Public Finance and Taxation: Intermediate Level

PUBLIC FINANCE
AND TAXATION
B4 PUBLIC FINANCE AND TAXATION

B4
STUDY TEXT
Intermediate level
THE NATIONAL BOARD OF

ACCOUNTANTS AND AUDITORS
TANZANIA (NBAA)
Introduction to Public Finance: i
B4 B4
PUBLIC FINANCE PUBLIC FINANCE

AND TAXATION AND TAXATION
STUDY TEXT STUDY TEXT
NBAA
NBAA
ii Public finance and National Income
Edition 1, Version 1
ISBN No 978-9976-78-086-4
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ISBN No 978-9976-78-086-4
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Introduction to Public Finance: iii
FOREWORD.
FOREWORD.
The National Board of Accountants and Auditors is a professional body in Tanzania, established under the
Auditors and Accountancy Registration Act No 33 of 1972 (CAP 286 R.E.2002). The Board has been charged
The National
with among otherBoardthings,
of Accountants and Auditors
the responsibility is a professional
to promote, develop andbody in Tanzania,
regulate established
the accountancy under the
profession in
Auditors
the country.and Accountancy Registration Act No 33 of 1972 (CAP 286 R.E.2002). The Board has been charged
with among other things, the responsibility to promote, develop and regulate the accountancy profession in
the country. its statutory obligations, NBAA prepares National Accountancy Examination Scheme for
In fulfilling
students aspiring to sit for Accounting Technician and Professional Examinations. F u r t h e r , f or effective
In fulfilling its of
implementation statutory obligations,
the examination NBAA and
scheme prepares
improveNational Accountancy
examination Examination
results, the Board provides Scheme for
Study
students aspiring to sit for Accounting Technician and Professional Examinations. F u r t h e r ,
Guides for all subjects to assist both examination candidates and trainers in the course of learning and f or effective
implementation
teaching. of the examination scheme and improve examination results, the Board provides Study
Guides for all subjects to assist both examination candidates and trainers in the course of learning and
teaching.
The Study Guides have been prepared in the form of text books with examples and questions to enable the
user to have comprehensive understanding of the topics. The Study Guides cover a wide range of topics in the
The Study
NBAA Guides
syllabi andhave been prepared
adequately cover inthethemost
form comprehensive
of text books with
andexamples
completeandknowledge
questions base
to enable
that the
is
user to have comprehensive understanding of the topics. The
required by a leaner to pass the respective examination levels.Study Guides cover a wide range of topics in the
NBAA syllabi and adequately cover the most comprehensive and complete knowledge base that is
required by a leaner to pass the respective examination levels.
Furthermore, the Study Guides have been prepared to match with the Competency Based Syllabi to enable the
learners to be exposed to practical understanding of issues rather than memorisation of concepts. In this case,
Furthermore, the Study
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are characterized been
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following to match with the Competency Based Syllabi to enable the
features:-
learners to be exposed to practical understanding of issues rather than memorisation of concepts. In this case,
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1. FocusGuides are characterized
on outcomes by theshown
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in every topic provides clear understanding on what to be
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CPA. Pius A. Maneno

EXECUTIVE DIRECTOR
CPA.
JUNE,Pius
2019A. Maneno
EXECUTIVE DIRECTOR
JUNE, 2019
B4 – Public Finance and Taxation
About the paper i - viii
Section A B4and
Public finance – Public
NationalFinance
Income and Taxation
About the paper 1 Introduction to public finance and the role of the public 1i - - vi
. sector
2 Public Revenues 13 1
-
. 2
Section A 3 Theoretical Concepts ofPublic
Taxationfinance and National Income 23 -2
. 2
4 Public Expenditure 41 -4
1. Introduction
. to public finance and the role of the public sector 1 - 0 20
5 Government Budget 4
2. Public Revenues 21 - 28
6 Public Borrowings and Debt 8
3. Theoretical
. Concepts of Taxation 29 - 84
4. Public
7 Expenditure
Fiscal Policy 85 - 104
5. Government
8 NationalBudget
Income Accounting 105 - 120
6. Public Borrowings and Debt 121 - 128
7. Section B
FiscalTax
Policy
Laws, Administration and Practice in Tanzania
129 - 136
8. National Income Accounting 137 - 178
Section B 1 Tax Administration in Tanzania

.2 Sources of TaxTax
49
Laws, Administration and Practice in Tanzania
-
Laws and Its Interpretations 69 -
.3 Tax Planning, Avoidance and Evasion 6
77 -8
1. Tax Administration
. in Tanzania 179 - 188 7
2. Section C Sources of TaxTax
Income Laws and Its Interpretations 189 - 68 194
3. Tax Planning, Avoidance
1 Introduction to Incomeand Evasion
Taxation 195 - 2 204
111 -
. Principles of Deduction
2 173 -
1
Section C . Realisation of assets and Liabilities
3 Income Tax 187 -
7
.4 Deduction of Depreciable Assets 197 -1
2
8
1
.
1. Section D Introduction to Income
Computation Taxation
of Taxable Income 205 - 224 6
9
2
2. Principles of Deduction
1 Employment Income 225 - 234
111 - 6
0
. Individual’s Business Income
2 173 - 2
3. Realisation of assets and Liabilities 235 - 246
. Individual’s Investment Income
3 187 -1
4. Deduction of Depreciable
. Payment
4
Assets
Procedures of Tax
247 - 258
197 7
-1
. 2
8
1
Section D
Section E Non-Compliance with Income Computation
Tax Actof Taxable Income 6
9
2
-0 6
111
2
1. Section F Employment Value Added
Income Tax Act 259 - 290 1
2. 1 Introduction
Individual’s Businessto VAT (Theory and Practice)
Income 111
291 - 302 -
7
. VAT Registration and Deregistration and Liability and VAT
2 173 2-
3. Individual’s Investment Income 303 - 308 1
.3 Imposition and Liability of VAT 187 -
4. Payment Procedures
. Input Tax Credit
of Tax 309 - 328 7
1
4 197 -2
. 8
1
Section E
Section G Customs Non-Compliance with Income Tax Act 6
9
2
111 -6 0
2
329 - 346 1
Section F Value Added Tax Act 7
2
1. Introduction to VAT (Theory and Practice) 347 - 352

2. VAT Registration and Deregistration and Liability and VAT 353 - 368
3. Imposition and Liability of VAT 369 - 378
4. Input Tax Credit 379 - 388

Section G Customs
389 - 450
Section H Other Indirect Taxes
1. Excise Duties 451 - 454

2. Stamp Duties 455 - 458
Total Page Count: 464

Features of the book
‘The book covers the entire syllabus split into various chapters (referred to as Study Guides in
the book). Each chapter discusses the various Learning Outcomes as mentioned in the
syllabus.
Contents of each Study Guide
‘Get Through Intro’: explains why the particular Study Guide is important through real life
examples.
‘Learning Outcomes’: on completion of a Study Guide, students will be able to understand

all the learning outcomes which are listed under this icon in the Study Guide.
The Learning Outcomes include:
‘Definition’: explains the meaning of important terminologies discussed in the learning

Outcome.
‘Example’: makes easy complex concepts.
‘Tip’: helps to understand how to deal with complicated portions.
‘Important’: highlights important concepts, formats, Acts, sections, standards, etc.
‘Summary’: highlights the key points of the Learning Outcomes.
‘Diagram’: facilitates memory retention.
‘Test yo u r s e l f ’: contains questions on the Learning Outcome. It enables students to

check whether they have assimilated a particular Learning Outcome.
Self-Examination Questions’: exam standard questions relating to the learning outcomes

given at the end of each Study Guide.
EXAMINATION STRUCTURE
The syllabus is assessed by a three hour paper based examination. The examination will consist of
two sections
Section A One compulsory question (covering a range of syllabus content) 40 marks

Section B Three questions out of Five 60 marks
SECTION A
PUBLIC FINANCE AND
A1
NATIONAL
SECTION A ACCOUNTING
SECTION A: and
Public finance PUBLIC FINANCE
AND NATIONAL
National Income INCOME
STUDY GUIDE A1: INTRUCTION TO

PUBLIC FINANCE
Public finance plays a vital role in deciding the fate of development of a country. How a
government raises funds, how those funds are spent and the effect of these activities on the
economy and society has, therefore, been a subject of continuing interest to thinkers since
ancient times.
Government needs funds to perform various functions to achieve economic and social
objectives. These funds are referred to as public revenue. The government receives revenue
from various sources like taxes, fees, grants etc; tax revenue is the major source of revenue
for any government.
One important aspect that first needs to be understood is why the Government needs to
intervene in the running of the economy. The emergence of public finance as a central discipline
in economics has its origin in the recognition of the fact that all the needs of the public cannot
be met by the private market. There is a risk that the public goods and services will not be
provided at all, or may be provided inadequately if left entirely to the private market. These are
goods and services that can be provided only by the government. A simple example could be
national defence.
This Study Guide explains the meaning of public finance, explain the economic functions of
public finance and explains the rationale behind the need for intervention of the government
in the economy.
a) Explain the meaning of public finance and describes the differences between public finance and
private finance.
b) Discuss the rationale for government intervention in the economy.
c) Discuss the economic functions of the government (allocation function, distribution function and
stabilization function)
d) Describe the importance of public finance
2 Public finance and National Income
1. Explain the meaning

1. Explain of public
the meaning finance
of public and describes
finance the differences
and describes between
the differences publicpublic
between
finance and private finance
finance and private finance
[Learning Outcome
[Learning (a)] (a)]
Outcome
1.1 The1.1
meaning of public
The meaning of finance
public finance
Public finance
Public finance is theofstudy
is the study the financial activities
of the financial of governments
activities and public
of governments andauthorities. It
public authorities. It
describes and analyzes the expenditures of government and the
describes and analyzes the expenditures of government and the techniques used by techniques used by
governments to finance
governments its expenditures.
to finance It dealsItwith
its expenditures. thewith
deals economic role of government
the economic as a as a
role of government
response to market failures, its limitation in responding to such failures,
response to market failures, its limitation in responding to such failures, the design the design and and
evaluation of expenditure and tax program, and short & long term consequences
evaluation of expenditure and tax program, and short & long term consequences of the of the
deficit in the economy.
deficit in the economy.
i) Public finance as a science

i) Public finance as a science
Public finance is concerned with the study of how the government collects revenue, how the
Public finance is concerned with the study of how the government collects revenue, how the
expenditure is financed and how this procedure is monitored. It includes the study of the
expenditure is financed and how this procedure is monitored. It includes the study of the
principles applied while raising revenue, and spending of that revenue by the Government.
principles applied while raising revenue, and spending of that revenue by the Government.
Thus, the various principles which form the basis of the collection of revenue by the
Thus, the various principles which form the basis of the collection of revenue by the
government, maintenance of that revenue and outlay of the expenditure forms the subject
government, maintenance of that revenue and outlay of the expenditure forms the subject
matter of public finance. Public Finance is considered a science because it requires the
matter of public finance. Public Finance is considered a science because it requires the
application of scientific methods of investigation. It, however, depends upon two others other
application of scientific methods of investigation. It, however, depends upon two others other
sciences - Political Economy and Political Science. While on the one hand, it draws largely
sciences - Political Economy and Political Science. While on the one hand, it draws largely
upon the conclusions of these two sciences for its premise, yet on the other, it contributes a
upon the conclusions of these two sciences for its premise, yet on the other, it contributes a
lot to them. However, the scope of the science of public finance now-a-days is not just
limited to to
lot thethem. However,
functions the scope
of raising revenue of the
by science
imposingof taxes
publicforfinance now-a-days
covering the costisofnot just
limited to the functions of raising revenue by imposing
administration and defense. It has widened considerably due to the fact that modern taxes for covering the cost of
states administration
have to perform and manifold
defense. functions
It has widened considerably
to promote due to
the welfare of the fact that Inmodern
its citizens.
states have to perform manifold functions to promote
addition to maintaining law and order within the country and provision of security the welfare of its from
citizens. In
external aggression, it has to perform many economic and commercial functions. Due to the from
addition to maintaining law and order within the country and provision of security
external
increased aggression,
activities it has
of the state, to perform
there has taken many economic
place a vast and commercial
increase functions. Due
in the expenditure of to the
increased activities of the state, there has taken place a vast increase
the public authorities. The sources of revenue have also increased. Taxes are levied not for in the expenditure of
the public authorities. The sources of revenue have also increased.
raising the revenue alone but are used as an important instrument of economic policy. Taxes are levied not for
raising now
Public finance the revenue alone
includes the studybutofare used administration
financial as an important andinstrument of economic policy.
control as well.
Public finance now includes the study of financial administration and control as well.
ii) Public finance as a branch of economics
ii) Public
Public financefinance as a branch
encompasses manyoftheories
economics
that have been expounded relating to the
efficientPublic finance
collection, encompasses
maintenance and many theories
expenditure of that have been
government expounded
funds. Therefore,relating
it has to the
efficient collection,
now developed as a branch maintenance andasexpenditure
of economics, it deals withofthe
government
income andfunds. Therefore,
expenditure of it has
funds ofnowthe developed
government, asincluding
a branchfinancial
of economics, as it deals
administration with the income and expenditure of
and control.
funds of the government, including financial administration and control.
iii) Public finance as a process
iii) finance
Public Public finance
can also as
be aregarded
processas a process in view of the following:
Public finance can also be regarded as a process in view of the following:
 It studies and documents the steps followed by the public authorities in order to resolve
financial
 It problems.
studies and documents the steps followed by the public authorities in order to resolve
 financial with
It is concerned problems.
in the operational issues regarding the laws relating to finance in the
economy/country.
 It is concerned with in the operational issues regarding the laws relating to finance in the
 It shows the methods of income collection (by way of various types of taxes etc.),
economy/country.
the amount of funds
It shows the collected,
methods ofandincome
also how these sources
collection of funds
(by way are classified.
of various types of taxes etc.),
 It reflects how the funds are branched out to various channels.
the amount of funds collected, and also how these sources of funds are classified.
 It reflects how the funds are branched out to various channels.
iv) Public finance as an art
iv) finance
Public is also sometimes
Public finance as an art regarded as an art because it involves finding the best
ways ofPublic
adopting the laws
finance andsometimes
is also policies to regarded
better conform
as an toartthe intended
because objectives.
it involves It also
finding the best
suggests ways in which government personnel can try to adopt an economical approach
ways of adopting the laws and policies to better conform to the intended objectives. It also
with regard to public
suggests waysfunds.
in which government personnel can try to adopt an economical approach
with regard to public funds.
Introduction to Public Finance: 3
1.2 Public finance versus private finance
In order to understand public finance better, we need to understand how it is different

