My previous three articles served as general highlights on Value Added Tax (VAT) challenges between Tanzania Mainland and Zanzibar. I have highlighted the fact each that each of the two sides of the Union has its VAT law. Despite several similarities between the two VAT laws, there are differences and some of them very fundamental. And some of those differences’ present challenges to various areas of the intra-Union trade. In this article, I focus on the taxation of financial services.
Worldwide, financial services have traditionally been exempted from the VAT. One of the reasons for this is the complexity. For most financial services, it is difficult to establish a suitable base for VAT. It is notoriously difficult to administer VAT on financial services in its current model. The cost of complying with the VAT on financial services would be too high for the taxpayers.
Some, however, including Tanzania, have started to move away from the tradition. In 2016, Tanzania Mainland made some VAT reforms to start collecting VAT on fees charged by financial services providers to their customers. Its implementation has to date not been smooth. Many questions remain unanswered. For banks operating on both sides of the Union, there was uncertainty on how the financial services consumed in Zanzibar would be taxed. Assume a mainland-based customer visiting Zanzibar withdraws cash from an ATM in isles. Should the withdrawal fee paid by the customer attract VAT in Mainland? Maybe not!
Unsurprisingly, this year Zanzibar also reformed its VAT law. The Legal Notice Number 90 for 2017 removed financial services from the list of exemption under the second schedule to the VAT law. But this essentially made all financial services taxable regardless of whether a fee is charged or not. The reform also widened the scope of financial services. In Mainland, the VAT law is explicit that financial services provided free of charge (i.e. no fee is charged) are exempt.
Most likely the reform in Zanzibar intended to mimic that of Tanzania Mainland but, in my opinion, the drafting of the law failed to reflect correctly that intention. Unlike the Excise Duty Act, 2017 (enacted around the same time with the introduction of VAT on financial services in Zanzibar) which is clear that with financial services, the dutiable value is “the amount of charges and fees payable” for the financial services. And subsequently, in 2020, the standard VAT rate in Zanzibar was reduced to 15% (from 18% that was as par with Mainland). This poses practical uncertainties to taxpayers.
How should the financial services providers account for VAT in Zanzibar? The Finance (Public Revenue Management) Act 2017 introduced section 5(7) of the Zanzibar VAT law. The section states that “the Minister may make Regulations for collection and calculation of Value Added Tax in the supply of financial services.” However, it does appear that Zanzibar’s Minister of Finance and Planning has not issued the said regulations. The question is how the taxpayers are expected to apply the Zanzibar VAT law for the periods from July 2017 to date? Unfortunately, the new section in the Zanzibar VAT law does not compel the Minister to issue the regulations.
Despite VAT in Mainland applying only to few financial services, the implementation has not been smooth. Regulations and practice notes in this area have been long overdue. Tax uncertainties create a bad business climate. The guidelines in the form of practice notes are important. If well prepared by considering the views of all the relevant stakeholder, such practice notes can significantly reduce uncertainties.
By Shabu Maurus, Tax Partner, Auditax International.