IN one of our last articles we covered the basics of VAT and discussed- what is VAT and who should register for VAT, but we also discussed briefly on VAT returns compliance. In our article today we will be discussing input tax credits.
As highlighted in our last article, in Tanzania VAT is regulated under the Value Added Tax Act [CAP.148 R.E. 2019] important to note, VAT credit is covered under Section 68 of the VAT Act.
What is Input Tax Credit
Input Tax Credit refers to the VAT already paid by a person at the time of purchase of goods or services, and which is available as deduction from VAT payable.
To understand, let’s look at a practical example. For e.g. A taxable person/trader purchases goods worth TZS 1,500,000 and pays input tax of 18 per cent on the purchase of the goods. Applying the 18 per cent statutory VAT rate the trader will end up paying input VAT (VAT on purchase) of TZS 270,000 as VAT.
The taxable person/trader now sells such goods at a markup at a selling price of TZS 2,000,000 and charges VAT on the sale (output tax) of TZS 360,000 after applying the VAT statuary rate of 18% on the selling price of TZS 2,000,000 and thereby collects VAT from the sale of his/her sales of TZS 360,000 from the buyer of his/her goods.
The trader is supposed to pay TZS 360,000 to the Tanzania Revenue Authority, however, she/he had already paid TZS 270,000 on his/her purchases, therefore the TZS 270,000 is input tax credit for the taxable person/ trader and will be allowed as deduction from the tax payable of TZS 360,000 and he/she must pay a net of TZS 90,000 (TZS 360,000 minus TZS 270,000). It should, however, be noted that the input tax credit is subject to conditions provided under the VAT Act as covered in this article.
Under the VAT Act, a taxable person, that is, a registered person or a person who is required to be registered for value added tax is allowed input tax credit for an amount of input tax incurred by him/her if;
(a) the goods, services, or immovable property on which the input tax was incurred were acquired or imported into Mainland Tanzania by the person in the course of the person’s economic activity and for the purpose of making taxable supplies;
(b) in the case of a supply, the person paid, or is liable to pay, the consideration for the supply; and
(c) in the case of an import, the person paid, or is liable to pay, the value added tax imposed on the import under the VAT Act or input tax paid under the value added tax law applicable in Tanzania Zanzibar, where the respective goods are transferred to Mainland Tanzania.
It should be noted that in the case of imported services, the value added tax payable by the purchaser of the imported will be accounted for as output tax and input tax in the same return of the purchaser and the purchaser can only be allowed credit for input tax credit for that supply only if he has accounted for the output tax in the same value added tax return in which the input tax credit is claimed.
Input Tax Credit Not Allowed
There are restrictions in claiming input tax credit. Some of the restrictions for which a taxable person will not be allowed to claim input tax credit include:
(a) an acquisition of goods, services, or immovable property, to the extent that it is used to provide entertainment, unless the person’s economic activity involves providing entertainment in the ordinary course of the person’s economic activity;
(b) an acquisition of a membership or right of entry for any person in a club, association, or society of a sporting, social, or recreational nature;
(c) an acquisition or import of a passenger vehicle, or of spare parts or repair and maintenance services for a passenger vehicle, unless the person’s economic activity involves dealing in, hiring out, or providing transport services in passenger vehicles and the vehicle was acquired for that purpose; and
However, where a taxable person is an employer and makes a taxable supply to an employee as part of the employee’s salary or because of the employment relationship, the supply is treated as having been made for consideration equal to the fair market value of the supply and the restrictions above relating to acquisition goods or services for entertainment and the acquisition of membership or right of entry to a club for the employees will not apply in the event they are provided as in-kind benefits to employees and the benefits are taxable.
Timing of Input Tax
It should be noted that where a taxable person is allowed an input tax (VAT) credit, the tax period in which the credit may be included in the calculations will be the latter of the tax period/month in which the value added tax became payable under this Act on the supply or import to which the input tax relates (VAT is payable on 20th day of the following month of the business that is a due date of submitting the return. If the 20th day falls on the Saturdays, Sunday, or public holiday the return will be due for lodging on the first working day following the Saturdays, Sunday, or Public day); or
(b) if the person did not claim the input tax credit in that period, any one of the six succeeding tax periods.
Taxable persons need to note that input tax is not deductible or cannot be credited after a period of six months from the date of tax invoice, fiscal receipt or other evidence specified in the Act.
Conditions for taking Input Tax Credit
At the time of claiming input VAT credit the taxable person must have duly filed his/her VAT returns for the relevant tax period and such person must hold;
(a) in the case of an import into the United Republic by the person, a proof for payment of tax, a Single Administrative Document or similar document, bearing the name, Taxpayer Identification Number and value added tax registration number of the importer which are duly cleared by customs for home consumption in Mainland Tanzania; and
(b) in the case of a supply made to a person in Mainland Tanzania, a valid tax invoice or fiscal receipt issued by the supplier under this Act
Input Tax Credit on Capital Goods and Reversal on its sale
An importer of capital goods may apply to the Commissioner General to defer the payment of tax due in respect of imported capital goods. An application for deferment of value added tax is done in a prescribed form and must incorporate a declaration by the applicant that the goods are for use in the business of the applicant.
VAT deferment means the postponement of payment of the value added tax in respect of capital goods.
The Commissioner General will only approve an application for deferment of value added tax on imported capital goods if the value added tax payable in respect of each unit of the capital goods is twenty million shillings or above. Goods imported whose VAT is less than 20,000,000/- shall be treated as normal and shall follow normal rules of calculation of taxes by Customs laws and procedures. It should be noted that the Commissioner General may, at any time during the period of deferment, inspect the capital goods in respect of which the value added tax was deferred to ascertain whether it is duly installed and utilized for the purpose specified in the application.
The period of deferment of value added tax is ten years from the date of importation of capital goods. The deferment granted must be for producing taxable goods and not exempt supplies.
The deferred tax on imported capital goods is treated as output tax and input tax of an importer and is accounted for in the same Value added tax return of the tax period in which the capital goods are imported.
Where the period of deferment lapses, the value added tax deferred on capital goods shall not become payable.