from private finance.
Public finance and private finance are based on the same fundamental principles and share
certain similarities, such as aiming for optimum use of limited resources, requiring efficient
administration etc. However, they are also different in many respects. Some of the differences
are discussed below:
Public Private
finance M finance
Public finance evaluates the role of the e Private finance refers to the monetary
government in a resources of an
the areas of income and expenditure (including n individual economic unit. It includes the income
administration and control) of public authorities
i and expenditure as well as the debt of
with a view to benefiting the public. n individuals and business entities.
g
O
The aim of public finance is to benefit the bj The aim of private finance is to bring about
public; and is utilised for the society as a ec benefits to individual economic units like
whole. tiv individuals, entities etc.
Naturee of
The government, which administers public investments On the other hand, private finance is
finance, is a perennial body. Hence, it invests held by individuals and who aim to make
in funds that have short term profits.
long term gestation periods (like Therefore, they invest their money majorly
development of iron industry) which would on short term investments.
bring about future economic
benefits. Sources of
The government has innumerable sources of income The sources of finance for private entities are
income limited in
like levy of taxes, printing currencies, raising comparison. The extent of availability of
loans internally as well as externally from finance depends upon the ability of an
bodies like world bank etc. The government individual / entity to raise money. Moreover,
can also call upon the resources of the society credit limit or loans are sanctioned based on
as a whole, in case of emergencies. the individual / entity’s repaying capacity.
Obligatory / elective
It is compulsory for individualsnature
to A private entity / individual cannot compel
contribute to the others to
government in the form of taxes, other levies extend finance to the entity/individual.
etc. Moreover, the government can, if
necessary, compel citizens to contribute, even
by force.
Benefi
The revenue collected by the In the case of private finance, the person/entity
ciaries
government goes back that
to its citizens in one form or the other. provides the finance usually gets the benefits.
However, the person who paid the taxes
may not be the one who receives the
benefits. In other words, the provider of
finance may not be the same individual / S
entity that
Details ofreceives
public the benefitsuch
finance, from it.
as the e In the case of private finance, these details can
contributors, the c be
amount of contributions, the r withheld from the general public; to some extent,
income and the expenditure, are made e the individuals and entities have a right to secrecy
public. c regarding their sources of finance, incomes and
y expenditures.
2. Discuss
2. Discuss
thethe
rationale
rationale
forfor
government
government
intervention
intervention
in the
in the
economy.
economy.
[Learning
[Learning
Outcome
Outcome
(b)](b)]
2.02.0
Rationale
Rationale forfor
Government
Government Intervention
Intervention in The
in The
Economy.
Economy.
TheTheidea
idea
of government,
of government, although
although
thenthen
notnot recognised
recognised
as government,
as government, hadhad
been
been
instituted
instituted
among
amonghumans
humans
even
evenbefore
beforethethe
recorded
recorded
history.
history.
Initially,
Initially,
thethesocieties
societies
thatthat
were
werea very
a very
small
small
group
group
of individuals
of individuals
would
would
manage
manage themselves
themselves withwith
relatively
relatively
littlelittle
government.
government. ButButwhenwhenthethe
societies
societies
started
started
becoming
becominglarge,
large,
complex
complex andand technologically
technologicallysophisticated,
sophisticated, thetheneed
need
arose
arose
for for
a referee,
a referee,
a rule
a rule
setter
setter
andandauthority
authority
for for
settling
settling
disputes.
disputes.
TheThegovernment
government plays
plays
a key
a keyrolerole
in solving
in solvingproblems
problems in the
in the
country.
country.
To Toachieve
achieve
this,this,
thethe
government
government
needs
needs
to expand
to expand its activities
its activities
through
through
thethe
expansion
expansion of the
of the
public
public
sector.
sector.
ButButthethe
important
important issue
issue
thatthat
firstfirst
needs
needs
to be
to be
understood
understood is why
is why
doesdoes
an aneconomy
economy require
require
a public
a public
sector
sector
at all;
at all;
whywhy
is itisnot
it not
possible
possible
for for
thethe
private
private
sector
sector
i.e. i.e.
thethe
market
market
to take
to take
carecare
of all
of that
all that
thethe
people
peoplein the
in the
country
country
need need
for for
theirtheir
living
living
andandwell-
well-
being?
being?
TheTheanswer
answer to this
to this
cancanbe befound
found
in the
in the
factfact
thatthat
thethe
economic
economic activity
activity
of the
of the
private
private
sector
sector
cancan
never
never
fulfilfulfil
all all
thetherequirements
requirements of of
a society.
a society. SomeSome goodsgoods(known
(known as aspublic
public goods)
goods) havehavecertain
certain
inherent
inherent
characteristics
characteristics duedueto which
to which it becomes
it becomes impossible
impossible for for
thetheprivate
privatesector
sector
to toprovide
providethese
these
goods
goods to to
thethesociety;
society; for for
instance,
instance,thethe
national
national
defence
defence function
function
cannot
cannot
be be
undertaken
undertaken by the
by the
private
private
sector.
sector.
Certain
Certain
otherotherpublic
public
goods
goodscancanactually
actually
be beprovided
providedby by
thetheprivate
private
sector,
sector,butbutoften,
often,
thethe
supply
supply
of such
of such
goods
goodsfallsfalls
shortshort
of the
of the
demand.
demand. TheThe
mainmainreason
reason
for for
thisthis
is that
is that
thethe
efficient
efficient
functioning
functioningof the
of the
market
market
system
systemrequires
requirescertain
certain
characteristics
characteristicssuchsuchas perfect
as perfect
competition
competition in the
in the
entire
entire
market,
market,perfect
perfect
knowledge
knowledge
of the
of the
market,
market, perfect
perfect
mobility
mobilityetc.etc.
These
Theseconditions
conditionsareare
hardly
hardlyever
ever
fulfilled
fulfilled
in ainmarket
a marketeconomy.
economy. As As
a a
result,
result,
public
public
goodsgoods
areareunderprovided
underprovided by the
by the
market.
market.
There
Therearearetwotwoeconomic
economic rationales
rationales
for for
government
government intervention
interventionin the
in the
economy:
economy: social
social
efficiency
efficiencyandand
equity.
equity.
Social
Social efficiency
efficiencyis achieved
is achieved at at
thethepoint
point
where
wherethethemarginal
marginal benefits
benefits
to tosociety
society for for
either
either
production
production or consumption
or consumption areareequal
equal
to the
to the
marginal
marginal
costs
costs
of either
of either
production
production
or consumption.
or consumption. Issues
Issuesof of
equity
equity
arearedifficult
difficult
to judge
to judge duedueto the
to the
subjective
subjectiveassessment
assessment of what
of whatis, and
is, and
what
what
is not,
is not,
a fair
a fair
distribution
distribution
of resources.
of resources.
Some
Some of the
of the
mainmain
reasons
reasons for for
market
marketfailure
failure
are:are:
 thethe existence
existence of monopoly
of monopoly in many
in manyareas,
areas,
 thethe failure
failure
of the
of the
price
price
to reflect
to reflect
thethe
opportunity
opportunity
cost,
cost,
 thethe presence
presence of spill
of spill
overs,
overs,
decreasing
decreasing costs,
costs,
immobility;
immobility;
andand imperfect
imperfect
knowledge.
knowledge.
TheThefailure
failure
of the
of the
market
market
system
system
calls
calls
for for
government
government
action.
action.
TheThe
need
need
for for
government
government
activity
activity
arises
arises
duedue
to the
to the
following
following
reasons:
reasons:
To Toensure
ensurethethe
production
production of goods
of goods andandservices
services thatthat
could
could
notnot
be be
supplied
suppliedby by
thethe
private
private
sector.
sector.
In aInfree
a free
market
marketthere
there
may may
be be inadequate
inadequate provision
provision
for for
dependants
dependants
andand
an an
inadequate
inadequateoutput
output
of merit
of merit
goods.
goods.
AlsoAlso
thethe
activities
activities
involving
involvingrisks
risks
andand
longlong
gestation
gestation
period
period
areare
notnot
thethe
preferred
preferred
choice
choice
of the
of the
private
private
sector.
sector.
Government
Government intervention
intervention ensures
ensures thethe
smooth
smooth
supply
supply
of the
of the
public
public
goods
goods
andand
supply
supply
in in
adequate
adequatequantity.
quantity.
To Toavoid
avoidfailure
failure
of the
of the
market
market
mechanism
mechanism in safe
in safe
guarding
guarding
thethe
interest
interest
of consumers.
of consumers.
Markets
Markets
may may
respond
respondlethargically
lethargically
to fluctuations
to fluctuations
in demand
in demand
andand
supply
supply
which
which
may may
leadlead
to an
to an
imbalance
imbalance
andand
instability
instability
in the
in the
economy.
economy.
3.03.0
Discuss
Discuss
thethe
Economic
Economic Functions
Functions
of of
thethe
Government
Government
(Allocation
(Allocation
function,
function,
Distribution
Distribution
function
function
andand
stabilization
stabilization
function).
function). [Learning
[Learning
Outcome
Outcomeb] b]
3.0 3.0
T heT he
Eco Enco mn oi cmFunctions
i c Functions of tof
h et hGeoGv eorvnem
r nemn te (Allocation
n t (Allocation
Function,
Function, Distribution
Distribution
Function
Functionandand
Stabilization
Stabilization
Function).
Function).
There
There
are are
various
various
functions
functions
of governments
of governments in market
in marketeconomies
economies identified
identified
by various
by variouseconomists.
economists.
These
These
functions
functions
mainly
mainly
include
include
providing
providing
the the
legal
legal
andandsocial
social
framework,
framework, maintaining
maintaining
competition
competition
in the
in the
market,
market,
providing
providing
public
public
goods goodsandand
services,
services,
redistributing
redistributing income,
income,correcting
correcting
the the
externalities
externalities
andand
stabilizing
stabilizing
the the
economy.
economy.
Richard
Richard
Musgrave
Musgrave
hashas
divided
divided
the the
economic
economic
rolerole
of government
of government
intointo
three
three
major
major
functions:
functions:
(i) (i) Allocation

Allocation
function
function
(ii) (ii) Distribution
Distribution
function
function
(iii) (iii) Stabilization
Stabilization
function
function
3.1 3.1
Allocation
Allocation function
function
Allocation
Allocation
function
functiondeals
deals
withwith
the the
determination
determination of the
of the
appropriate
appropriate process
processto divide
to dividethe the
totaltotal
resources
resources
of the
of the
community
community between
between private
private
goodsgoodsandand social
social
goods.
goods. Government
Government hashas to provide
to provide for for
public
public
goods
goodsandand services,
services,
such suchas as national
nationaldefense,
defense,primary
primary education,
education, public
public
transport,
transport,healthhealth
care,
care,
government
government administration
administration etc.etc.
Private
Private
goods
goodsare are
available
available
to only
to onlythosethose
whowho
cancan buybuythem.
them. Therefore
Therefore
these
these
are are
limited
limited
to some
to some individuals
individuals of the
of the
community.
community. On On the theotherother
hand,
hand,public
public
goodsgoods mustmust
be be
available
available
to all,
to all,
even even
to those
to thosewhowho can'tcan't
afford
afford
them them
financially.
financially.Thus,Thus,the the
public
public
goodsgoods
are are
essential
essential
for for
consumers
consumers but butcannot
cannotbe be provided
provided through
through market
marketmechanism
mechanism andand therefore
therefore government
government hashasto to
provide
provide
them. them.ThisThis
makes
makes it vital
it vital
for for
the the
government
government to allocate
to allocateits resources
its resources to ensure
to ensurethe theessential
essential
public
public
goodsgoods andandservices
servicescancanbe provided
be provided to the
to the
people
peopleof the
of the
country.
country.
TheThefunction
function of determining
of determining the the
fundsfunds
allocation
allocation
is closely
is closely related
related to the
to the
issues
issuesof taxation
of taxation andand
spending.
spending.TheThe allocation
allocation
of funds
of fundsdepends
depends upon upon
the the
revenue
revenue collected
collected by the
by the
government
government in the
in the
formform
of taxes
of taxes
andand dutiesduties
andandthenthenusingusing
thatthat
revenue
revenue for the
for the
specified
specifiedpurposes.
purposes.
TheThenational
national budget
budgetof the
of thecountry
countrydetermines
determines the the
various
variousoverheads
overheads for for
whichwhichthe the
fundsfundsare are
to be
to be
allocated.
allocated.
TheThe budget
budget
specifies
specifiesthe the
amountamountof funds
of funds
set set
asideaside
for for
the the
purposes
purposes specifically
specificallylaidlaid
out out
by by
the the
government.
government. Thus,
Thus, proper
properallocation
allocationof sufficient
of sufficientfundsfundsfor for
appropriate
appropriate purposes
purposes hashas a direct
a direct
impact
impact
on the
on theeconomic
economic development
development of the
of the
country.
country.
3.2 3.2
Distribution
Distribution function
function
Distribution
Distributionfunction
functionwithwith
reference
referenceto public
to public
finance
finance
refers
refers
to activities
to activities
andand
policies
policies
of the
of the
government
government
thatthat
affect
affect
the thedistribution
distribution
of income
of income andandwealth.
wealth.
Distribution
Distributionsimply
simply
means
meansthe the
sharing
sharing
of national
of national
income
incomeby individuals
by individuals in ainsociety.
a society. Everything
Everything thatthat
the the
government
government does,
does,
suchsuchas as
framing
framing
policies
policies
to provide
to provideprimary
primaryeducation
education or toor make
to makeavailable
available
subsidised
subsidisedfoodfood
to underprivileged
to underprivilegedsections
sections
of the
of the
society
society
etc.,etc.,
affects
affects
the the
distribution
distributionof income
of income andandwealth
wealthto various
to varioussections
sections
of the
of the
society.
society.
TheThe
market
marketforces
forcescannot
cannotbe berelied
relied
uponuponto create
to create an anequal
equalsociety;
society;
therefore
therefore
a budgetary
a budgetaryprocess
processis is
required.
required.
Under Under
the the
allocation
allocation
function,
function,
the the
fiscal
fiscal
policies
policies
set set
out out
the the
various
various
overheads
overheads andand
alsoalso
set set
aside
aside
fundsfundsfor for
each each
of the
of the
overhead.
overhead. TheThedistribution
distribution
function
function
thenthen
determines
determinesmoremore
specifically
specifically
howhow
those
those
fundsfunds
will will
be distributed
be distributed through
through
various
various
sections
sections
of the
of the
economy.
economy.
3.3 3.3
Stabilisation
Stabilisation function
function
Stable
Stableeconomic
economic growth
growth is the
is the
keykey
objective
objectiveof theof the
budgeting
budgetingprocess.
process.
TheThe stabilisation
stabilisation
function
function
is is
another
anotherimportant
important function
function of the
of the
economic
economic policy
policy
to achieve
to achievethe the
objective
objective
of stable
of stable
economic
economic growth.
growth.
Stabilisation
Stabilisation refers
refers
to those
to those government
government actions
actionsthatthat
influence
influence
the the
overall
overall
level
level
of employment,
of employment, output
output
andand
prices.
prices.TheThe stabilization
stabilization function
function
attempts
attempts to maintain
to maintaina reasonable
a reasonable degree
degreeof price
of price
stability.
stability.
TheThe
economic
economic instabilities,
instabilities,
whether
whether under
under
conditions
conditions of inflation
of inflation
or depression,
or depression, affect
affect
the the
economy
economy of aof a
country.
country.EveryEverychange
change in the
in the
economy
economy will will
have have
the the
effect
effect
of benefiting
of benefiting
someone
someone in the
in the
community
community
andand
harming
harming others.
others.
In such
In sucha situation,
a situation,
the the
appropriate
appropriatepolicy
policy
measures
measures applied
applied
by the
by the
government
government to to
avoid
avoid
the the
situations
situationsof infla-
of infla-
tiontion
andand
unemployment
unemployment helphelp
in levelling
in levelling
the the
aggregate
aggregatedemand
demand in the
in the
economy of the country. Such measures are called stabilisation measures. It is also important to
note that the economic measures are not the only means of achieving economic stabilisation;
the monetary policy, debt policy and income policy also need to be considered. Monetary and
economic policies often complement each other. The economic growth of the country could become
unstable unless appropriate restrictions are put on spending which ultimately may result in periods of
unrestrained growth and contraction. While many economists criticise the policy of the government to
put restraint, the stock market crash of 1929 made it clear that unregulated growth could have serious
consequences. The market is cyclical in nature i.e. when growth periods end they are followed by
contraction in the form of recessions. Thus, it is evident that unrestrained growth of the market cannot
continue for an indefinite period. Therefore, it is imperative that the economic policies are designed to
anticipate and mitigate the effects of such economic trench.
4.0 Describe the importance of public finance.
[Learning Outcome (c)]
4.0 The Importance of Public Finance

(i) Ensuring economic and financial stability
Public finance is used to ensure economic and financial stability in an economy. Economic stability is
the absence of excessive fluctuations in the economy, whereas financial stability can be achieved by
efficient allocation of resources by appropriate policy making. For example, an increase in direct taxes
will reduce the money available with the people to purchase goods and services and will, in turn, help to
reduce inflation. On the other hand, increase in public expenditure during depression helps to increase
demand for goods and services, which is otherwise very low during periods of depression.
(ii) Optimum utilisation of resources

Public finance ensures optimum utilisation of scarce resources by adopting suitable monetary policies.
(iii) Effective tool to tackle unemployment

Public finance is an effective tool to tackle unemployment - for example, the government sets up fiscal
policies which increase employment opportunities.
(iv) Capital formation

Public finance involves providing infrastructure like railways, road-ways, improved transportation etc.
This kind of capital expenditure, in turn ensures increase in capital formation, which brings about long-
term benefits to the public in general.
(v) Improved income and services of economy

Public finance involves raising funds from the public. Furthermore, investments in such funds is
sometimes linked to a reduction in the amount of tax paid by the general public. This helps in increasing
the income and savings of an economy, thereby helping in its development.
Self-Examination Questions
Question 1
Free riders are actors who take more than their fair share of the benefits or do not shoulder their fair share of
the costs of their use of resource, involvement in a project, etc. The free rider problem is the question of
how to prevent free riding from taking place, or at least limit its effects.
Required:
(a) Explain any six [6] solutions to the free rider problem.
(b) Define a public good and explain two main properties of such a good.
Question 2
In the presence of externalities, an inefficient allocation of resources can emerge if nothing is done about it.
Therefore, private individuals acting on their own and the government may intervene to make sure there is
efficient allocation of resources.
Required:
Explain any five specific measures to be taken by private individuals and the government to reduce the
effect of externalities.
Question 3
Over time, the mix between public and private modes of provision of public goods has changed substantially.
There is much greater private responsibility for education, health, related security services and other related
services than in the past. No one can predict with greater accuracy what will happen in the future but the
right mix of public and private provision of goods should be a topical issue in the near future.
Required:
Briefly describe any FOUR considerations which should be taken into account in finding the right mix of
public and private provision of goods.
Question 4
The market often fails, but the government often does not succeed in correcting the failures of the market.
The recognition of the limitation of the government implies that the government should direct its focus only to
those areas in which the market failures are most significant and where there is evidence that the
government intervention can make a significant difference.
Required:
Describe different schools of thought and perspectives on the role of the government in the economy.
Question 5
(a) Identify any four (4) characteristics which differentiate public goods from private goods.
(b) ‘A perfectly competitive economy is capable of functioning satisfactorily without formal government
intervention and so without taxation. This is, however, far apart from the world of reality’
Required:
(i) In view of this statement, discuss the economic role of the government in supplying public
goods to the economy.
(ii) Identify possible positive and negative implications of recommended government
intervention to the market system.
Question 6
Public finance plays a vital role in deciding the fate of development of a country. How a government raises
funds, how those funds are spent and the effect of these activities in the economy and society has been a
subject of continuing interest to thinkers since ancient times.
Required:
Discuss the rationale for government intervention in the economy.

