Value Added Tax (VAT)

Value Added Tax (VAT) – known in some countries as Goods and Services Tax (GST) – is a major indirect tax in Tanzania. It applies to the sale of goods and services in Tanzania and on imported goods and services. For investors, understanding VAT is crucial for pricing, cash-flow (input credits), and compliance.

VAT Rates and Scope

Tanzania’s standard VAT rate is 18% on taxable supplies in Mainland Tanzania​. In Tanzania Zanzibar (the semi-autonomous island region), the general VAT rate is 15%, though for certain services the mainland rate applies uniformly​. Key points:

• VAT is charged on “taxable supplies” of goods or services made in Tanzania by a VAT-registered business, and on goods imported into Tanzania​.
• The standard rate in Mainland is 18%. However, for Zanzibar, although the law sets 15% as the general rate, an important exception is that services in sectors like financial services (banking), telecommunications, insurance, digital services are taxed at 18% even in Zanzibar​. Essentially, those services have a unified rate across the Union.
• Zero-rated supplies (0%) include exported goods and certain services (e.g. services to non-residents consuming them outside Tanzania). Zero-rating means no VAT is charged, but the supplier can still claim input VAT credits. Exports of goods are explicitly zero-rated​. – e.g. a Tanzanian coffee producer exporting beans charges 0% VAT on the export sale, and can reclaim VAT paid on local inputs.
• Exempt supplies are not taxed, and the supplier cannot reclaim input VAT related to them. Exemptions cover various basic goods and social services (discussed below).

Example: An investor manufacturing textile in Tanzania for export will charge 0% VAT on export sales (zero-rated) but can claim back VAT paid on fabrics, dyes, machinery, etc. Conversely, a manufacturer selling domestically will charge 18% VAT on sales to customers and net off any VAT paid on inputs.

Registration Requirements

Not all businesses need to register for VAT – only those above the turnover threshold or engaged in certain activities:

• The registration threshold is an annual taxable turnover of TZS 200 million in Mainland or TZS 100 million in Zanzibar​. Businesses whose taxable sales exceed (or are expected to exceed) these amounts in 12 months must register for VAT.
• Voluntary/Intentional Registration: The Commissioner may allow registration for investors even if they haven’t met the threshold, for instance, “intending traders” starting projects who will have taxable supplies in the future​.. This lets new investors claim input VAT on heavy start-up costs. The TRA often registers large projects so they can reclaim VAT on construction, equipment, etc., before revenues start.
• Certain sectors require mandatory VAT registration regardless of turnover: professional service providers (like law and accounting firms) and government entities carrying out taxable economic activities must register and charge VAT even if below threshold​.
• Non-resident digital service providers: Since 2019, foreign providers of B2C electronic services (e.g. streaming, software) must register for VAT in Tanzania (no threshold applies for them) and charge 18% VAT on services to Tanzanian consumers​. Alternatively, they can appoint a local VAT representative. (Finance Act 2023 expanded this to all electronic services, not just via marketplaces​.)

Once registered, a business must charge VAT on all its taxable supplies and is entitled to claim input VAT credits on VAT paid to suppliers or on imports, to the extent inputs are used in making taxable (including zero-rated) supplies.

VAT-Exempt Goods and Services

Tanzania exempts various basic goods and services from VAT, often for social policy reasons. If a supply is exempt, the seller does not charge VAT, but also cannot recover input VAT (input VAT becomes a cost). Significant exemptions include​:

