Hon. Mwigulu Lameck Mchemba the for Finance announced the national budget for the fiscal year 2022 / 2023 on 14 June 2022, the budget speech was received with a well coming note by the public, specifically on the proposed measures to control government expenditure. The speech addressed positive fiscal measures in the Agriculture sector which contributes the lion share of the country’s economy. As the practice, the fiscal tax measures are always part and parcel of the budget measures which touches the public at large as consumer of goods and services and also the business community as part of tax paying community.
The government’s general trend in the collection of direct tax ( Income Tax ) has been the collection of tax at source in the form of withholding taxes, where the obligation of collecting tax upon payment is imposed to the person (taxpayer) making the payment. This approach has been in practice long time in memorial era and becomes a general practice in most of the governments in the world in particular on the collection of employee taxes commonly known as Pay as You Earn (PAYE). Over time this scheme of colleting tax gain momentum and extended into other forms of payments , practically on passive income such as Interest, dividends, royalty etc. where a payer ( withholder) has an obligation to withholding the tax before making the payment to receiver of income (Withholder) remits the tax to the government coffer.
There are several advantages of collection tax at source from the government perspective , these advantages includes, easy to collect , predictability, tax administrative efficiency in terms of costs of collection, possible imposition of dual tax obligations for both the withholder and witholdee. In summary the government is much more guaranteed of tax revenue cash flow, in most cases on monthly basis. The proposal of advanced tax on fuel for retailers, where the Oil Marketing Company (OMC) will have an obligation to withhold the tax proposed at a rate of Tshs 20 per litre. According to the Finance Bill, 2022 this tax will treated as “Single Instalment tax on sale of petroleum products” and tax payable shall be the retailer’s advanced tax”
Whereas there are several consideration by the government to propose this measure, there are numerous pro and cons that the government, Ministry Of Finance and Tanzania Revenue Authority (“TRA”), should re- examine in implementation of this tax. Potential issues relate to the tax administration aspects and the likely elasticity of fuel price. Example what is the basis of proposing TZSHS 20 per litre, one may argue that this is the amount of corporate or income tax payable on taxable profits/ income, arrived at after taking into account the costs of running the business.
In order for a retailer to pay corporate tax amount of TZSHS 20 per litre at a corporate rate of 30% the person has to earn an equivalent net taxable profit of TZSHS 67 per litre, at a proposed withholding tax scheme. Under normal business environment and in the petroleum sector at the retail level such net taxable profit after taking into account the direct costs and operational costs is unlikely to be achieved considering the prevailing margins.
When you consider the above scenario the likely corporate / income tax implications for the retailers will be in the tax overpayment as a result of proposed advanced tax payment and consequently stacked in the corporate / income tax refundable position..
The above scenario has been taken as an example of the impact of proposed advanced tax of TZS 20 per litre in the petroleum sector at retail level , though there such similar circumstances in other business where tax overpayments arises as results of withholding tax Scheme. Given the fact that withholding tax scheme is facilitating timely collection of tax and in certain circumstances given rise to the tax overpayments, the tax administration should also be streamlined to facilitate tax setoff on tax overpayment against other taxes as possible solution.
In my view this is achievable given the tax electronic filling for most of the tax returns, commissioner has visibility of the tax position of the taxpayer online and immediately. I would suggest that the process will be for the taxpayer to apply for setoff notification and details of the tax overpayment and proposed set of the tax overpaid and within say 30 days approval is granted. This is against the current 90 days which in practice is not achieved due to number of factors.
As much as the government is collection tax in a more tax efficient manner in the same way the taxpayers’ cash flow position should not be constrained and tired up due to tax overpayments and the refund and setoffs process, should also be given priority it deserves in the same way the collection of taxes by the TRA.
The government should also consider the fact that this type of tax at source is likely to be interpreted by the petroleum retailers as indirect tax, which increases the direct costs of purchase of fuel consequently increases the price of fuel by the same amount. In the event of such scenario which is likely, one would imagine the implications of fuel pump price increase though it is not the intention of the government. While currently the price of fuel is a major concern to the public as well as the government, it paramount to perform the critical review before approval of the Finance Bill, 2022. My suggestion would be to have a dialog with stakeholders to examine the implication and possible have alternative solution due to the price sensitivity nature of the fuel products in the whole economy.
Please take a note that this article was published on 25 June 2022 before the Finance Bill 2022 was passed into an Act where the proposal for advance tax on fuel was dropped Laurian Justinian is a tax expert and Tax Partner at Hassock Associates. The views expressed in this article do not necessary represent those of Hassock Associates. He can be reached through Email: firstname.lastname@example.org
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