5

VAT

VAT Administration

5.0 Introduction
This chapter focuses on VAT administration. It explains the VAT assessments, VAT accounts,
corrections of errors and VAT returns. It further talks about penalties and interest for tax
noncompliance, VAT tax evasion, VAT tax avoidance and how to deals with tax
noncompliance. Finally, it discusses the procedures and challenges brought by VAT refunds.

OBJECTIVES

Having studied this chapter the student will be able to:

1. Prepare VAT return

2. Prepare VAT Account
3. Explain how errors are corrected
4. Make corrections of errors in VAT account
5. Distinguish tax evasion from tax avoidance practices.
6. Compute penalties and interests for tax noncompliance
7. Explain how VAT refunds are treated

5.1 VAT assessment, VAT returns and VAT liability

VAT is a self-assessment tax where every taxable person computes his/her VAT liability and
files VAT return monthly. Value added tax returns are due on the last working day of a
month after the end of the tax period to which it relates, whether or not that person has a net
amount of value added tax payable for that period (Section 66 (1) of the Value Added Tax
Act 2014). Tax period means a calendar month, beginning at the start of the first day of the
month and ending at the last day of the month (Section 2 of the Value Added Tax Act 2014).

5.2 Net Amount of Value Added Tax Payable

Taxable persons calculate net amount which is required to be paid to Tanzania Revenue Board
when the net amount is positive, and carry forward to next period when the net amount is
negative using the following formula as per section 67 of the Value Added Tax Act 2014:

1. adding all output tax that becomes payable by the person in that tax period
2. subtracting all input tax credits allowed in that tax period, and
3. adjusting the resulting amount by-
i. adding all increasing adjustments required to be made in that tax period; and
ii. Subtracting all decreasing adjustments allowed in that tax period.

These adjustments are made in the tax period in the tax period in which the taxable person
becomes aware of the adjustment event (Section 73(1) of the Value Added Tax Act 2014).

5.2.1 Carry forward of negative net amount

When there is a negative carrying amount, a taxable person should be allowed a decreasing
adjustment for negative net amounts carried forward from earlier tax periods, which is
calculated as follows:
1. in any tax period, the formula of calculating the net amount above should first be applied
without taking into account any decreasing adjustments allowed on the amount carried
forward;
2. if the net amount in the tax period is a positive amount:
3. the person is allowed a decreasing adjustment for such part of one or more negative
net amounts carried forward from an earlier tax period as would reduce the net amount
for the current period to a positive amount or to nil; and
4. negative net amounts from earlier tax periods is taken into account in chronological
order, with the oldest being taken into account first and the most recent being taken
into account last; and any part of a negative net amount for which a decreasing
adjustment cannot be made shall be carried forward and applied as discussed below until
the current net amount has been reduced to nil or it has been carried forward for six
consecutive tax periods without being reduced to less than minimum amount which is
now Tshs 100,000. Then, a taxable person who has carried forward all or part of a
negative net amount for six or more tax periods may apply for a refund of the
unadjusted amount if the amount is equal to or greater than the minimum amount or the
sum of all the unadjusted amounts the person has carried forward for more than (6) six
tax periods exceeds the minimum amount. The minimum amount means the amount
which would not be taken into consideration for the purpose of claiming the input tax.
However, taxable person may choose to continue carrying an unadjusted amount
forward until such time as the person applies for a refund of the amount (Section 81
of the Value Added Tax Act 2014). Nevertheless the application for refunds must be
made not more than three years after the end of the tax period to which the negative net
amount relates (Section 83(2) of the Value Added Tax Act 2014).

Example 1

Suppose that there is Tshs 10,000,000 output tax, and Tshs 7,000,000 input tax in the current
month. Also, there was negative amount of the Tshs 200,000 for the previous month, and Tshs
300,000 for the month before previous month.

Required

Compute net amount of the current month is there is no adjustments in the current month.

Solution

a) The net amount is Tshs 10,000,000 – Tshs 7,000,000 = Tshs 3,000,000

b) Adjusting amount is Tshs 0
c) Net carrying amount (a) –(b) = Tshs 3,000,000
d) Since the net amount is positive amount, previous negative net amount are deducted =
Tshs 3,000,000- Tshs 500,000
e) Tax payable is Tshs 2,500,000

5.2.2 Post supply adjustments for adjustment events

Where an adjustment event has the effect that the value added tax previously accounted for
by the supplier is less than the value added tax properly payable on the supply (Section
71(1) of the Value Added Tax Act 2014). The supplier is required to make an increasing
adjustment equal to the amount of the difference and issue a valid adjustment note to the
customer within seven (7) days of becoming aware of the adjustment event; and where the
customer is a taxable person, he is allowed a decreasing adjustment (Section 71(1) of the
Value Added Tax Act 2014).

Similarly, where an adjustment event has the effect that the value added tax previously
accounted for by the supplier exceeds the value added tax properly payable on the supply the
supplier be allowed a decreasing adjustment equal to the amount of the difference; and
issue a valid adjustment note to the customer within seven (7) days of becoming aware of
the event; and where the customer is a taxable person, is required to make an increasing
adjustment (Section 71(1) of the Value Added Tax Act 2014).

The amount of a decreasing adjustment allowed to customers when the value added tax
previously accounted for by the supplier is less than the value added tax properly payable on
the supply (when the price paid by the customer (Tshs 100)) is less than the correct price
(Tshs 150) so the customer make addition payment (Tshs 50); or an increasing adjustment
the customer makes when an adjustment event has the effect that the value added tax
previously accounted for by the supplier (when the price paid by the customer (Tshs 150)
exceeds the value added tax properly payable on the supply ((Tshs 100) so the customer get
refunded (Tshs 50)) after a post supply adjustment is equal to:

1. if the customer is entitled to a full input tax credit for the original acquisition, the
amount of the difference (150-100) x18/118= Tshs 7.63;
2. if the customer is entitled to a credit for only part of the input tax on the original
acquisition (partial exempt suppose T/A =0.6), an appropriate proportion of the
amount of the difference; the adjustment is (150-100) x18/118 x .06 = Tshs 4.57; or
3. If the customer is not entitled to an input tax credit for only acquisition, nil (Section
71(3) of the Value Added Tax Act 2014).

Nonetheless, a customer can make decreasing adjustment only when he holds a valid
adjustment note issued by the supplier at the time when the customer submits value added
tax returns for the tax period in which the adjustment is claimed. Whereas, a supplier makes
a decreasing adjustment when he has issued an adjustment note to the customer and retained
a copy for his own records; and if the customer is not a registered person, he has repaid the
excess value added tax to the customer, whether in cash or as a credit against any amount
owing to the supplier by the customer.