Question 7
(a) Describe the meaning of a “public good”.
(b) The concept of “public goods” is confusing because it confounds three analytically distinct concepts:
excludability, rivalry and public finance.
Required:
Explain why public goods are regarded as pedagogical bad.
Question 8
Government provides public goods and merit goods because some of these goods have characteristics
which make them less suitable for market provision.
Required:
Explain briefly the concepts of “public goods” and “merit goods”, and describe at least two characteristics
which make government intervention in their provision inevitable.
Question 9
(a) Explain the functions of a government relating to public finance, in a developing economy.
(b) Public finance can be viewed in different perspectives depending on the role of the government in
the area of income and expenditure (including administration and control) of public authorities with a
view to benefiting the public.
Required:
Briefly discuss the perspective of public finance as science and as a process in the area of income
and expenditure.
Question 10
(a) Juma has been wondering why governments interfere in an economy causing in many cases market
distortion. Since his academic background is medicine, he has approached you to advise him on that.
Required:
Discuss why government can be compelled to interfere in a successful free market economy.
(b) Externalities are those gains and losses sustained by others as a result of actions initiated by producers
or consumers or both, and for which no compensation is paid. Externalities are sometimes called “third
part effects”, “neighborhood effects” or Spillovers”. As an example of an externality, consider a chemical
firm which discharges noxious wastes into a river estuary, killing all the fishes and resulting in
endangering the livelihood of the fisherman: nothing is paid for this loss.
Required:
Discuss at least four approaches that local or national governments can use in an attempt to control
pollution (negative externalities) and its effects.
Question 11
(a) Public goods and services are generally provided by the government with a view of satisfying public
needs. Sometimes a government may provide goods at a price while an individual or firm may
provide goods for free.
Required:
Comment on whether:
(i) A bridge constructed by the government, whereby bridge toll is charged, amounts to a public
good.
(ii) A bore hole dug by a private firm, whereby anybody can fetch water for free, amounts to a
private good.
(b) Not all goods may be purely public goods. Some goods have characteristics of both private and
public goods.
Required:
Required:
Briefly
Briefly
discuss,
discuss,
with with
the help
the help
of examples,
of examples,
whenwhen
will education
will education
and and
national
national
parkpark
fail to
failmeet
to meet
the the
criteria
criteria
of pure
of pure
public
public
goods.
goods.
Question
Question
12 12
BothBoth
allocation
allocation
and and
distribution
distribution
fiscalfiscal
functions
functions
of public
of public
sector
sector
are designed
are designed
to shift
to shift
resources
resources
fromfrom
one one
pointpoint
to another
to another
in order
in order
to achieve
to achieve
fairness
fairness
and and
equity
equity
within
within
the society.
the society.
Required:
Required:
Distinguish
Distinguish
between
between
the two
the fiscal
two fiscal
functions.
functions.
Question
Question
13 13
(a) (a) Describe
Describe
at least
at least
four four
rolesroles
of public
of public
finance
finance
in a country’s
in a country’s
economy.
economy.
(b) (b) Explain
Explain
at least
at least
four four
primary
primary
functions
functions
of a of
government
a government
relating
relating
to the
to public
the public
finance.
finance.
Question
Question
14 14
Often
Often
missing
missing
fromfrom
the discussion
the discussion
and and
current
current
thinking
thinking
on the
on role
the role
and and
nature
nature
of government
of government
intervention
intervention
in in
the economy
the economy
is theis negative
the negative
implications
implications
associated
associated
with with
the government
the government intervention.
intervention.
Required:
Required:
Evaluate
Evaluate
the likely
the likely
harmful
harmful
effects
effects
that that
government
government
intervention
intervention
is likely
is likely
to create.
to create.
Answer
Answer
to Self-Examination
to Self-Examination
Questions
Questions
Answer
Answer
to SEQ
to SEQ
1 1
(a) (a) Possible
Possible
solution
solution
to free
to free
riderrider
problem
problem
(i) (i) Dominant
Dominant Assurance
Assurance Contracts.
Contracts. Assurance
Assurance contracts
contractsare contracts
are contracts in which
in whichparticipants
participants
make make
a binding
a binding
pledge
pledge
to contribute
to contributeto a to
contract
a contract for building
for buildinga public
a public
goods,goods,
contingent
contingent
on on
a quorum
a quorumof a of
predetermined
a predetermined size size
being being
reached.
reached. Otherwise
Otherwise theirtheir
moneymoneyis refunded.
is refunded. A A
dominant
dominant
assurance
assurance contract
contract
is a isvariation
a variation
in which
in whichan entrepreneur
an entrepreneur creates
creates
the contract
the contract
and and
refunds
refunds
the initial
the initial
pledge
pledge
plus plus
an additional
an additionalsumsum of money
of money if theif quorum
the quorum is notis reached.
not reached.
(ii) (ii) Coasian
CoasianSolution.
Solution.The The
coasian
coasiansolution,
solution,
named named for thefor theeconomist
economist RonaldRonald
Coase Coase
and and
unrelated
unrelated
to the
to Coase
the Coasetheorem,
theorem,proposes
proposesa mechanism
a mechanism by which
by whichpotential
potential
beneficiaries
beneficiaries
of of
a public
a public
goodgood
bandbandtogether
together
and and
poolpool
theirtheir
resources
resources based based
on their
on their
willingness
willingnessto pay
to pay
to to
create
create
the the
public
public
good.good.Coase Coasearguedargued
that that
if the if the
transaction
transaction costscosts
betweenbetween potential
potential
beneficiaries
beneficiaries
of a of
public
a public
goodgood
are sufficiently
are sufficientlylow, low,
and andit is therefore
it is thereforeeasyeasy
for beneficiaries
for beneficiariesto to
find find
eacheach
otherother
and andpoolpool
theirtheir
money money
based basedon the on public
the public good’s good’s
valuevalue
to them,
to them,thenthen
an an
adequate
adequate
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to impose
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to fund
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by economic
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(v) Incomplete Markets. Pure public goods and services are not the only goods and services
that private markets fail to provide adequately. Whenever private markets fail to provide
goods or service even though the cost of providing it is less than what individuals are willing
to pay, there is a market failure that we refer to as Incomplete Markets (because a complete
market would provide all goods and services for which the cost of provision is less than what
individuals are willing to pay).
(vi) Imperfect Competition. For market to result in Pareto efficiency, there must be perfect
competition-that is, there must be sufficiently large number of firms that each believes it has
no effect on prices. But in some Industries, there are relatively few firms, or one or two firms
have a large share of the market. Output in imperfect competition is lower than competitive
output hence welfare loss. Government can attempt to reduce or eliminate inefficiency
resulting from market power by making it illegal for a firm or a group of firms to exercise or
acquire market power.
(vii) Asymmetric Information. One of the most common information problems occur when
participants in potential exchange are not equally well informed about the product or service
that is offered for sale. Economists use the term asymmetric information to describe
situations in which buyers and sellers are not equally informed about the characteristics of
products or services. In these situations sellers are typically much better than buyers, but
sometimes the reverse will be true.
(viii) Merit Goods. A merit good is defined in economics as a good that is under consumed if
provided by the market mechanism because individuals typically consider how the good
benefits them as individuals rather than the benefits that consumption generates for others
in society. In economic terms, this is because the positive externalities of the good are not
internalized by consumers. To increase efficiency, the state may choose to encourage
greater production or consumption of a merit good through state provision, regulation,
subsidies or to produce the good itself. Goods typically considered to be merit goods include
education and preventive healthcare.
(b) A public good is a good that is hard or even impossible to produce for private profit, because the
market fails to account for its large beneficial externalities. By definition, a commodity is called a
public if its consumption by any one person does not reduce the amount available to others. Or a
good is said to be a public if providing good to anyone makes it possible, without additional cost, to
provide it to everyone. Public good possess two properties:
(i) Non-rivalrous: Its benefits fail to exhibit consumption scarcity; once it has been produced,
everyone can benefit from it without diminishing other’s enjoyment. If this good is supplied
to one person there are huge positive externalities to others.
(ii) Non-excludable: Once it has been created, it is very difficult to prevent access to the good
by others. Defence is a good example of this. If defence forces exist to protect a country
from external aggression, then it is impossible to exclude anybody in that country from being
defended.
A free market is highly unlikely to produce the optimum amount of any public good. Such important
goods like national defence will be under produced due to the free rider problem.
Answer to SEQ 2
Measures to reduce externalities:
Private Individuals Response
 Mergers. This is the process of internalizing it by combining the parties involved in generating
the externality. This may result each part to be more responsible and take the corrective
measure so that the total effects of the externality won’t affect their welfare. However,
sometimes it is very difficult to have a merger when the externality involved is the large scale
where many parties are involved.
 Social conventions. This is when the certain social conventions attempts to force people to
take into account the externalities they generate.
Government Response
 Taxes. This is when the government levy tax on the polluter that makes up for the fact that
some of the inputs are priced too low. This is known as Pigouvian tax, named after British
Economist A.C. Pigou in the 1930s. The tax is levied on each unit of polluter’s output in an
amount just equal to the marginal damage it inflicts at the efficient level of output.
There are practical problems in implementing Pigouvian tax system, including determination of
the correct tax rate to use. More generally the tax approach assumes it is known who is doing
the polluting and in what quantities. In many cases, these questions are hard to answer.
 Subsidies. Given the fixed number of polluting firms, the efficient level of production can be
obtained by paying the polluter not to pollute. Although this notion may at first seem peculiar, it
works much like tax scheme. This is because a subsidy for not polluting is simply another
method of raising the polluter’s effective production cost.
 Creating a Market. The inefficiencies associated with externalities can be linked to the absence
of a market for the relevance resource. This suggests another way for the government to
enhance efficiency-sell producers permits to pollute. By doing so, the government in effect
create market for clean air or water that otherwise would not have emerged.
 Establish Property Rights. Under certain circumstances, it may make sense for the
government to create conditions that allow a market to come into existence but then stay out of
the market.
 Regulation. Under regulation, each polluter is told to reduce pollution by a certain amount or
else face legal sanctions. Regulation is likely to be inefficient when there is more than one firm.
 Evaluation. The presence of externalities often requires some kind of intervention to achieve
efficiency. Implementing any environmental policy entails a host of difficult technical issues. No
policy is likely to do a perfect job. However, most economist prefer market oriented solutions
which are more likely to achieve efficient outcome than direct regulation.
Answer to SEQ 3
In finding the right mix of the public and private position, the following should be considered:
(i) Relative wage and material cost: If the public and private sectors pay different amounts for
labor and material, then the less expensive sector is to be preferred on efficiency grounds. Input
costs faced by public and private sectors may differ if public sector employees are unionized
while their private sector counterparts are not.
(ii) Administrative cost: Under the public provision, any fixed administrative costs can be spread
over a large group of people. Instead of everyone spending time negotiating an arrangement for
garbage collection, the negotiation is done by one office for everybody. The larger the
community, the greater the advantage to being able to spread these costs.
(iii) Diversity of tastes: Households with and without children have different view about the
desirability of high – quality education.
(iv) Distributional issues: The community notions of fairness may require that some commodities
be made available to everybody, an idea sometimes referred to as commodity egalitarianism.
Answer to SEQ 4
(i) Different schools of thought

 Merchantilists’ view – Economic nationalism (favourable balance of trade). The
government should actively promote trade and industry.
 Doctrine of Laissez Faire (Adam Smith, John Stuart etc. The government should leave
the private sector alone, it should not try to regulate or control enterprises. But it should
only ensure peace and order and erecting and maintaining public works.
 Socialist View, e.g. Karl Max, Robert Owen. They suggested the reorganization of the
society to address grave inequalities in income and condition of the working class. They
advocate the government to take a greater role for the state in controlling the means of
production.
 Market System 20th century – the government implements market and private
enterprises.
(ii) Perspectives – Administration role, protection role, social role, economic role,
development role.
Answer to SEQ 5
(a) Characteristics of public goods (or social goods) vs private goods (market goods)
 Product divisibility ( non –exclusion)
Public/social goods are indivisible/are difficult to price in order to prevent some members of the
society from its benefits. That is, the use of such goods does not reduce its availability to others.
 Externalities
In contrast to private goods, pure public goods are characterized by the existence of externalities
(also known as spillover effects, neighbourhood effects or third party effect), which represent
economic effects which flow from their production or use to other parties of economic unit.
 Marginal costs (non rival)

Public goods have zero or close to zero marginal cost, i.e. additional member of the society can
be benefited without appreciably adding to its total cost.
 Decreasing average cost

Pure public goods are characterized by decreasing costs due to economies of scale.
(b) Economic role of the government in supplying public goods

(i) The economic role of the government in supplying public goods to the economy Government
intervention/interaction is inevitable, and so, necessary on the following grounds/arguments:
- Market tend to operate inefficiently (market failures) due to
Market mechanism can supply only a priced good
 Government intervention necessary to address free rider problem

o Free market may give rise to monopolies
o Free market may give rise to wasteful competition
o Market may fail to accelerate desired rate of growth

o Market economy is prone to trade cycles/successive periods of inflation and
unemployment
o Locational planning problem
- Infrastructure
Infrastructure or social overheads are commercially non-viable and require huge

resources beyond the capacity of private sector
-Provision of merit goods, such as education and health services can best be
achieved by the government.
(ii) Positive and negative implications as a result of government intervention/role

Positive implications of government intervention
- According to traditional Keynesian Macroeconomics theories, many of the public

expenditure/government spending, including recurrent expenditure can contribute
positively to economic growth.
- High levels of government consumption are likely to increase employment, profitability
and investment multiplier effects on aggregate demand
- Thus, government spending raises aggregate demand, leading to increased output
depending on the size and effectiveness of expenditure multiplier.
Negative implications of government intervention
- When intervention is through taxation high taxes may serve as disincentive to invest,
and work
- When intervention is through borrowing to finance growing government spending,
borrowing may affect private investment since government accesses funds that could
otherwise have been invested in the private sector, i.e. crowding out effect.
- May lead to a movement of resources in to more unproductive use.
- Continuous expansion of government moves expenditure in to less and less productive
activities
Possibility of rent-seeking activities, i.e. people will tend to obtain income by having government transfers to
themselves rather than providing goods and services to others.
Answer to SEQ 6
 To ensure the production of goods and services that could not be supplied by the private
sector.
 To avoid failure of the market mechanism in safe guarding the interest of consumers.
 To establish the economy by controlling the ups and downs in the economy.
 To use the appropriate combination of taxes and subsidies as means of correcting market
distortions.
 To set up regulatory bodies to monitor and control activities which are against the public
interest.
Answer to SEQ 7
a) Public goods and services are produced by the government sector with a view to satisfying public
needs. For example, national safety, public healthcare, clean air etc.
b) Public goods have two principle characteristics – non – exclusion and non – rival consumption.
Each of the characteristics is explained below:
 Non-exclusion
- Non-exclusion means that it is impossible to prevent people from using the
goods/service or the cost of restricting the use of the goods to selected persons is
exorbitant.
 Non-rival consumption
- Non-rival consumption means that the use of goods by one individual does not
reduce the quantum of goods available to others; or the same goods can be used
simultaneously by a number of people.
(i) Non-rivalry creates the problem of public finance: how to pay for goods that, from a point of
view of economic efficiency, should be provided at low cost or free of charge, because the
marginal cost of an additional user is (close to) zero.
(ii) Non-excludability can be thought of as the problem of definition and enforcement of property
rights: how to make agents take account of the effect their actions on others.
(iii) The public goods discussion violates the first basic pedagogical principle: explain one thing
at a time. Confounding rivalry and excludability, it attempts to teach these two analytically,
empirically and economically different concepts together.
(iv) The problem of public finance and the problem of the definition of property rights are
confounded into one lecture, one chapter, what seems to be one idea. Moreover, to the
extent that the pure public goods discussion ignores goods that are rival but non-excludable,
or goods that are non-rival but excludable, the implications of rivalry or excludability are not
fully discussed. Hence the second pedagogical principle, begin with basic concepts and
work upwards, is violated.
(v) Finally, the concept of public goods is not grounded in reality. The concept of excludability,
as defined in public goods textbooks, is based on technology that is whether or not it is
technologically feasible to exclude those who do not pay from using the good. However,
technological feasibility is a hypothetical construct.
Answer to SEQ 8
Concepts of Public goods and merit goods
Public goods are the goods which are provided by the government principally because of the jointness of
their consumption, non-exclusion and non rivary. These include defence, law and order, street lighting,
urban parking, urban cleaning etc.
The government must provide these since the exclusion principle cannot be applied, i.e. there is absolute
jointness in consumption, and hence, no one can be separated from consuming the product.
Merit goods are goods which are provided by the state mainly because of ignorance and externalities. Also,
merit goods are provided by government because are important and it provided by private sectors many
people could not afford them. Such merit goods are education and health services. Characteristics of social
goods and merit goods which make them less suitable for market provision.
Answer to SEQ 9
(a) Three key economic functions or roles of the government as stipulated by Richard Musgave are
explained here under:
(i) Allocation functions
Allocation function deals with the determination of the appropriate process to divide the total
resources of the community between private goods and social goods. Since private goods
are available to only those who can buy them, the government has to provide for public
goods and services, such as national defense, primary education, public transport, health
care, government administration etc.
Considering the fact that, private goods are limited to some individuals of the community.
Public goods must be available to all, even to those who can’t afford them financially.
Therefore the allocation of funds depends upon the revenue collected by the government in
the form of taxes and duties and then using that revenue for the specified purposes.
(ii) Distribution function

Distribution function with reference to public finance refers to activities and policies of the
government that affect the distribution of income and wealth. Distribution simply means the
sharing of national income by individuals in a society. Everything that the government does,
such as framing policies to provide primary education or to make available subsidized food
to underprivileged sections of the society etc., affects the distribution of income and wealth
to various sections of the society. The market forces cannot be relied upon to create an
equal society; therefore, a budgetary process is required.
(iii) Stabilization function

Stabilization refers to those government actions that influence the overall level of
employment, output and prices. The stabilization function attempts to maintain a reasonable
degree of price stability. It is very important function of the economic policy to achieve the
objective of stable economic growth. Even though many economists criticize the policy of
the government to put restraint, the stock market crash of 1929 made it clear that
unregulated growth could have serious consequences.
(b)
(i) Public Finance is considered as science because it requires the application of scientific methods
of investigation. It is concerned with the study of how the government collect revenue, how the
expenditure is financed and how this procedure is monitored. It includes the study of the principles
applied while raising revenue, and spending of that revenue by the Government. However, depends
upon two others other sciences – Political Economy and Political Science.
(ii) Public finance is also regarded as a process in the sense that it studies and documents the
steps followed by the public authorities in order to resolve financial problems. It further concerned
with in the operational issues regarding the laws relating to finance in the economy/country and it
shows the methods of income collection (by way of various types of taxes etc.), the amount of funds
collected, and also how these sources of funds are classified.
Answer to SEQ 10
(a) Why government interferes a successful free market

(i) The government tries to combat market inequities through regulation,
taxation, and subsidies.
(ii) Government may also intervene in markets to promote general economic

fairness.
(iii) Maximizing social welfare is one of the most common and best
understood reasons for government intervention. Examples of this include breaking up
monopolies and regulating negative externalities like pollution.
(iv) Governments may sometimes intervene in market to promote other goals,

such as national unity and advancement.
(b) There are a number of approaches that local or national government can use in an attempt to control
pollution and its effects. These include:
(i) Pollution Taxes

Tax will be levied to polluters for emitting certain quantities of pollution. The tax will compel
polluting producers to include in the prices of their goods and this will increase costs of
production and will in turn discourage production and therefore reduce the firm’s or people;
ability to emit pollution.
Advantage of pollution taxes:
Incentive to reduce pollution:

If a producer has to pay a tax based on the quantity of pollution created, then the producer
can pay less as a result of emitting less pollution. Therefore, pollution tax can give a
producer continuing incentive to reduce pollution.
(ii) Direct Control

Another approach to dealing with negative environment externalities is to introduce direct
controls or legislation (often referred to as a command or control approach). This approach
may specify minimum environmental standards, concerning air or water quality.
Alternatively, direct controls may be imposed stipulating a complete ban on the use of
particular inputs.
In some cases, the government requires installation of specific types of anti-pollution

equipment such as catalytic converters for all new cars sold in the country.
(iii) Trade-able Emission Allowances

The use of emission allowances (or tradable permits) can be traded between producers
whose economic activity results in pollution. With this system, the department controlling
pollution will set a target for a reduction in a particular type of pollution. Generally,
companies for the cost of pollution abatement is low can sell some of their allowances to
other producers.
Advantage of tradable emission allowances:

