FINANCE AND TAX LAW UPDATE: OVERVIEW OF THE TAX AND NON-TAX CHANGES FOR TANZANIA AS PER FINANCE ACT 2023

• Partial revamping of Section 56 of the Income Tax Act (Change of control provision)
• Exemption of withholding tax requirement to individual residential tenants
• VAT deferment to be applicable to domestically manufactured goods
• EFD non-compliance offences reduced
• Introduction of excise duty on local and imported cement

Notable reform on tax and non-tax laws

With the issuance of the Finance Act 2023 which comes into operation on 1^st day of July, 2023, there are various tax and non-tax changes to our laws that have been enacted. Below, we have looked into the changes that are worth noting for your business or investment at this point;

1. The Income Tax Act, Cap 332

1. Exclusion of direct transfer of shares and new issuance of shares in the ambient of Section 56 (change in control provision)
   The Finance Act has made changes to Section 56 (change in control provision) in order to exclude the direct transfer of shares and new issuance of shares in the scope of the change in control for triggering the deemed realization of assets and liability once the underlying ownership has changed by more than 50%.The long outcry on the double taxation emanating from such local sale of shares (direct transfer) in a Tanzanian entity has been pardoned. With this change, we will see that the direct transfer of shares will only suffer Capital Gain Tax (if any) on the sale and hence foster investment in various areas of the economy where investors were hesitant in making the business move. For example, we do see quite a number of business arrangements especially in the mining industry that entails the listing of companies in stock exchanges where the original local investors sell their stakes to the public once the project has been proven to be viable for investment. This change is also well received by businesses which anticipate to grow their share capital base through the issuance of new shares because there would be no double taxation on the injected capital.

   NOTE: Following the read Budget speech, it was captured that the intention of this change is to exclude all local share transactions and issuance of new shares from being affected by Section 56. However, as the change is worded in the Finance Act, we still see contention issues on its interpretation. This is because on the direct transfer of shares, the change has only captured the share transfer that will be made by resident persons (whether entities or individuals) due to the use of the word “resident”. As such, the change has not taken into consideration the direct transfer of shares that can take place in the local entity when the persons involved are not residents for tax purposes, that is, foreign shareholders. This will still propel the current problems to sail with the new changes.

2. Exemption of gains derived from the internal restructuring of mining companies from income tax
   The Finance Act has exempted from income tax, the gains derived from the internal restructuring of mining companies in line with the various agreements in place with the Government in forming partnership entities. Previously, any gain from such realization of shares or interest in land or mineral rights would suffer income tax.We understand that, recently there has been an increase in activities in the mining space in Tanzania and the government is also taking a front seat in ensuring that they get a fair share of involvement in the ongoing and upcoming mining projects. Therefore, this exemption will ensure the restructuring process is undertaken smoothly with not much tax implication involved in order to foster investment.
3. Reinstatement of the exemption for individual tenants (not doing business) to withhold tax on rental income
   The Finance Act has once again removed the obligation for individual tenants who are not conducting business to withhold tax on rental income.It should be remembered that this obligation was introduced in the previous year’s Finance Act and brought about a lot of complications for individual tenants on the manner and way to withhold the said tax and remit to the revenue authority on behalf of the landlords.

   With this change, the tenants who are not conducting business (that is, reside for domestic purposes) are eased with such tax obligations. As such, the landlords, still have their obligation to pay their taxes as required.

4. Introduction of obligation to withhold tax at the rate of 2% of precious metals and gemstones by small-scale miners
   The Finance Act has introduced an obligation for a resident person to withhold tax at a rate of 2% for payment made to a holder of a primary mining licence or artisanal miner for buying precious metals, gemstones and other precious stones.Additionally, this withholding tax has been categorized as final and hence the income earned by the said small-scale miner will not suffer any additional income tax.

   Since this change seeks to treat the withholding tax as final, it will thus reduce the administrative burden to the small-scale miners to account for any additional income tax in the case of filing their final tax returns.

5. Capital Gains Tax to be charged on sale value or approved value of land on certain circumstances
   The Finance Act has reduced Capital Gain Tax from 10% on profits to 3% of the sales value (incomings) or the approved value of land, (whichever value is higher) regardless of the investment costs for property sellers who do not keep records of expenses.This move will reduce the administrative burden for the seller to substantiate the investment costs in relation to the property and hence the reduced rate will be adequate in arriving at the tax to be paid. This option will also reduce the Capital Gain Tax disputes with the revenue authority in instances where the TRA did not agree with the seller on the investment costs. This is another good move by the government to foster the investment climate.