Moreover, where a supplier refunds part or all of the price paid to a non-taxable person due
to: a cancellation of the supply, an alteration in the consideration for the supply or the return
of the thing supplied or part thereof to the supplier, the amount refunded shall, unless there is
evidence to the contrary, be presumed to include an amount of value added tax equal to
the tax fraction of the amount refunded. But, when a supplier refunds an amount because
a variation of, or alteration to, all or part of the supply and which h a s the effect that the
supply becomes or ceases to be a taxable supply the amount refunded would be presumed
to be the amount of value added tax that is no longer payable, unless there is evidence to
the contrary (Section 72 and 3 of the Value Added Tax Act 2014).

5.3 Application for private use and self-supply

A person is deemed to have applied property for private use where that person uses or
consumes the property for a purpose other than for the person’s economic activity.
Consequently, a taxable person must make an increasing adjustment if the person: is or has
been allowed an input tax credit in respect of all or part of the input tax incurred on an
acquisition or import of property; and applies the same property wholly to a private use, or
having used the property wholly or partly in its taxable activity, applies it to such use from a
particular time onwards. The amount of the increasing adjustment is equal to the lesser of
the following amounts:

1) the amount of the input tax credit the person was allowed for the acquisition or import
of the goods: supposed it was Tshs 9,000,000; or
2) if the property has been used in the person’s taxable activity before it is applied to private
use, the tax fraction of the fair market value of the property at the time it is first applied
wholly to a private use, reduced to reflect the extent to which no input tax credit was
allowed (Section 75(3) of the Value Added Tax Act 2014). This reduction of input tax
happens when a taxable person was not allowed all input tax due to being a partial exempt
supplier. Supposed, that a fair price of the property was Tshs 118,000,000 at the time of
changing uses of the property, and the person was not allowed deduction of input tax of
1,000,000. So the amount is 118,000,000 x 18/118 -1,000,000 = Tshs 17,000,000.

Also, a taxable person should make an increasing adjustment in respect of property he

modifies, improves, or produces, if the person applies that property wholly to a private use;
and a supply of that property by the person would have been a taxable supply (Section 75(4)
of the Value Added Tax Act 2014). This situation is known as self-supply when taxable
person uses his own produces for person purpose but it seems it applies only to goods not to
services because of the term property. The amount of the increasing adjustment required to be
made under self-supply is the tax fraction of the fair market value of the property at the time
it is first applied wholly to a private use. Finally, all these adjustments are supposed to be
made in the tax period in which the property is first applied to a private use (Section 75(5)
of the Value Added Tax Act 2014).

5.4 Adjustment on making insurance payment

An insurer shall have a decreasing adjustment if: he makes a payment to another person
under a contract of insurance; and (a) the supply of the contract of insurance is a taxable
supply; (b) the payment is not made in respect of a supply to the insurer or an import by insurer
or an import by the insurer (for instance payment to an insured); (c) and the payment is not
made in respect of a supply to another person (another person implies 3rd person not party
of the contract), unless that supply is a taxable supply on which value added tax is imposed
at a rate other than zero; and (d) the person to whom the payment is made is a resident or a
non-resident who is a registered person (Section 76(1) of the Value Added Tax 2014). The
amount of the adjustment is equal to the tax fraction of the payment made and the
adjustment made is reflected in the value added tax return for the tax period in which the
payment is made (Section 76(2) of the Value Added Tax 2014).

5.4.1 Adjustment on receiving insurance payments

A taxable person shall make an increasing adjustment if: the person receives a payment
under a contract of insurance, whether or not that person is a party to the contract; the
payment relates to a loss incurred in the course of the person’s economic activity; or in relation
to an asset used wholly or partly in the person’s economic activity; and the supply of the
contract of insurance was a taxable supply (Section 77(1) of the Value Added Tax Act 2014).
This increasing adjustment shall be made in the tax period in which the payment is received
and the amount of the adjustment is equal to the tax fraction of the amount received, or
reduced to the extent that: (a) the economic activity in which the loss was incurred involves
the making of exempt supplies; or (b) the asset to which the loss relates was used in making
exempt supplies or for a private use; and if (a) and (b) apply, whichever is most appropriate
in the context of the payment received (Section 77(2) of the Value Added Tax Act 2014).

An insurer makes an increasing adjustment if: he recovers an amount, other than the
aggravated or exemplary damages, as a result of the exercise of rights acquired by subrogation
under a contract of insurance; and a decreasing adjustment is allowed to the insurer for the
payment to which the recovered amount relates (Section 77(3) of the Value Added Tax Act
2014). The amount of the increasing adjustment is equal to the tax fraction of the amount
recovered and the adjustment must be made in the value added tax return for the tax period in
which the amount is received (Section 77(4) of the Value Added Tax Act 2014).

5.5 Relief for bad debts

Output tax and input tax is usually accounted for at the point of supply which is may not be
the time at which cash is received. When the debt becomes irrecoverable, but a seller has paid
VAT to TRA and never recovered this from the customer, the seller can claim VAT bad debt
relief. A debt is considered bad debt when: the taxable person has undertaken action for
recovery of the debt or has handed over the bad debt to an attorney or debt collector for
recovery; the action for recovery has exhaustively proven futile; and the taxable person has
made all necessary entries in the books of account, including writing-off the bad debt
(Regulation 25(2) of the Value Added Tax (General) Regulations, 2015).
Moreover, all or part of consideration payable to the supplier for a taxable supply has been
overdue for more than twelve months and the supplier has, in his books of account, written
off the amount unpaid as a bad debt, the supplier is allowed a decreasing adjustment (input
tax) equal to the amount that remains unpaid after the tax period in which: the amount first
becomes overdue by more than eighteen months; or the debt is written off as bad in the
suppliers books of account (Section 74(2) of the Value Added Tax Act 2014; Regulation 25(1)
of the Value Added Tax (General) Regulations, 2015).
The input tax i.e. a decrease adjustment must meet the following adjustments: consideration
for the taxable supply was payable in monetary value, the taxable person accounted for the
supply in a value added tax return and the amount of the input tax to be claimed is calculated
by applying a tax fraction to the actual amount written off (Regulation 25(1) of the Value
Added Tax (General) Regulations, 2015). This adjustment is made in the tax period in which
the supplier issues the adjustment note (Section 73(2) (a) of the Value Added Tax Act 2014).
Similarly, where all or part of the consideration payable to a supplier for a taxable supply
has been overdue for more than eighteen months and the customer claimed an input tax
credit for the supply, the customer must make an increasing in adjustment equal to the amount
that remains unpaid in the tax period in which the payment first becomes overdue by more
than eighteen months (Section 74(3) of the Value Added Tax Act 2014).
In summary, a decreasing adjustment on debtor balance is allowed when it has been overdue
more than 12 months and has been written-off after satisfying conditions mentioned
before. Also, the decreasing adjustment is allowed if the supplier does not write-off the debt
and the debt becomes overdue for more than more than eighteen months, it assumed to be
bad debt: at that time both supplier and debtors have to make decreasing and increasing
adjustment respectively after writing it off.

