Africa-Press – Tanzania. This article summarizes basic income tax understanding in Tanzania as of the date of its publication, it highlights key features of income tax and the key tax knowledge every Tanzanian should know about Income Tax.
This is not a new question to many of my readers.
Albert Einstein once noted that “I have been struggling trying to figure out how much I owe to the Internal Revenue Services this year” What is funny and outrageous about this quote is the identity of the person who apparently said it.
Albert Einstein once said, “The hardest thing in the world to understand is the income tax” It is not abnormal to be faced by the same dilemma.
Nevertheless, the truth remains that, intellectually, most of us understand the importance of paying taxes and the need for voluntary compliance which is a necessary component of good citizenship.
Paying taxes is important because the government needs the taxes to fund our roads construction, fund our national defense, support our medical care and education system and other many Government social services provision. But in our hearts, virtually many people across the world and Tanzanians included hates paying taxes.
It seems punitive. It is therefore important to understand the imposition of income tax and who is liable. With the sixth phase government’s efforts to ensure that every Tanzanian and Tanzanian company pays their rightful taxes to ensure growth of the country, the Tanzania Association of Accountants thought it’s important to provide legal basic information on income tax in Tanzania.
Paying Tax on income earned in the country is an obligation of every individual or entity that earns an income in the country. Therefore, it is necessary to provide basic tax knowledge and information on the subject, to ensure compliance and avoid unnecessary fines and penalties. For one to be required to pay any form of tax, a tax liability must arise.
The Income Tax Act, 2019 outlines what is subject to Income Tax under the statutes. For all incomes that are chargeable, the tax must be paid. It should be noted that there are no assumptions or intendments in a tax.
What Is a Tax Liability?
In simple definition a Tax liability can be defined as a payment owed by an individual, a business, or other entity to the Government through the revenue authority. In principle, a tax liability is incurred when income is earned and when income is generated.
It is possible for people to have no income tax liability if their total tax owed was zero or if their income was below the level that would require them to pay tax. It is important to note that both individuals and businesses can lower their tax liabilities by claiming allowable deductions, exemptions, and tax credits. It is therefore important to understand what deductions and exemptions are allowable under the income tax Act.
Imposition of Income Tax Under Section 4 of the Income Tax Act, which is the main charging section but not the only one, the section imposes income tax on the following:
• Total Income for a year of Income – Every person who has a total income in a year of income or is a corporation which has a perpetual unrelieved loss in that year of income and the pervious two consecutive years of income are liable to tax.
It should be noted that corporations with unrelieved losses will be subject to the 0.3% turnover tax. One should always take special look on the unrelieved losses as determined by the Income tax act to ensure optimal tax payments;
• Repatriated Income of a domestic permanent establishment in the year of income: and
• Final withholding tax received during the year of income. The term total income is defined in the Act and it means the sum of the person’s chargeable income for a year of income from each employment, business, and investment less any reduction allowed under section 61 relating to retirement contributions to approved retirement funds.
The income tax payable on the various categories highlighted above are calculated by applying the relevant rates of income tax, which is determined by the Income tax Act,2019 to the persons total income or turnover for the year of income. It should always be remembered that a person can claim tax credit from the total tax payable for the year of income.
It should be noted that the credit is for resident persons other than partnerships and the credit is with respect to foreign tax credit for that year of income for any foreign income tax paid by the person to the extent to which it is paid with respect to the person’s taxable foreign income for that year of income.
A person may also have a tax credit for payment of non-final withholding tax. The total income of a corporation, trust, unapproved retirement fund or domestic permanent establishment of a non-resident person are taxed at the rate of 30% in a year of income. However, it should be noted that there are special considerations for some entities as below:
• Newly listed companies at the Dar es Salaam Stock Exchange with at least 30% of their equity ownership issued to the public are taxed at a reduced rate of 25% for three consecutive years from the date of listing.
• Corporations with newly established plant for assembling motor vehicles, tractors, fishing boats or out boats engine and having performance agreement with the Government are taxed at a reduced rate of 10% for five consecutive years from the year of commencement of production.
• Newly established entities dealing in manufacturing of pharmaceuticals or leather products and having a performance agreement with the Government of the United Republic of Tanzania are taxed at a reduced corporation tax rate of 20% for five consecutive years from the year of commencement of production.
It should be noted that corporations with perpetual unrelieved losses for three consecutive years are taxed at 0.5% of their turnover of the third year of perpetual unrelieved loss.
The repatriated income of a domestic permanent establishment of a non-resident person is taxed at 10%. In order to be taxable, the income must arise from any one or more sources. These are gains or profits from either”
• Business
• Investment
• Payment having a source in the United republic of Tanzania.
Tax is charged in a year of income. A year of income is defined as a calendar year i.e., a period of 12 months commencing 01st January in any calendar year and ending 31st December in the same calendar year.
It should however be noted that a taxpayer may apply to prepare his accounts for the standard twelve months period but ending on any date other than 31st December.
In such a situation the taxpayers’ financial period is taken as the year of income.
Exemption from Tax
It should be noted that not all sources of incomes are taxable.
For various economic and social considerations for example to encourage investments, charities or to take cognizance of reciprocation by other countries some incomes may be exempted from tax.
The Income Tax Act under Section 10 and the second schedule of the Act provides details of the exemptions.
Taxation at Source
Under the withholding tax system, certain incomes are required to be paid to the recipients net after deduction of tax.
The system minimizes tax evasion and makes collection of tax easy and economical.
Under the system, the payer remits to Tanzania Revenue Authority the amount deducted within 30 days after the deduction or payment together with details of the payment.
A good example of withholding tax is e.g., pay as you earn (PAYE) this is a form of income tax that is collected by the employer as an agent of the government from the employee and paid directly to the government without it first going to the employee.
There are other forms of withholding tax deducted from payments such as rental income, interest rate royalty and service fees. In our next article we will be focusing on the frequently asked questions.
• The writer, Godvictor Lyimo is the President of Tanzania Association of Accountants (TAA) reachable via [email protected], Phone: 0787514014
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