   Additionally, the change still provides room for those sellers who keep records of the cost to apply the current tax rate, and thus increase the compliance morale among sellers as the current tax rate seemed to be high, especially for those who do not file their final tax returns.

6. Change of due date for Non-resident electronic services providers to file their income tax monthly returns
   The Finance Act has changed the due date for Non-resident electronic services providers to file their income tax monthly returns from the 7^th day to the 20^th day of the month following the month to which the payment relates.This change will align with the current due dates for VAT returns.
7. Introduction of obligation to withhold tax at the rate of 10% on payment in respect of Verified Carbon Emission Reduction
   The Finance Act hasintroduced an obligation for a resident person to withhold tax at the rate of 10% on payments made to a resident person in respect to Verified Carbon Emission Reduction.Additionally, this withholding tax has been categorized as final and hence the income earned will not suffer any additional income tax.

   We are of the view that this change aims at providing a rather fair taxing regime for the income accrued due to Verified Carbon Emission Reduction which is a new industry in our market.

   This is one of the moves in taping businesses that will emanate from the carbon trading space which is fast growing at the moment following heightened awareness on environmental protection and the Environmental, Social and Governance (ESG) agenda globally.

8. Restricting the special taxing regime on transportation of passengers and goods to only resident individuals
   The Finance Act has restricted the special taxing regime introduced in the previous year on the taxation of the business of transportation of passengers and goods to only resident individuals. As such, the previous repealed provision in the Income Tax Act had also included entities in this special taxing regime which had led to confusion on its applicability.Now, this change has provided a lumpsum tax scheme for resident individuals dealing with Passenger Service Vehicles, Tour Service Vehicles, Goods Carrying Vehicles and Private Hire Service Vehicles (Motorcycle, Taxi, Ride Hailing).
9. Investment income earned by the National Health Insurance Fund (NHIF) is now exempted from income tax
   The Finance Act has exempted investment income emanating from returns on fixed deposit, treasury bonds, treasury bills or dividends earned by NHIF from attracting income tax.As noted during the Budget speech, this change aims at providing the fund with adequate financial resources to cater for its health insurance services (especially to the pensioners, who do not contribute anymore).

   However, it should be noted that the expenditures that will also be incurred in generating such exempted income will also be treated as disallowable for income tax purposes, hence raising the tax charge.

2. The Value Added Tax (VAT) Act, Cap 148

1. VAT deferment to now be applicable on domestically manufactured capital goods
   The Finance Act has included domestically manufactured capital goods in the list of items qualifying for VAT deferment. There is also a change for the VAT deferment on importation to cease to have effect after 3 years (i.e., 30^th June 2026), that is, VAT deferment will only be applicable for locally sourced capital goods after the time expiry.This is a welcoming move since traders now have a choice to procure capital goods locally and still be able to enjoy the VAT deferment avenue. Previously, VAT deferment only applied to certain imported capital goods. This will boost the sales of local manufacturing companies and suppliers of raw materials, and reduce the procurement time for traders when they need capital goods.

   However, the change to eliminate imported capital goods from the scope of VAT deferment within the period of 3 years might not be good news to traders because our local industries are yet to have the full capability of manufacturing the intended capital goods (heavy machinery and equipment) that can be procured and subsequent enable traders to enjoy the VAT relief. It will be also noted that, with the coming of the African Continental Free Trade Area (AfCFTA), traders would be able to benefit with imported capital goods from the region following the special customs regime available to member states.

