TAX LAW UPDATE: PROCEDURES FOR VAT EXEMPTION IN TANZANIA UNDER THE NEW VALUE ADDED TAX (EXEMPTION MANAGEMENT PROCEDURES) REGULATIONS, 2021
- The scope of value added tax exemption.
- Procedures for application for tax VAT exemption under the Regulations.
- Involvement of the Ministries in the exemption process.
- Who shall grant the exemption of value added tax under the new law?
- Powers of the Commissioner General in the processing of exemption.
- Post VAT exemption requirements and procedures.
On 30th June 2021 the Finance Act, 2021 was enacted by the parliament of the United Republic of Tanzania. The Finance Act 2021 amended various tax laws among them being the Value Added Tax Act, CAP 148 RE 2019 (“the Value Added Tax Act”). One of the remarkable amendments in the Value Added Tax Act is empowering the Commissioner General of the Tanzania Revenue Authority with the power to issue Value Added Tax (VAT) exemptions. Section 6(2) of the Value Added Tax Act gave the power to exempt VAT to the Minister. Following the enactment of the Finance Act 2021, the provision has now been substituted with a new provision that grants the said power to the Commissioner General.
Consequently, on the 8th October 2021 the Ministry of Finance published the Value Added Tax (Exemption Management Procedures) Regulations GN. No 715 (“the Regulations”) which shall apply to value added tax exemptions granted under section 6(2) of the Value Added Tax Act.
Our Tax Department at Breakthrough Attorneys has prepared this article briefing on the procedures to apply for exemption of value added tax in Tanzania and granting of the same. This is another article in our series of articles discussing the amendment brought by the Finance Act, 2021 in tax laws. Previous articles in this series can be accessed here, here, and here.
2.0 The scope of VAT exemption under the Regulations;
The Regulations provide specifically for value added tax exemptions under section 6(2) of the Value Added Tax Act. In summary, the Regulations provide for the circumstances where the Commissioner General can grant exemption of value added tax. These include:-
- The importation of raw materials to be used solely in the manufacture of long-lasting mosquito nets.
- The importation by or supply to a Government entity of goods or services to be used solely for implementation of a project funded by the government, concessional loan, non-concessional loan or grant through an agreement between the Government of the United Republic and another government, a donor or lender of such loans. Provided that the agreement provides for value added tax exemption.
- A grant agreement between a local government authority and a donor approved by the Minister of Finances in accordance with the provisions of the Government Loans, Grants, and Guarantees Act. Provided that the agreement provides for value added tax exemption.
- The importation or supply of goods or services for the relief of natural calamity or disaster.
- The importation by or supply of goods or services to an entity having an agreement with the Government for executing a strategic project if such agreement provides for value added tax exemption on goods or services.
- The importation by or supply of goods or services to a Non-Governmental Organisation having an agreement with the Government solely for a project implemented by the respective non-governmental organization if such agreement provides for value added tax exemption on goods or services.
3.0 The process to acquire VAT exemption from the Commissioner General;
The Regulations provide for the whole process starting from the application to the grant of VAT exemption and the requirements to be observed. The process is explained below;
- Application for tax VAT exemption under the Regulations;
In line with the Value Added Tax Act, a person eligible for VAT exemption is required to make an application to the Commissioner General. The application is made through a prescribed Form No. ITX264.01.E as set out in the Schedule to the Regulations. The application must be made within a period of not less than sixty (60) days before commencement of the project as per Regulation 4(2) of the Regulations.
Depending on the sought exemption, the following documents shall accompany the application form;
- An agreement with the Government which binds the Government to grant such tax exemption as approved by the Minister for Finance;
- A contract between a government entity and a contractor or level one sub-contractor with respect to a Government-funded project as approved by the Minister for Finance;
- Quotations, bill of quantities, and a list of goods and services to be exempted for the entire project;
- A tentative description of the place of procurement of goods or services proforma invoices, and a tentative analysis showing exact quantities, value of goods and services to be exempted with the corresponding amount of tax sought to be exempted;
- A list of contractors and level one sub-contractors who shall execute the project;
- Physical location and address of where the project is carried out;
- A written confirmation from the Ministry or Government entity executing the project verifying that the project exists and the quoted values are tax exclusive, and any other necessary information as may be required by the Commissioner General.
- Verification of the application by a Permanent Secretary;
The applicant, after completing the application form and its respective annexures is required to submit the same to the Permanent Secretary of the Ministry responsible for the respective project for verification.
The purpose of this stage is to allow the respective Ministry to satisfy itself and authenticate the information provided in the application vis a vis the information that is available at the Ministry. Upon receiving the application and accompanying information, the respective Permanent Secretary will confirm if the application complies with the requirements, approve and forward the same to the Commissioner General pursuant to Regulation 4(4) of the Regulations.
The documents, which are forwarded to the Commissioner General under Regulation 4(4) of the Regulations, must be accompanied by a declaration that the goods or services applied for exemption are solely for use in the project. This means the applicant must submit this declaration when submitting the application to the Permanent Secretary. This is a requirement under Regulation 4(5) of the Regulations. We must emphasize on this procedure that applicants must ensure the goods or services subject to exemption are solely for the project. This is in order to avoid rejection of the application and any other action that may be taken during the monitoring stage.
