VALUE ADDED TAX (VAT) SUMMARY

INTRODUCTION TO VAT
1.0 Meaning of VAT

A value-added tax (VAT) is a tax assessed against businesses at each step of the
production and distribution process, usually whenever a product is resold or value is
added to it. A VAT is levied on the difference between the purchase cost of an asset
and the price at which it can be sold (i.e., the amount of value added to it).
Consequently, value added tax is tax on consumption of taxable goods and services.
Because the tax is taxed on what people buy rather than on their earnings, savings,
or investments.

Though final consumers suffer value added tax burden it is taxable persons who pay
the tax collected to Tanzania Revenue Authority. Taxable persons are required to
collect value added tax on their sales of goods and services to either registered
persons or non-registered ones by increasing their prices of goods and services. The
registered persons however, can claim the tax paid on their purchase

1.1 Why VAT

(i) Merits of VAT

• Broad coverage
• Administrative advantage
• Avoid double taxation
• Reduces cost of evasion
• More transparent
• Selective
• Economic efficiency
(ii) Demerits of VAT
• Regressive
• Inflationary
• Compliance Costs
• Complex
• Administratively burdensome

1.2 VAT Tax Bases

Value added tax may apply on consumption of a taxable person, income of taxable
person or gross product value. These three bases are sometimes used to classify
value added taxes into consumption, income and gross product value added
taxes.

In the consumption type, all supplies of goods and services including purchase of
capital goods are taxable and their input taxes are deductible in the period of
acquisition.

VAT of income type follows the general accepted accounting principles. In the income
approach, all goods and services supplied are taxable but input taxes paid on the
purchases of capital goods is spread over the life span of the products or assets as
depreciations. Argentina and Peru are good example of those countries which use this
base
Value added tax basing on the gross product type recognizes only revenue
transactions and totally disallows input taxes deduction on capital goods. So the
calculation of value added tax liability is based on sales/revenues less expense does
not includes depreciation because the depreciation is part of capital goods. The
system can be seen in Finland, Morocco and Senegal.

Example

The following is the income statement of NK Ltd for the year ended 2010. You are
required to compute tax liability for the company using consumption base, income
base and gross product base and comment of the differences. Assume a tax rate of
18%.

Item Tshs
Sales 10,000,000
Services fees 8,000,000
Less:
operating expenses 2,000,000
Depreciation 3,000,000
Profit before tax 13,000,000
Taxation 30% 3900000
Net profit 9,100,000
Additional information

During the year the company acquired news machine costing Tshs 20,000,000 and its
depreciation has already included in the income statement.

Solution

Consumption base = Sales less (purchases +other expenses + capital purchases in

the period) = Tshs 18,000,000-(Tshs 2,000,000+20,000,000) = Tshs 4,000,000. There
is a tax refund of Tshs 4,000,000 x18%=Tshs 720,000.

Income base= Sales less (purchase + other expenses +depreciation) = Tshs

13,000,000 This produces a tax liability of Tshs 13,000,000 x18%= Tshs 2,340,000.

Gross product base = Sales less revenues expenses only= Tshs 18,000,000-Tshs
2,000,000 = Tshs 16,000,000 There is tax payable of Tshs 16,000,000 x 18%= Tshs
2,880,000.

Comments

The consumption base has allowed input tax deduction on purchase of capital in the
period of the acquisition and, the depreciation has been left out because its respective
input taxes were deducted in the previous period at the time of purchase. As the results
the taxable person has a refund claim from the Tanzania Revenue Authority of Tshs
720,000.

While the consumption accelerates the deduction of input taxes on capital items, the
income base defers it, but allows it only on depreciation amount of Tshs 3,000,000.
Consequently, the taxable liability is Tshs 2,340,000. Finally, the maximum tax revenue
is obtained from the gross product method after denying capital element neither
depreciation nor its cost. In that base the tax payable improved to Tshs 2,880,000.

It should be noted that, VAT is based on self assessment and there are only two tax
rates, 18 percent and zero percent.
QUESTIONS

Question 1

What do understand by the term VAT? Is Value Added Tax (VAT) a direct or an indirect
tax? Discuss

Question 2

Why VAT is so common in both developed and developing countries like Tanzania?

