According to Tanzania's (mainland) VAT regime, supplies can either be exempted from paying VAT or taxable/charged VAT. Consecutively, the standard rates of VAT in Tanzania Mainland are either zero or 18 percent. Put differently, taxable supplies can either be charged VAT at
either zero or 18 percent. However, the VAT Act, 2014 CAP abolished charging zero rate on domestic supplies and only allowed the rate to be charged on export supplies due to the destination principle of taxation
Currently, VAT is charged at a zero rate for only export supplies to align with the destination principle of taxation. Since VAT is a consumption tax, export supplies are chargeable by and payable to the destination country. The originating country loses the right to collect VAT and thus charges it at a rate of zero percent.
The VAT regime provides incentives to either consumers or producers by exempting certain supplies (goods or services). For example, in Tanzania, some of the supplies
that are exempted from VAT include; most agricultural inputs, agricultural implements, education and health services, etc. Take note that, VAT is not charged on persons but rather on supplies that are either goods or services. Similarly, the exemption will be provided for such goods or services and not persons
The reason behind the VAT exemption depends on what
party you are looking at. However, there are positive reasons for doing so. For example;
- For manufacturers or producers, an exempt supply is meant to reduce the cost of production
- For Final consumers; an exempt supply is meant to reduce the cost of purchasing the commodity and thus increase its affordability
Challenges associated with the VAT exemption regime.
Exempting VAT on some supplies has been posing a challenge to manufacturers of exempted supplies e.g., manufacturers of fertilizers.
How is it a challenge to them?
Tanzania’s VAT regime does not provide a window for manufacturers of exempt supplies to claim their VAT on input tax. That is, if you sell or produce an exempt supply such as fertilizer, according to the VAT Act (cap 148), you will not be able to claim a refund on VAT paid on inputs used to produce or distribute the said supply (e.g., fertilizer). This may include VAT paid on electricity and other utilities.
This has been making the cost of production to be very high for manufacturers of exempt supplies. The increased cost of production can either reduce the manufacturers’ products’ competitiveness in the market or tend to eat up their profit margins if they want to maintain market share and thus remain competitive.
Zero-rating of domestic supplies has been the advocacy agenda for the private sector:
Through the 2022/23 Budget Speech or Finance Act, the government has introduced the concept of zero-rating to locally manufactured double-refined edible oils and fertilizer though it is only for one year. Before this measure, the supply of fertilizer was exempted while that of double refined edible oil was taxable.
The rationale is to lower the cost of production and also cushion consumers from the increased cost of accessing edible oils but farmers on accessing fertilizer (though for one year)
The advocacy agenda remains to push for more of these reforms on other goods and services suffering from the effect of the existing “VAT exemption regime.”