Incentive for pollution reduction; As with pollution taxes, the introduction of tradable
allowances can give firms an incentive to reduce actual levels of pollution. If a firm can find
a way of reducing its emissions cheaply, it may find itself able to increase profits by selling
some of its allowances to other firms.
(iv) Social Conversion

A number of social conversions can force people to take into account the environmental
pollution. For example, school children can be taught that water pollution is irresponsibility.
Another approach can be through seminars, educational discussion with members of the
public, etc.
(v) Subsidies
Efficient level of production can be obtained by paying subsidies to polluters for not
producing above certain limits.
Answer to SEQ 11
a) Public vs Private goods

i) A good being provided by the government does not necessarily make it a public good. A
government may also supply private goods. Therefore, the focus shall be on the
characteristics of goods rather than the provider
The bridge that charges tolls does not qualify to be recognized as a public good.
Public goods are provided free of charge and charging a price is a characteristic of a private
good.
Also public goods have a characteristic of non-exclusion. That is, one may not be excluded
from consuming the good.
In this case, those who have no ability to pay tolls will be excluded from consuming the good
(crossing the bridge)
ii) The provider of good does not necessarily make a good private or public.
In this case the bore hole is not a private good since it has characteristics of a public good.
First, it is offered free of charge

Second, it has non-exclusion characteristic. That is, no person is rejected the right to
consume the product. However, a person may choose not to consume the product – which
makes it not a purely public good. But this would have been the same if the product was
being offered by the government.
Third, the bore hole water may be consumed without rivalry. However, this is if it is assumed
that the bore hole has plenty of water for every person in need.
Therefore, the bore hole is public good although it may not be as pure public good as
national defense or road might be.
b) Pure public goods have three major characteristics:

1. Provided free of charge
2. Non-exclusion: no member of society may be excluded from consumption of the good either for
reasons of prices or by his/her own choice
3. Non-rivalry consumption: when a member of society consumes the good, he/she does not
deprive others from consumption of the good. This means also the good can be consumed
simultaneously by all the members of society.
Now education and national park may lose the characteristics of pure public goods if they miss
any of the above characteristics.
For example, when education institutions and national parks charge fees to get access to
education/national parks they will no longer be pure public goods/services.
By charging prices also access to education/national parks becomes restricted to those who can
afford the fees.
Also, where access to education is limited (even if it is free) and thus provided to some individuals
who meet certain criteria, this means exclusion of some members from its consumption.
Similarly, it would be the case to national parks where there are certain requirements to be
fulfilled by entrants (e.g. must use four-wheel drive motor vehicles). This excludes some
members from national parks entry who cannot meet the requirements.
Answer to SEQ 12
 Allocation function shifts resources from the satisfaction of private wants to that of public wants
 Distribution function shifts resources from the disposal of one individual to that of another (between
alternative private wants)
Answer to SEQ 13
(a) Roles of Public Finance in a country’s economy.

(i) Ensuring economic and financial stability
Public Finance is used to ensure economic and financial stability in an economy. Economic
stability is the absence of excessive fluctuations in the economy, whereas financial stability
can be achieved by efficient allocation of resources by appropriate policy making for
example any increase in direct taxes will reduce the money available with the people to
purchase goods and services and will, in turn, help to reduce inflation. Public finance helps
to reduce the economic imbalance on account of unequal distribution of income and wealth
among the public.
(ii) Optimum utilization of resources:

Public finance ensures optimum utilization of scarce resources by adopting suitable
monetary policies.
(iii) Effective tool to tackle unemployment:

Public finance is an effective tool to tackle unemployment for example the government sets
up fiscal policies which increase employment opportunities.
(iv) Capital formation public finance involves:

Providing infrastructure like railways, roadways improved transportation etc. this kind of
capital expenditure in turn ensures increase in capital formation which brings about long
term benefits to the public in general.
(v) Improved income and service of economy:

Public finance involves raising funds from the public. Furthermore, investments in such
funds is sometimes linked to a reduction in the amount of tax paid by the general public.
This helps in increasing the income and savings of an economy thereby helping in its
development.
(b) Primary functions of a government relating to the public finance
(i) Providing basic utility services and promoting social and economic development
The government is mainly engaged in providing public utility services like electricity,
telephone, roads and high ways, transportation facilities etc. to the public such services are
provided at economical rates so that these can be veiled by common man. The government
generally establishes its own monopoly over the supply of such services, with a view to
avoid consumer exploitation. In providing of such services the government invests in social
and economic capital.
(ii) Encouraging capital formation

Industrialization is the key to development of an economy. This is brought about by
investing in heavy infrastructure such as machinery and tools, chemicals, iron and steel.
Such investments carry high risks and the return can be gained only in the long run.
Therefore the private sector rarely makes investments. Thus it becomes the responsibility
of the government to make such investments in these sectors which ultimately enables the
economy to improve its capital formation.
(iii) Complementing private investment

The private sector also invests in industrial goods. However, whenever there is insufficient
investment by the private sector, the government steps in and makes good the shortage.
This ensures a balanced development of the economy with the government investing in less
profitable sectors or back ward areas where private investment is not forthcoming.
(iv) Providing an environment conducive to development

The government encourages private investment in areas of economic development by
setting up basic industries and providing financial assistance by promoting the development
of banks.
(v) Conserving and efficiency utilizing natural resources

Economic development depends on the efficient and effective utilisation of its natural
resources like oil, minerals aquatic life and forestry. Many economies especially the
developed and developing economies are often faced with underutilization as well as
inefficient utilization of its natural resources. The government therefore intervenes as well
as conserve the natural resources.
Answer to SEQ 14
Likely harmful effects/negative implication the process of government intervention is likely to create
(i) Higher taxes or further borrowing required to finance growing government expenditure inhibit
growth.
 High taxes serve as disincentives for households to invest, take risk and find jobs
 Borrowing on affect private investment since government accesses funds that could
otherwise have been invested in the private sector, thus crowding out private
investment.
(ii) Large government sector increases potential profits from rent-seeking activities.
 May lead to a movement of resources in to a more unproductive use.
 Rent-seeking occurs when people try to obtain income by having government
transfers to themselves rather than providing goods and services to others.
 Engender corrupt practices where governance is weak.
 E.g. offering generous tax incentives to investment which would have come anyway.
This is a loss to the government.
(iii) Continuous expansion of government move expenditure in to less and less productivities.
(iv) Continuous expansion eventually result in to government becoming too large and carries out
activities which it is ill-suited.
A2
SECTION A
Public finance and

National Income
STUDY GUIDE A2: PUBLIC REVENUE
In case of a company, revenue is the income derived from sale of goods or services and in case of
non- profit organisations, revenue is in the form of donations or membership fees etc. In other
words, revenue is income received by an organisation. Revenue is very important for financial
statement analysis. The performance of an organisation is measured in terms of net profit earned
by the organisation (profit = net sales less expenses) as well as in terms of the top- line i.e.
revenue earned by the company.
Government needs funds to perform various functions to achieve economic and social objectives.
These funds are referred to as public revenue. Government receives revenue from various
sources like taxes, fees, grants etc; tax revenue is the major source of revenue for any
government. Revenue obtained by Government from sources other than tax is called Non- Tax
revenue.
This Study Guide discusses the meaning and type of government revenue
a) Explain the meaning and classification Public Revenue.

b) Describe sources of Government Revenue (Tax and Non-Tax Revenues)
c) Identify the factors distinguishing a tax from other sources of government revenue.
d) Explain the arguments for and against foreign aids
22 Public Finance and National Income
1.0 Explain the meaning and classify public revenue.
[Learning Outcome (a)]
1. Meaning and Objectives of Public Revenue

This refers to amounts received by the government from its various sources to meet expenditures.
It includes all receipts of a public authority may secure during any period of time. Public revenue,
consists of taxes, revenue from administrative activities like fines, fees, gifts & grants. Public
revenue can be classified into two types.
(i) Tax revenue
(ii) Non tax revenue
2.0 Describe the sources of government revenue (Tax and nontax revenues)
[Learning Outcome (b)]
2. Sources of government revenue (tax and non-tax revenues)
2.1 Tax Revenue
Taxes are the first and foremost sources of public revenue. Taxes are compulsory payments to
government without expecting direct benefit or return by the tax payer. Taxes collected by Government
are used to provide common benefits to all mostly in form of public welfare services. Taxes do not
guarantee any direct benefit for person who pays the tax. It is not based on direct quid pro quo
principle.
Characteristics of Tax
The following are the characteristics of a tax :-
(a) A tax is a compulsory payment made to the government. People on whom a tax is imposed must
pay the tax. Refusal to pay the tax is a punishable offence.
Public Revenue: 23
(b) There is no quid pro quo between a taxpayer and public authorities. This means that the tax payer
cannot claim any specific benefit in return for the payment of a tax.
(c) Every tax involves some sacrifice on part of the tax payer.
(d) A tax is not levied as a fine or penalty for breaking law.
The governments collect tax revenue by way of direct & indirect taxes. Direct taxes includes; Corporate
tax; personal income tax capital gain tax and wealth tax. Indirect tax includes custom duty, central excise
duty, and VAT and service tax.
2.2 Non-Tax Revenue
The revenue obtained by the government from sources other then tax is called Non-Tax Revenue. The
sources of non-tax revenue are :-
(i) Grants or aids
Grants can be defined as the non- repayable voluntary transfer of resources.
The grants could be of the following types:
 Grants provided by the central government to state government for
specific objectives
 Grants provided by foreign countries to the Central/ State Governments (also called as
foreign aid). Foreign aid may be given to support social causes, for contribution during
emergencies/ natural calamities, for strengthening ties with the country or for commercial
purposes.
(ii) Debts from other governments or banks/ funds

When public expenditure exceeds public revenue, governments resort to borrowings. Borrowings
may be from:
 foreign countries or
 internal borrowings from the private sector in the form of debentures
or bonds etc or
 internal borrowings from central bank of the country
(iii) Income from investments made by the Government

Governments invest excess funds in bonds, mutual funds of other institutions. The revenue
that is earned by governments from such investments is in the form of interest or dividend.
(iv) Revenue from public enterprises

Government sets up public sector enterprises, which are owned and controlled by the government.
The profit earned by such public sector enterprises is a source of revenue for the government.
Furthermore when the public sector enterprise income from sale of its non-current asset, it is
revenue for government, although it is a one- time revenue and is not a recurring income.
(v) Royalties
Royalty is received by the government when it allows private enterprises to use government/
public assets or intellectual property. Royalty is generally charged as a percentage of revenue
derived from the use of the asset or a percentage of the unit price of the product sold. Example:
Private sector enterprise has to pay royalty to the government to extract natural resources like
petrol/ crude oil from government owned lands.
(vi) Fees and penalties

Government’s charges fees for a number of services it renders to the general public. For
example fees for issuing driving license/ passports, fees for generating copies of official
documents, fines/ penalties levied for breaking traffic rules etc.
(vii) User fees

The government charges fees for use of its assets / services provided by the government. For
example a toll is charged for the use of roads/ highways.
(viii) Subsidies received from other countries/ banks

Government receives subsidies from international banks/ monetary fund’s which are an
indirect source of revenue for the government.
(ix) Rent
Government may earn revenue by way of renting of owned buildings or by renting out parking
space etc. A local authority like municipality may rent out some empty space to the central
government on requirement.
3.0 Describe the factors distinguishing tax from other sources of government revenue.
[Learning Outcome c]
3. Factors distinguishing a tax from other sources of government revenue.

The unique factors which distinguish a tax from the other sources of government revenue are as
follows:
(a) Taxes are mandatory charges; they are compulsory payment made to the government. People on
whom a tax is imposed must pay the tax. Taxes are not voluntary contributions, donations or gifts to
the state. Furthermore, refusal to pay the tax is a punishable offence.
(b) Only government or other taxing body has power to levy taxes, therefore other non government
bodies like sports clubs, churches, political parties can not charge taxes.
(c) Depending on tax laws all person regardless of their citizenship pay taxes though non-citizens
now get refunds of VAT paid in Tanzania for goods that will be spent outside of Tanzania. On the
other hand, the non-government revenue are received from either individuals or
corporates(depending on the type of revenue)
(d) A payment of tax, does not involve a “quid pro quo” status i.e. taxpayers cannot expect equal
returns for the tax paid. On the other hand generally the non-tax government revenue like user
fees has the characteristic of ‘quid-pro-quo’.
(e) Though individuals and legal persons pay taxes to government, the government does not have an
obligation to provide an individual account of how tax is utilized; in most cases; however
governments account to parliaments of behalf of taxpayers.
(f) Taxes are usually paid and collected in monetary terms either coins or paper
money
(g) Every tax involves some sacrifice on part of the tax payer.
(h) A tax is not levied as a fine or penalty for breaking law.
4.0 Explain the argument for and against foreign aids
[Learning Outcome d]
4. The arguments for and against foreign aids

A foreign aid is any form of assistance from a foreign country or foreign institutions.
Forms of Aids
 Technical assistance
 Capital (funds, machinery)
 Grants
 Gifts
 Consultancy
Arguments for foreign aids

(i) Foreign aids supplement/increases domestic sources of finance, thus increasing the amount of
investment and capital stock.
Public Revenue: 25
 Consultancy
Arguments for foreign aids

(i) Foreign aids supplement/increases domestic sources of finance, thus increasing the amount of
investment and capital stock.
(ii) Foreign aids Finance development projects
(iii) Foreign aids promote good governance and democracy
(iv) A recipient country can obtain technology from a donor country.
(v) Aids are very useful during natural calamities such as floods
(vi) Aids promotes cordial relationships between a donor country and a recipient country
Arguments against foreign aids

(i) Aids create economic dependency
(ii) Some aids are not provided on time therefore cannot be utilized efficiently
(iii) Some aids are accompanied with some conditions which may be harmful to the economic and social
interest of a country
(iv) Some aids are in poor quality and therefore useless.
(v) Aids may be a disincentive for domestic production.
Question 1
Examine the nature and types of non-tax government revenue.
Question 2
Discuss the non-taxation sources of government revenue in the country apart from Tax revenue.
Question 3
Explain three unique features of tax over the other sources of government revenue.
Question 4
Assume you are given the following information relating to the fiscal position of Tanzania for three years:
% of GDP
2011/2012 2012/2013 2013/2014

Total Revenue 19.4 22.8 20.5
Domestic Revenue 14.4 15.9 15.9
Grants 5.0 6.9 4.6
Total Expenses 23.5 22.8 25.2
Deficit 4.1 0.0 4.7
Net Financing 5.9 1.7 0.3
Despite a considerable improvement on the fiscal performance between years 2011/2012 and 2012/2013
due to increase in domestic revenue, the government’s main challenge is that almost one third of its
revenue comes from external grants/foreign aid.
Required:
a) Discuss why foreign aid is important to a developing nation like Tanzania.
b) Outline the negative effects of foreign aid dependency.
Answers to Self-Examination Questions
Answer to SEQ 1
Nature and types of non-tax government revenue
a. User Fees
Fees are another important source of revenue for the government. A fee is charged by public
authorities for rendering a service to the citizens. Examples are payment made by users if public
services on government cost sharing in health and education. That is to say the payment made by
users of public service i.e. health and education. Other examples include fees charged for issuing
of passports, during licenses, etc. what makes user fees different from conventional taxes is that
there is no compulsion involved in case of fees.
b. Fines or Penalties
Fines or penalties are imposed as a form of punishment for breach of law or non-fulfillment or
certain conditions or for failure to observe some regulations. Like taxes, fines are compulsory
payments without quid pro quo. The destination between taxes and penalties lies in the motive. A
public authority imposes taxes mainly to obtain revenue and imposes penalties mainly as a form of
punishment or to deter people from doing certain acts.
c. Grants and Gifts
Grants and gifts are voluntary contributions by individuals or institutions to the government. Gifts
are significant source of revenue in the modern days. Grants from foreign countries are known as
Foreign Aid. Developing countries receive military aid, food aid, technological aid, etc from
developed countries. Unlike taxes, grants and gifts are voluntary.
d. Surplus from Public Enterprises
The Government also gets revenue by way of surplus from public enterprises. The Tanzania
government has set up public sector enterprises to provide public goods and services. Some of
the public sector enterprises do make a good amount of profits. The profits or dividends which the
government gets can be utilized for public expenditure.
e. Borrowing for Deficit Financing
Deficit means an excess of public expenditure over public revenue. This excess may be met by
borrowing from the market, borrowings from abroad, by the central bank creating currency. In
case of borrowing there may be compulsion. The government may force various individuals, firms
and institutions to lend to it at a much lower rate than the market would have offered. It is
ordinarily presumed that money borrowed will eventually be repaid from funds raised from other
sources of revenue, although in practice this may not always be the case.
Answer to SEQ 2
Revenues obtained by the government from sources other than tax are:
 Fees charged by government for rendering certain services. These are payment made by users of
public services on government cost sharing in health and education, That is to say the payment made
by user of public services i.e. health and education is not the actual cost that they were required
to pay rather than contribution on cost already payable government.
 Grants and Gifts
 Fines and penalties are the payments made for the contravention of law.
 The Government also gets revenue by way of surplus from public enterprises.
 Borrowing of money.
Public Revenue: 27
Answer to SEQ 3
(a) Taxes are mandatory charges; they are compulsory payment made to the government. People on
whom a tax is imposed must pay the tax. Taxes differ from contributions, donations or gifts to the
state, which are voluntary. Furthermore refusal to pay the tax are a punishable offence.
(b) A tax is not levied as a fine or penalty for breaking law. On the other hand, fines or penalties are
imposed as a form of punishment for breach of law or non-fulfilment or certain conditions or for
failure to observe some regulations.
Though individuals and legal persons pay taxes to government, the government does not have an
obligation to provide an individual account of how tax is utilised; in most cases; however governments
account to parliaments of behalf of taxpayers.
Answer to SEQ 4
(a) (i) Helping the poor to save and invest in businesses through micro-finance
programs which have created thousands of enterprises and employment.
(ii) Powerful in attracting private investments from individuals and businesses thus generating
high tax revenues. This because aid improves water, transport, power, and education,
which are powerful tools for attracting investment.
(iii) Increase national growth.
(iv) Aid is crucial for a long-term equitable and sustainable development, for improving gender
equity, and for ensuring that poorest citizens can enjoy their rights. Real aid helps to
transform lives.
(b) (i) Loss of policy autonomy for the government depending on foreign aid.
(ii) Aid can undermine accountability and responsiveness to national citizens, and delivery of
services by the government; as government focuses on the relationship with the donors.
(iii) Aid can undermine the predictability of the government spending and therefore long-term
planning.
A3
SECTION A
Public finance and

