Re-thinking the VAT registration cutoff

Its 2021 and the pandemic, COVID-19, is far from over. It has affected the world economy. And likely, its economic impacts will continue to be felt some years to come. Of course, the impacts of the pandemic vary from country to country. And businesses have been affected differently. Some, highly affected. Highly affected businesses need tax policies that will make resuscitating easy.

As the government is crafting the budget for 2021/22 and related tax reforms, it is important to think of how these businesses can be facilitated. Reduction of the tax burden is probably one route. But the government also needs more money to provide public goods and services. More so as it needs to address the challenges COVID-19 is exposing. Understandably, balancing these conflicting objectives becomes very delicate.

One area that needs some reforms is VAT. Specifically, the VAT registration threshold. Generally, this is the point in terms of annual taxable turnover, at which VAT registration becomes compulsory. Businesses with taxable turnover below the threshold are not obliged to register for VAT. The threshold, therefore, effectively acts as a form of VAT exemption. This is because goods and services supplied by unregistered businesses do not explicitly bear VAT. The level of turnover at which registration for the VAT becomes compulsory is, therefore, a critical choice in the design and implementation of the VAT. It is an important policy issue.

When VAT was introduced in Tanzania in 1998, the threshold was set at 20 million shillings. This was later increased to 40 million shillings in 2004. And to 100 million shillings when the new VAT Act, 2014 came into force in 2015. This means that traders with average daily gross taxable sales of 280,000 shillings are obliged to register. There have been calls for the 100 million shillings threshold to be revised upwards. The current threshold may be too low for the structure of the economy where SMEs and the informal sector are dominant. It is not surprising that some people have proposed a threshold as high as 500 million shillings. Given the relatively poor performance of our VAT system, these calls cannot be ignored. Probably, a 200 million shillings threshold can be considered.

The VAT registration threshold determines the administrative efficiency in the operation of the VAT. A low threshold tends to include many small businesses into the VAT system which may exceed the administrative capacity of TRA. The VAT revenue should exceed the administrative cost of collections. The cost of collecting VAT from many small traders, if the threshold is set too low, is likely to exceed the VAT revenue. VAT registration entails additional compliance burdens to the registrants. Most notably are the costs related to managing the tax invoices, VAT returns, VAT payments and the financial cost if customers delay in paying their bills and VAT is due to TRA. These VAT compliance costs tend to be relatively more burdensome to small traders than to large businesses. EFDs is a typical example of this. Smaller traders tend to complain more about the cost of devices.

On the other hand, setting a high threshold would eliminate many businesses from the VAT system and increase administrative efficiency. But the increased efficiency may come at the expense of revenue loss as the VAT base narrows if the threshold is set too high. VAT is a multiple-stage tax and only tax on value-added on each stage, so simply exempting traders below the threshold may not necessarily mean a 100 per cent revenues loss. Unregistered traders cannot claim input taxes. This also means that the removal of small traders from the VAT system will reduce the problem of bogus input tax claims that are difficult for TRA to trace.  The VAT threshold, therefore, needs an appropriate balance between reducing administrative and compliance burdens and avoiding competitive distortions.

By Shabu Maurus, Tax Partner, Auditax International.

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