Question 3

Differentiate VAT Zero rate from VAT Exemption by discussing their similarity and
differences.

Question 4

Discuss any four main features of the Value Added Tax (VAT) to be adopted in
Tanzania by 1st July, 1998 (CPA (T) 1998)

Question 5

Compute the missing values from the simple value chain if the manufacturer’s markup
is 10%, wholesaler’s is 12%, and of the retailer’s is 15% and the VAT rate is 18%.

Players Purchase Input tax Selling price Output VAT

price-exclusive Exclusive VAT tax payable
VAT
Manufacturer 10,000 1,800 12,000 2,160 360
Wholesaler 12,000 2,160 A B C
Retailer D E D E F
Final G H I J K
consumer
Question 10

a) What are the advantages of VAT over sales taxes

a) The following is an illustration of how VAT works in Tanzania:-

Item/Value added Cost/price Input tax Output tax Tax payment

MANUFACTURER
Manufacturing 10,000 1,800 B C
Cost
Value Added 8,000
Price to Whole A
seller
WHOLE SELLER
Manufacturing 18,000 D E 1,530
Cost
Value Added 8,500
Price to retailer 31,270
RETAILER
Wholesale costs F 4,770 6,120 1,350
Value Added 7,500
Price to Consumer G
Total tax H

Required

Calculate the values A to H in the illustration above (updated -CPA (T) May 1999)

Question 7

a) List three types of VAT system.

b) Which type of VAT system has been adopted by Tanzania and why?
c) Briefly explain the method of computing VAT which is being used by Tanzania
VAT and list advantages of the said method.
d) Discuss the advantages and a disadvantage of self-assessment as far as value
added tax is concerned.
e) Explain five challenges those are likely to be brought by introduction of electronic
fiscal devices and possible solutions for each of the challenge.
f) Mention three tax laws which either were amended or repealed by the
introduction of value added tax law, clearly state whether the law was amended
or repealed.

Ouestion 14

(a) Give four reasons as to why the Value Added Tax (VAT) has become a
prominent feature in the tax systems of many Less Developed Countries (LDC's) CPA
(T) May 2000)
Question 15

Timbwilitimbwili Ltd owns a quarry. It extracts stone from this quarry and sells the stone
to Machapakazi ltd for TZS 25 million plus VAT. Mchapakazi ltd coverts all the stone
into paving slabs and sells these slabs to sasakazi ltd for TZS 45 million, plus VAT.

Sasakazi ltd owns and runs a garden centre, where one third of the slabs are sold at
TZS 65 million plus VAT to the general public in Tanzania and the remaining part is
sold to Kenya for the total of TZS 15 million, plus VAT.

Required:

Show how VAT is charged and collected at each stage of this process. 10 Marks (CPA
(T) B4 November 2015)
1.3 Scope of VAT

Refers to which area or supplies and to whom the value added tax is applicable, at
what rate, and on which taxable values of supplies.

i) The taxable values mean the price of the goods or service without include
the value added tax.
ii) A supply can be defined as something (goods or services) available for
another person either for consideration or otherwise. There are three broad
categories of supplies: taxable, exempt and supplies outside the scope
of value added. (Why is important to class items according to their classes
in computation of VAT?? Also, what advanteges and disadvantages of VAT
exemptions)
iii) Classification of Goods and services (Section 12). this classification is
very important not only it affects the place where the supply is said to have
taken place it is also an important factor in determining whether the goods
has been imported or exported in addition to determining the time of supply.
iv) Time of Supplyor tax point of VAT - Time of supply determines the tax
point when the value added tax becomes payable by the buyer and
accounted for by the supplier of goods or services. A tax point, or the time
of supply occurs when the supply take place. In that case, the significant of
this point is when value added tax is payable and accountable.

It crucial to understand when the tax must be accounted for because the tax point
might not be the time when cash is received. According to section 2 of the Value Added
Tax Act 2014 the time of supply is:

i. in relation to a supply of goods, the time at which the goods are delivered or
made available;
ii. in relation to a supply of services the time at which the services are rendered,
provided, or performed;
iii. In relation to a supply of immovable property, the earlier time at which the
property is- (i) created, transferred, assigned, granted, or otherwise supplied to
the customer; or (ii) delivered or made available.