National Income
STUDY GUIDE A3: THEORETICAL

CONCEPTS OF TAXATION
Tax is a financial charge imposed by the government. The fundamental purpose of taxation is to
finance government expenditure. Any money the government expends mostly comes from
taxation.
You will agree that having to pay tax from your earnings is a painful experience. You must also
have wondered why the government needs to collect taxes. What is the purpose behind
collecting a part of our hard-earned money? Most of the tax payers feel that paying taxes is a
waste of their money.
This Study Guide explains the basic theoretical concepts of taxation starting from the nature
and essence of taxation, explaining principles of taxation. Various approaches of classifying
taxes will be discussed followed by a discussion on theories of tax distribution, effects of
taxation and various taxation concepts. Lastly this Study Guide will explain the optimal taxation
theory.
a) Explain the nature and objectives/purposes of taxation

b) Explain the principles/canons of taxation
c) Identify and explain the bases on which taxes are classified
d) Explain principles of equity in taxation (benefits theory, sacrifices theory, ability to pay
theory)
e) Describe the criteria for evaluating taxes
f) Discuss economic effects of taxation
g) Explain the incidence of taxation
h) Explain the concept of tax buoyancy and elasticity and taxable capacity
i) Explain the concept of excess burden and optimal taxation
j) Explain the relation between tax rate and revenue collection
k) Explain the concepts tax incentives and tax competition
Explain the nature and objectives/purposes of taxation, explain the principles/canons of

taxation, Identify and explain the bases on which taxes are classified, explain principles
of equity in taxation (benefits theory, sacrifices theory, ability to pay theory)
[Learning outcome a, b, c, and d]
1. The Nature and Objectives/Purposes of Taxation

1.1 Introduction
Taxation traces its origin to the ancient times as a major source of revenue needed for
governance. Kingdoms, monarchies and even dynasties had an elaborate form of taxation
imposed on their subjects to source funds that were used to run affairs of the government.
Taxation has had a long and influential history in the shaping of civilizations throughout the
world. All the great ancient civilizations – Egyptian, Romans , Greek, Persians, Zulu, Oyo,
Malian, Songhai, Benin – taxed their people to achieve a collective greatness.
1.2 Definitions of Tax

Tax is one of the most important social and economic issue that has kept both the experts
and the public preoccupied throughout the evolution of human civilization.
“Tax is a compulsory contribution to the state revenue, levied by the government on

workers’ income and business profits or added to the cost of some goods, services and
transactions”
The Oxford Dictionary
“Tax is a compulsory a contribution imposed by a public authority regardless of the exact

amount of service rendered to the taxpayer in return”
Dalton (1978)
"Tax is any leakage from the circular flow of income into the public sector, excepting loan
payments and direct payments for publicly produced goods and services up to the costs of
producing these goods and services." Charles M. Allan (1971)
According to Allan, this definition is clearly relevant to fiscal economics and is stated in terms
of income flows. "Tax is unrequited, compulsory payments collected primarily by central
governments."
The World Bank Definition

Tax is a source of derivative revenue; From the angle of the citizens, a tax is a coerced
payment; From the administrative point of view, it is a demand for money by state in conformity
to established rules; From the point of view of theory, a tax is a contribution from individuals for
common expenditure."
Professor Adam Smith

These definitions shed light not only on the conditions under which people make a contribution
to their government but also reflect a range of attitudes towards tax. In all definitions there is a
pursuit to underpin whether taxation is a civic obligation, a bond between the rulers and the
ruled based on reciprocity or just an unrequited payment to finance government expenditure.
Taxes are the first and foremost sources of public revenue. Taxes collected by Government
are used to provide common benefits to all mostly in form of public welfare services. Taxes
do not guarantee any direct benefit for person who pays the tax. The payment of tax is made by
the members of the community without any assurance given by the tax-levying authority that
they will get direct benefit in return for paying the tax. There is no direct give and take
relationship between a taxpayer and the tax-levying public authority. It is worthy to note
that;
Theoretical Concepts of Taxation: 31
Tax is compulsory
It is paid by the taxpayer for the benefit of all
It is not levied in return for any special services
Tax is a financial charge imposed by the government. The fundamental purpose of taxation is to
finance government expenditure. The imposition of taxation by governments withdraws money
from the economy, and their expenditure returns the money to the economy.
Taxes are the most important source of public revenue and are necessary for the functioning of
the government. Funds collected by way of tax are utilised by the government to provide various
infrastructure/ facilities to the taxpayer; however benefits of such public expenditure by the
government is enjoyed even by those people who are not liable to pay taxes.
Following are the essential features of any tax:

It is generally payable in money
It is a proportion or a percentage
It is levied on persons
It is levied by the government
It is levied in order to cater to public purpose
1.1 Nature of taxation

Revenue from taxation may be in several forms:
The main taxes employed within Tanzania are as follows:
Tax Suffered by
Revenue taxes
Income tax Individuals, Partnerships, Corporates
Import duty Importer
VAT Final consumer
Excise duty Supplier
Capital taxes
Capital gains tax Individuals, Partnerships, Corporates
Property tax Owner
Revenue Taxes
a) Income tax
It is a tax levied on the income of an individual. Income can be from any sources such as:
i] income from earnings (e.g. employment income / trade profit)

ii] income from pensions
iii] income from other benefits (e.g. rental income)
iv] income from savings (e.g. interest income)
v] income from investments (e.g. dividend income)
Income tax is calculated on earned income (i.e. income from employment)as well as on
income from savings etc. Income from various sources is pooled together and tax is charged
on the aggregate income after deducting the relevant allowance.
b) Import duty
Import duty is a tax collected on imports and some exports by the customs authorities of a
country. It is usually based on the value or quantity of the goods that are imported/.
c) VAT
VAT is Value Added Tax. It is the tax which is paid on the value added. This tax is levied
at each stage of production. VAT is a consumption tax paid by customers in addition to the
price of the product.
d) Excise duty
Excise Duty is a duty charged on specific goods and services manufactured locally or imported
on varying rates. It is mostly charged on alcohols, soft drinks, cigarettes, telecommunication
services, money transfer services etc.
Capital taxes
a) Capital Gains Tax

When a person sells an asset that is in his / her possession, the profit arising from such
sale is chargeable to tax as capital gains.
Therefore, capital gains tax liability arises when a ‘chargeable person’ makes a chargeable
disposal of a chargeable asset. For example, Adam sells his business asset at a profit of Tshs
5,000,000. So, the amount of profit i.e. Tshs 5,000,000 is chargeable to capital gains tax.
b) Property tax
Property tax is levied at flat rates on the property value by the municipal or city councils.
Applicable rates vary depending on the size, use and location of the property.
1.2 Purposes of taxation
(a) Economic purpose

Taxes have an economic significance; they are used to promote goals such as full
employment, satisfactory rates of economic growth, and stability of the money supply. The
economic goals of taxation are achieved by raising or lowering tax rates. The imposition of
taxation by governments withdraws money from the economy, and their expenditure
returns the money to the economy. Government therefore uses taxation policies to
manage the economy by manoeuvring tax structure. For example, when government need to
reduce inflation, increase employment, protect consumers and society, balance of payment
etc. it can simply rise or reduce tax rate and decide to tax or not to tax some activities.
Taxes provide the money that makes it possible for government to function. Governments
require substantial revenue for expenditure on various public services, such as the provision
of health, education, defense, transport, administration of justice housing and many other
services. All governments in the world depend mostly on tax revenue to achieve their roles
to their citizens. Failure to collect enough tax revenue might lead to government failure or
collapse of the government. Therefore tax revenues are important because of governments
need to manage the economy, regulate society, develop society and provide public goods.
Although these goods can be financed through other means, like loans, even when
governments borrow they need tax revenue to repay them.
(b) Social purpose

The government aims to reduce the gap between poor and rich; this has been a political
agenda in our country. Taxes are therefore used as a redistribution of wealth. The purpose of
income redistribution is to lessen the inequalities of wealth in society. In addition to taxing the
rich more than the poor government can use cash transfer system to reduce poverty and
promote social equality. The effect of the system is to transfer money from those who have
much of it to those who have very little. Two of the most common examples are social security
payments and welfare payments made to people who, for one reason or another, do not work.
(c) Implementation of government policies

Taxation has been used as a tool of encouraging particular behaviour in a particular society.
For instance tax reduction may encourage an economic activity that perhaps it could not have
existed. The introduction of Export Processing Zone is one of examples which aim at
encouraging exports.
(d) Environmental purpose

Taxation can be used as a regulation tool to protect the environment, domestic industries or
sectors, consumers and public in general. Government can enact heavy taxes on harmful
products like cigarettes, liquor, etc. hence making it expensive and discouraging its
production. It is considered unlikely that individuals will contribute voluntarily to protect the
environment as they are unlikely to be affected in their lifetime by the changes taking place.
As a result, the government aims to protect the
(e) Other objectives of taxation include:

Encouragement of domestic industry and discouraging imports: the government may
increase custom duties on imports which will increase the price of imported goods and will in
turn help government to control import of goods.
Income redistribution: this refers to bridging the gap between the rich and the poor and
reducing inequality.
This is done by levying higher tax on the richer sections of society. These funds are used for
the welfare of the poorer sections to reduce the disparity between different sections of society.
Economic stability: this refers to reducing the effect of inflation/ depression. For example,
an increase in direct taxes will reduce the money available with the people to purchase goods
and services and will in turn help to reduce inflation, whereas increase in public
expenditure during depression helps to increase demand for goods and services, which is
otherwise very low during depression. Protection of particular sectors/ industries: the
government may levy lower rates of taxes or give tax concessions to particular sectors/
industries to protect or promote their growth
2. The Principles or Canons of Taxation

Taxation system should adhere to certain basic principles so that it can function effectively.
 the tax system should be fair (that is a person should be taxed
according to his ability to pay),
 the provisions of tax should be clearly specified without any ambiguity,
 it should be easy to understand to the common man,
 it should be efficient and cost of
compliance should be minimum.
The main principles of a good tax system are:
Equality: This is the most important principle of taxation. It means that the tax system
should be framed depending on the ability of the people to pay tax that is the richer sections
or the high- income group should be subjected to higher tax while relatively less tax should
be imposed on the low income group
Economy: A good tax system will ensure that the cost of collecting and paying tax as well
the compliance cost is minimum. For example, if there are many procedures for payment of
tax and filing of related documents or if a number of visits are required by the tax payer to
the tax office, then the tax system is said to be uneconomical.
In a broader sense, if very high tax is levied on the income of the tax payer, it will
discourage savings and the productive capacity of the economy will go down, which will be
uneconomical for the country.
Taxes on products like alchohol, cigarettes etc are considered as economical because they
fetch revenue to the government as well as increase the price of those products which will
discourage their consumption.
Certainty: It means that tax that each tax payer is required to pay should be certain and
there should be no ambiguity. The amount to be paid, timing of payment, procedure for
payment should all be certain and known to the tax payer. There should be no element of
ambiguity in the taxation provisions as this may lead to corruption (if any element of taxation
can be controlled by the will of the government authorities).
Certainty is also required from the point of view of the government in terms of the
estimated amount to be collected from various taxes and the time frame when the same will
be collected.
Efficiency: This means that the revenue collected from the tax payers in the form of tax
should be sufficient to meet the government expenditure. However the government has to
ensure that in order to raise sufficient revenue to meet expenditure, it does not overburden
the tax payers such that the productive capacity is affected.
Understandable: Tax system should be simple and should be such that it can be
understood by common man. This will help curb corruption.
Benefit principle: Taxation system should be such that persons who benefit from goods/
services provided by the government and which are primarily funded through taxation,
should pay for it.
Convenience: The tax system should be so designed that it causes minimum

inconvenience to the tax payers in respect to payment of tax, record- keeping, filing of
returns, audits etc.
Generally indirect taxes like VAT are convenient to the consumers because a consumer
pays for them when he makes purchases and at a time when he can afford to because he
chooses his own time of purchasing.
Fairness / equity: Taxation system should ensure that no special treatment is meted out to
specific political or other interest groups.
Demand management: In times of depression in the economy, demand for goods and
services is low; government can help increase demand by reducing taxes on goods/
services and consequently, reducing prices.
Elasticity: Government should be able to increase revenues from taxation if required

in case of an emergency for eg: a surcharge levied on incometax can considerably
increase government revenue during the period of emergency
Flexibility: This is a necessary criterion for elasticity. Unless the tax system is flexible
that is it can be modified to suit new conditions, revenue cannot be increased.
Diversity: There should be a number of taxes both direct and indirect so that all the people
who can afford to contribute are subjected to tax.
Broad basing: This principle requires that taxes should be spread as wide as possible over
the sections of population/ economy, to minimise individual tax burden.
Earmarking: Tax revenue from a specific source should be used for the purpose for
which it is collected when a direct link can be established between the tax collected and the
expenditure for eg toll collected for road maintenance.
3. Approaches to Classification of Taxes

Taxes may be classified into different types according to
various criteria like:
 tax base,
 tax incidence shift ability,
 unit or ad-valorem based taxes,\ and
 hypothecated taxes
 Distribution of tax burden.
Each of the above are

explained below.
3.1 Classification according to tax base
Tax base means what is being taxed and what is no. Under this basis we have the
following classes:
a. Income tax: taxed based on the quantum of income earned or received by taxpayers
at specific period e.g. corporate tax, PAYE for employee etc. Income base taxes are
most popular taxes all over the world but as we shall see, what constitutes income is
highly debatable.
b. Wealth tax: taxed based on wealth accumulated by taxpayers. In this category we

have capital gain tax, property taxes, etc. From those two bases we have income
tax.
Sometimes wealth taxes can be easily measured and administered, for example land rent
taxes which are based on square metres. Also wealth tax can be used to tackle tax
avoidance in the tax system, for instance, if you buy shares in corporate entity you will
only be taxed when you sell or receive dividends. On the other hand some of wealth
taxes are difficult to administer; issue such as inflation, valuation of properties without
being sold for council taxes make the wealth tax complex.
c. Expenditure tax: taxed based on taxpayers spending their income or wealth

accumulated. For example value added taxes and excise duties on purchase of
alcohol and cigarette. Expenditure taxes, unlike income and wealth taxes relate to
taxes on consumption from an economy. Thus, we do not have to worry about
valuation of income in expenditure taxes; and since taxpayers are taxed only if they
spend the income or wealth, they are somehow encouraged to save. However, if we
depend only on expenditure tax base, some income or wealth [savings] will not be
taxed so we may end up paying high tax rate.
3.2 Classification according to ability to shift the tax incidence
Tax impact or formal incidence is legal requirement to pay tax. It refers to who is required by
tax law to pay taxes while tax incidence is the actual effect / burden of paying taxes by the one
who actually pays taxes. Building on this basis we have direct and direct taxes.
1. Direct tax
It is a tax levied directly on tax payers (individuals and non-individuals) who are required to
by tax laws to pay taxes with no possibility of shifting the incidence to another person. In
this case the tax impact and incidence falls on the same person. Thus the tax is levied on
and paid by the same person.
Examples of direct taxes include:
i. Income taxes
 Corporate tax - 30% of all companies (whether resident or none resident)
carrying on a business in Tanzania.
 Individual Income Tax - non-corporate resident tax payers including sole
proprietors and salaried employees are taxed at progressive individual income
tax rates,
ii. estate duty, property tax and capital gain tax
iii. Skills and development levy - a tax on the gross monthly emoluments paid by an
employer to employees. iv. Game of chance and Gambling Tax - charged to
casinos, private lotteries and slot machines.
iv. Withholding taxes - a scheme, that is basically not a tax source in itself that is
operated on a number of payments made by persons in course of doing
businesses/investments. [e.g. investment income, etc].
(a) Benefits of Direct Taxes

The direct taxes are always regarded to be more equitable than indirect taxes
because they can be related to taxpayer’s ability to pay through the progressive rate
structure where a change in income automatically pushes the taxpayer to the next
higher or lower tax bracket without altering the tax rates.
Direct taxes also create public consciousness since the taxpayers are made to feel
the burden of taxes directly and hence take keen interest in how public funds are
spent. The taxpayers are likely to be more aware about their rights and
responsibilities as citizens of the state
The direct taxes can help to control inflation. During inflationary periods, the
government may increase the tax rate. With an increase in tax rate, the consumption
demand may decline, which in turn may reduce inflation.
The direct taxes are relatively elastic. With an increase in income and wealth of
individuals and companies, the yield from direct taxes will also increase. Elasticity
also implies that the government's revenue can be increased by raising the rates of
taxation. An increase in tax rates would increase the tax revenue.
As far as direct taxes are concerned, the tax rates are decided in advance therefore
the tax payer is certain as to how much he is expected to pay. The Government can
also estimate the tax revenue from direct taxes with a fair accuracy.
(b) Criticisms of Direct Taxes