Example 2
Bibi wewe Ltd sold Tshs 3,000,000 to Dada Ltd on credit on 1st July 2015. Since then Dada
Ltd has closed the office and its director went into hiding. Bibi wewe Ltd decided to write-off
the debt on 1st January 2016 after taking necessary steps as required the Value Added Tax laws.

Required

Advise the company on decreasing adjustment on that bad debt written-off.

Solution

There is a decreasing adjustment when a balance of debt is not recovered, as debtor fails to pay
consideration of the supplies supplied including the value added tax now is Tshs 3,000,000
composed of output tax of Tshs 457,627 from Tshs 3,000,000 x18/188 and selling price
exclusive of value added tax Tshs 2,542,373.

However, the decreasing adjust of Tshs 457,627 is only available after the date has been
overdue for more than 12 more months in this case, the allowance is available after 1st July
2016. So, the company cannot deduct the decreasing adjustment and the customer cannot make
an increasing adjustment of Tshs 457,627.

Example 3

Bibi wewe Ltd sold Tshs 3,000,000 to Dada Ltd on credit on 1st June 2014. Since then Dada
Ltd has closed the office and its director went into hiding. But, Bibi wewe Ltd did not write-
off the debt as it hopes the customer will pay one day.

Required

Advise the company on the treatment of that balance.

Solution

There is a decreasing adjustment when a balance of debt is not recovered. The debt is assumed
irrecoverable after being overdue for more than 18 months: in this case is in February 2016.
At that time, the company will make decreasing adjust of Tshs 457,627 after writing-off the
debt and the customer has to make an increasing adjustment of Tshs 457,627.

However, when the bad debt is recovered, the supplier should account output tax equal to
the tax fraction of the consideration actually received, and the customer, is allowed input tax
credit is the appropriate proportion of the tax fraction of the consideration actually paid
(Section 74(4) of the Value Added Tax Act 2014; Regulation 25(4) of the Value Added Tax
(General) Regulations, 2015). This adjustment (bad debt recovered) must be made in the tax
period in which the customer first becomes aware of the adjustment event or in any period
only of the subsequent six tax periods (Section 73(2) (b) of the Value Added Tax Act 2014).

Example 4

Assume that in July 2016 Bibi wewe Ltd recovered all of the bad debt written in February i.e.
Tshs 3,000,000 from Dada Ltd on credit.

Required

Compute the increasing adjustment required and state when the adjustment has to be made in
the Bibi wewe Ltd’ books of accounts and those of the customers.

Solution

The total debt to be written off was Tshs 3,000,000 including output tax Tshs 457,627 (Tshs
3,000,000x18/118). Now it has recovered, there is an increase adjustment of the same amount
i.e. Tshs 457,627 to BiBi wewe Ltd, and the decreasing adjustment of Tshs 457,627.

BiBi wewe Ltd and the supplier will make the increasing adjustment in the period of receipt of
the balance i.e. July 2016, but Dada Ltd may make the decreasing adjustment any period
between July to December 2016 (tax period in which the customer first becomes aware of the
adjustment event or in any period only of the subsequent six tax periods.

5.6 Repayments and refunds

VAT repayments cause several challenges. First, the potential for VAT refunds may increases
tax evasion in which taxpayers may overstate their input taxes deduction. Second, corruption
practice can go high as tax officials have authorities to allow or disallow input tax deduction.
Third, it is common for refunds to be made after long time has passed since claims have been
filed. This delay may lead taxpayers into financial stress as input taxes represent their working
capital tight up waiting for refunds.

Repayment of tax occurs where input taxes claimed in a period exceeds output taxes collected
in the same period. There are many reasons for VAT repayments. VAT tax repayment might
occurs when a taxable person exports taxable goods and services which are zero rated supplies
or when are sold at reduced rate to special relief persons. It is also possible that in particular
month taxable purchases and therefore input tax exceeds supplies of taxable goods and services
and then output tax in that month. This section, however, deals with refund to diplomats,
international bodies and non-profit organization. The Commissioner General within one tax
period after receiving the application for refund may refund part or all of the input tax
incurred on an acquisition or import by:

1. a public international organization, an non- profit organization, foreign government, or

other person prescribed by regulations, to the extent that the person is entitled to
exemption from value added tax under an international assistance agreement;
2. a person to the extent that such person is entitled to exemption for value added tax under
the Vienna Convention on Diplomatic Relations or under any other international treaty
or convention having force of law in United Republic, or under recognized principles
 of international law; or
3. A diplomatic or consular mission of a foreign country established in Mainland Tanzania,
relating to transactions concluded for the official purposes of such mission (Section 84
of the Value Added Tax Act 2014).

5.6.1 Refund without carry forward

However, a taxable person who has negative net amount may get refund without carry forward
when: fifty percent or more of the person’s turnover is or will be from supplies that are zero-
rated, fifty percent or more of the person’s input tax is incurred on acquisitions or imports
t h a t relate to making supplies that are or will be zero-rated; or in any other case, the
Commissioner General is satisfied that the nature of the person’s business regularly results in
negative net amounts (Section 82 (1) of the Value Added Tax Act 2014).

Yet, the person may apply for a refund of the amount; or choose to carry the amount forward
until such time as the person applies for a refund of the amount (Section 82(2) of the Value
Added Tax 2014). Nevertheless the application for refunds must be made not more than three
years after the end of the tax period to which the negative net amount relates (Section 83(2)
of the Value Added Tax Act 2014).

Example 5

When a taxable person can be refunded negative net amount each month by the commissioner?