However, the value added tax imposed on a taxable supply is payable at the earlier
of:

i. The time when the invoice for the supply is issued by the supplier;
ii. The time when the consideration for the supply is received, in whole or in part;
or
iii. The time of supply (Section 15 of the Value Added Tax Act 2014).

Not always payments are made in full, therefore, where there is part, or an electronic
fiscal receipt is issued for a part of supply a supply the tax point will base on only that
part received or included in the receipt (Section 15 of The Value Added Tax Act 2014).

For instance, if the supply worth Tshs 100,000 VAT inclusive but the amount only
Tshs 20,000 was paid and is the payment is the earliest point of the above. Thus the
value added tax which must be account at that point is Tshs 1,800.
The time of supply of imported goods differ too. When goods are imported they normal
pass through customs, the value added tax on the goods are paid together with on
custom duty, tax or levy is payable in accordance with the Customs Law (Regulation
3 of the Value Added Tax (General) Regulations 2015).

Also the time of tax payment of progressive or periodic supply is different.

Progressive or periodic supply is a supply made progressively or periodically under
an agreement, arrangement or law that provides for progressive or periodic payments;
a supply by way of lease, hire, license or other right to use property, including a supply
under a finance lease; or a supply made directly in the construction, major
reconstruction, or extension of a building or engineering work (Section 2 of the Value
Added Act 2014).

However, treatment of a progressive supply or period supply depends on whether

it is separable. When the supply is separable, each part of a progressive or periodic
supply is treated as a separate supply. Where the progressive or periodic parts of a
progressive or periodic supply are not readily identifiable, the supply should be treated
as a series of separate supplies for separate part of the consideration relates. Also,
for the purpose of determining the time of supply for each part of a lease or other
supply of a right to use property, the supply is treated as being made continuously over
the period of the lease or right of use (Section 15 of the Value Added Tax 2014).

Generally, these taxes are payable when.

(i) separate invoice is issued;
(ii) any part of the consideration for the supply is paid;
(iii) the payment of the consideration for the supply is due;
(iv) Where the supplier and customer are connected persons: for a periodic supply,
on the first day of the period to which the supply relates, or for a progressive
supply, at the time of supply (Section 16 of The Value Added Tax 2014).

Similarly, where a taxable supply of goods is made under a lay-by agreement-the

value added tax imposed on the supply becomes payable at each time when any part
of the consideration is paid for the supply; and

i. the amount of value added tax that becomes payable at such time is the tax
fraction of the amount paid; and
ii. where a taxable supply is made through a vending machine, meter, or other
automatic device not including a pay telephone that is operated by a coin, note,
or token, the value added tax becomes payable when the coin, note, or token
is taken from the machine, meter, or other device by or on behalf of the supplier
(Section 16 of The Value Added Tax 2014).

A “lay-by agreement” means an agreement for the sale and purchase by which

i. The price is payable by at least one additional payment after the payment of a
deposit;
ii. delivery of the goods takes place at a time after payment of the deposit; and
iii. ownership of the goods is transferred (Section 16 of The Value Added Tax
2014).
v. Place of Supply - Only taxable goods and services supplied in Mainland Tanzania
are subject to value added tax. The following supplies are considered to be made in
Mainland Tanzania (From section 44 to 52)

vi. Taxable value and consideration of value added tax

The taxable value of a supply is the value on which value added tax is charged. The
amount of value added tax is the tax value multiplied by a tax rate. The taxable value
of a supply depends on what is given in exchange for the supply. This value is called
a consideration. The consideration can be in money or in kind, including anything
which is itself a supply.

Consideration of a supply, is the sum of person, whether direct or indirectly, the

amount in money paid or payable, or the fair market value of anything paid or payable
in kind, by any person in response to, or for the inducement of the supply. Actually, the
consideration for a supply includes: any duty, levy, fee, charge, or tax including value
added tax payable by the supplier on, or by reason of, the supply is included in or
added to the amount charged to the customer. Also, it includes any amount charged
to the customer that is calculated or expressed by reference to costs incurred by the
supplier; any service charge that is automatically added to the price of the supply; and
any amount expressed to be a deposit paid when goods are sold in a returnable
container and which may be refunded on the return of the container.

