I have recently been embroiled in a dispute with the Zanzibar Revenue Authority (hashtag#ZRA) regarding a hashtag#ValueAddedTax (VAT) refund’s issue on behalf of a client, that got me to write an article about it, hoping it could raise awareness and influence a positive change by those charged with the tax administration and legislation in the United Republic of Tanzania.

The client (or “the Company”) in this instance is an incorporated person in Mainland Tanzania, engaging in the supply of fast moving consumer goods (hashtag#fmcg industry). The Company’s offices and operations are based in hashtag#DaresSalaam.

In this scenario, my client won and supplied a multi billion shillings worth of goods to a hashtag#Zanzibari government agency (herein “their client”). In doing so and in line with the provisions of the Value Added Tax Act, 2014 (herein “the VAT Act)” and its regulations, the Company charged VAT at the applicable rate of 18% on the supply.

To my client’s dismay, their client withheld VAT at 15% from the total payment made to them and remitted to the hashtag#ZRA. Since their client paid a few months later, the Company had correctly reported the supply in the VAT and paid the VAT that ought to be collected from their client to the Tanzania Revenue Authority in line with the provisions of the VAT Act. Their Zanzibari client on the other hand, withheld 15% of the payment and issued them with a withholding receipt of the VAT, directing my client to follow up with the TRA for refund of the amount they withheld on behalf of ZRA.

My client, as would anyone would have done, took the withholding VAT receipt to his nearest TRA office in order to understand the rationale for the withholding and the mechanism of refund of the withheld amount. To their disappointment, they were later informed by the TRA that although they recognize this practice by the ZRB, the amount of VAT withheld cannot be refunded to them. This means of the total supply to their client, they paid VAT at 34% instead of the applicable 18% based on the provisions of the VAT Act.

Upon reaching an impasse with the TRA, they then approached us for an expert’s opinion of what really happened and advise on how they could get their hundreds of millions of shillings back. To them, this made no sense as it implies the sale was made at a loss since 15% has been taken from to product cost and higher than the anticipated margin.

After a series of back and forth with the two revenue authorities i.e. the one on the Isles and the mainland, we were informed that, contrary to the provisions in Mainland Tanzania, my client would not be be refunded the VAT withheld in Zanzibar, so long as they do not have an incorporated or registered entity in Zanzibar. This means for a person to claim input VAT in Zanzibar from a supply from Mainland Tanzania, that person must invoice through a Subsidiary or a Branch incorporated/registered in the Isles. I provide below my comments and analysis of this decision below for your perusal:

First and foremost, it is worth noting that Mainland Tanzania and Zanzibar are the two states making the union of the United Republic of Tanzania. The members to these union agreed that VAT would be handled by each of the two States, meaning that each would prescribe, adjudicate and enforce matters relating to the VAT separately.

Despite Zanzibar being regarded as a different State for VAT Act, our VAT Act does not zero rate the supplies of goods and services to them (exports), but requires a registered person to charge VAT at the applicable rate of 18%. The Act then places a burden on TRA to collect the VAT on such supply and remit it to the ZRB (amounting to the applicable rate of 15%). Unlike a supply to a different state other than hashtag#Zanzibar, which uses a destination principle, whereby a Mainland registered person would regard the supply as zero rated the importer from the other State will account for the VAT and pay to the authorities in his own State.

Therefore, under an ideal scenario, based on the current provision in the VAT Acts of Mainland and Zanzibar, a VAT registered person from Mainland supplying goods to Zanzibar is to charge VAT at 18%, of which TRA will pass on the VAT at 15% to ZRB, whilst the customer in Zanzibar claims VAT at 15% on its VAT returns. Similarly, when a person registered in Zanzibar supplies goods to Tanzania mainland, the Zanzibar supplier will charge VAT at 15%, which will be collected by ZRB to TRA and the customer in Mainland Tanzania to pay and claim the VAT 18%. The latter scenario is applicable for goods and services purchased by hashtag#TanzaniaMainland customers as the VAT Act includes, among the definition of input tax, input tax charged under the applicable VAT Act in Zanzibar.

Despite the above, I understand from this encounter, that the ZRA requires its registered persons to withhold VAT on supplies done by Mainland registered persons at 15%, where such person has not registered a business in the Isles. This is contrary to the provisions of the VAT Act that would require the TRA to collect and pass on to the ZRA.

In light of this confusion, it would be prudent for the United Republic of Tanzania to amend its two VAT legislations to align with the hashtag#destinationprinciple of VAT when it comes to dealing between different States (cross border VAT transactions). This principles guides that the VAT to be levied (retained) in the country where a product is being sold. This implies that supplies to Zanzibar be zero rated by a registered person in Mainland but upon entering the Isles, the Zanzibari customer will account for the VAT on importation at 15% and remit the same to ZRA. The same can be adopted by a supply from Zanzibar where a customer is from Mainland.

The requirement to have the registered persons from Mainland Tanzania to register in Zanzibar is a serious deterrent to trade (barrier to trade) among the two States which I am sure is not the intended target. The demand to have Mainland traders register in Zanzibar in order to avoid the 34% VAT is baffling, considering a similar trader outside Tanzania, would effectively carry out a similar transaction and suffer 0% VAT.

Consequently, I would call upon the responsible parties within TRA and ZRA to sit down in order to resolve this minor but significant issue. VAT in general is a tax on consumption to be levied on to consumers. In cases like these that the supplier suffers the unrecoverable additional 15% VAT on the supply is not only against the underlying principle of VAT, but a serious barrier to trade among the two States, which I am certain Nyerere and Karume will be turning in their graves.