TMT 06101: FUNDAMENTALS

OF VAT

TOPIC ONE:
INTRODUCTION TO VALUE ADDED TAX
(VAT)

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VALUE ADDED TAX (VAT)
 Statutes/Laws/Regulations to be
used
THE VALUE ADDED TAX ACT
[PRINCIPAL LEGISLATION] REVISED
EDITION 2019 & IT’s REGULATIONS
THE TAX ADMINISTRATION ACT
[PRINCIPAL LEGISLATION] REVISED
EDITION 2019 & IT’s REGULATIONS

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 INTRODUCTION AND BACKGROUND
The most important tax innovation of
the second half of the twentieth
century. Goode(1984:157)
One stage VAT was introduced in
France in 1954 after WWII
(Metcalf,1995)
A comprehensive value-added tax first
appeared in Brazil in 1967
Designed to overcome the defects of
turnover taxation and to secure a
greater degree of tax coordination
among the states of the Brazilian
Federation
VAT 2018/2019
(Shoup, 1990:4).
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 INTRODUCTION AND BACKGROUND
 1967 Denmark became the first
country to introduce a comprehensive
VAT at the national level
 In the following years, the VAT was
adopted by the other member states
of the European Community to
replace their turnover taxes
 Sweden, in 1969, and Norway, in
1970, enacted a VAT to replace retail
sales tax
 Today, VAT is found in more than 90
countries. Of the OECD countries
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 INTRODUCTION OF VAT IN
TANZANIA
 December 1991 the Tax Commission,
appointed by the Govt of TZ offered a
proposal for reform of the Tanzanian tax
system. The replacement of the existed
sales tax by a value-added tax (VAT)
was the Tax Commission’s central
recommendation in the domain of
indirect taxation.
 The Government announced in the 1992
(June) Budget Speech its intention to
introduce VAT in January 1994

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 INTRODUCTION OF VAT IN
TANZANIA
 Value Added Tax (VAT) was introduced
in Mainland Tanzania on 1 July 1998
with the coming into operation of the
VAT Act 1997, Zanzibar has its own
VAT Act and tax administration, and
the tax was introduced there on 1
January 1999.

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 INTRODUCTION OF VAT IN
TANZANIA
 VAT replaced Sales tax which was
perceived to be prone to evasion, overly
complicated and economically inefficient
 VAT is a multi-stage or cascade tax, its
essence being that all supplies of goods
and services made in the course of
business is subject to the tax.
 It is collected by businesses at each
stage in production and distribution
chain. VAT is also charged on the
importation of goods and services

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 MEANING OF VALUE ADDED
TAX (VAT)
 VAT is indirect tax charges on consumptions
of goods and services at every stage of
production and distribution chain and on the
importation of goods and services
 It is the tax charged on value added at each
stage of production and distribution chain

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 What does Value added
means?
 Is difference between trader’s sales price
and purchases price exclusive of VAT.
Value added(VA) also incorporates costs,
expenses and gross profit of the business.
 It is a contribution made at each stage of
production and distribution chain.