However, the consideration for a supply excludes a price discount or rebate allowed
and accounted for at the time of the supply. Also, an exact reimbursement of costs
incurred by agent for the payer should not form part of the consideration for the supply
made by the agent to the person paying the reimbursement (Section 13 of The Value
Added Tax 2014).

Fair market value of supply” means the consideration the supply would fetch in an
open market transaction freely made between persons who are not connected; or
where it is not possible to determine an amount under the opening market, the fair
market value which a similar supply would fetch in an open market transaction freely
made between persons who are not connected, adjusted to take account of the
differences between such supply and the actual supply (Section 2 of The Value Added
Tax 2014.

Taxable value of imported goods and services

The taxable value of imported goods includes cost of purchase, insurance, freight,
import duty, excise duty and any other tax or levy payable on the goods other than
value added tax (Section 9 of Value Added Tax Act 2014). On the other hand the
taxable value of the imported service is the consideration of the supply (Section 17(2)
of Value Added Tax Act 2104). The value of returning goods from abroad after having
been exported for the purpose of undergoing repair, maintenance, cleaning,
renovation, modification, treatment, or other physical process; and the form or
character of the goods has not been changed since they were exported, is amount of
the increase in their value as is attributable to the repair, maintenance, cleaning,
renovation, modification, treatment, or other physical process (Section 10 of The Value
Added Tax Act 2014).
Example 10

ABC Co. Ltd of DSM is a wholesaler of home appliances; the firm has been registered
for value added tax since 2007. In order to improve its services it delivers goods to
customers freely. The company distributed goods worth Tshs 10,000,000 VAT
exclusive to one of her customer at Mwenge center. The transportation of goods to
Mwenge costs Tshs 100,000 VAT exclusive.

Required

Calculate the taxable value from that transaction.

Solution

The supply of goods is treated having been delivered to the recipient at the
supplier’s place of business , consequently the recipient will bear freight, insurance,
and other costs, charges and expenses incidental to the supply and the delivery of
the goods to him.

So the taxable value of the supply is Tshs 10,000,000 and the value added tax is
1,800,000. The transportation costs are the cost of customers otherwise a self-supply
is necessary on the party of supplier and output tax of Tshs 18,000 must be accounted
for r by the company. In the self-supply the company pays on behalf of the customers.
This payment of output tax enables the company to claim input tax incurred in
relationship to transportation of goods to customers.

Example

A taxable person imported Toyota Pickup 1ton from Japan. The price of the car was
Tshs 4,000,000, insurance Tshs 2,000,000 and Tshs 1,500,000 for freight costs to Dar
es Salaam port. On importation the person was liable to import duty of 25%, excise
duty of 5%, excise duty of aged car 20% and the VAT 18%. It also paid Tshs 500,000
to a custom agent to help processing importation documents.

Required

Compute the VAT payable on importation of the car.

Solution

Item Tshs
Cost 4,000,000
Insurance 2,000,000
Freight 1,500,000
CIF 7,500,000
Import duty 25%xCIF 1,875,000
A 9,375,000
Excise duty of aged car=Ax20% 1,875,000
Excise duty AX5% 468,750
Treatment of discounts in value added tax

Discount allowed to a customer reduces prices and the amount received from the
customers. Section 13(3) of the Value Added Tax Act 2014 states that the
consideration for a supply does not include a price discount or rebate allowed and
accounted for at the time of the supply. Besides, discount allowed for prompt payment
form part of the consideration at the time of supply but when subsequently are allowed
the suppliers is allowed to make a decreasing adjustment in respect of the value added
tax allowed. Moreover, the electronic fiscal receipt must include all information
regarding the discounts to customers. Consequently, it can be said that if the discount
offered to a customer is an unconditional discount and the customer pays the
discounted amount the tax value is based on the discounted amount.

In all other cases for example discounts for prompt payment the taxable value is the
full amount paid or to be paid. Then a credit note must be issued later on when the
customer earns the discount resulting into reduction of tax consideration and value
added tax value.