An important criticism of direct taxes is the possibility that highly progressive direct
taxes may have serious disincentive effects. It may reduce people's ability and
willingness to work and save and thus have a negative impact on investment and
productive capacity in the economy. If tax burden is high, people's consumption level
gets adversely affected and this has an impact on their ability to work and save. High
taxes also discourage people from working harder in order to earn and save more.
In direct tax burden of tax cannot be shifted. The disadvantages of direct taxation are
therefore mainly due to administrative difficulties and inefficiencies. The extent of
direct taxation should depend on the economic state of the country. A rich country
has greater scope for direct taxation than a poor country.
Direct taxes are inconvenient in the sense that they involve several procedures
and formalities in filing of returns. For most people payment of direct tax is not only
inconvenient, it is psychologically painful also. When people are required to pay a
sizeable part of their income as a tax to the state, they feel very much hurt and
their propensity to evade tax remains high.
It is also argued that direct taxes are prone to tax evasion. Indeed compared to
indirect taxes it is said that direct taxes are easier to evade. The tax evasion is due to
high tax rates, documentation and formalities, and poor and corrupt tax
administration. It is easier for the businessmen to evade direct taxes. They
invariable suppress correct information about their incomes by manipulating their
accounts and evade tax on it. In due to high rate of progressive tax evasion &
avoidance are extensive.
The direct taxes tend to be arbitrary. Critics point out that there cannot be any
objective basis for determining tax rates of direct taxes.
2. Indirect tax
It is a tax whose incidence can easily be shifted to another person from a person who is
required to pay it by law. In other words tax incidence in indirect taxes falls on another
person than the one paying the tax. For example VAT is paid by a consumer to a retailer /
manufacturer, at the time of purchase of goods. However the retailer / manufacturer is
required to pay this tax (which is collected) to the government. The ability of taxpayers to
shift tax incidence to others depend on a number of factors such as market
structures, industry cost structure, price elasticity of product, and types of tax.
When taxpayers are operating in imperfect market as monopoly, oligopoly, and duopoly where
products are differentiated and there is imperfect communication, tax incidence may easily be
shifted. It is difficult to shift tax burden in perfect market containing many buyers and sellers,
full knowledge, no restrictions of exist and entry as small increase in price lead to significant
decrease in sales.
In increasing cost structure any attempt to shift the tax incidence will increase the price of goods
that are probably perceived already high by taxpayers. Therefore a rational taxpayer cannot try
to shift tax incidence in that situation. Taxpayers can possibly shift tax burden in constant
cost structure and justify it to his/her customers, but he/she can easily put the tax burden on
customers shoulder in decreasing cost structure simply by maintaining the price.
The price elasticity of product describes the demand changes due to a change in prices. The
product is elastic if small change in price leads to great change in demand hence less possibility
of shifting tax incidence in respect to that product. If a change in price leads to a very small
change in demand the price elasticity is said to be inelastic, and in this situation there is very
high possibility of shifting tax incidence.
Generally if tax is classified as indirect tax there is more possibility of shifting tax incidence
while in direct tax it is not easy to shift tax incidence as tax authority identify and charge tax
direct to the tax payer.
Examples of indirect taxes include:
 Excise duty on locally manufactured goods - levied on locally manufactured

goods which includes beer, wines, whiskeys, spirits, soft drinks, smoking tobacco,
cigarettes, and petroleum products.
 Stamp duty - certain legal instruments attract payment of stamp duty for the
purpose of authenticating them.
 Value Added Tax (VAT) - a consumption tax charged on VAT registered traders for
goods and services at a standard rate of 18%.
 Other Internal Taxes such as fees, levies and user charges, which are collected
from various sources. For example. taxes and charges on motor vehicles, port and
airport departure services.
 Import duty or customs duties. These are tariffs, which are imposed on goods
coming into the country.
 Excise duty on imports of certain

consumer goods into the country.
1. Advantages of Indirect Tax

Indirect tax is convenient to both the Government and the taxpayer. It is convenient to
taxpayer as the taxpayer do not feel the burden much because they do not pay a lump sum
amount for tax and that tax is paid only when making purchases. Moreover, the tax is
"price-coated" i.e it is wrapped in price and therefore the burden cannot be easily felt. It is
convenient to the Government as well because the business owners collects the tax on the
Government’s behalf when they charge a price.
There is mass participation. Each and every person getting goods or services has to pay
tax. Indirect taxes are the only means of reaching the poor who are always exempted from
paying direct taxes. It is a sound principle that every individual should pay something,
however little, to the Government.
Unlike direct taxes, the indirect taxes have a wide coverage. Majority of the products or
services are subject to indirect taxes. The consumers or users of such products and
services have to pay them.
Indirect taxes can be used to influence pattern of production by imposing taxes on certain
commodities or sectors, the government can achieve better allocation of resources. For
example by Imposing taxes on luxury goods and making them more expensive,
government can divert resources from these sectors to sector producing necessary goods.
When imposed on luxuries or goods consumed by the rich, indirect taxes are considered
equitable as only the well-to-do will pay the tax.
Indirect taxes are very elastic in yield, if imposed on necessity goods which have an
inelastic demand and therefore can yield very large revenue, because people must buy
these goods. However the dilemma of indirect taxation is the fact that it is based on
consumption and therefore hits the majority of lower income earners.
There is a less chance of tax evasion as the taxpayers pay the tax collected from
consumers. They cannot be evaded, as they are a part of the price. They can be evaded
only when the taxed commodity is not consumed, and this may not always be possible.
The government can check on the consumption of harmful goods by imposing higher taxes
to those goods such as tobacco, and other intoxicants.
The indirect taxes may not affect the motivation to work and to save. Since, most of the
indirect taxes are not progressive in nature, individuals may not mind to pay them.
Therefore, individuals would not be demotivated to work and to save, which may increase
investment
The indirect taxes are more flexible and buoyant. Flexibility is the ability of the tax system to
generate proportionately higher tax revenue with a change in tax base, and buoyancy
is a wider concept, as it involves the ability of the tax system to generate proportionately
higher tax revenue with a change in tax base, as well as tax rates.
2. Disadvantages of Indirect Tax

The biggest criticism of indirect taxes, is that they do not take into account the taxpayer’s
ability to pay both the rich and the poor pay exactly the same amount of tax. It is therefore
regressive because tax burden to the rich and poor is the same making the poor
spending a greater percentage of their income than the higher income earners. This may
further increase income disparities among the rich and the poor.
Indirect tax is uncertain. As demand fluctuates, tax will also fluctuate. Unless necessities
are taxed (which is normally not the case) the yield is uncertain. Taxes on commodities
with elastic demand are particularly uncertain, since quantity demanded will greatly be
affected as prices go up due to the imposition of tax. In fact a higher rate of tax on a
particular commodity may not bring in more revenue. When the commodity is not
purchased, the question of the tax payment does not arise.
Indirect tax has a direct effect on consumption, production and employment. For
instance, a high rate of duty on certain products such as consumer durables may restrict
the use of such products. Consumers belonging to the middle class group may delay their
purchases, or they may not buy at all. The reduction in consumption affects the investment
and production activities, which in turn hampers economic growth.
Most of the taxes are concealed in the price of goods or services. As a consequence, the
tax-payer does not even know that he is paying a tax let alone know the amount of tax he
paid to the Government.
They are uneconomical. The cost of collection is quite heavy. Every source of production has
to be guarded.
The government has to set up elaborate machinery to administer indirect taxes.
Therefore, cost of tax collection per unit of revenue raised is generally higher in the case of
most of the indirect taxes.
The indirect taxes are inflationary in nature. The tax charged on goods and services
increase their prices as taxes are shifted forward.
3.3 Classification according to quantities or values
There are two types of taxes under this category: us unit and ad-valorem taxes.
A unit or specific tax is levied on the physical measures of what is being taxed e.g. volume,
weight, square meters like land and property taxes etc.
Examples
Items charged under specific rates in Tanzania include: Wine, spirits, beer, soft drinks,
mineral water, fruit juices, Recorded DVD,VCD,CD and audio tapes, cigarettes, tobacco,
petroleum products and Natural gas.
Ad-valorem tax is levied on the value of the tax base, for example income tax is charged on
the level of income, VAT on consumer expenditure and import duty.
Examples
40 Items
Public charged
Finance under Income
and National ad-valorem rates include: Money transfer services, electronic
communication services, pay to view television services, imported furniture, motor vehicles,
plastic bags, specified aircrafts, firearms, specified cases, cosmetics and medicaments.
Examples
Examples
Items charged under ad-valorem rates include: Money transfer services, electronic
Items charged
Ad-valorem
communication rates under
are: 0%,
services, ad-valorem
pay 0.15%,
to view 5%, rates10%,
televisioninclude:
17%, Money
15%,
services, transfer
imported services,
furniture, motor electronic
vehicles,
communication
20%,
plastic25% services,aircrafts,
andspecified
bags, 50%. pay to view television
firearms, services,
specified cases, imported
cosmeticsfurniture, motor vehicles,
and medicaments.
plastic bags, specified aircrafts, firearms, specified cases, cosmetics and medicaments.
One advantage
Ad-valorem ratesofare:
ad 0%,
valorem taxes
0.15%, 5%, is 10%,
that the
17%, tax15%,
revenue to the government can rise
Ad-valorem
automatically
20%, 25% andratestheare:
as50%. 0%, 0.15%,
economy grows. 5%, 10%, 17%,
This means 15%,
that the tax rate does not need to be adjusted
20%, 25% and
frequently, as in50%.
the case of specific unit taxes, such as duties on cigarettes and alcohol.
One advantage of ad valorem taxes is that the tax revenue to the government can rise
One advantage
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3.4 C l a s s i f i c a t i o n for hypothecated taxes

The hypothecation of a tax (also known as the ring fencing or ear marking of a tax) is a tax
where the money obtained, or part of the money obtained, is used for a particular purpose,
3.4 C l a than
rather s s i f ispent
c a t i oon
n for hypothecated
a number taxes
of things. These are taxes that are raised to pay for specific
3.4 C lhypothecation
assification
activities.
The of for hypothecated
a tax (also knowntaxes
as the ring fencing or ear marking of a tax) is a tax
The hypothecation
where the money obtained, of a tax or
(also known
part of theasmoney
the ring fencing
obtained, or used
is ear marking of a tax) purpose,
for a particular is a tax
where the
rather thanmoneyspent obtained,
on a numberor part
of of the money
things. obtained,
These are taxes is used
that for a particular
are raised to pay forpurpose,
specific
rather than
activities.
Example spent on a number of things. These are taxes that are raised to pay for specific
activities.
Rural energy fund, taxes charged when we buy electricity from TANESCO and skill and
development levy paid by employers to raise fund to the Vocational Education and Training
Example
Example (VETA) for the purposes of providing the skills to the workforce that employers require
Authority
the levyenergy
Rural is also fund,
used to finance
taxes the Higher
charged whenLearning
we buyStudents Loan
electricity Board
from [HLSLB].and skill and
TANESCO
Rural energy levy
development fund,paid taxes charged when
by employers we fund
to raise buy electricity from TANESCO
to the Vocational Educationandand skill and
Training
development
Another
Authority levyfor
example
(VETA) paid
in the by
many employers
European
purposes tocountries
raise the
of providing fundis to the Vocational
a television
skills to the Education
license.
workforce There,
that and Training
all users
employers of
require
Authority
the levy is(VETA)
television sets areforobliged
also used thefinance
to purposesthe of
to pay theproviding
government
Higher the skills
Learning to the
an annual
Students workforce
fee Board
Loan that employers
to use[HLSLB].
their require
televisions. The
the levy isof
proceeds also
theused to finance
levy are the Higher
then used to fund Learning Students Loan Board [HLSLB].
public broadcasting.
Another example in many European countries is a television license. There, all users of
Dedicating tax revenues
Another example to specific expenditures
countries iscan however license.
be used There,
by policymakers to
television sets are in many
obliged toEuropean
pay the government ana annual
television
fee to use their all usersThe
televisions. of
mask increases
television sets in total government spending, and it has been shown empirically that
proceeds of theare
levyobliged
are then toused
pay to
thefund
government an annual fee to use their televisions. The
public broadcasting.
hypothecated
proceeds of the taxes
levytend to result
are then usedintoan increase
fund public in total government size but have little effect on
broadcasting.
the expenditures to which they are tied.
3.5 Classification according to distribution of tax burden fairness

Dedicating tax revenues to specific expenditures can however be used by policymakers to
mask increases in total government spending, and it has been shown empirically that
hypothecated taxes tend to result in an increase in total government size but have little effect on
the expenditures to which they are tied. Theoretical Concepts of Taxation: 41
3.5 Classification according to distribution of tax burden fairness
Under this categorization we have progressive, proportion and

regressive taxes.
1. Progressive taxes: as income rises so does the proportion of tax i.e. the rate of tax rises as
well as the amount of tax. Furthermore in this case marginal rate of tax is greater than the
average rate of tax. This can be considered as just and fair, as the higher tax payments are
made by those with higher incomes. Taxes which take a higher percentage of the incomes
of higher income earners are said to be progressive.
2. In proportional taxes the amount of tax to be paid increases in the same way as the rise in
income or any tax base. It occurs when marginal rate of tax and average rate of tax being
equal, good example all tax payers paying 10% constant of their income.
3. Regressive taxes increase slower than the rise in income and the marginal rate of tax
(MRT) is less than average rate of tax (ART). As income rises, the proportion of tax
decreases, e.g. the tax on a packet of cigarettes remains the same, regardless of the
income of the consumer. Regressive taxes can be justified as smokers are likely to require
additional hospital care, which is the reason why they should contribute towards the cost of
it. Taxes which take a higher proportion of the incomes from lower income earners are said
to be regressive.
Most of income and wealth taxes belong to either progressive or proportion taxes which
mean that the richer pay more in progressive tax while they (the rich) suffer the same as poorer
in proportional tax.
Example
In progressive tax system taxpayers will end up paying different tax rates depending on their
incomes, with the higher income earner attracting high tax rate.
Assume that Mrs Kanje earns Tshs 1,000,000 per month which is subjected to say 20% tax
rate under PAYE and her friend Mrs. Swabiri gets Tshs 200, 000 per month which is taxed at
say 10% under PAYE. You will end up paying different taxes under progressive tax system, you
pay Tshs 100,000 and she/he pays 20,000 to TRA.
If it was proportional tax system they would all be subjected to the same tax rate, for example
20%, Mrs Kanje would pay Tshs. 200,000 and Mrs. Swabiri would pay 40,000.
In the regressive taxes wealthy taxpayers spend proportionally less of their income than poorer.
Consequently, the poor spend much of their income in paying regressive taxes. In regressive
system taking the example, Mrs Kanje and Mrs. Swabiri buy food at Bestbite for Tshs 10,000
assume it includes Tshs 1,000 as VAT. The richer (Mrs Kanje) would have spent
1,000/1,000,000=0.1% paying for taxes in this transaction, while poorer (Mrs. Swabiri) would
have spent 1,000/200,000=0.5% paying for VAT significantly above the richer (Mrs Kanje)
burden.
Marginal rate of taxation (MRT) and Average Rates of

Taxation (ART)
The marginal and average rates are very important to both government and taxpayers.
Marginal rates of taxation is the rate of tax which is due if taxpayers earn Tshs 1 more than
their current income. The average rate of tax is the total amount of tax paid as a proportion of
their total income.
Change in tax paid or amount of tax paid on next Tshs1on Income

MRT =
Change in income
Total tax due

ART =
Total income
The taxpayers care more about the marginal rate of tax than average rate of tax as it shows how
much they are going to pay as taxes for an increase in income. Take an example of employed
taxpayers who want to work overtime to earn more income, the progressive nature of our payroll
taxes mean that the extra income will be taxed more. Progressive taxes may discourage
hardworking individuals, while the government can induce hard working spirit through
decreasing the marginal rate of taxation.
Compute the marginal rate of tax and average rate of tax from following information:
Y Income Tax paid

2e 'Tshs' 1,5 'Tshs ' 4
2
0a 2,0
00, 6
5
2
0
1r 2,5
00,
00 7
0
2
0
1
0 3,0
00,
00
0 9
5
0
,
0
1 00,
00
0 0
,0
Answer
1
2 00
0 0
,0
3 0 ,0
0
Marginal rate of tax is given by change in tax paid0 0 over change in income giving the following
results. 0
0
Y Change in Change in tax Marginal rate of
2e income amount - tax %
2
0a 5 1 30
2
0
1r 5
0 1
5 30
2
0
1
0 5
0 1
5
0 30
0
1 0
, 5
0
,
1
While
2 the average rate of 0 0
,0tax is total tax paid/total income.
,0
3 ,0 ,0
Y Income 0 Tax paid 0
0 Average rate of
2e 'Tshs' 1,50 'Tshs ' 0 4 450,000
tax / 1500,000
2
0a 2,0
00, 6
0 5 30%
= 30%
2
0
1r 2,5
00,
00 7
0 30%
2
0
1
0 3,0
00,
00
0 9
5
0 , 30%
0
1 00,
00
0 0
,0
1
Comment:
2 00
this is a proportion
0 tax system as marginal 0
,0 and average rate of tax are equal.
3 0 ,0
0
4. Theory Of Equity In Taxation 0
0
0
4.1 The Benefits Theory. 0
According to the benefits theory, tax burden should be split up according to the benefit gained
from the government expenditure that are funded by taxation. The persons who receive
benefits from the government should pay amount as taxes which are equivalent to the benefits
received. Therefore those who receive greater benefits should pay more as taxes than those
receiving less benefits. The government should not impose taxes greater than the benefits
received by the tax-payer. If the taxes are greater than the benefits received, then the tax
system would not be equitable one.
Under the benefit principle therefore, taxes are seen as serving a function similar to that
of prices in private transactions; that is, they help determine what activities the
government will undertake and who will pay for them. If this principle could be implemented,
the allocation of resources through the public sector would respond directly to consumer
wishes.
Example
The following are examples of the public services that are currently funded, in some part, on
the basis of the benefit principle.
 Public college tuition fees (only paid by the people who attend public colleges)
 National park admission fees (only paid by the people who visit public parks)
 Fuel taxes (only paid by the people who purchase fuel)
 Bus fares (only paid by the people who take the bus)
 Bridge tolls (only paid by people who use the bridge)
 Road license tax paid by motor vehicle owners
The application of the benefit theory