Solution

When a taxable person who has negative net amount may get refund without carry forward
when: fifty percent or more of the person’s turnover is or will be from supplies that are zero-
rated, fifty percent or more of the person’s input tax is incurred on acquisitions or imports
t h a t relate to making supplies that are or will be zero-rated; or in any other case, the
Commissioner General is satisfied that the nature of the person’s business regularly results in
negative net amounts

5.6.2 Application for refunds

Moreover, the speed of value added tax refund depends on proof of credibility of the
taxpayer, where when the taxpayer is credible, commissioner refunds without undertaking an
audit or investigation of the applicant’s tax affairs (Section 84(1) of the Value Added Tax
Act 2014). Also, the commissioner is required that within ninety (90) days of its receipt, make
a decision on the application and inform the applicant of the decision by notice in writing
stating the amount of the refund allowed; and the period during which the refund should be
made (Section 84(1) of the Value Added Tax Act 2014). Where the Commissioner General is
not satisfied that the refund should be allowed, or is satisfied that the amount refundable is
less than the amount requested he shall give: the reasons for the decision; the applicant’s
rights to objection and appeal against the decision; and the time, place, and manner of filing a
notice of objection (Section 84(2) of the Value Added Tax Act 2014).

Additionally, The Commissioner General refunds if he is satisfied that the person is entitled to
a refund of the amount requested; or a lower amount represents the person’s actual entitlement
to a refund. Nevertheless, The Commissioner General does not refund the person if he is
satisfied that such person is not entitled to a refund. Also, the refund should not be paid unless
t h e applicant has filed all value added tax returns which the applicant is required to file; and
the Commissioner General may apply the refund first in reduction of any outstanding liability
of the person for value added tax or under another tax law, including any interest, penalties, or
fines payable under this Act or under that tax law. Also, if the amount remaining after deduction
of the existing liabilities does not exceed the minimum amount i.e. Tshs 100,000, the
Commissioner General may refund the amount or require the taxable person to take the
refund as a decreasing adjustment in a tax period prescribed by the Commissioner General.
Also, any allowed refund with the agreement of the Commissioner General, may be used as a
decreasing adjustment in a tax period agreed with the Commissioner General (Section 84 of
the Value Added Tax Act 2014).

5.7 VAT Account

VAT account is an abstract of value added tax accounted by taxpayers. It provides link between
business records and VAT returns. VAT account shows input taxes deductible, output taxes
collected any VAT adjustments for a period and VAT payable or repayable for the period.

It is mandatory that all taxable persons keep VAT account and accompanied records to show
how the input taxes, output taxes, adjustment were made (Government Notice NO. 177
Regulation 12(1)). There is no unique format of the VAT account but it is important to have
one that is appropriate to your business and must be kept monthly but is permanent account.

The connection between input taxes in VAT account and input taxes on VAT return must be
proved by records showing how deductible input taxes has been calculated. Furthermore, VAT
account shows any correction of errors that have happened in or in previous prescribed
accounting periods.

Taxable persons also are allowed to make adjustments for any discount allowed or received,
bad debt in the VAT account. Additionally, annual adjustments for input taxes for partial
exempt traders, issues or receiving of credit and debit notes, pre-registration and post
deregistration expenses can all affect the VAT account.
Once the VAT account is completed information can be shifted direct to VAT return and then,
the return must be filed and any payment due no later than one month after the end of your
accounting period.

VAT ACCOUNT
Tshs Tshs
Input tax –January XX Output tax-January XX
Bad debt relief XX Errors XX
VAT on discount received XX VAT on discount allowed XX
Annual adjustment-input tax XX Annual adjustment-input tax XX
Cash paid to TRA XX Refund received from TRA XX
Balance c/f YY Balance c/f ZZ
Xx XX
Balance b/f 1st February ZZ Balance b/f 1st February YY
Input tax-February Xx Output tax- February Xx
5.8 Correction of errors
Taxable persons normally prepare VAT returns themselves or through their tax agents. So it is
possible that they can make errors in computation of input taxes, output taxes and then VAT
liability or VAT repayment. Since commissioner has power to enter business premises, inspect
documents, including profit and loss accounts and balance sheets, take samples, and inspect
computers records taxable persons need make correct tax returns and correct their errors as
they find them (Section 42 of the Tax Administration Act 2015).

It is important for taxable persons to correct errors as soon as they are discovered to avoid
penalties and possibly criminal prosecution. Errors are inadvertent over declaration or under
declaration of the tax due. Separate records must be kept to show when the error was
discovered, the period in which the error occurred, any related document, and whether the error
was related to output or input taxes.

5.8.1 Correction of errors in electronic fiscal receipts

Sometimes electronic fiscal receipts may contain arithmetic or other errors like including VAT
in exempt supplies. Some electronic fiscal receipts may have incorrect prices. Specifically,
suppliers might charge customers VAT when is not due, or by increasing price and
consequently the VAT. Where a user mistakenly enters an erroneous data or information into
his Electronic Fiscal Device, he should proceed to print the erroneous information and keep
the record thereof for further reconciliation and rectification with the Commissioner
(Regulation 12(1) of the Income Tax (Electronic Fiscal Devices), 2012). Then, the user should
enter the correct data and information into his Electronic Fiscal Device and issue a correct
fiscal receipt (Regulation 12(2) of the Income Tax (Electronic Fiscal Devices), 2012). Finally,
the user should report errors made at the time of filing a return of income for the year of income
by submitting to the commissioner a written statement of correction errors recording each sales
error made during the year for reconciliation.

5.8.2 Errors discovered before filing VAT returns

When errors are discovered before filing VAT returns are amended in accounting records and
by keeping complete records showing reason for occurrence of errors, then compute the correct
VAT figure as normal and fills in the VAT account and finally file the VAT return. In situation
of discovering errors after filing the VAT return, the errors must be amended as discussed
below.

5.8.3 Errors on VAT returns

It is important to disclose errors when are identified to avoid penalties and interests. Yet,
making an application to amend a value added tax return (because of errors) before the receipt
of a notice of audit or investigation, if any, a s t h e y h a v e pay the unpaid tax and the
applicable interest for late payment (Section 66(6) of the Value Added Tax Act 2014).
However, the treatment of errors depends on whether the error is major or minor. Minor
errors means errors of which the net amount of the value added tax resulting from that error
does not exceed one million shillings (Regulation 22(3) of the Value Added Tax (General)
Regulations, 2015). So, implicitly errors of which the net amount of the value added tax
resulting from that error does exceeds one million shillings are major errors.
 Major errors are amended or replaced by applying to the commissioner stating the reasons
for amendment or replacement, the decision is required to be made in ninety days ((Section
66(5) of the Value Added Tax Act 2014;Regulation 21 of the Value Added Tax (General)
Regulation,2015). The decision shall states the details, if any, of the amendment made, the
reasons for the decision and the details of the applicant’s rights to object and appeal against
the decision; and the time, place, and manner of filing a notice of objection (Section 66(5) of
the Value Added Tax Act 2014).