Example

The company has a policy of offering discount at the rate of 10% to any customer who
buys goods worth Tshs.600, 000/= or more and further cash discount of 10% for
prompt payment. The following information was extracted from the company records.

1. Received a cash of Tshs.2, 000,000/= from a customer for settlement of debt

balance of Tshs.2, 200,000/= on 01.06.2012.

2. Cash receipt from cash sales amount Tshs 5,000,000.

Required

State the taxable values from those transitions

Solution

1. The taxable value was the reduced value of Tshs 2,000,000x100/118=Tshs

1,694,915 and the output tax was Tshs 2,000,000 less Tshs 1,694,915=Tshs
305,085 after bulk discount of 10%. The cash discount of Tshs 200,000 will
reduce the amount of VAT payable by Tshs 200,000x18/118= Tshs 30,508.47
in that period by adjusting the VAT account.

2. The taxable value is the cash received x100/118 =Tshs 5,000,000x100/118

=Tshs 4 237,288 implying after allowing bulk discount while the VAT collected
is Tshs 762,712(Tshs 5,000,000-Tshs 4,237,288).

A single, multiple supply and a composite supply

A multiple supply is defined as being two or more supplies made in conjunction with
each other to a customer for a total consideration covering all those where each of
those supplies are physically and economically dissociable from each other. In this
arrangement each of the supplies made in conjunction with others is treated as
an individual supply and is taxable/exempt in its own right.
A composite supply has one principal element referred to as a principal supply with
the other elements of that supply being described as ancillary supplies. These always
accompany the principal supply and the main feature of an ancillary supply is that it
would not make sense from an economic or practical point of view to supply it other
than in the context of that principal supply.

In the case of a multiple supply, each constituent element of the transaction is treated
as an individual supply for VAT rating purposes. The taxable person must apportion
the consideration payable by the customer between all the constituent elements
supplied, thereby ensuring that the appropriate rate of VAT is applied to each portion
of the consideration payable.

In the case of a composite supply there is one principal element or supply to which
any other element or elements are ancillary. A single rate of VAT applies to the entire
transaction at the rate applicable to the principal supply.

In the majority of transactions it will be clear what the appropriate category for each
supply is. However, cases will inevitably arise where it is not so clear. In such cases
the following criteria, illustrated by examples, are relevant in deciding on the nature of
a particular supply i.e. whether it is a multiple supply consisting of a number
of individual supplies taxable at different rates or a composite supply taxable at a
single rate or exempt as appropriate.

A feature of an individual supply, which by definition always forms part of a multiple

supply, is that it is physically and economically dissociable from the other elements of
that multiple supply. This means that each element the customer is being supplied with
must be a distinct element of the overall supply. It must amount to more than a mere
enhancement of a principal supply i.e. "an aim in itself". An indicator that it is an
individual supply is that it would be possible and sensible to supply the item or element
separately in its own right. For example, a meal made up of food together with an
unbottled drinking water is sold for a single price. The food is liable to VAT at the
standard rate whereas the unbottled water is exempt supply. Under the current rules
such a meal is taxed as a multiple supply as each of the parts of the meal are physically
and economically dissociable from one another. Accordingly, the total consideration
payable should be apportioned so that the food element is taxed at the standard rate
and the water is exempt.

The composite supply rule applies where there is a principal element as well as an
ancillary element or elements being supplied and where the ancillary elements would
not realistically be sold on their own without the principal element. Such ancillary
supplies are not physically and economically dissociable from the principal supply. The
VAT rate applicable to the total consideration is the rate applicable to the principal
supply. Again, in the words of the ECJ, a supply must be regarded as ancillary "if it
does not constitute for customers an aim in itself, but a means of better enjoying the
principal service supplied." In addition, when considering if a transaction is a
composite supply or not, due regard should be given to the essential features of the
transaction, e.g. would it make sense or would it be practical to supply an ancillary
element on its own, what are the terms of the contract, the intention of the parties
involved, the pricing arrangements, etc. Also, a supply that is a composite supply, from
an economic point of view, should not be artificially split to gain a tax advantage. In
this regard the existence of separate contracts, or the furnishing of two or more
invoices is not always indicative of two individual supplies having taken place. The
following are some examples of a composite supply:

• The supply of a mobile phone (the standard rate VAT) with an instruction booklet
(exempt supply). The instruction booklet is clearly for the better enjoyment of
the mobile phone and is clearly ancillary to it. The rate applicable to the principal
supply is the standard and this rate applies to the entire supply regardless of
how the consideration for the supply is allocated by the supplier.