2. Zero-rating of VAT on locally manufactured fertilizer and garments made from locally grown cotton
   The Finance Act has extended an additional year to 30 June 2024 for zero-rating the locally manufactured fertilizer. Furthermore, zero-rating locally manufactured garments made from locally grown cotton domestically for the period from 1 July 2023 to 30 June 2024.Since the previous year, we have seen the government’s initiative to zero-rate local products which is a commendable move because it makes the said products cheaper to the consumers but also aids the manufacturer to recoup the input VAT through claiming of the purchases.
3. Introduction of VAT exemption on the supply of aircraft, aircraft engine or parts and aircraft maintenance to a local operator of air transportation
   The Finance Act has exempted VAT on the supply of aircraft, aircraft engine or parts and aircraft maintenance to local air transport operators. This change will boost the tourism sector by making such services affordable. This change comes as an extension of the previous year’s change that exempted air charter services with effect till 30^th December 2022.For the local air transport operators, the problem as evidenced in similar changes in the past, would be an additional cost in operations due to the fact that the business will be supplying exempt supplies and hence, ending up not being eligible for input VAT claiming. Since the goal is to support the tourism industry which is still recovering from Covid-19 pandemic, it would have been better for the government to zero-rate these services instead of treating them as exempt supplies. VAT exemption creates additional cost but zero-rating the said services will allow the local operators to claim the VAT charged on purchases as input tax.
4. Widening the scope for VAT exemption on the sale of minerals and gemstones
   The Finance Act has widened the scope for VAT exemption on the sale of precious metals, gemstones and other precious stones at buying centres, mineral markets and Gem houses designated by the Mining Commission under the Mining Act or refinery situated in Mainland Tanzania.With the changes passed in the previous year, the exemption was only to small-scale miners trading at the buying stations or at the Mineral and Gem Houses designated by the Mining Commission under the Mining Act.

   This change widens the scope to include any trader of minerals and gemstones and also adds refinery into the trading hubs. This will assist in making the minerals and gemstones affordable. However, the change will create additional costs in operations due to the fact that the business will be supplying exempt supplies and hence, end up not being eligible for input VAT deduction.

5. Other supplies that have been exempted from VAT
   The Finance Act has also exempted from VAT the following supplies:
   • Sale of a house of a value not exceeding TZS 50 million by a real estate developer.
   • Extension of another year on the supply of double refined edible oil from locally grown seeds by a local manufacturer
   • Supply of automobile accessories used in the conversion of motor vehicle fuel system to natural gas or electricity system to persons engaged in the conversion of such motor vehicles.

   The aim of such changes is to make the supply cheaper in the hands of the consumer. However, the is a risk of this goal not being met as explained above, because exempting a supply, creates additional costs in operations due to the fact that businesses supplying exempt supplies are not eligible for input VAT deduction (hence absorbing the VAT cost).

3. The Tax Administration Tax Act, Cap 438

1. Definition of Primary Data Server is clarified to include “virtual or other servers which store data”
   The Finance Act has amended the definition of the Primary Data Server to include a physical server in the country, virtual or any other server which stores data that is created or collected by a taxable or liable person in the ordinary course of business and change the effective date to start complying with the requirement to 1^st January 2024.Previously, the definition of the Primary Data Server is “a server which stores data that is created or collected by a taxable or liable person in the ordinary course of business”. Therefore, the change provides more clarity on the nature/form of the said Server. In today’s technological advancements, virtual servers are widely used and hence this clarity will be a welcoming news to businesses and investors.

   However, the only concern that businesses will still have on this matter is the requirement for such servers to be maintained in Tanzania (despite their nature/form) as stipulated under Section 35(7) of the Act.

2. Introduced time limit for the construction and extractive entities to disclose on their contract
   The Finance Act has introduced a time limit of 30 days from the date of executing a contract, for entities in the construction and extractive industry to disclose the information pertaining to the contracted or sub-contracted project.It should be noted that this disclosure provision had been present in the Act, but no timelines had been placed on it. As such, the required information to be disclosed include names of the persons, the nature of the sub-contracted works together with the duration of carrying out the works.

   Furthermore, a person who contravenes this requirement is liable for a fine not exceeding 25% of the quantum payable under the project or TZS 60 million, whichever is greater.

3. Definitions of “storage facility” and “owner” are now provided
   The Finance Act has defined two terminologies for the provision introduced in the previous year on registration and monitoring of storage facility for purposes of clarifying the scope and applicability of the provision.As such, a storage facility is defined to mean “warehouse, godown or any other storage facility, which is used to keep own or other persons’ goods for business purposes, provided that such warehouse, godown or other facility is not part of a shop, factory, industry or farm”. Furthermore, an owner is defined to mean “a person who establishes or operates and is in control of the facility and possession of the storage facility or a person to whom the storage facility has been leased or sub-let to”.

   This provision had gained much popularity, especially on the requirement to file a monthly return which proved to be an administrative burden to various businessmen. It was our hope that such a requirement could have been abolished with this Finance Act for the purpose of easing the business environment.