Correction of minor errors, are just made in a tax period in which the errors are discovered
by making an increasing adjustment or decreasing adjustment (Regulation 22(1) of the Value
Added Tax (General) Regulation, 2015; Section 78 of the Value Added Tax Act 2014). The
amended are made in the value added tax account and reflected in the value added tax return
of the subsequent tax period Regulation 22(3) of the Value Added Tax (General) Regulation,
2015). Then, the person amending a minor error should in writing notify the Commissioner
General for such correction (Regulation 22(2) of the Value Added Tax (General) Regulation,
2015). The treatment of errors can be summarized as follows.

Summary of correction of errors

Errors

Found by trader and Found by TRA

disclosed voluntarily 1. No evidence for evasion no penalty
neither interest
2. With evidence for evasion penalty
Total errors ≤ Total errors > and interest may be charged
Tshs 1M Tshs 1M.
include on next Apply for the
VAT return amended
and notify

The taxable persons are liable for interest when they do not correct discovered errors neither
notify the commissioner (Section 66(6) of the Value Added Tax Act 2014). Specifically, the
section provides that person who reports errors before the receipt of a notice of audit or
investigation, if any, shall pay the unpaid tax and the applicable interest for late payment. In
the notification taxpayer might inform the office about the following issue:

• how each error arose

• the VAT accounting period in which it occurred
• if it was an input tax or output error
• the VAT under declared or over declared in each VAT period
• how you calculated the VAT under declared or over declared
• whether any of the errors resulted in paying an amount that was not due, and
• The total amount to be adjusted.
Example 5

Max is a taxable person; on 12th March 2012 he discovered the following errors made in the
previous periods.

1. He transposed the figure of output tax from Tshs 33,000,000 to 3,300,000 on the VAT
return of December 2011.
2. Input VAT on motor car of Tshs 4, 000, 0000, was wrongly reclaimed as input tax in
February 2011.
3. He did not deduct input tax in respect of business entertainment of employee costing Tshs
2,000,000 VAT inclusive.

Required

Discuss how the discovered errors should be adjusted

Solution

The net amount of errors is Tshs (33,000,000 - 3,300,000) + Tshs 4,000,000 - Tshs 2,000,000x
18/118= Tshs 33,394,915. Since the net amount of errors, Max should apply for amending the
error to the commissioner general and the commissioner shall dictate how errors should be
amended and when.

Example 6

Mandago Co. Ltd was registered for VAT in 2011. It sells domestic and office supplies. For
the month of January 2012 it made the following transactions:
1. On 2nd January 2012 the company paid Tshs 1,000,000 to EXZ Ltd for purchase of
photocopy machine. The machine was delivered on 21st December 2011.
2. On 8th January 2012 the company’s customer from Zanzibar bought goods worth Tshs
4,000,000 and exported the goods to Zanzibar on the same day. In addition the company
purchased standard rated goods of value Tshs 5,000,000 before 18% VAT from Zanzibar
and imported them to its head office located in Dar es Salaam city.
3. On 9th January 2012 the company paid Tshs 3,000,000 for laptops from ABC Co. Ltd.
It also made donation of taxable goods amount to Tshs 1,000,000 to Inspire training
center- an education establishment.
4. On 15th January 2012 the company received Tshs 2,360,000 for sales of used laptops.
5. On 20th January 2012 standard rated goods were sold to one company who was given
10% discount. The value of goods before discount was Tshs 5,000,000.
6. On 25th January 2012 the company received an electronic fiscal receipt from Z Ltd a UK
company for importation of services worth Tshs 20,000,000. The service will be provided
in September 2012.
7. On 29th January 2012 the company received invoices for electricity (Tshs 200,000) and
telephone (Tshs 100,000). These bills were paid on 2nd February 2012.
8. On 31st January 2012 a customer returned goods worth Tshs 300,000 and the company
issued a credit note to acknowledge the return
9. On 31st it made a credit sales to her prominent customer of Tshs 4,000,000 and the
company offered him 10% discount if the balance is paid within 1 month.
10. Finally, it written off a bad debt of Tshs 400,000 after a customer went on hiding for 13
months.
Required

1. Prepare a trader’s VAT Account for the month of January 2012.

2. Complete a trader’s VAT return for the month of January 2012

Solution

a) Computation of input taxes - since the person only sells taxable supplies computation of
input taxes is simple (summing all input taxes). The transaction values with exception of
goods from Zanzibar and exempt supplies are assumed to include value added tax. So
VAT fraction of 18/118 is applicable to compute input taxes and 100/118 to eliminate
output taxes taxable supplies made. Note that the value of imported service represents
reverse charge in which the person claims input tax in normal way and account for the
output tax collected.

Supplies made VAT exclusive'000' Input tax on purchase '000'

Deductible
Items Exempt Taxable Items Input tax
Zanzibar 3,390 Photocopy 152.54
Used laptops 2,000 Goods from Zanzibar 900
Donation-self supply 847 Imported services 3600
Credit sales 3389.8 Electricity and telephone 45.76
Sales after discount 3813.6 Laptops bought 457.63
Total 0 13441 5155.93
Input tax deductible 5155.93 5155.93
Output tax collected=13,441x18% +20,000 x 18% 6,019.38
Net amount 863.45

b) Adjustment for bad debt written-off is Tshs 400,000x18/118 = Tshs 61,017 and the
adjustment for credit note is Tshs 300,000x18/118=Tshs 45,763.
c) VAT account in Tshs '000'

VAT account
Items Tshs Items Tshs
Input tax 5155.93 Output tax 6,019.38
Adjustment-bad debt 61
Adjustment- credit note 46
VAT payable for the month 756.45
6,019.38 6,019.38

d) Most information in VAT return is taken directly from the VAT account.
 TANZANIA REVENUE AUTHORITY
VALUE ADDED TAX RETURN / RITANI YA KODI YA ONGEZEKO LA THAMANI

Note / Tanbihi Before filling this form please read carefully instructions provided overleaf.
Kabla ya kujaza fomu hii tafadhali soma kwa uangalifu maelezo yaliyopo
nyuma ya fomu