The Regulations, however, do not provide for recourse in case the Permanent Secretary does not approve the application. We propose that the Regulations should state clear as to what should the Applicant do in case the application is not approve i.e. the application should be rectified and resubmitted with complete information. This can be done by amending the Regulations or by simply issuing supporting Guidelines.
- Determination of the application by the Commissioner General;
Upon receiving the application, the Commissioner General will review and conduct verification on the application. As a matter of practice, the Commissioner General may in conducting review and verification, request to be provided with any additional document or information from the applicant, the ministry, or the government entity for purposes of review. This may usually be expected in case the information submitted to the Commissioner General is not satisfactory for him to do a complete verification of the application. The Commissioner General is allowed to make this request pursuant to Regulation 5(2) and (3) of the Regulations.
Regulation 5(6) of the Regulations requires the Commissioner to issue a certificate of exemption within thirty (30) days from the date of receipt of the application if he approves the application pursuant to Regulation 5(4) and (1). The Exemption Certificate is issued in Form No. ITX 281.01.E as prescribed in the Schedule to the Regulations.
- Procedure in case the Commissioner General rejects the application;
According to Regulation 5(4) of the Regulations, the Commissioner General may reject the application, and in doing so he is required to give reasons thereof to the respective Permanent Secretary. The Regulations are however silent as to whether or not, and within what time shall the Permanent Secretary communicate the said decision and reason thereof to the applicant.
Furthermore, Regulation 8 of the Regulations provides that an applicant who is aggrieved by any decision or demand issued by the Commissioner General may lodge an objection to the Commissioner General in a manner provided for under the Tax Administration Act. In our view, this provision may bring confusion when it comes to objection to decisions of the Commissioner General under the Regulations due to lack of clarity as to when shall the rejection decision shall be communicated to the applicant.
Also, what Regulation 8 entails is that the decision of the Commissioner General falls within the scope of tax decisions envisaged under section 50 of the Tax Administration Act which shall be subject to objection pursuant to section 51 of the same, Tax Administration Act.
- Utilization of the granted exemption;
Once issued with a Certificate of Exemption the applicant is required to process for utilization of the granted exemption which is done by making an application. The application is done by submitting to the respective Tanzania Revenue Authority’s Department or Regional office a duly filled Form No. ITX265.01.E set out in the Schedule. In case of importation of goods, processing of the utilization of the granted exemption is to be made to the Commissioner for Customs and Excise using the same Form. This requirement is provided under Regulation 6(1) and (2) of the Regulations.
The application for utilization of the exemption must be accompanied with a copy of the Exemption Certificate, a proforma invoice from the supplier of goods or services in case of goods or services procured locally, or a final invoice, packing list, and a bill of lading in case of importation of goods. (Regulation 6(3).)
- Determination of the application for utilization;
At this stage the Commissioner General will review and determine the application for utilization. The law requires him to communicate his decision to either allow or refuse the applicant within seven days from receipt of the application.
In case the Commissioner decides to refuse the application, he is required to communicate the decision and his reasons for refusal to the Applicant. (Regulation 6(4) and 6(5)).
It is worthy to emphasize that the Applicant even though granted with the certificate it will not be of substance unless the application for utilization is allowed. Thus, it is important for the applicant to adhere to all requirements and even engage tax lawyers to prepare the applications.
4.0 Monitoring of the exemption after the grant.
The Regulations provide for a monitoring mechanism in which after approval of the application for utilization, the applicant is required to periodically submit a utilization report to the Commissioner General. This report must be submitted within a period of thirty (30) days after the lapse of six months for a twelve months’ project, and within twelve months for projects with a maximum period of more than one year.
The implication for failure to submit these reports is that the Commissioner General may immediately stop approving any further tax exemption until the applicant properly accounts for all of its previous utilized tax exemption. Therefore successful applicants must always adhere to these periodic reports to avoid negative consequences.
Breakthrough Attorneys is of the view that the enactment of these procedures is one of the most remarkable reforms in the tax exemption regime especially since the procedures have been laid out and the Commissioner General shall be responsible to approve exemptions instead of the Minister for Finance as previously provided under the Value Added Tax Act. Tax exemption has been one of the areas from which many tax disputes arise because there was no structural interconnection between the ministries under which projects were undertaken, the Ministry of Finance and the Tax Revenue Authority.
The Regulations create a procedural link between the three organs by involving Permanent Secretaries of respective ministries in the process which will ensure the involvement of Ministries in the implementation of tax exemption clauses agreements signed between ministries and institutions.
Our call is that the Ministry of Finance should amend or come with guidelines to cure the procedural gaps in the Regulations especially on the timelines in which the Permanent Secretary is to review, verify and forward the application for exemption. Also, the Regulations should provide for recourse in case the Permanent Secretary does not approve the application for exemption.
This publication has been prepared for information purposes only, and it does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.