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MERITS/ADVANTAGES OF VAT
Administrative Advantage
It is much easier to assess tax
liability of a firm through VAT Credit
Method whereby a VAT registered
person is required to maintain proper
records of VAT collected or charged on
sales (Output Tax) and VAT paid on
inputs or purchases (Input Tax). Thus,
the amount paid to or refunded from
Tax Authorities (TRA) is the difference
between Output Tax and Input Tax.
Broad coverage
VAT widens the tax base considerably
as it is charged not only on sales but
also on purchases, hence a possibility
of increased revenue.
Allows self-checking by a taxable
person
VAT system is a self-assessment
system such that a taxable person is
motivated to keep proper records
knowing that through Credit Method
they may also be entitled a refund.
However, being a tax compliant has a
huge reputation in business
undertakings.
Encourages exports
VAT encourages exports by zero-
rating products leaving Mainland
Tanzania and allowing full credit of the
Input Tax on exports. Zero-rated
supplies in Mainland Tanzania have
been identified in section 54 – 63 of
the Value Added Tax Act, Cap.148 (R.E
2019).
VAT simplicity system
The tax rates applicable are very
few. There is only one standard rate
of 18% and 0% for special cases
applicable.
Reduces chances/possibility of evasion
VAT is charged on every step of
production and sales process until a
product or service reaches the final
consumers, thus reduces the chance
of losing government revenues. With
VAT when a person tries to evade tax
other person in the chain might have
paid their taxes or will pay their taxes
if the chain is not finished, hence the
government does not lose 100%.
More transparent
The use of electronic fiscal devices
(EFDs) and compulsory issue of
electronic fiscal receipts which show
the price exclusive of VAT, the value
added charged thereon and price
(VAT inclusive) makes VAT system
very transparent compared to other
taxes. This helps TRA to compute the
amount of tax collected and paid or
evaded.
 DISADVANTAGES OF VAT

Assignment.

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 HOW DOES VAT WORKS
(MECHANISM OF VAT)
Any person who is supposed to charge VAT
must be registered under VAT Act, Cap.148
(R.E 2019).
Registered person between the first
supplier and the final consumer is charged
on the taxable supplies made to him (Input
Tax) and charges tax on taxable supplies
made by him (output tax).
Excess of Output tax over the input tax is
paid to TRA or the excess of input tax over
the of output tax is recovered from TRA

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 HOW VAT WORKS

VAT Minus
VAT paid =
VAT Due
charged on or
on sales purchased Creditable

(Output Tax) (Input Tax)

VALUE
VALUE ADDED
ADDED TAX:FACTS
TAX (VAT) FOR FINANCIAL SERVICES
 Example
Illustration on how VAT is charged as
goods move from one registered
person to the next in the
manufacturing and distribution chain,
until they reach the final consumer.
Assume for the purposes of this
illustration, that VAT is charged and
accounted for at the rate of 18%.

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 Input Output VAT
tax tax payable/Refundable
MANUFACTURER
Cost 180
2,000 360 540
Value Added
1,000
Price to wholesaler
3,000
Invoice price TZS
3,540
WHOLESALER
Cost
3,000 540 900 360
Value added 2,000
Prices to retailer 5,000
Invoice price TZS
5,900
RETAILER
Cost 5,000
Value Added 900
VALUE ADDED TAX (VAT) 600 1,008 108
 EXAMPLE
 In the illustration above, the manufacturer incurs
3,000 cost of purchase of inputs and he sells goods
manufactured at shs, 5,000, which becomes the
purchase price by the wholesaler, He pays to VAT
Department a tax of shs. 180 on the value created
(i.e. 1,000). X 18%). The wholesaler pays VAT of shs.
540 on the purchase of input to the manufacturer,
and he charges a tax of shs. 900 from the retailer.
The wholesaler is then Pay shs. 360 (i.e shs. 2,000 x
18%) to VAT department: and the amount of tax paid
to the VAT department by the retailer who has sold
the goods to the final user is shs. 108 (ie.5,600 x
18%). The total ultimately paid to VAT Department is
shs.648 (i.e.180 + 360 +108). Thus, although the tax
is calculated on the gross sales figure, what is
ultimately paid to VAT department is the tax on
value added at each stage of sale and production.
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 IMPOSITION OF VALUE
ADDED TAX IN TANZANIA
-VAT shall be imposed and payable on
taxable supplies and taxable
imports.