• The purchase or lease of computers programmed to perform a specific function

coupled with specific training on how to operate and access the system as an
integral part of the overall deal provided by registered education institution. The
leasing of the equipment (the standard rate of VAT) is the principal supply and
the provision of the training (exempt from VAT) is ancillary. Accordingly, the
standard rate will apply to the overall transaction.

But, where a supply consists of more than one element, the following criteria are
considered in determining whether the supply is single, multiple or composite supply:

1. Every supply shall normally be regarded as distinct and independent;

2. a supply that constitutes a single supply from an economic, commercial, or

technical point of view, shall not be artificially split;

3. the essential features of the transaction shall be ascertained in order to

determine whether the customer is being supplied with several distinct principal
supplies or with a single supply;

4. there is a single supply, if one or more elements constitute the principal supply,
in which case the other elements are ancillary or incidental supplies, which are
treated as part of the principal supply; or

5. a supply shall be regarded as ancillary or incidental to a principal supply if it

does not constitute for customers an aim in itself but is merely a means of better
enjoying the principal thing supplied (Section 15 of The Value-Added Act 2014).
 EXAMPLES

Example 2

A tourist from UK bought taxable goods from a taxable person and the licensed duty-
free vendor for Tshs 300,000 and exports it to UK through Mwalimu Nyerere Airport.

Required

Will the supply be zero rated supply?

Solution

Yes, the supply is zero-rated supply as it was made within Tanzania main land by
licensed duty-free vendor and there is evidence that the supply will be exported to the
United Kingdom.

Example 3

A foreign aircraft is in need of maintenance while at Mwalimu Nyerere airport engages

DED engineering Co. Ltd a taxable person to provide the repair needed.

Required

Will the supply be zero rated supply?

Solution

Yes it is listed on the list above.

Example 4

Juma purchased goods for Tshs 500,000 at Juma enterprise registered in Dar es
Salaam. Juma intend to export these goods to Kenya a gift to his uncle.

Required

Explain how the goods sold to Juma will be treated for VAT purpose in Tanzania.

Solution

Since goods are sold direct to Juma are taxable at 18 per cent but if they were sold by
Juma enterprise direct to Juma's uncle in Kenya the goods could be treated as
exported goods hence zero rated supplies.

Example 5

A foreigner engaged a value added tax registered transporter to transport goods from
her country to Dar es Salaam. The payment was effectively made in a foreign currency
and in a foreign country.
Required

Is the supply zero rated supply?

Solution

Services generally are exported when the services are physically carried outside
Tanzania. Since part of the service is carried out of Tanzania that part may qualify to
zero rated supply and the other part provided inside Tanzania is standard rated supply.
Theoretically, the apportionment of the payment may be done preferably by mileage
based.

Example 6

TT Co Ltd a taxable person rent out a modern car to Amina to be used in Malawi while
on holiday.

Required

Is the supply zero rated supply?

Solution

Services generally are exported when the services are physically carried outside
Tanzania. Since the service is carried out of Tanzania the supply might be classified
as zero rated supply.

Example 7

A registered education institution charges Tshs 4,000,000 for tuition fees per person,
Tshs 1,000,000 per annum for food, and Tshs 800,000 for accommodation.

Required

May those services be classified as exempt supplies?

Solution

A tuition fee received by registered education establishment is exempt supplies but

provision of food might not exempt depending on whether is processed or
unprocessed food. Similar, the provision of accommodation to students is taxable
supplies.

Example 8

Classify the following supplies into goods or services.

• Teaching
• Sells of food in restaurant
• Transporting goods
• Supplying of electrical power.
Solution

• Teaching is a supply of services simultaneously produced and consumed at the

same time.
• Food in restaurant is also a supply of service though the service is embodied in
goods, food.
• Transporting is service.
• Supply of electrical power is a supply of service.
 QUESTIONS

Question 1

a) What is the important of time of supply?

b) Sales were made on two months credit by a taxable person in June and the VAT
was accounted for as required. Using your answer above discuss any problem
that taxpayers experience from this kind of tax.

