Tackling intra-Union tax challenges – (3)

This article continues the discussion on the existing disparities of levying Value Added Tax (VAT) between Tanzania Mainland and Zanzibar. The previous article focused on the VAT rates. This article zooms some criteria for VAT registration in Tanzania Mainland and Zanzibar.

Generally, for a business to be able to charge its customers a VAT, it needs to be registered by the taxing authority. In Tanzania Mainland, the authority is the Tanzania Revenue Authority (“TRA”) and for Zanzibar, the Zanzibar Revenue Board (“ZRB”). Qualification for VAT registration is mainly a tax policy choice. Registration criteria need to balance several factors, including the administrative capacity of the tax authority. A big number of VAT registrants may not necessarily mean higher VAT revenue. Poor administration of tax often leads to poor revenue performance.

Looking at VAT registration criteria under the two VAT laws (Tanzania Mainland and Zanzibar), there are several similarities. Under both VAT laws, the VAT registration can be either by application or by compulsion. Also, VAT registration is mainly based on turnover level. For simplicity, turnover is similar to sales. But, strictly, “turnover” is a much broader concept than sales. Also, under both VAT laws, one can be registered for VAT based on “national interest” including protection of tax revenues. Both laws criminalize failure to apply for VAT registration when registration criteria are met. But there are also some fundamental differences.

VAT registration threshold is the amount of turnover where registration for VAT becomes compulsory. The registration threshold for Zanzibar is only about a third of that in Tanzania Mainland. The threshold for Tanzania Mainland is an annual turnover of TZS 100 million (about 43,000 USD). For Zanzibar, the threshold is TZS 50 million (about 21,500 USD). When VAT started back in 1998, the registration threshold was TZS 20 million and TZS 15million Mainland and Zanzibar respectively. But a hotel in Zanzibar becomes eligible for VAT registration if it charges (for “bed and breakfast”) at USD 100 per person per night.

Therefore, based on turnover, operating similar-sized businesses on the two sides of the Union will have different VAT implications. VAT registration entails an additional compliance burden. Most notably is the cost of managing the tax invoices, VAT returns, VAT payments and the financial cost if customers delay in paying their bills while the VAT is due to the tax authority. Thus, if all other factors are the same except for the VAT compliance costs, then doing business on Tanzania Mainland appears as a cheaper option for small and medium enterprises (those with less than TZS 100 million annual turnovers).

Providers of professional services in Tanzania Mainland are obliged to register for VAT regardless of their annual turnovers. Services providers such as lawyers, architects, engineers, auditors, tax consultants and quantity surveyors would fall under this category. There is no similar requirement under the VAT law in Zanzibar. Using the same argument of compliance cost, it would seem cheaper for a small-scale provider of professional services (with less than TZS 50 million annual turnovers) to operate in Zanzibar than in Tanzania Mainland.

By Shabu Maurus, Tax Partner, Auditax International.

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