Taxing and Taxations

Introduction

The Government provides wide variety of services, such as: education, health care,
water, security, roads and societal security etc

Taxes are provided on: schools, colleges & Universities, national defense, law
enforcement, construction and operation of roads and railways, amongst others

Therefore, due to these issues, taxes are compulsory

Note that, by paying taxes, we do not receive a direct and immediate return; for
example, by paying amounting to, say Tsh 2 mil in Jan., does not mean that you
will be able to enjoy health care, education, security services etc. equivalent to
your 2 mil. in the same month. However, government collects and re-distribute
the taxes as per its decisions
The purpose of taxation is to finance the
government expenditure that cater for the
above mentioned needs
For this aim to be achieved, it should design its
tax systems as to:
(i) raise revenue to be used to fund government
operations;
(ii) assist in the redistribution of wealth and
income (fairness/equity question); and
(iii) for regulation purposes with a view to
encourage certain activities, and, or discourage
other activities e.g. smoking, by setting high
 Definition
A tax is a fee charged ("levied") by the government
on a product/property, income, or activity.
It is divided into two types: direct and indirect tax
• Direct tax: Is the tax charged directly on personal
income or on corporate income
• Indirect tax: is the tax charged on the price of a
goods or service. Examples: sales taxes, Value
Added Tax (VAT), goods & services taxes
 Tax evasion
It is a manner in which tax payers, or those who
qualify as tax payers evade in paying taxes. It is
characterized as follows:
• Failing to manage different operational
characteristics that create different incomes, or
different properties to be charged tax
• Different individuals with different habits that lead
to mistrust, these tend to report little than what
they earn
• Many informal sectors or consulting services not
registering for taxes
• Weak tax administrative base (management &
policies)
 Principles of taxation
Principles or characteristics that guide tax policy (4 in
number):Equity, adequacy, simplicity and neutrality
(i)Adequacy: a tax system is adequate if it raises
enough funds to pay for public services, and in a
sustainable manner.
There are two factors that contribute to the adequacy
of a tax, stability/predictability and its elasticity - In
the preparation of the Budget, policy makers usually
match expected spending within a realm of
predictability growth of tax revenues. However, in
order to achieve adequacy in the long run, they
would like to know whether growth of a specific tax
keeps up with the pace of the growth of the
economy (elasticity)
(ii) Simplicity: - this ensures that the tax system
has simple rules for citizens to understand and
at the same time ensure that the cost of tax
collection and administration is not higher
than the actual tax raised. E.g. a tax is made
complex if, (i) people do not see the logic
behind the earning and the taxed rate or (ii)
the tax system has many tax exemptions – tax
credits, tax reductions, etc.
(iii) Neutrality (efficiency): - relates to a question
hardship in operations – i.e. on whether the tax
system interferes with the investment and
spending decisions of individuals and businesses.

e.g. We need a tax system that:

(i) expand the taxable base by abolishing tax
exemptions for individual tax payers;
(ii) reduce the number of tax rates; and
(iii) lower the tax rate level
(i & ii create hardship to the tax payers)
(iv) Equity (fairness): - idea that taxes should be
fair is one of the principles that guide the tax
policy – it is measured in two ways (i)
horizontal and (ii) vertical

• Horizontal: tax system is horizontal if

taxpayers, in similar circumstances, pay similar
amounts of tax. It implies that, if you have two
families with an equal income level, then, by
passing the same amount of tax they would
pass the test of horizontal fairness, otherwise
it would violate this principle
• Vertical: -it refers to the idea that people with
greater ability to pay, that is individuals
earning higher incomes or rich people, should
pay higher level of tax compared to poor
people.
 Tax expenditure

It is a ‘loss of revenue for a government and the deviation from a

benchmark tax structure’, and, as for a tax payer, ‘it is a tax
reduction for tax payers’
Types of tax expenditures
• Tax exemptions: - are incomes that are excluded from the tax
base. E.g. NGO exempted tax
• Tax deduction (allowances): - amounts that reduce taxable
income. E.g. allowances or investment losses
• Tax deferrals:- amount not included in the calculation of income
for a given year but are included in the calculation of a future
year
• Tax rate reliefs (reductions): one in which a tax system allows
tax rates that are lower than the generally applicable rate – e.g.
reduced tax on fuel on mining
• Tax credits:- amounts deducted from tax liability
• Since the structure of the nation and the local
taxation systems is complex and the
application of the situation differ, these
require appropriate administration and
(management and policies)

• For an investor, the taxes are necessary part of

the cost of doing business and must be
accounted for, when estimating ‘cost versus
income’ on their investments.
• Property taxes are usually assessed in proportion of the value
of the property.