Question 2

a) A supply of goods worth Tshs 200,000 was made on 10/05/2012 and half of the
value was paid on the same day and others will be paid in August 16, 2012.

Required

• State the tax point of that transaction?

• In which month the tax should be accounted for?

Question 3

a) Explain exempt supplies differ from special relieved supplies.

b) Explain why certain supplies or transactions and relieved from tax.

Question 4

A graduate started business of selling and buying computers but now has added
computers rental business. He is not sure whether the transactions of computer rental
businesses are taxable or exempt transactions.

Required

Discuss whether those transactions are taxable or exempt ones.

Question 5

a) What do you understand by the term “Export of Services” and “place of supply of
services” for VAT purposes?
b) Mr. Shidusa is a taxable person registered with TRA. He has land in Zanzibar
and wants to build a tourist hotel. Then he hired a service from Dr. Gwiji who is
also registered to provide hotel’s plan.

Required

a) Is the transaction amount to be export supplies?

b) If the answer is no, would you change your mind if land was located in Somalia?
Question 6

a) Explain four types of supplies for VAT purpose.

b) Compute the value taxable turnover from the following information:

Supply Tshs
Taxable goods 40,000,000
Exports 30,000,000
Exempt goods 40,000,000
Imported taxable services 20,000,000
Supplies to a religious organization 5,000,000

c) Classify the following transactions according to the types identified in (a) above.
• Tuition fees.
• Per Diem.
• Disposal of personal properties.
• Fine.
• Cancellation of debts.
• Sales of live cows by Wasukuma and Wamasai.

d) Banks are exempted from VAT and are not required to register for VAT. Discuss
the correctness of this statement

Question 7

(a) Briefly define the following terms as used under the Value Added Tax Act, 1997.
(i) Exempt supply
(ii) Import
(iii) Partial exemption
(iv) Credit input VAT
(v) Zero rated supply

(b) "However unpopular taxation may be, governments today are compelled to
impose them".

Required

(i) Identify three reasons as to why the Tanzania Government is compelled to

impose tax on its citizens.
(ii) For each reason so identified explain:-
• The tax which is used to achieve the stated objective
• Explain how such a tax is expected to achieve the identified reason (CPA
(T) 2005).

Question 8

a) Discuss the distinction between a zero-rated supply and an exempt supply of

goods and services under the VAT Act 1997. What are the limitations in each
case? and Under what circumstances is an exemption of a supply from the Value
Added Tax is beneficial or not beneficial to a business. (CPA (T) 1999).
b) What are the similarities and differences between:
i. Zero rated supplies and exempt supplies
ii. Zero rated supplies and special relief
Example 1

Amani Ltd commenced trading on 1 January 2016. Its monthly taxable supplies are as
follows:

2014 2015
Tshs ‘000’ Tshs ‘000’
January 2,700 3,890
February 2,800 3,960
March 2,900 4,330
April 3,000 4,400
May 3,040 4,770
June 3,110 4,840
July 3,180 5,060
August 3,250 5,830
September 3,320 6,090
October 3,690 7,160
November 3,750 7,730
December 3,830 7,300

In addition, in May 2015 the company sold surplus plant for Tshs 30,000,000

Required

Determine the date from which Aman Ltd liable to register for VAT if it thinks that its
turnover in the last 12 months is equal or greater that the registration threshold.

Solution

By considering last twelve months, ending the previous month December 2015, Amani
Ltd’s taxable turnover for the past year is:

Tshs “000”
Value of supplies for registration purposes: 40,920
Supplies to customers -
Supply of plant excluded 40,920

Amani Ltd is not liable to register as the person’s turnover is not equal to or greater
than the registration Tshs 100,000,000.