Taxpayer Identification Number (TIN) / Namba

ya Utambulisho
January 2012
VAT registration number / Namba ya usajili wa
VAT

This return is for the Month of / Ritani hii ni ya mwezi wa

Full name of business / Mandago Co. Ltd

Jina kamili la biashara

Postal address / Anuni

ya posta

For NIL return tick (ü) here 01 Kwa ritani isiyo na malipo weka alama (ü)
hapa

Supplies of goods & or Services / Value (Excluding VAT Rate / VAT

Mauzo ya bidhaa na / au huduma VAT) / Thamani (Kiwango) Amount /
(bila kodi) (Kiasi cha
Kodi)
Standard rated supplies / 02 33,441 03 18 04 6,01
Mauzo yanayotozwa VAT 9.38

Zero rated supplies / 05 -

Mauzo yanayotozwa kiwango cha
sifuri
Exempt supplies / 06
Mauzo yaliyosamehewa kodi
Special relief / deferred supplies / 07
Mauzo kwa watu waliopewa nafuu -
maalum
Purchase (Inputs) / Value (Excluding VAT) / VAT Rate / VAT
Manunuzi Thamani (bila kodi) (Kiwango) Amount /
(Kiasi cha
Kodi)
 Exempt (local & imports) purchases 08 -
/
Manunuzi yaliyo samehewa VAT
Non-Creditable purchases / 09 -
Manunuzi yasiyostahili Marejesho
ya VAT
VAT deferred purchases / 10
Manunuzi ambayo VAT -
imeahirishwa
Standard rated purchases / 11 12 18 13
Manunuzi ya hapa nchini 3,644 655.
yanayotozwa kodi 93
Standard rated imports / 14 15 18 16 4,50
Manunuzi kutoka nje yanayotozwa 25,000 0
kodi
Total input tax / 17 5,15
Jumla ya VAT kwenye manunuzi 5.93

Total VAT payable / Refundable 18

Kiasi kinachostahili kulipwa / 863.
kurejeshwa 45

VAT credit brought forward / 19

Marejesho
ya VAT yatokanayo na miezi
iliyopita
Total VAT due or carried forward / 20
Kiasi cha kulipwa au kusogezwa
mbele

Declaration /Tamko
I hereby certify that the information given in this form is true and complete. / Nathibitisha kuwa
taarifa niliyotoa kwenye fomu hii ni sahihi na kamili

Dr Mahangila, Deogratius . ………………………………………

Name (Jina) Signature (sahihi)
Date (Tarehe} 25/01/2016

FOR OFFICIAL USE ONLY / KWA MATUMIZI YA OFISI TU.

Date of Payment Pay In slip No. Name
of Bank
Amount paid Payment type Cheque
No
Posted by Designation

Note that the adjustments are only shown in the VAT account as the official VAT return does
not provide a place for that adjustment. The discrepancy between input taxes deducted and a
total of item 13 and 16 is because of the adjustments; consequently it is important to keep your
VAT account accurate and update.

5.9 Value Added Tax deferment

Deferment means the postponement of payment of the value added tax in respect of capital
goods (Regulation 2 of the Value Added Tax (General) Regulation 2015). This allowance is
applicable to importers of capital goods. Capital goods means goods for use in the person’s
economic activity which have a useful economic life of at least one year and are not:
consumables or raw material; and imported for the principal purpose of resale in the
ordinary course of carrying on the person’s economic activity, whether or not in the form
or state in which the goods were imported (Section 11 (11) of the Value Added Tax Act
2014). The importers are not required to pay VAT on the time of importation as the payment
is delayed until a later prescribed accounting period. The deferment scheme is only limited to
VAT registered persons; non-registered persons are required to pay VAT on the date of
importation. Furthermore, a Tanzania Investment Center certificate holder can apply to the
Commissioner of Customs to extend this relief so that other goods can be imported.

The deferment is given by treating tax payable on taxable imports by the p e r s o n as if it were
output tax payable by the person in the tax period in which the goods were entered for home
consumption (Section 11 (9) of the Value Added Tax Act 2014). So, when the importer defers
payment of input tax on importation, the amount must be shown in the current tax return, the
VAT applicable both as a VAT liability (as output taxe because are not paid) and, tax credit
(input tax deduction). So where the importer is entitled to 100 percent, the input tax credit
reported as a liability will be completely offset by the corresponding input tax credit
(Regulation 8 of Value Added Tax Regulation (General) 2015).

Taxable person who import capital goods may be given deferral of payment of value added
tax for 10 years. (Section 11 (11) of the Value Added Tax Act 2014; Regulation 7 of Value
Added Tax Regulation (General) 2015). The Commissioner General approves an application
of the deferral of payment of value added tax when satisfied that-

(a) the person is carrying on an economic activity;

(b) the person’s turnover is, or is expected to be made up of at least ninety percent of taxable
supplies;
(c) the person keeps proper records and files value added tax returns and complies with
obligations under this Act and any other tax law;
(d) the person has provided security required and
(e) there are no reasons to refuse the application: having an outstanding liability or an
outstanding return under any tax law; or having been convicted in a court of law in the
United Republic or elsewhere for an offence of evading payment of tax, custom duty or
an offence relating to violation of trade laws or regulations.

The decisions applications for deferment are made within fourteen (14) days of receiving the
application, notify the applicant of the decision to approve or reject the application, and when
the applications for the deferments are rejected the Commissioner General states the reasons
for such rejection, and afford the applicant the right to object and appeal against the
decision (Section 11 (6) of the Value Added Tax Act 2014).

However, the deferment ceases to have effect and the value added tax becomes due and
payable as if the deferment had not been granted if the applicant fails to account for deferral
import value added tax, the said goods are transferred, sold or otherwise disposed-off in any
way to another person not entitled to enjoy similar privileges. Moreover, this deferment may
be cancelled when: the person no longer meets the requirements for approval, the security
provided by the person has expired; or the person becomes liable to fines or penalties, or is
prosecuted for or convicted, under any other tax law (Section 11 (9) of the Value Added Tax
Act 2014). Moreover, when the period of deferment lapses, the deferred taxes on capital goods
is not payable (Regulation 9 of Value Added Tax Regulation (General) 2015). Thus, the
deferment of value added tax on capital goods intends to encourage long terms investments.

5.10 Interests and offences

5.10.1 Interest for failure to pay tax on due date (section 76 of the Tax
Administration Act 2015)
All taxes must be paid on due dates which is on or before the last working day of the month
following the month of transaction. Late payment of tax is liable for interest for each month or
part of a month for which any of the tax is outstanding calculated at the statutory rate
compounded monthly, applied to the amount outstanding at the start of the period (Section
76(1) of the Tax Administration Act 2015).

Formula: I = Z ((1 + R)N – 1), Where

I = Interest for failure to pay tax
Z = Outstanding tax.
R = Bank of Tanzania discount rate at the start of the calendar year per annum. Because the
Interest is computed for the month and part of month it is necessary to convert annual interest
into month interest. Assume the statutory rate is 12% converted into monthly is 1 % pm.
N = number of “periods” tax payable is outstanding (for each month or part of a month).