The principle of benefit arises from the need that greatest beneficiaries should make the
greatest tax contribution. This is indeed the essence of fairness. It finds common application in
near public goods whereby only those who pay and consume the goods are liable for such
taxation.
The benefit principle is utilised most successfully in the financing of bridges, roads and highways
through levies on motor fuels and road-user fees (tolls). In these specific cases, it is easy to
implement tax according to the benefits received because it is possible to quantify a direct and
reasonable benefit.
Formidable examples include tourist paying their levies, students paying for their tuition, patients
paying for their medical charges among many other instances. The people who do not directly
benefit from such goods and services are thus exempted from the associated charges. Such
manner of fairness is elaborately justifiable. Under the benefit principle each individual pays for
the amount of government provided goods and services they consume. Because the exchange
is voluntary, at least as envisioned by many promoting this principle, and payments are in
accordance with benefits, it satisfies this notion of equity.
In the absence of benefit taxation, it is impossible to tax persons who benefit

from a specific government project. For example: If the government does not follow the
principle of benefit, and imposes tax on the basis of ability to pay, then it would end up in
imposing tax upon people in Musoma for meeting the expenditure of a bridge constructed in
Kigamboni making persons in musoma, who do not use the bridge, worse off. This unfairness in
taxation can be avoided, if the government follows the benefit principle.
Limitations of
Benefit theory
Although simple in its application, the benefit theory has the following difficulties
in its application:
i. Despite the logical fairness identified in the principle of benefit, it suffers a
setback in terms of efficiency Inefficiency in provision of goods is based
on the notion that there would be a decline in quantity demanded if direct
beneficiaries pay a price equal to the derived value as it is for private goods.
ii. The principle is based on the assumption that it is possible to determine
the benefit received for every individual for each government expenditure.
However, the implementation of this principle faces daunting challenges on
public goods. Excluding non-payers and identifying the received benefits is
complicated thus making it almost impossible to set the amount of tax. In
some public expenditures such as defense, fire force, expenditure in
advanced scientific research etc the benefits available to each individual is
very difficult to calculate separately.
iii. It is difficult to trace benefits (example defense, justice, law and

order) to each individual in the society. So the application of this
principle depends on the person himself to reveal information about the
amount of benefits he receives. But citizens generally have no inclination to
pay for a publicly provided service such as a police department unless they
can be excluded from the benefits of the service.
iv. In modern times, government is welfare oriented with the objective of

increasing the welfare of the society as a whole. It is thus impossible to
individualize the benefits rendered to the society. Therefore, an individual
cannot be taxed but the taxation should be taken as a collective instrument
for supporting the services of the government.
v. Under the benefit principle the rich and poor people pay equal tax for the
same benefits received. However since the marginal utility of income of rich
people is lower than the poor people, it is unjust to tax both rich and poor
equally. Therefore the principle ignores the income re-distribution
objective of taxation that requires the government to take away income
from rich people by way of higher taxes and give it to poor people.
vi. Again, it can be argued that some services provided such as

infrastructural development and national defense may benefit everyone
but not in equal proportions. A criterion for identifying the major
beneficiaries in such scenarios may therefore be erratic. Indeed it is difficult
to establish who benefits more. The benefit received from government
spending might be used as a way of determining vertical equity where
persons enjoying many services pay more taxes than others. For example,
road taxes are paid only by all taxpayers who own motor vehicles, while this
can be seen as fair, but other road users are not contributing toward it. Is it
proper for elders to pay more taxes because are more likely to be sick and
enjoy free health services than youths who pay for the services? It is still
problematic. Some benefit received are difficult to trace to taxpayers, for
instance, how can we measure the cost of service of the police, armed
forces, or judiciary to different individuals. And if taxes base on tax benefit
received, then the poor will have to pay the heaviest taxes, because they
benefit more from the services of the state than the rich.
vii. The benefit theory holds that the rich benefit more from protection because
their property is more valuable; if those with higher incomes also consume
more government provided resources, then this would justify a progressive
tax structure. But which income groups use the most resources is an
empirical question. If lower income groups consume more government
goods, then this could also support a regressive structure. However the cost
of protection may have little relation to the value of the property
4.2 The Ability to Pay Theory

The “ability to pay” principle suggests that people with higher incomes should pay more
than those with lower incomes. However the principle does not answer the question of how
much more. Its policy implications are based on a diminishing marginal benefit of a dollar
assumption: the widely-accepted belief that the value of an additional dollar of income
falls, as income rises, i.e. a rich man values an additional dollar less than a poor.
The ability-to-pay approach treats government revenue and expenditures separately. Taxes
are based on taxpayers’ ability to pay; there is no quid pro quo. Taxes paid are seen as a
sacrifice by taxpayers, which raise the issues of what the sacrifice of each taxpayer should be
and how it should be measured. Potential measures of “equal sacrifice” include equal absolute
sacrifice (each person’s welfare declines by the same amount), equal proportional sacrifice
(each person’s welfare declines by the same proportion), and equal marginal sacrifice
(each person’s “displeasure” from taking away an additional dollar is the same). Equal
absolute sacrifice would suggest proportional taxation if the marginal benefits of a dollar of
income fell proportionally with income.
Example
Based on the above principle, if James earns $25,000 and Jack earns $5,000 during 20X3 and
John values a dollar approximately a fifth as much as James, then for every dollar one collects
from John, one collects $5 from James.
In the above example, the principle implied a proportional tax system.
If the marginal benefit of a dollar diminishes, but at a fairly slow rate, a regressive tax system
could also be consistent with the principle, while if it diminishes at a faster rate, a progressive
tax would be appropriate.
An alternative measure of sacrifice is equal proportional sacrifice. This method is much

more likely to justify progressive tax system, but it too depends on how fast the value of an
additional dollar declines with income. There are many reasonable functional forms that do
not support progressivity.
The equal marginal sacrifice principle suggests steeply progressive taxes that will collect
the least valued dollars in the economy. The result also uses the assumption that the value
of a dollar falls as income rises. Under this principle, in contrast with the previous two cases,
the progressivity does not depend on the rate with which the value declines.
Thus, without further information on the nature of welfare and the exact standard to be used,
the ability to pay criterion does not necessarily justify regressive, proportional, or
progressive taxes. The equal marginal sacrifice principle suggests an extreme degree of
progression
Application of the ability to pay theory
Due to the inconsistencies in the benefit principle, the ability to pay principle forms a better
alternative for equity in taxation. The principle suggests that the ability to pay should form basis
of taxation to maintain fairness. This means that citizens who earn more should pay more taxes
than their counterparts in lower income cadres. In spite of everyone sharing the benefits, only
those who can afford are taxed accordingly. The principle correctly addresses the concerns of
efficiency since goods are provided to citizens at zero prices and tax payment is not pegged on
the beneficiaries alone.
The ability-to-pay approach treats government revenue and expenditures separately. Taxes
are based on taxpayers’ ability to pay; there is no quid pro quo. The approach also makes a
great deal of sense, especially for the provision of public goods that are consumed by all. If
everyone benefits from public goods, without exclusion, then everyone should pay. However,
not everyone can pay, so those who can afford to pay need to bear the burden.
Because taxes are a means of transferring the purchasing power of income to governments, the
ability to pay is based on income. Those who have more income can afford to pay more
taxes, that is, they have a greater ability to pay.
Analysis of tax equity is concerned with the distribution of tax burdens among persons in
different economic circumstances, i.e., with vertical equity as well as persons in essentially the
same economic circumstances— horizontal equity.
Limitations of Ability to Pay Theory
Although the ability to pay approach is more popular, the main challenge lies on the
determination of the ‘ability to pay’. Ability to pay is mostly determined by income, wealth or
expenditure. Wealth is however considered as a poor indicator of one’s ability to pay because
property may not be easily convertible into cash with which to pay tax. A progressive tax
structure based on wealth may thus run on serious liquidity problems.
Furthermore we can measure ability to pay by expenditure incurred by a taxpayer. However this
may be inequitable or unfair as taxpayers with many dependents may expend more and hence
end up paying more taxes.
Lastly, ability to pay can be measured by an income base which is the most accepted measure
of the ability to pay. In fact the ability to pay approach assumes “income” to be the basis for the
ability to pay. Individuals with higher income is not only better able to bear the tax burden than
the lower income earners, but they can bear heavier tax burdens of tax. A tax system that takes
away proportionately more income from the higher income earners than from the lower income
earners is known as a progressive tax system. On the other hand a tax system that takes away
proportionately more income from the lower income earners than from the higher income
earners is known as a regressive tax system
4.3 The Sacrifice Theory

This theory emerged from discussions of “ability to pay” theory in which taxes paid are seen as a
sacrifice by taxpayers. Although it is now decidedly going out of fashion, the many variants of the
"sacrifice" approach are similar to a subjective version of the "ability-to-pay" principle. Under this
doctrine, ability to pay is assumed to increase as incomes increase, and the objective is to
impose taxes on a basis that would involve “equal sacrifice” in some sense. Tax payers
should make equal sacrifices in contributing to the cost of the government activity. However there
is disagreement about whether there should be equal absolute sacrifice, where the rich and the
poor should suffer the same absolute decline in utility
The sacrifice theory divides into three main branches:
(a) Equal sacrifice: The total loss of utility as a result of taxation should be equal for all
taxpayers (the rich will be taxed more heavily than the poor).
(b) Equal proportional sacrifice: The proportional loss of utility as a result of taxation should
be equal for all taxpayers.
(c) Equal marginal sacrifice: The instantaneous loss of utility (as measured by the
derivative of the utility function) as a result of taxation should be equal for all
taxpayers. This will entail the least aggregate sacrifice (the total sacrifice will be the
least).
The Assumptions of Sacrifice Theory
The theory rests on three

general premises:
 The utility of a unit of money to an individual diminishes as his stock of
money increases;
 These utilities can be compared interpersonally and thus can be summed up,
subtracted, etc.; and
 Everyone has the same utility-of-
money schedule.
The assumptions
The assumptions of sacrifice theories
of sacrifice that the
theories relative
that utility of
the relative different
utility incomes
of different is measurable
incomes is measurable
and that andthe relation
that between
the relation incomeincome
between and utility
and is approximately
utility is approximatelythe same for all for
the same taxpayers—
all taxpayers—
cannotcannot
be verified by actual
be verified data ordata
by actual experience.
or experience. The marginal utility of
The marginal money
utility does diminish,
of money does diminish,
but it butis impossible to compare
it is impossible to compare one person's
one person's utilitiesutilities
with another, let alone
with another, believebelieve
let alone that that
everyone's valuations
everyone's are identical.
valuations UtilitiesUtilities
are identical. are not are quantities,
not quantities, but subjective
but subjective ordersorders
of of
preference. Any principle
preference. for distributing
Any principle the taxthe
for distributing burden that rests
tax burden that on such
rests on assumptions
such assumptions must must
therefore be declared
therefore fallacious.
be declared Nevertheless,
fallacious. the ability-to-pay
Nevertheless, idea has
the ability-to-pay ideabeenhas abeenpowerful force force
a powerful
in history and has
in history and undoubtedly
has undoubtedly contributed to thetowidespread
contributed the widespread acceptance
acceptanceof progressive
of progressive
taxation. However,
taxation. severalseveral
However, aspects of this of
aspects theory are of are
this theory interest. Utility Utility
of interest. and "sacrifice" theorytheory
and "sacrifice" has has
generally been used
generally been to justify
used progressive
to justify taxation,
progressive although
taxation, sometimes
although proportional
sometimes taxation
proportional taxation
has been has upheld on thisonground.
been upheld Briefly,Briefly,
this ground. a dollar is alleged
a dollar to "mean
is alleged less" or
to "mean less"be orworth less inless in
be worth
utility to a "rich
utility to aman"
"rich than
man"tothan a "poor
to a man"
"poor ("rich" or "poor"
man" ("rich" or "poor"
in incomein income
or wealth?),
or wealth?),
and therefore
and therefore
payment payment
of a dollar
of a dollar
by a rich
by aman rich imposes
man imposes less ofless a subjective
of a subjectivesacrificesacrifice
on himonthan him onthan a on a
poor man.poor man.Hence,Hence,
the richthe man rich should
man should be taxed be taxedat a higher
at a higherrate. Many
rate. Many"ability-to-pay"
"ability-to-pay"
theories theories
are really
are really
invertedinverted
sacrifice sacrifice
theories,theories,
since theysinceare theycouched
are couchedin the in formthe of ability
form of ability
to to
make makesacrifices.
sacrifices.
Describe
Describe
the criteria
the criteria
for evaluating
for evaluating
taxes,taxes,
discuss
discuss
economic
economic
effects
effects
of taxation,
of taxation,
explain
explain
the the
incidence
incidence
of taxation,
of taxation,
and explain
and explain
the concept
the concept
of taxofbuoyancy
tax buoyancy
and elasticity
and elasticity
and taxable
and taxable
capacity.
capacity.
[Learning
[Learning
outcome
outcome
e, f, g,e,and
f, g,h]and h]
5. The
5. Criteria
The Criteria
for Evaluating
for Evaluating
Taxes Taxes
Designing
Designing
a tax asystem
tax system
has always
has always
been abeen
subject
a subject
of considerable
of considerable
controversy.
controversy.
Any taxAny tax
systemsystem
influences
influences
behavior
behavior
since the
since
government
the government
takes takes
away money
away money
from anfrom
individual,
an individual,
who who
may respond
may respond
in somein way
sometoway
lower
to his/her
lower his/her
tax liability.
tax liability.
a) Economic
a) Economic
efficiency-
efficiency-
a gooda taxgood
system
tax system
shouldshould
not interfere
not interfere
with the
with
efficient
the efficient
allocation
allocation
of of
resources.
resources.
To doTo so,doit should
so, it should
minimize
minimize
distortionary
distortionary
and disincentive
and disincentive
effectseffects
to work
to and
work and
savings
savings
which which
may affect
may economic
affect economic
growth.
growth.
 Generally,
 Generally,
almostalmost
all resource
all resource
allocationallocation
decisions
decisions
in the ineconomy
the economy
are affected
are affected
in some in some
way byway taxation.
by taxation.
 A tax system
A tax system
is non-distortionary
is non-distortionary
if and ifonly
andif only
thereif is
there
nothing
is nothing
an individual
an individual
can docan to do to
alter his
alter
taxhis
liability.
tax liability.
Non-distortionary
Non-distortionarytaxes taxes
are sometimes
are sometimesreferred to as lump-sum
referred to as lump-sum
taxes. taxes.
 Any taxAnyontax
commodities
on commodities
is distortionary
is distortionary
since ansince
individual
an individual
can change
can change
his taxhisliability
tax liability
by reducing
by reducing
his purchases
his purchases
of the ofcommodity.
the commodity.
A tax on A tax
income
on income
can alsocanbealso
distortionary
be distortionary
if an individual
if an individual
can reduce
can reduce
his taxhisliability
tax liability
by working
by working
less orless
by saving
or by saving
less. less.
 Taxation
 Taxationcan sometimes
can sometimes
be used be in used
a positive
in a positive
way toway raise
to revenue
raise revenue
while atwhile
the atsame
the same
time correcting
time correcting
marketmarket
failure/externalities
failure/externalities
and thusand improving
thus improving
efficiency
efficiency
of resource
of resource
allocation.
allocation.
b) Administrative
b) Administrative simplicity-
simplicity-
a gooda taxgood system
tax system
ought ought
to be easy
to be and
easyrelatively
and relatively
inexpensive
inexpensive
to to
administer.
administer.
There There
are significant
are significant
costs associated
costs associated
with administering
with administering
the taxthe
system:
tax system:
(i) Direct
(i) Direct
(administrative)
(administrative)
costscosts-
the costs
the of
costs
running
of running
the taxthe authority.
tax authority.
(ii) Indirect
(ii) Indirect
(compliance)
(compliance)costscosts-
the costs
the costs
which which
taxpayers
taxpayers
must bear-including
must bear-including
the costs
the costs
of of
time spent
time filling
spent out
filling
theout
taxthe
forms,
tax forms,
costs ofcosts
record
of record
keeping, keeping,
and costs
and of
costs
hiring
of accountants
hiring accountants
and lawyers.
and lawyers.
Indirect Indirect
costs are
costsusually
are usually
about about
five times
five greater
times greater
than the
than
direct
the costs.
direct costs.
 The  overall
The overall
administrative
administrative
costs costs
of running
of running
a tax asystem
tax system
dependsdepends
on theonextent
the extent
of record
of record
keeping, keeping,
the complexity
the complexityof the oftaxthesystem
tax system
(number(number
of taxesof taxes
and rate
andstructure),
rate structure),
extent extent
of tax of tax
evasion evasion
and level
andoflevel
enforcement
of enforcement
required,
required,
and theand
typetheoftype
income
of income
being being
taxed taxed
(taxing(taxing
capitalcapital
is more is expensive
more expensive
than taxing
than taxing
labor-where
labor-where
tax is mostly
tax is mostly
withheldwithheld
at the at
source).
the source).
c) Fairness/Equity-a good tax system ought to be fair in its relative treatment of different
individuals.
(i) Horizontal equity- a tax system is horizontally equitable if individuals who are the same in
all relevant respects are treated equally.
(ii) Vertical equity- a tax system is vertically equitable if individuals who are in position to pay
higher taxes than others actually do so. Progressive taxation is usually used to accomplish
this.
 Decisions about who should pay more than another may be based on ability to pay, higher
level of economic wellbeing, or receipt of more benefit from general government spending. In
most cases the level of income is used as the basis for measuring economic wellbeing and
hence ability to pay.
(iii) To be fair the tax system should not be characterized by arbitrariness or uncertainty about
tax liability; should be based on observable and measurable variables of welfare such as
income or expenditure; and should also not be inconvenient with respect to the timing and
manner of payment.
d) Flexibility- a good tax system ought to be able to respond easily (automatically) to changed
economic circumstances in order to counteract fluctuations in the level of economic activity.
 Changes in economic circumstances require changes in tax rates. For some tax structures
(e.g., where ad valorem tax rates in a progressive fashion are used) these adjustments are
easy and automatic; but for some they require extensive political debate/approval by
Parliament thus making the tax system adjust inflexibly with a lag.
e) Political Responsibility- the tax system should be designed so that individuals can ascertain
what they are paying so that the political system can more accurately reflect the preferences of
individuals.
 Governments should not try to take advantage of uninformed taxpayers/citizens by using