   Kindly also refer to our Tax Digest Wednesday post on (LinkedIn) which highlighted on a Public Notice issued by the TRA on this matter.

4. The 3 years’ time limit for requesting tax refunds to now refer to the date of issuance of tax decision as well
   The Finance Act has amended the 3 years’ time limit for requesting tax refund to also include the period from the date of issuance of a tax decision or other decision that has led to a tax overpayment.As previously worded, the law counted the time limit from when the taxpayer has made the tax overpayment which results from his/her self-assessment. This left out the scenario where a higher assessed tax has subsequently been lowered or vacated following the Commissioner General’s decision.
5. EFD non-compliance offences reduced
   The Finance Act has reduced the range of penalties that are charged for non-compliance with the EFD machines as follows:
   • For failure to use EFD or issue a fiscal receipt – From TZS 3 million – TZS 4.5 million or imprisonment for a term not exceeding 3 years or both to the higher of TZS 3 million or 20% of the value of tax evaded.
   • For failure to demand a receipt or report a denial of issuance of receipt – From TZS 30,000 – TZS 1.5 million to the higher of TZS 30,000 or 20% of the value of tax evaded.

   This change aims at improving compliance with the existing tax laws as it is noted the previous penalties are on the high side and encourage corruption in its implementation. Additionally, there will be reduced disputes with the law enforcers on the punitive actions to be taken.

4. The Excise (Management and Tariff) Act, Cap 147

1. Increase of tariff for specific excise duty rates to cater for inflation
   The Finance Act has adjusted the specific excise duty rates on non-petroleum products to cater for inflation. As such, the below adjustments that will increase the excise duty rate are as follows:
   • Beer and tobacco products – 20%
   • All other non-petroleum products (including juice, drinking water) – 10%

   There are no changes on excisable goods that are charged in percentage of the value of the goods since the ad-valorem rates take care of the value for money in tandem with inflationary effects.

   It can be viewed that the new rates are on the higher side even though some of the excisable goods were not adjusted since 2017. This abrupt increase will disrupt the expected prices of such excisable goods in the market and can have a detrimental effect on the consumption and economy at large if not received properly.

   We have noted that the cost for Electronic Tax Stamp (ETS) rate has not been amended despite the same being advocated for a long time by various manufacturers using such stamps.

2. Introduction of a 3-year excise duty freeze calendar
   The Finance Act has introduced a 3-year excise duty freeze calendar on adjustments emanating from inflation and other key macroeconomic indicators. Previously, the Act provided for a room for annual adjustment. This change will enable the certainty for businesses in terms of predictability of taxes that are levied on their products/ services. It has been the long-term concern of businesses and investors.
3. Introduction of excise duty on cement
   The Finance Act has introduced excise duty on cement, whether imported or domestically manufactured, at a rate of TZS 20 per kilogram. During the Budget speech, the Minister stated that this change is purported to increase Government revenue and reduce the effect of emission gases.With this change, we are of the view that, the manufacturers or importers of cement will pass through this increased cost which in turn will raise the price of cement in the market hence, reducing the purchasing power.

   On the other hand, the manufacturers or importers of cement will also need to comply with the ETS rules which are currently viewed to be of high cost to the businessman.

   According to Tanzania Investment Center (TIC) Monthly Investment Bulletin Reports for the past 3 months (available here), the manufacturing sector has been one of the key contributions of FDIs. Therefore, to support the growth of this important sector, the government should consider reducing the passed excise duty rate per kilogram.

