-2230639/223341 Fax: 255-24-2233904 E-mail: zrb@zanzinet.com

TRA-TSED-400GUIDE TO SMES HANDBOOK N0 13 /2007