• These are divided into two types: (i) real property and (ii)
personal property

Real property consist of un movable property such as land,

building and fixed attachments.

Personal property deals with movable properties, which are also

divided into two parts
• Tangible movable property – readily movable property that has
inherent value, for example: equipment – bulldozer; car, jewel,
cloth, etc.
• Intangible property – consist largely of paper that represents a
right or title to the value inherent in some other objects,
properties or enterprise, for example bond, stock exchange.
 Tanzania's Tax Structure
Introduction
• Taxation is one of the oldest functions of a
government in running government affairs.
• In this regard, the government has to raise revenues
to cater for society service expenses. Thus, the
government finance is all about budgeting the
revenue and expenditure. The government financier
normally has five sources to choose from namely:
• ‘Taxes’ – our main subject;
• the sale of goods and services;
• grants;
• the creation of new money; and
• borrowing.
• There is no universal formula of how the
government should raise such revenue to cater
for government expenses, but in most cases the
government relies on taxes as a major means of
raising its revenue.
• Thus, taxation is the primary source of revenue
at all levels of government. Thus, this is discussed
here shortly.
Types of taxes
• Basically there are two types of taxes, direct and
indirect taxes, describes ad follow.
 Direct taxes

These are taxes relating to: any income –

• Pay as you earn (PAYE),
• rental tax,
• presumptive tax,
• withholding tax – those who do not
register/declared for the tax, e.g. informal
sectors, professionals, donor agencies, etc.
 Indirect tax

This tax can be corporate tax, which is paid from corporate

profits. It generally relates to domestic services and goods like
the value added (VAT tax)
Companies or entities have to prepare final accounts, which must
be approved by the authorized Auditors, and Accountants
recognized by both NBAA and TRA. These accounts are
submitted to TRA on the prescribed accounting date.

All companies whether resident or non-resident are required

by the Income Tax laws to file an estimate of income within
three months after the start of its accounting year. The firm is
supposed to pay tax based on four installments. Six months
after the accounting period, the firm must file a final tax return
to TRA. The current corporation tax rate is 30%.
Individual Income Tax
Individuals include sole traders and salaried people who
are taxed at progressive individual income tax rate,
which varies from the lowest marginal rate of 14% to
the top marginal rate of 30%.
However, for a non-resident, individual the applicable
rate is 20%, which is charged on the total income. The
table below shows the current resident individuals’
tax rates.

Resident Individual tax rates for 2012/13 Financial

Year [Source: Income Tax Act, 2004 (As amended)]
Monthly Income Tax Rate
Where total income does not exceed Nil
Tshs. 170,000/=.
Where total income exceeds Tshs. 14% of the amount in excess
170,000/= but does not exceed Tshs. of Tshs. 170,000/=
360,000/=
Where total income exceeds Tshs. Tshs. 26,600/= plus 20% of
360,000/= but does not exceed Tshs. the amount in excess of Tshs.
540,000/= 360,000
Where total income exceeds Tshs. Tshs. 62,600/= plus 25% of
540,000/= but does not exceed Tshs. the amount in excess of Tshs.
720,000/= 540,000/=
Where total income exceeds Tshs. Tshs. 107,600/= plus 30% of
720,000/= the amount in excess of Tshs.
720,000/=
Taxation of small traders with and without
complete record (Presumptive cases)

Small traders, who operate mostly without

keeping proper business records, are charged
income tax based on the annual turnover of
their business. There are four turnover bands
with their taxes as per the table below:

Tax Rates for Presumptive Cases [Source:

Income Tax Act, 2004]
TURNOVER PER ANNUM TAX PAYABLE WHERE TAX PAYABLE WHERE RECORDS ARE
INCOMPLETE OR NO KEPT
RECORDS ARE KEPT

Tshs. 4,000,000 or Nil Nil

less
Tshs. 4,000,000 - 100,000 2% of the turnover in excess of
7,500,000 4,000,000

Tshs. 7,500,000 - 212,000 Tshs. 70,000 plus 2.5% of the

11,500,000 turnover in excess of 7,500,000

Tshs. 11,500,000 - 364,000 Tshs 170,000 plus 3.0% of the

16,000,000 turnover in excess of 11,500,000

Tshs. 16,000,000 - 575,000 Tshs 305,000 plus 3.5% of the

20,000,000 turnover in excess of 16,000,000
• The above bands which are legally enforceable
by TRA are mere estimates and they are not a
substitute for the requirement for keeping
business records.
• All taxpayers whose turnover exceed Tshs
20,000,000 are required to prepare and
submit to TRA the audited financial
statements together with the return of income
of the year of income.