Tackling intra-Union tax challenges – (2)

My article last week served as an introduction to a series of articles on Value Added Tax (VAT) challenges between Tanzania Mainland and Zanzibar. VAT is one of the most important sources of revenue to both Mainland Tanzania and Zanzibar. VAT makes around 30 per cent of the total annual tax revenues for each of the two sides of the Union. For VAT purposes Mainland Tanzania and Zanzibar are two different jurisdictions. Each side of the Union has its VAT law.

Despite several similarities between the two VAT laws, there are some differences and some of them very fundamental. For consumers residing in either or both parts of the Union, the fact that each part of the Union is a different VAT jurisdiction may not sound relevant. However, for businesses operating on both sides of the Union or across the two sides (“intra-Union trade”), VAT should be one of the key considerations in their business decisions. Paramount is the difference in VAT rates.

Both Mainland Tanzania and Zanzibar introduced VAT in the late 1990s at the standard rate of 20%. Subsequently, they both reduced their standard rates to 18% in 2009. In 2020 Zanzibar further reduced its standard rate to 15%. Mainland Tanzania still maintains 18% as its standard rate. Likely there are good reasons for this recent departure in standard rates between the two sides. But the question is what sort of implications this has on businesses?

Most businesses fail to adequately if at all, take into consideration the VAT intricacies and the potential tax challenges of operation on both sides of the Union. The biggest pitfall, especially for Mainland-based businesses when extending to Zanzibar, has been the assumption that the two sides of the Union are the same. It is Tanzania! Whilst this is correct for Union matters, such as the licensing of Telecommunication and Banking business. But it is not the case for non-Union matters like the VAT.

So even when a business has a license to operate in ‘Tanzania’ as one jurisdiction, when it comes to VAT, the two sides of the Union are two different jurisdictions. In Mainland Tanzania, the VAT law (VAT Act, 2014) is administered by the Tanzania Revenue Authority (TRA). The VAT law (the VAT Act, 1998) in Zanzibar is administered by the Zanzibar Revenue Board (ZRB). The two tax administrators are legally and practically independent of each other.

Compliance burden

The VAT laws require prices of taxable goods and services to include VAT. But managing VAT at two different rates is one of the biggest practical challenges to intra-Union trading. The rate difference brings in complexity that needs to be handled with care. This, in turn, increases the compliance costs of businesses doing intra-Union trade.

The complexity of administering the two different rates makes it difficult for the businesses to pass on the advantage of lower tax rates to the consumers (if they wanted to). Take an example of mobile phone bundles or telecom services. The pricing would be the same whether you consume the telecom service in Zanzibar (with a VAT rate of 15%) or Mainland Tanzania (with a VAT rate of 18%). The same can be said for taxable financial services.

By Shabu Maurus, Tax Partner, Auditax International.

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