Example 2

Mama owns a local industry in Moshi selling goods to Kenya and stationery at standard
rate and imports services for maintaining her factor from a Kenyan supplier. She sold
only taxable supplies in 2014 for Tshs 4,000,000 per month. However, in the last year,
2015 the sales of flour was Tshs 3,000,000 per month and sold stationery for Tshs
12,000,000 per month. In this period, 2016 the sales are Tshs 6,000,000 and Tshs
12,000,000, respectively.
Required

Determine the date at which the company must inform the Commissioner of Domestic
Revenue for value added tax registration, if she expected in November 2015 that her
turnover could be equal or more than half of the six months ending in the previous
month.

Solution

Since flour is exempt supplies the sales of stationery alone for the last 12 months
ending October 2015: the previous month of November 2015 is Tshs 128,000,000
from Tshs 12,000,000 for 10 months of 2015 and Tshs 8,000,000 for 2014. So Mama
is required to register for value added tax from the first day of that November 2015.

Example 3

The following financial information relates to the financial transactions of M Ltd for the
year ended 2014.
• Issue of new shares for Tshs 40, 000,000.
• Loan Tshs 100,000,000.
• Sales of floor Tshs 50,000,000
• Sales of books Tshs 15,000,000.
• Importation of taxable goods from Zanzibar branch amount to Tshs 40,000,000.

Required

Is M Ltd legible for value added tax registration?

Solution

The company did not make any taxable supplies in that period, and the importation of
taxable goods from Tanzania Zanzibar into Mainland Tanzania does not qualify for
reverse charge so it is not legible for registration.
 QUESTIONS

Question 1

Ndumba imported a VAT taxable item from Japan. On the arrival of the cargo, Ndumba
could not produce valid documents acceptable by the Customs Department. For that
case, Customs Officers came out with the following values for such imported item:

Values for identical items:

A - Tshs. 40 million
B - Tshs. 50 million
C - Tshs. 45 million
Values for similar items:
D - Tshs. 30 million
E - Tshs. 35 million
F - Tshs. 60 million

The cargo is subject to 25% import duty, 10% excise duty and 18% VAT.

Required

(i) Compute the amount of import duty, excise duty and VAT on importation of this
item.
(ii) State the tax point for VAT on imports. (CPA (T) November 2007)

Question 2

(a) According to the VAT Act 1997, ‘taxable supplies’ means any supply of goods
or services made by a taxable person in the course of or in furtherance of his
business after the start of the VAT. What are the four specific activities included
in that definition?
(b) Value Added Tax (VAT) refers generally to a tax charged on value added on
goods and services at various stages of business transactions.

Required

(i) Explain the types of supply in determining VAT chargeability

(ii) Clarify and differentiate the concepts of input tax and output tax under the VAT
system
(iii) Distinguish between allowable and non-allowable input tax ( CPA (T) May
2005)
(iv) What do you understand by the term “Export of services” for VAT purposes? (CPA
(T) November 2005)

Question 3

Mr. Gwambu has imported a brand new saloon car on 1st March 2004 for business
use. During the VAT control verification exercise, the Commissioner found that taxes
were not paid in full as they had been affected by the importation of saloon. This has
been found via ERV which reflected the following:
(i) Import Duty – Tshs. 2,000,000; Excise Duty – Tshs. 3,000,000 and VAT – Tshs.
4,000,000.
(ii) The motor car was acquired for Tshs. 12,500,000 at a retail selling price which is
120% of the aggregate sum of CIF, taxes payable to customs department and
1% of CIF as wharfage charges.
(iii) The tax rates at the time of importation were 20% Import Duty, 5% Excise Duty
and 18% VAT.

Required

Determine the CIF value and taxes to be paid to the Tanzania Revenue Authority. (CPA
(T) November 2006)

Question 4

Explain the following in details in relation to VAT

(a) Though VAT exemptions and zero rated supplies are important but have
negative impact too.
(b) What factors do you think are important in classifying supplies as zero rated,
exempt and standard rated (do not explain the classification as VAT Act 1997)?
(c) Is the VAT registration threshold too high, moderate or too low? Discuss
(d) What responsibilities of taxable persons are as stipulated in the VAT Act 1997?

Question 5

Explain advantages and disadvantages of type of VAT registrations discuss in the

chapter on the party of taxpayer and the Commissioner of revenue.

Question 7

What is the meaning of VAT threshold for registration? What factors must be
considered in setting a right threshold?