5. Other notable tax and non-tax changes

1. Collection of property taxes and advertisement fees for billboards, posters and hoardings shifting to the Local Government Authority under the Local Government Finance Act, Cap 290
   The Finance Act has shifted the obligation for the collections of fees arising from the billboards, posters and hoardings from the TRA to the Local Government Authority immediately.Furthermore, the obligation for assessing and collecting property tax will be shifted from the TRA to the Local Government Authority effectively after 31 December 2023.
2. Increase of property taxes to reflect the actual value of property under the Local Government Authorities (Rating) Act, Cap 289
   The Finance Act has increased in property tax rate from TZS 12,000 to TZS 18,000 for normal buildings and from TZS 60,000 to TZS 90,000 per storey building.Furthermore, it has clearly excluded mud huts, thatched houses and mud houses used for residential purposes from being regarded as rateable properties for taxation purposes.
3. Increase of road and fuel toll by TZS 100 under the Road and Fuel Tolls Act, Cap 220
   The Finance Act has increased in the road and fuel tolls by TZS 100 per litre of petrol or diesel which as such, will be directed towards the implementation of strategic projects. Therefore, the road and fuel toll will now be TZS 513.This move will lead to an increase in the pump price of petrol and diesel which at current are already at their peak. This will increase the production cost and ultimately create more financial burdens on the final consumers.
4. Restriction of electronic money levy to withdraw transactions under the National Payment System Act, Cap 437
   The Finance Act has removed the electronic money levy on transactions involving sending and receiving money electronically. As such, the levy will only be applicable to electronic money withdrawal transactions. This will remove double taxation in one transaction. It will also stimulate more electronic payment transactions because it will discourage withdrawals. This change is in line with the current government’s plan to become a cashless economy.
5. Abolishment of the airtime levy under The Electronic & Postal Communications Act, Cap 306
   The Finance Act has abolished the levy imposed on each SIM Card based on airtime recharge by users in order to stimulate the use of electronic transactions.It can be remembered that when this levy (together with the levy on mobile money) were introduced in the year 2021, they faced a lot of backlashes from the community due to increasing the cost of communication and mobile money transaction. This is a good move to support the growth of telecommunication industry which is a backbone of other industries and society at large.
6. Exemption from payment of inspection fees to refineries centres under the Mining Act, Cap 123
   The Finance Act has exempted refineries centres from paying the inspection fee of 1%. This is an additional fee that is payable by the traders when selling refined minerals. This change aims to promote the small-scale refining of minerals in Tanzania on the verge of rising investment in the mining sector where we see a lot of new projects and development of mines.
7. Good news to employers on the reduction of SDL under the Vocational Education and Training Act, Cap 82
   The Finance Act has reduced the SDL rate from 4% to 3.5%. The aim of the change is to reduce the operational cost to employers and achieve the Government’s commitment to reducing the rate gradually. The trend projects that the rate is certainly going to gradually reduce given the fact that across the EAC countries, it is only Tanzania that imposes SDL.
8. No monthly SDL return filing obligation for employers not required to pay SDL under the Vocational Education and Training Act, Cap 82
   The Finance Act has removes the obligation for employers not required to pay SDL to have to file monthly SDL returns to the TRA.This is a welcoming move as it reduced the administrative burden on taxpayers who are not liable for SDL.

   However, as these returns are to be filed online through the Taxpayer Portal, it will be keen for the TRA to align their system to this new change to avoid any inconveniences.

   Additionally, it would be best for the same principle to apply on the requirement to file monthly PAYE returns to taxpayers with no such obligation.

9. Granting powers to the Minister of Finance and the Minister of Education to exempt an employer from SDL under the Vocational Education and Training Act, Cap 82
   The Finance Act has granted powers for the issuance of SDL payment exemption orders by the Minister of Finance after consultation with the Minister responsible for education, given that such exemption is for the public interest.
10. Requirement of 5% local shareholding for obtaining a commercial gaming licence under the Gaming Act, Cap 41
    The Finance Act to introduce a requirement for Tanzanian citizens to have not less than 5% of paid up share capital in an entity for it to be able to obtain a gaming licence for operations of commercial gaming undertaking.
    Furthermore, the Act has provided for the definition of commercial gaming undertaking to mean “any gaming activity which is subject to gaming tax”.
    This move will then require the existing foreign owned companies to restructure their entities in order to include Tanzanian citizens in the shareholding structure for the entities to continue trading in the gaming space.
11. Clarity given on the definition of Gross Gaming Revenue (GGR) under the Gaming Act, Cap 41
    The Finance Act has provided clarity in the definition of GGR which means “collective amount of wagering or staking placed by players minus the collective amount of winnings paid out to players”.This will assist the gaming companies to have a clear understanding of the definition of GGR which is essentially used in administering gaming tax on their businesses.
12. Waiver of export levy under the Export Act, Cap 196
    The Finance Act has waived 80% export levy on raw or semi-processed hides and skin exported outside the country by investors who are in the Export Processing Zone (EPZ). The measure is intended to reduce costs to EPZ operators who incur levy on export business and hence making their products competitive in the world market.

Our tax team can assist you in further explaining the various implications that the changes in the Finance Act 2023 can have on your business or investment in Tanzania. Feel free to reach out to us via info@breakthroughattorneys.com for such an engagement.

 

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