With almost 57 years of existence, the Union between Tanganyika and Zanzibar (forming the United Republic of Tanzania) is, perhaps, amongst the most successful in Africa. Despite its many successes, there are still some challenges. This is evident from recent remarks by President Samia Suluhu Hassan at the swearing-in ceremony of Vice-President Dr Philip Isidor Mpango. The President tasked the new Vice-President to resolve the “remaining” challenges facing the Union. After almost all other challenges were resolved, financial related matters remain the only burning Union issue, she remarked.
Although not specifically mentioned by the President, but from a practical point of view, there are intra -Union taxation issues that also need attention. Value Added Tax (VAT) is one example. VAT is not one of the Union matters listed under the First Schedule to the Constitution of the United Republic of Tanzania. Mainland Tanzania and Zanzibar, for VAT purposes, are two different jurisdictions. 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.
Both sides of the Union adopted VAT from July 1998. The VAT Act, 1997 was the law applicable in Mainland Tanzania only. Zanzibar, on the other hand, had (and still have) the VAT Act, 1998 that is applicable in Zanzibar only. These original VAT laws were, for all intents and purposes, similar but this has changed over time.
In 2014, Mainland Tanzania repealed its 1997 VAT law and replaced it with the VAT Act, 2014 with a destination principle as one of its key pillars. The destination principle is an internationally recognized rule that requires VAT to be collected by the jurisdiction where goods or services are finally consumed and not where the seller is located. The new VAT law was effective from July 2015. Zanzibar, however, still has its 1998 VAT law but it has undergone several changes over the years, including the recent reduction of the standard rate from 18% to 15%. Mainland still maintains 18% as its standard rate.
The Zanzibar VAT law has not fully adopted the destination principle. 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.
The two VAT laws and their administrations bring several challenges to businesses operating on both sides of the Union or those with a ‘cross-border supply of goods or services. Some of the challenges stem from the existing differences between the two VAT laws.
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. Imagine a banking business for example. As most mobile banking transactions are subject to VAT at a standard rate, the banks have real practical challenges in handling the two VATs. Should a bank charge VAT its Mainland-based customer using mobile banking services while Zanzibar at a rate of 18% or 15%? If a 15% rate should apply (as the services are consumed in Zanzibar), do bank’s systems capable of easily telling whether their customer is accessing mobile banking services while in Zanzibar? Yes, with technology it can be done, but at what cost – to the banks and customers?
In my next few articles, I intend to cover the differences between the two VAT laws and their implications for business. First, to highlight the key VAT aspects that taxpayers operating on both sides of the Union should be aware of as part of their tax risk management. And second, is to point out some areas that I believe may require some reforms to make the two VAT laws more harmonious and facilitative to the intra-Union trade.
By Shabu Maurus, Tax Partner, Auditax International.