• Unprocessed agricultural products and livestock: Basic staple foods (unprocessed cereals, fruits, vegetables), live animals, and livestock products in raw form are exempt. For instance, fresh milk, maize flour, and unprocessed rice are exempt from VAT​.
• Agricultural inputs and implements: Seeds, fertilizers, pesticides, farm implements like ploughs, as well as fishing equipment, beekeeping and dairy equipment are exempt to support farming​.
• Medical and health: Human medicines and pharmaceuticals, medical equipment, and hospital services are exempt​. Supplies of health services by registered facilities are not subject to VAT.
• Education services and materials: School and university tuition is exempt, as are educational materials (e.g. textbooks, laboratory equipment for schools)​.
• Financial services: Most financial services (banking, lending, insurance) are exempt from VAT by definition (since interest spreads and insurance premiums are not taxed under VAT in Tanzania).
• Residential accommodation: The lease or sale of residential property is exempt from VAT​. For example, rent on a house or apartment is not subject to VAT (though commercial property rent is taxable). Sale of undeveloped land is exempt as well​.
• Public transport of passengers is exempt (except air travel which is standard-rated, but international air transport is zero-rated as an export).
• Import of certain humanitarian goods: e.g. food, clothing, shoes donated to non-profits for free distribution to orphanages or special needs schools are exempt on import​. Goods for disaster relief by NGOs are conditionally exempt​.
• Imports for mining and petroleum exploration: Under the EAC Customs law, certain capital goods imported by licensed explorers are VAT-relieved​.
• Utility supplies: Unbottled water supply is exempt (to ensure basic water is not taxed); however, bottled water is taxed as a luxury. Also, sales of electricity by TANESCO to consumers are VAT-exempt (by specific exemption for electrical energy for usage below certain consumption levels, as per recent finance acts).
• Solar energy equipment: To encourage renewable energy, solar panels, chargers, inverters, etc., are VAT exempt​.

This list is not exhaustive, but illustrates the range of exemptions. Businesses dealing solely in exempt supplies cannot register for VAT and thus cannot recover any VAT they incur​. For example, a private school that only provides VAT-exempt education cannot claim back VAT on its textbooks or school bus purchase – that VAT becomes a cost.

If a business has mixed supplies (taxable and exempt), it can only reclaim input VAT proportionally related to taxable supplies. If exempt supplies are more than 10% of total, the business must pro-rate input VAT (“partial exemption”)​. The law provides formulae for this.

Zero-Rating vs Exemption

Zero-rated supplies differ from exempt: zero-rating (0%) means no output VAT is charged, but input VAT is reclaimable. Aside from exports, some specific local supplies are zero-rated by special law, e.g. certain nutritious foods or farming inputs might be zero-rated by the Minister to reduce consumer cost while preserving input claims (though most are structured as exemptions). The VAT Act allows the Minister to zero-rate certain supplies by order (common in East Africa for goods like tourist services or supplies to the UN, but one should check current schedules).

As of recent policy:

• Exports of goods and services (where the use or consumption is abroad) are zero-rated. For services, this might include services performed for a non-resident who is outside Tanzania at the time (with conditions).
• Services to mining and oil/gas companies under special agreements can enjoy VAT relief (the VAT Act and regulations specify that suppliers to mining/oil companies with government agreements get zero rating or exemptions per those agreements)​.

VAT Compliance

VAT Returns must be filed monthly by all registered persons. Returns and any VAT due are to be submitted by the 20th day of the following month. For example, the VAT return for March is due by April 20. If the 20th is a weekend or public holiday, the due date shifts to the next working day. All VAT collected from customers minus creditable input VAT is paid to TRA with the return.

If input VAT exceeds output VAT (common in export businesses or investment phases), it results in a VAT credit. Legitimate VAT credits can either be carried forward to offset future VAT, or a refund can be claimed. In Tanzania, VAT refunds are notably an area of caution for investors:

• Only certain persons are entitled to periodic cash refunds, e.g. regular exporters (where at least 50% of outputs are zero-rated exports) qualify for refunds. Others must generally carry forward credits and can only claim a refund after 6 months of continuous credits​. For instance, an EPZ company exporting 100% can claim monthly refunds of its input VAT on raw materials because it’s predominantly an exporter.
• Refund claims can be complex and subject to audit. Delays in refunds have been an issue historically, but the law requires TRA to pay interest on late refunds beyond the statutory time.

Import VAT: Importers pay 18% VAT on goods at the time of import (assessed on CIF value plus import duty). For capital goods, Tanzania offers VAT deferment – eligible importers of capital goods can defer import VAT so it’s not paid at customs but accounted for in the next VAT return (effectively self-accounted as both output and input VAT)​. This eases cash flow for investors importing machinery. (However, note: the Finance Act 2022/2023 set that VAT deferment on capital goods will end by 30 June 2026, meaning after that date import VAT must be paid upfront unless extended​.)