Example 7
Tanzania prime product ltd, had estimated value added tax payable of Tshs 8,000,000 in March
2015. Which was paid on 1st July 2015.

Required

Determine the interest for failure to pay tax on due date if the statutory rate is 12% per annum.

Solution

Formula: I = Z ((1 + R)N – 1), where;

I = Interest for failure to pay tax on 30th April 2015 (the last day of the following month;
Z = Outstanding tax Tshs 8,000,000
R = Statutory rate 1% pm
N = number of periods the tax payable is outstanding is three months, from 1st May to 1st July
2011 (for each month or part of a month).
Hence, the Interest = Tshs 8,000,000 ((1 + 1%) 3 – 1) = Tshs 242,408
5.10.2 Offences and penalties
Non-compliance of the Value Added Tax Act 2014 may results in criminal activities. The
following summarizes some offences given in the Tax Administration Act 2015 are following:

(a) fails to apply for registration as required under the Value Added Tax Act;
(b) fails to notify the Commissioner General of ceasing to be liable for value added tax as
required under the Value Added Tax Act;
(c) fails to notify the Commissioner General of a change in circumstances as required under
the Value Added Tax Act;
(d) Fails to notify the Commissioner General the change in interest or ownership of
property or control of business by reason of death, bankruptcy, winding-up or other
legal process that vests in another person interest or ownership of property as required
under the Value Added Tax.
(e) fails to notify the Commissioner General of a transfer as required under the Value
Added Tax Act; or
(f) Holds himself out as a taxable person under the Value Added Tax Act, where that
person is not.

The person who commits an offence among these are liable, on conviction:

(a) where the failure or holding out is made knowingly or recklessly, to a fine of not less
than 100 currency points and not more than 200 currency points or imprisonment for a
term of not less than one year and not more than two years, or to both; or
(b) in any other case, to a fine of not less than 50 currency points and not more than 100
currency points or imprisonment for a term of not less than one month and not more than
three months, or to both.

5.10.3 Compounding of offences

Compounding offences refers to the power of the commissioner to increase penalties in case
fines given for offences are not maximum penalties (Section 92 of the Tax Administration Act,
2015). However if criminal procedures are in process the commissioner can only increase the
penalty after written approval from the Director of Public Prosecutions. This increase in penalty
does not reduce or relieve the person from other penalties and interests.

5.10.4 Offence by body corporate

In a corporate environment it is a person running the entity will be liable for an offence
committed by corporate body not the entity itself (Section 88(1) of the Tax Administration Act,
2015). The person might comprise director, partner, agent or an officer running it. However,
the person may not be subjected to criminal offence if they have exercised due care, reasonable
skills and their knowledge while doing their responsibilities.

5.11 VAT evasions

Tax evasion is illegal ways of decreasing tax liabilities. Taxpayers use several ways to evade
VAT. These include: non-registration of businesses, underreporting of gross receipts, abuse of
multiple rates, and non-remittance of tax collected to the tax authority, use of fake electronic
fiscal receipt and claiming of VAT credits for non-creditable purchases.
Similarly VAT depends on tax consideration of goods or supplies by suppressing the amount
collected reduce the VAT liability. For instance, someone may collect Tshs 20,000 from sales
of taxable goods and report Tshs 10,000 consequently reducing VAT illegally by half.

In situation of multiple tax rates or supplies misclassification of goods and services might
reduce or eliminate tax liability. For example, VAT is completely evaded is the goods is
classified as zero rated or exempt supplies.

Taxable persons can collect VAT from customers and fail to remit them to Tanzania Revenue
Authority. In that case the person will be stealing both from customers and Tanzania Revenue
Authority.

Use of fake electronic receipt is said to be very common way of evading VAT. The fake
electronic fiscal receipts might be issued to customers showing the amount collected thereafter,
the person records lower amount in another electronic fiscal device. The uses of audit trail that
cross check electronic fiscal receipts of suppliers and purchasers may reduce this problem but
only mostly to registered person.

Not all input taxes are deductible. Claiming input taxes on private goods, some of business
entertainment, purchase of motor car and exempt input tax is tax evasion. Legal all these input
tax are not deductible.

5.11.1 Tackling VAT tax evasion

Tackling VAT tax evasion is difficult but an effective audit can reduce tax evasion. The
effective audit covers nearly all sectors and taxpayers, focus on high risk areas or taxpayers,
not too long as it uses samples, properly coordinated with income tax audit and only done when
there is criminal concern.
However, the effective audit program needs sufficient, proper trained and well paid staff,
supportive tax authority, high ethically guided staff to reduce corruption, strong legal system
and political will to curb tax evasion. Since most of these criteria of a good tax audit program
are lacking it is not surprising that tax evasion is very common in developing countries
including Tanzania.

Summary
This chapter focused on VAT administration. It explained the VAT assessments, VAT
accounts, corrections of errors and VAT returns. It further talked about penalties and
interest for tax noncompliance, VAT tax evasion, VAT tax avoidance and how to deals
with tax noncompliance. Finally, it discussed the procedures and challenges brought by
VAT refunds.
Exercises
Question 1

In order to promote both local and foreign investment in Tanzania the Government has enacted
the Tanzania investment Act, 1997.

Required

(a) Are fiscal and tax incentives really necessary in the investment decision making process?
( CPA (T) May 1999)
(b) Specify two incentives under the VAT Act 1997 ( CPA (T) May 1999)
(c) Define and distinguish between tax avoidance and tax evasion (CPA (T) May 2001)
(d) Discuss three main causes of VAT tax avoidance and evasion and suggest appropriate ways
and means to minimize them. (CPA (T) May 2001)

Question 2

The VAT system involves refunds of input taxes however there is a risk of false claims and
deductions.

Required

a. Explain how VAT Act 1997 guides about VAT refunds.

b. Mention fives steps that can be taken to reduce VAT tax evasions.
c. Identify four tax recovery measures available to the Commissioner for VAT under the
Value Added Tax Act, 1997 (CPA (T) May 2002)
d. What is the meaning of the term “Scheme for obtaining undue tax benefits” for VAT
purposes? (CPA (T) May 2007)
e. Referring to VAT Act, 1997, briefly explain the time in which goods or services are
regarded as supplied. (CPA (T) May 2008)

Question 3

a) Value Added Tax (VAT) refers generally to a tax charged on value added on goods and
services at various stages of business transactions.