- Persons Liable To Pay VAT

Taxable import ⇨ the importer
 Taxable supply (M/land TZ) ⇨ the
supplier
Taxable supply (imported services) ⇨
the purchaser
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 VAT TAXABLE PERSON
Who is Taxable person?
A registered person or a person who is
required to be registered for VAT under
Value Added Tax Act, Cap.148 (R.E 2019).
Person means:-
 An individual
 A company
 An association of persons
 A Government entity
 A foreign Govt or a political sub of a
foreign Govt
 NGOs
 A public international organization

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 VAT -REGISTRATION
 The tax authority needs to know who is
going to pay VAT 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. This process of
delegating responsibility of collecting
VAT to the traders is commonly known
as VAT Registration.
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 TYPES OF VAT -
REGISTRATION
 There are 3 common types of VAT
registrations: These are:-
 Normal registration,
 Compulsory registration and
 Intending traders’ registration.

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 TYPES OF VAT -
REGISTRATION
 Normal registration
 If a person’s taxable sales exceed the
registration threshold or have the reason
to believe that it will exceed, then the
person need to register. The registration
limit is currently a cumulative total taxable
turnover of TZS 200,000,000 for the last
twelve consecutive months.
 Whether the threshold is exceeded or not
may be tested as follows:
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 TYPES OF VAT -
REGISTRATION
Historic Turnover Test
The trader is required to look at the cumulative
total of taxable sales for the last 12 months if it
exceeds TZS 200,000,000 (or for the last 6
months if it exceeds 100mil) or since the
commencement of business whichever is shorter.
If the total exceeds the registration limit,
currently TZS200 mil, then the trader must apply
for registration by notifying the Commissioner in
writing within 30 days since the end of the
month in which the turnover exceeded the limit.

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 TYPES OF VAT -
REGISTRATION
Historic Turnover Test
This test is considered at any time,
when taxable supplies in the next 30
days are expected to exceed a per
annum cumulative total taxable
turnover of TZS 200mil or a
consecutive 6 months cumulative total
taxable turnover of TZS 100mil.

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 TYPES OF VAT -
REGISTRATION
Person’s Turnover
A person’s turnover is sum of :
 Total value of supplies made, or to be
made, by the person and
 Total value of supplies of imported
services made, or to be made, to the
person during the period that would
be taxable supplies if the person was a
taxable person during that period.

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 TYPES OF VAT -REGISTRATION
 Compulsory registration
 When a person fails to apply for the VAT
registration within 30 days, the
Commissioner General, compulsory
register the person and not later than 14
days after the day on which the
registration is done, notify the person on
the registration. Also where there is a
good reason including protection of
government revenue, the commissioner
general may register the person for VAT
regardless of the turnover
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 TYPES OF VAT -REGISTRATION
Intending Registration
VAT Act, 2019 R.E allows any person
who has grounds for believing he will
qualify for registration to 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)
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 TYPES OF VAT -
REGISTRATION
Person may be registered by CG as
intending trader under following
conditions-
Provision of evidence to satisfy the CG
intention to commence an economic
activity e.g. contracts, tenders, business
plans, bank financing
Will make taxable supplies once registered
Specify the period commencement of
production of taxable supplies.
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 EXCEPTION ON
REGISTRATION
A person shall be required to be registered
for VAT if
The person supplying of professional
services in Mainland TZ,
supplies of professional services in M/TZ
made by a person who is permitted,
approved, licensed, or belongs to a
professional association
A Govt entity or institution which carries
on economic activity
Registration for Intending Trade
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 NOTE
CG shall issue a registration
certificate to the registered
person
A registered person shall use
Taxpayer Identification
Number(TIN) and a Value
Added Tax Registration
Number(VRN) on all documents
required to be issued VAT Act.
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 VAT REGISTRATION
THRESHOLD
The level at which registration for
the VAT becomes compulsory is
called VAT registration threshold.
threshold
now TSHS 200,000,000.
Important?
Yes! determines the efficiency
operation of the VAT.