Imported Services (Reverse Charge): If a VAT-registered business imports a service (e.g. consultancy from abroad) for use in Tanzania, it must apply a reverse charge – essentially add 18% VAT on the cost and simultaneously claim it as input (if fully taxable business). However, if that business engages partly in exempt supplies (>=10% exempt), the reverse charge VAT on imported services becomes an actual cost in proportion to exempt use​. So, a bank (largely exempt services) importing software support from abroad would have to pay reverse VAT with only partial credit.

Impact on Investors

For most investors, VAT is not a direct cost if structured well – it’s collected from customers and passed to government, while input VAT on business purchases is reclaimed. Key considerations:

• Cash flow: There is a timing aspect – output VAT is collected usually before or at the time goods/services are delivered, while input VAT on imports or local purchases might be paid earlier. Efficient refund or credit usage is important, especially for export businesses. Investors often budget for some VAT cash flow delays.
• Pricing: VAT at 18% will increase the price of goods/services to final consumers. Businesses may need to consider market sensitivity to VAT – some industries (like basic consumer goods) are VAT-exempt to avoid burdening the poor, whereas luxury or non-essential goods carry VAT.
• Contracts: Investors should ensure contracts specify whether amounts are VAT-inclusive or exclusive. Also, foreign suppliers should be aware if they trigger digital VAT or need to charge Tanzanian VAT.
• Bookkeeping: VAT-registered entities must keep proper tax invoices and receipts for all transactions. TRA may disallow input VAT if not supported by a proper fiscal receipt/invoice from an approved Electronic Fiscal Device (EFD). Compliance with EFD issuance is strictly enforced (penalties up to TZS 4 million for not issuing receipts have been introduced​).

Example Scenario:

A foreign investor sets up a hotel in Tanzania:

• During construction, they import furniture and equipment. As a VAT-registered entity, they qualify for VAT deferment on import of capital goods like kitchen equipment. This saves them from paying 18% at customs and instead accounts for it in returns​.
• Once operational, the hotel charges 18% VAT on room charges to tourists. However, tourist lodges in Zanzibar would charge 15% on accommodation unless it falls under a special Union service at 18%. Many tourist services to non-residents could be zero-rated if paid from abroad, but generally local hotel services are standard-rated.
• The hotel’s restaurant sales are 18% VAT. But if the hotel provides conference services to an international organization under an agreement, that might be zero-rated. The hotel’s purchases (food, linens, utilities) come with VAT that it credits against its output VAT.
• If most guests are international and paying in foreign currency, the hotel might treat the service as an export (though tourism is tricky – currently, local tourism services are taxed, not zero-rated, unless reforms change that).
• The hotel invests in solar panels for some energy – those panels are VAT-exempt by law​, so the supplier charges no VAT and the hotel cannot claim any input (but it didn’t pay any).
• At month-end, the hotel tallies output VAT from room bills and restaurant bills, subtracts input VAT on supplies (food purchases, outsourced laundry service, etc.), and pays the net to TRA by the 20th of next month.

Recent Developments

Finance Act 2022 and 2023 made some tweaks such as expanding the scope of digital services tax (requiring more non-residents to register for VAT)​, exempting certain items like sanitary pads (to make them affordable), and clarifying refund processes via the online portal​. As of Nov 2023, VAT refund and remission applications can be done online for efficiency​. Also, certain temporary VAT reliefs were introduced for strategic investments and key commodities (for example, a temporary VAT exemption on sunflower oil inputs to encourage local edible oil production was enacted in a recent Finance Act).

Investors should keep an eye on the annual Finance Act for any new VAT exemptions or zero-ratings in their industry. VAT is often used as a policy tool; for instance, in 2022 Tanzania zero-rated the supply of farm implements like combine harvesters for two years to spur agriculture (hypothetical scenario for illustration).

In conclusion, Tanzania’s VAT at 18% is in line with regional standards. It’s a well-established system with input-output mechanism. Proper VAT planning can improve an investor’s cash flow – e.g., timing large capital purchases to claim refunds or ensuring export status to zero-rate outputs. Non-compliance, on the other hand, can lead to fines or denial of input credits. Therefore, businesses should install robust accounting systems to track VAT and file accurate monthly returns. With the TRA pushing electronic processes and cross-checking invoices, transparency in VAT operations is both necessary and beneficial for investors in the long run.

For more inquiries and information about VAT reach us out through info@auditaxinternational.co.tz