Required

1. Explain the types of supply in determining VAT chargeability

2. Clarify and differentiate the concepts of input tax and output tax under the VAT system
3. Distinguish between allowable and non-allowable input tax

(a) Mwendapole Co. Ltd. deals with garments and was registered for VAT since July, 2003.
The company accurately lodged the respective VAT returns up to October 2004.
However, the returns for November 2004 to April to April 2005 were all submitted on 1st
May 2005. The VAT due for each month were as follows:
 Month Amount in Tshs
November, 2004 400,000
December, 2004 800,000
January, 2005 500,000
February, 2005 Nil
March, 2005 600,000

Required

(i) Specify the due dates for each return

(ii) Calculate the total penalty due. (CPA (T) May 2005)

Question 4

Mr. Alvin is the owner of ABC Co. Ltd. a VAT registered Company with VRN 27J and TIN
0032H that deals with purchasing and selling different articles locally and overseas. The
following purchases and expenses were made during the month of March, 2005
1) Imported human medicines containing antibiotics that have been approved by
the Minister for Finance and recommended by the Tanzania Food and Drugs
Authority for Tshs. 1.5 million C.I.F value.
2) Purchased Journals and Newspapers to be used by the International Academy
owned by him for Tshs. 350,000/= and Tshs. 300,000/= respectively.
3) Acquired residential building for Tshs. 3.5 million that has to be used for the
similar purposes.
4) Imported an “automatic” Toyota Mark II for Tshs. 8 million to be used by the
disabled employees of his Company free of charge.
5) An International NGO has provided the business a subsidy of Tshs. 20 million,
two quarters (2/4) which represent CIF value has been used to purchase one
minibus for official use and one quarter (1/4) for the purchase of computers and
printers.
6) Paid Tshs. 1.7 million as park fee in respect of the tourists that have commercial
interest with the Company in the United Kingdom.
7) Mr. Alvin is also a Sub-Contractor of the Project under the International Donor
Agencies a relieved entity under the Third Schedule of the VAT Act, 1997. He
therefore purchased motor vehicle for the project in his name for Tshs. 25
million CIF Value. Form VAT 220A has not been filed for that purposes.
8) Paid electricity Tshs. 750,000/=, telephone bills Tshs. 250,000/=, and owned
refrigerators for official use of Tshs. 450,000/=.
9) Given sanitary pads worth Tshs. 560,000/= by one of the NGOs to be allocated
to employees of the Company.
In the same period, the following supplies were made:

Items Tshs.
Cooking Oil 600,000/=
Beer and Spirits in one of his Groceries 290,000/=
Soft Drinks (supplied free to employees) 750,000/=
Fresh Milk 400,000/=
Transportation of Goods 360,000/=
Toilet Soap 890,000/=
Mosquito Coils 700,000/=
 The following additional information is also available:
(i) There was an opening stock of Tshs. 3,290,000/= which is the closing stock for
the month of February 2005.
(ii) Crates of beer worth Tshs. 180,000/= was taken for personal consumption in the
Extra-Ordinary meeting of the Company. The amount was not included as part
of stock in the month of February.
(iii) No cash discount was given during the month.
(iv) All values are VAT inclusive except imports.

Required

By using the Second Method of apportionment, compute input tax to be claimed or credited
during the month of March 2005.

(Note: The importation is subject to 25% import duty, 10% excise duty and 18 % VAT and
ignores the issue of depreciation.) (CPA (T) November 2005)

Question 5

(a) Write short notes on the following categories of untaxed goods and services:
(i) Zero rated
(ii) Exempt
(iii) Special relief
(iv) Outside the scope
(v) Partially exempt

(b) The operation of VAT system depends very much on declaration made by VAT
registered person that is done on monthly basis. To ensure compliance from registered
taxpayers, the VAT law does provide punitive measures for the person who does not
comply with the law.

Required

What are the measures are taken against a person who fails to submit a return or pay tax within
the time allowed under the law?

(c) Compute penalty and interest and final liability from the given information that ABC
is a registered taxpayer that did submit a return for June 2005 on 30th October, 2005 with the
payment of Tshs. 650,000 as VAT payable. The prevailing rate of interest was 10%.
(CPA (T) November 2007)
Question 6

Shimbo Ltd commenced trading as a wholesaler and retailer of electronic sound equipment and
music systems on 1 July, 2006. The company registered for Value Added Tax (VAT) on 1
March 2007. Its inputs for each of the months of July 2006 to February 2007 are as follows:

Goods purchased Services incurred Fixed assets

Tshs. Tshs. Tshs.
July 12,300,000 1,400,000 42,000,000
August 11,200,000 5,100,000 -
September 12,300,000 7,400,000 -
2006
October 16,400,000 6,300,000 14,400,000
November 14,500,000 8,500,000 -
December 18,800,000 9,000,000 -
January 18,500,000 9,200,000 -
2007
February 23,400,000 8,200,000 66,600,000

During February 2007, Shimbo Ltd sold all of the fixed assets purchased during October 2006
for Tshs. 12,000,000. On 1 March 2007, Tshs. 92,000,000 of the goods purchased were still
in stock under FIFO Method. The above figures are all exclusive of VAT. Shimbo Ltd’s sales
are all standard rated and all inputs are also taxable.

Shimbo Ltd pays all of its input tax one month after receiving the purchase invoice. However,
many customers are not paying Shimbo Ltd until four months after the date of the sales invoice.
In addition, several customers have recently defaulted on the payment of their debts. In order
to encourage more prompt payment, Shimbo Ltd is considering offering all of its customers a
5% discount if they pay within one month of the date of the sales invoice.

Required

(i) Explain whether and how much Shimbo Ltd. Was able to recover input VAT in respect
of input incurred prior to registration for VAT on 1 March, 2007.
(ii) Explain the VAT implications of Shimbo Ltd. Offering its customers a 5% discount for
prompt payment. (CPA (T) November 2007)

Question 7

The figures provided below were extracted from the cashbook of the VAT registered trader for
the month of August 2006.

Purchases Value (Tshs.)

Leather (imported) 3,000,000
Paper 3,200,000
Glue 20,000
Cardboard Sheet 3,000,000

Sales Value (Tshs.)

Hand bags: Leather imported 2,000,000
Children’s books 2,000,000
 Newsprint 9,000,000
Diaries 5,000,000
Newsprint (export) 2,000,000

Required

From the information provided above, as an Auditor, calculate the amount of VAT due to TRA
or due to be refunded to the trader. Assume 18% VAT rate.

(CPA (T) November 2008)