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 VAT REGISTRATION
THRESHOLD

⇨low threshold level includes many

firms as taxable persons which may
exceeds tax authority
administration capacity
⇨ high threshold eliminates many
small firms from being included in
the VAT population but it is
manageable

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 CONSEQUENCES/EFFECTS OF
VAT REGISTRATION
Once registered, the taxable person
will be issued with a registration
certificate and the VAT Registration
Number (VRN).
The taxable person will be required to
display the certificate at a conspicuous
place in the business premises.
Moreover, he will be required to quote
the VRN number on each tax invoice
issued.
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 CONSEQUENCES/EFFECTS OF
VAT REGISTRATION
Then the person will be entitled to
the following requirements:
i] Charge output tax on each
taxable supply
 ii] File returns
iii] Recover input tax (subject to
some restrictions)on business
purchases and expenses iv]
Maintain appropriate VAT records
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 CONSEQUENCES/EFFECTS OF
VAT REGISTRATION
V] Use Taxpayer Identification
Number and a Value Added Tax
Registration Number on all
documents required to be issued.

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 Statutory Records To Be
Maintained By VAT
Registered Traders
Tax Invoice
A registered person who makes
a taxable supply shall, no later
than the day on which VAT
becomes payable on the supply
Issue a serially numbered true
and correct tax invoice
generated by EFD for the
supply.
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 CONTENTS OF TAX INVOICE
 The date on which it is issued
 The name, TIN and VRN of the supplier
 The description & quantity
 The total consideration and the amount of
VAT
 If the value of the supply exceeds the
minimum amount prescribed in the
regulations, the name, address, TIN and
VRN of the customer
 Any other additional information as may

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beVATprescribed
2018/2019
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VALUE ADDED TAX (VAT)
 NOTE:
One original tax invoice shall be
issued for each taxable supply, and a
person who has issued the original tax
invoice may, if the customer is a
registered person, provide a copy
marked as such to a customer who
claims to have lost it.

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 Adjustment notes
Taxable persons should issue the
adjustment notes when there is increasing
or decreasing adjustment event of the
previously accounted VAT
An adjustment note which is required to be
issued shall include the following
information-
- the date on which it is issued;
- the name, Taxpayer’s Identification
Number and Value Added Tax Registration
Number of the supplier;
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 - the nature of the adjustment event and
the supply to which it relates;
- the effect on the amount of value added
tax payable on the supply;
- if the effect on the value added tax
payable on the supply exceeds, the
minimum amount prescribed in the
regulations, the name, Taxpayer’s
Identification Number and Value Added
Tax Registration Number of the customer;
and
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 Documentation issued by or to
agents
Where a taxable supply is made by an
agent or to an agent on behalf of a
principal and both the agent and principal
are registered persons, any
documentation required to be issued by
the principal, including tax
documentation, may be issued by the
agent or to an agent in the name,
address, Taxpayers Identification Number
and value added tax registration number
of the principal.
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 Where a taxable supply is made to an
agent acting on behalf of a principal and
both the agent and the principal are
registered, any documentation required to
be issued to the principal, including a tax
invoice generated by electronic fiscal
device or adjustment note, may be issued
to the agent and shall be in the name,
address, Taxpayer Identification Number
and value added tax registration number
of the principal.
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 Records and accounts
A taxable person shall keep record
of all accounts, documents, returns,
and other records that are required
to be issued or given under this Act,
or such other tax law, including
tax invoices and adjustment notes
issued and received by the person;
customs documentation relating to
imports and exports of goods by the
person;
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 records relating to supplies of imported
services to the person, whether or not those
supplies were taxable supplies;
a value added tax account that records, for
each tax period, all the output tax payable
by the person in that period, or the input tax
credit the person is allowed in that period,
and all the increasing and decreasing
adjustments that the person is required or
entitled to make in that period; and
records showing the deposit of amounts paid
to the Commissioner General under this Act.

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 The records referred to shall be
maintained-
 for at least five years from the end of
the tax period to which they relate; or
 until a later date on which the final
decision is made in any audit,
recovery proceedings, dispute,
prosecution, or other proceedings
under this Act relating to that tax
period.

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END
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