mostly taxes whose burden is not so apparent.
6. Economic Effects of Taxation

6.1 Tax effects on Consumer and Producer Surplus
In a market without taxes, the difference between the market price of a good and the
highest amount consumers would be willing and able to pay for it is referred to as
consumer surplus. Consumer surplus occurs because first, every consumer has his own
maximum price he would be willing to pay for a good (although the market aggregates this
demand, along with supply, to produce a market price); secondly, is due to the fact that
demand is rarely perfectly elastic. For most goods there is a limit to how much or how little
consumers will buy, no matter how much the price changes. For example, people are
unlikely to stop buying bread if the price rises, and they are unlikely to buy a lot more
bread if the price falls. In effect, consumer surplus can be seen as the total use or value
that consumers get without paying for it. On the other hand producer surplus represents
the difference between the market price and the lowest amount for which producers would
be willing and able to sell a good in a market without taxation. It is possible -- and, in fact,
normal -- that there will be consumer surplus and producer surplus for the same good. In
the same way each consumer has her own maximum price for a good, each producer has
a minimum price for the good. In most cases, this is at or slightly above the producer's
costs, because there is no benefit to producing and selling more cheaply than this. In
effect, producer surplus means profit.
Tax Effect
The addition of the tax will also remove some consumer and producer surplus. Consumers
are forced to pay more for the same good because the price has risen. Meanwhile,
producers are losing out on potential profits because their revenue has not increased by
as much as the price rise would suggest. Total surplus will therefore be reduced, because
people and firms sell or buy less of a good when the tax adds to its price. The effective
price paid may rise, causing the demand curve to shift to the left, or the effective price
received may fall, causing the supply curve to shift to the left, creating the Deadweight
Loss. This means that some people that would have engaged in trade without the tax, no
longer are "willing and able" to buy or sell the good, meaning their surplus disappears, and
the tax revenue that would have been derived from their market participation disappears
as well. Thus, taxes always cause deadweight Losses for society and always negatively
affects the free market system.
Graphic example of the effect of sales tax on producers and consumers
The initial equilibrium is at point E, with price Pe and quantity Qe. At the outset, the gains from trade
are shown by PmaxEPmin, allocated as before between consumers and producers. Suppose now
that the government imposes a per unit sales tax of say, TZS T per disk on the sale of compact
disks (A to E'). We know that the tax raises the costs of production by TZST for each disk that is
produced. As a result, the industry supply curve shifts up vertically by the TZST, leading to a
higher equilibrium price, PT and a lower equilibrium quantity, QT. The impact of the tax on
consumers' surplus is clear: From consumers' perspective, the price of disks rises, and they
reduce consumption in response. Instead of enjoying a surplus of P maxE’Pe, they now must make
do with the smaller surplus PmaxE'PT. Thus, consumers lose the area PTE'EPe.
As viewed by producers, the tax-inclusive price of CDs rises to PT, but of course TZST per disk
must be handed over to the tax collector. Thus, the net (after-tax) price received by sellers falls to
PN (which equals (PT - T)). The new level of producers' surplus is shown by the triangular area
PNAPmin, which is clearly smaller than before the tax. Indeed, producers lose the area P eEAPN
6.2 Tax Effects on Demand and Supply
Putting a tax on a good distorts the relationship between demand and supply. Taxes have an
effect on the amount of supply produced and consumer’s demand for goods. Taxation puts both
consumers and producers in a worse position because with the introduction of taxes, the price that
consumers pay is higher than what they would have paid before. On the other hand, the price that
producers get after the introduction of taxes is lower than what they would have received before
taxation.
The resulting change in relative cost of goods and services will have an effect of motivating
consumers to switch from one product or activity to another. The act of switching from one product
to another as a result of a tax, given a certain income level, leads to substitution effect. The
substitution effect interferes with consumer choice and subsequently leads to economic
inefficiency. Taxes that affect relative prices and influence consumers to substituting consumption
of the taxed commodity for another are also termed distortionary taxes and the substitution
changes the consumer’s tax liability. The distortionary effects are not limited to commodity tax
alone but are also associated with tax on income as an individual may decide to reduce his tax
liability by working less as will be shown in the following sections.
The market has narrowed because lower quantity of goods is being exchanged. The decrease in
consumers' and producers' welfare turns into tax revenue of the state. Thus, for the purpose of full
understanding of the impact of taxes on welfare, the decrease in welfare of consumers and
producers should be compared with the tax revenue collected by the state. Such an analysis will
show that the decrease in consumers' and producers' welfare exceeds the tax revenue collected
by the state. The loss of welfare that takes place after introduction of taxes (a part of which
belongs to no one - neither to a consumer or producer, nor to the state) represents a dead weight
loss or excess tax burden, or a degree of inefficiency that taxes introduce to economy.
6.3 Tax effects on savings

Taxes can reduce economic growth by affecting savings and investment. The higher the
proportion of income that is being saved and invested, the higher will be the future income
level. In other words, through its impact on the amount of the income being saved or invested,
taxation policy has a crucial effect on the future level of income per capita. The effect of taxes
on saving (of individuals and companies) is briefly presented below.
6.3.1 Impact of Taxes on Savings of Individuals

The gross savings in private sector are accumulated in households and companies.
However, a large part of the gross savings is used for covering depreciation and is
needed for the maintenance of the existing capital. The net savings, consisting of
savings in households and retained earnings of companies, represent the real
potential, available for new investments. The major part of these savings is
accumulated in households, while the retained earnings account for only a small part
of them. If all individuals would save the same proportion of income, then the impact of
income tax on the total savings would be the same, regardless of the pattern of the
distribution of tax burden to individuals. But, wealthy individuals save more than poor
citizens, so it is expected that the taxes collected from higher tax brackets create more
burden on savings than the ones collected from lower tax brackets. Consequently, a
more progressive income tax seems to be creating a heavier burden on savings than a
less progressive tax system. This claim suggests that a less progressive income tax
system would be favorable to the increase in savings of individuals. However,
research has established that the impact of income progressiveness on level of
savings is much less important than it could be expected: replacement of progressive
income tax with a proportional one could increase household savings by not more than
10 percent. This implies that propensity to save is affected by other non-tax factors: for
example it varies with stage in a life cycle: in youth and in old age it is much lower than
in middle age when income is highest and when people save for education of their
kids, for a house or a flat and for the old age. Income tax also affects savings by
lowering the net return from savings, that is, by lowering the interest rate on savings.
In such conditions, savings are expected to drop. However, the savings of individuals
are motivated with various other reasons and their final amount does not have to
depend on interest rate trends only. For example, many households will not save less
when interest rates are lower, because they are in that part of life cycle when they
have to save for retirement. Besides income tax, consumption tax also affects savings
of individuals. While income tax is generally progressive, consumption taxes are
mostly regressive, that is, they are mostly paid by lower-income households.
Since these households have a higher marginal propensity to consume than the
households with higher income and since their marginal propensity to save is
lower than the one of wealthy individuals, consumption taxes burden total
consumption more and savings less. This is why it is often recommended to the
countries with low level of savings that they should direct their tax systems to taxation
of consumption much more, because this will boost savings and growth, too.
6.3.2 Impact of tax on gross savings of companies
Retained earnings and depreciation reserves account for the predominant part of
company savings. Since profit is taxed after deduction of depreciation, income tax
does not reduce the depreciation reserves. But if profit taxation law allows accelerated
depreciation, then depreciation reserves and company savings will increase in the first
years following the purchase of fixed assets. Profit is divided in the dividends
distributed to company owners and undistributed profit remaining in the company.
Different taxation of the dividends and retained profit has an impact on savings, too.
Higher taxation of the retained profit will stimulate its distribution to dividends, while
lower taxation of the retained profit will increase the company's savings. The amount
of savings also depends on whether profit taxation system and income taxation
system are reconciled. If they are, double taxation of the dividends on company level
and again on the level of individuals is thus avoided.
6.4 Tax effects on labour supply
In regard to the labour market, labour is the supply and wages are the price of labour. Because
the supply of unskilled labour is highly inelastic, unskilled workers bear most of the burden of
the payroll tax. However, when workers offer valuable skills, they are generally much more
highly compensated because there is more competition for their abilities and services. Thus,
highly compensated individuals bear less of the burden of the payroll tax than the employers.
The overall effect is that the tax incidence of the payroll tax falls more heavily on lower income
workers than on higher income workers.
6.4.1 Impact of income tax on wages and employment

Taxation of labour introduces a difference between real gross cost of labour for a
company and real net wage that employees receive. Thus, taxes create a difference
between the cost of labour and net wage that is called tax wedge in economic theory.
Tax wedge is the difference between before-tax and after-tax wages. The tax wedge
measures how much the government receives as a result of taxing the labour force.
In some countries, the tax wedge increases as employee income increases. This
reduces the marginal benefit of working therefore employees will often work less hours
than they would if no tax was imposed. Some argue that the tax wedge on investment
income will also reduce savings, create less innovation, and ultimately lowers living
standards. By having a tax wedge the inefficiency will cause the consumer to pay
more and the producer to receive less. This is due to higher equilibrium prices paid by
consumers and lower equilibrium quantities sold by producers.
Tax wedges are the basic value with which impact of tax on labour market, that is, on
the amount of supply and demand for labour is analysed. The amount of real gross
cost of labour determines the amount of labour demand, while the amount of real net
wage determines the amount of labour supply. What part of tax wedge will be
distributed on the entrepreneur, thus determining the labour demand, and what part of
tax wedge will be distributed on the employee, thus influencing the amount of labour
that he can supply to the market, depends on the possibility of shifting of the tax
incidence. In analysing the impact of tax on employment rate and growth, it is
essential therefore to analyse tax incidence. It depends on the elasticity of supply and
demand in labour market, as well as on other factors that determine flexibility of wages
(e.g. negotiating skills of unions, minimum wage etc.).
Thus, for example, in markets where negotiating skills of unions are not strong, or
where labour supply is not flexible to change of wages, an entrepreneur will be able to
shift taxes on the worker, which will result in a lower net wage and the same gross
cost of labour for the employer. In a real situation, workers will eventually react on
reduction of their net wages, i.e. reduction of their income. Are they to offer a higher or
lower amount of labour to the market now? If substitution effect prevails, they will offer
less labour, expanding their leisure time. If income effect prevails, the workers will
want to work more, in order to compensate for the lost income, which will result in a
higher amount of labour in the market. This means that workers' reaction on taxes can
be to work more or to work less, depending on what will prevail - substitution effect or
income effect. Which way the combination works out depends upon preferences. For
some preferences labour supply increases with taxation, with others it decreases.
In the context of economic theory, the income effect is the change in an individual's or
economy's income and how that change will impact the quantity demanded of a good
or service. The relationship between income and the quantity demanded is a positive
one, as income increases, so does the quantity of goods and services demanded.
Income effect where a tax is imposed on the labour income as a result the worker will
not be able to buy most of the things he wants thus the effect is to persuade him to do
more work in order to restore his disposable income to its previous level
Substitution effect describes the relationship between a change in relative prices and
any resulting change in a person’s expenditure pattern. It describes the effect on a
person’s choice between work and leisure as the marginal benefit from either or both.
Only empirical research can help finding out which of the effects prevails in a given
market, that is, will introduction of taxes and reduction of real net wage encourage
people to offer more or less labour. In markets where negotiating skills of unions are
strong and where labour supply is flexible to changes of wage, an entrepreneur will not
be able to shift taxes on workers. The workers will react to introduction of taxes with
demands for increased net wages. This will make the cost of labour higher for the
entrepreneur and he will reduce the demand for labour. Such reduced demand for
labour results in reduced employment rate and, with constant use of capital, could lead
to lower growth. Empirical research indicates that labour markets are mostly rigid, that
is, entrepreneurs bear higher tax burden than. So, when conditions in labour market
are rigid, workers will oppose paying labour tax, thus initiating a negotiating process
and pressure for wage increase. This will increase the cost of labour for
entrepreneurs.
For its part, higher cost of labour for entrepreneurs reduces demand for labour; by
changing relative costs of labour and capital, it stimulates capital-intensive production.
Thus, reduction of tax burden on labour, as well as reduction of rigidity in a labour
market (reviewing the amount of minimum wage; unemployment benefit; increased
mobility of labour force) would lead to a higher supply and demand for labour. This
would result in increased employment rate on the one hand and increased output on
the other hand.
6.4.2 Impact of taxes on consumption on wages and employment
Beside direct taxes, indirect taxes (that is, consumption taxes) also have impact on the
supply of labour by reducing the purchasing power of net wage. However, workers
seem to be reacting somewhat slower to a change in the consumption taxes, and the
impact of the consumption taxes on labour supply also appears within a longer period
of time than normally is the case with direct taxes. Taxes on labour income and
consumption spending encourage households to shift away from work in the legal
market sector and toward untaxed uses of time such as leisure, household production,
and work in the shadow economy. Empirical evidence also show that taxes affect work
activity directly through labour supply-and- demand channels and indirectly through
government spending responses to available tax revenues. Higher tax rates on labour
income and consumption expenditures lead to less work time in the legal market
sector, more time working in the household sector, a larger underground economy,
and smaller shares of national output and employment in industries that rely heavily on
low-wage, low -skill labour inputs.
6.5 Effects of Taxation on Production, Consumption and Distribution

6.5.1 Effects on Production:
a) Production is affected by taxes in two ways:
 By affecting the ability to work, save and invest
 By affecting the desire to work, save and invest

b) A tax on necessaries of life will obviously affect the workers productivity and hence
reduce production. A heavy tax on income tends to reduce the ability to save and
invest on part of individuals. A decrease in investment is bound to affect adversely
the level of output in the country
c) Normally taxation induces people to work harder, earn more, save more and invest
more to increase their income and enjoy the same income after tax
d) Some taxes has no adverse effects, for e.g., import duties, tax on monopolists, etc.
e) High marginal rates of income tax are likely to affect adversely the tax payers desire
to work, save and invest
f) The reaction varies from individual to individual. It depends on the individuals
elasticity of demand for income. When it is fairly elastic, the tax will lessen his desire
to work and save
g) Entrepreneurs may avoid the production of goods which are taxed. There is likely to
be a diversion of resources from some sectors of economy to others
6.5.2 Effects on Income Distribution:
a) The effects of taxes on income distribution depends on the type of taxes and rates of
taxes
b) Taxation of goods of mass consumption is regressive and redistributes incomes in
favour of rich.
c) But if such commodities are exempted and luxuries are taxed, and the taxation is
made progressive, then the income will be redistributed in favour of poor.
6.5.3 Effects on Consumption:

a) By imposing tax on a consumable good which is injurious to health, its consumption
can be checked.
b) Similarly the tax on luxury goods can decrease their consumption and resources
diverted to the production of mass consumption
7. Incidence of Taxation
One of the important concepts of taxation is the incidence of tax. Taxes are not always borne by
the person who pays the tax; in many instances the burden of tax is shifted to another person. Tax
incidence is said to be on the person who ultimately bears the burden of tax whereas impact of tax
is on the person from whom government collects money in the first instance. It is important for the
government to know who ultimately bears the tax in order to achieve equality in taxation.
7.1 Statutory and economic incidence

It is usual to distinguish between statutory / legal and economic incidence.
The statutory / legal incidence refers to the person on whom the law says the tax obligation falls.
Legal incidence is established by law when new taxes are enacted, and specifies which individuals
or companies must physically remit tax payments to the revenue authorities.
7.2 Absolute incidence and differential incidence of tax

The distributional impact of tax or systems of taxes depends partly on how the question is framed.
An absolute incidence examines the effects of a tax when there is no change in either other taxes
or government expenditure. The examination considers the burden of change in taxes without
regard to the use the tax proceeds. However, the true burden of the tax cannot be properly
assessed without knowing the use of the tax revenues. If the tax revenues are employed in a
manner that benefits owners more than producers and consumers then the burden of tax will fall
on producers and consumers. If the proceeds of the tax are used in a way that benefits producers
and consumers, then owners will suffer the tax burden.
A differential incidence examines how incidence differs when one tax is replaced with another,
holding the government budget constant. The differential incidence analysis carries out a revenue-
neutral change in tax by raising one tax while lowering another.
7.3 Shift ability of Incidence of taxation

Burden of tax may be shifted from one person to another; shifting finally ends in incidence. A
person on whom tax is levied may shift the burden of tax on another person either entirely or partly
or he may not be able to pass on the burden at all.
Types of incidence shifting
 Forward shifting of tax takes place if burden of tax falls entirely on user and not on the
manufacturer/supplier of the goods or service;
 Backward shifting occurs when the price of the product/ service remains same but the cost
of tax is borne by the manufacturer.
 In certain cases, there would be no shifting of tax at all.
Factors determining shift ability of Incidence of taxation
It would appear that the incidence of a tax or where its ultimate burden rest, depends on a number
of factors. We give below some of them in a summary way.
(a) Elasticity:
While considering incidence we consider both elasticity of demand and elasticity of supply.
If the demand for the commodity taxed is elastic, the tax will tend to be shifted to the
producer but in case of inelastic demand, it will be largely borne by the consumer. In case
of elastic supply, the burden will tend to be on the purchaser and in the case of inelastic
supply on the producer.
 If supply elasticity ᶯs is zero (very inelastic supply), Id is zero; consumers bear none of the
tax incidence.
 If supply elasticity ᶯs is ∞ (very elastic supply), Id is one; consumers bear the entire tax
incidence.
 If demand elasticity ᶯd is zero (very inelastic demand), Id is one; consumers bear the entire
tax incidence.
 If demand elasticity ᶯd is ∞ (very elastic demand), Id is zero; consumers bear none of the
tax incidence.
The above incidences are extreme cases. Most markets fall between two extremes, and
ultimately the incidence of tax is shared between producers and consumers in varying
proportions.
 Id is sometimes called the pass-through fraction for buyers, and is expressed in percentage of
the tax incidence borne by buyers.
Example:
If elasticity of demand is -0.4 and elasticity of supply is 0.5, the pass-through to buyers is
calculated as 0.5/[0.5-(-0.4)] = 0.5/0.9 = 56%. This means 56% of any tax will be paid by
the buyers and 44% by the producers
(b) Price: Since shifting of the tax burden can only take place through a change in price, price
is a very important factor. If the tax leaves the price unchanged, the tax does not shift.
(c) Time: In short run, the producer cannot make any adjustment in plant and equipment. If,
therefore, demand falls on account of price rise resulting from the tax, he may not be able
to reduce supply and may have to bear the tax to some extent. In the long run, however,
full adjustment can be made and tax shifted to the consumer.
(d) Cost: Tax raises the price; rise in price reduces demand and reduced demand results in
the reduction of output. A change in the scale of production affects cost and the effect will
vary according as the industry is decreasing, increasing or constant costs industry. For
instance, if the industry is subject to decreasing cost, a reduction in the scale of production
will raise the cost and hence price, shifting the burden of the tax to the consumer.
(e) Nature of tax: The incidence of taxation will definitely depend on the nature of tax. For
example, an indirect tax burden is fall on the consumer.
(f) Market form: Another factor determining the incidence of taxation is the market form.
Under perfect competition, no single producer or single purchaser can affect the price;
hence shifting of tax in either direction is out of the question. But under monopoly, a
producer is in a position to influence price and hence shift the tax.
Theories of Tax Shifting and Incidence
a) Concentration or Surplus theory:

According to concentration theory, each tax tends to concentrate on a particular class of
people who happen to enjoy surplus from their products.
b) Diversion or Diffusion theory
The diffusion theory states that the tax eventually got diffused in the entire society. That is, the
final placing of tax is not one but multiple. The process of diffusion took place through shifting
or through process of exchange.
c) Modern Theory:
According to modern theory, the concentration and diffusion theories are partially true. Actually
there are both concentration and diffusion of taxes according to the conditions present. The
modern theory seeks to analyse the conditions which bring about concentration or diffusion.
8. The Concept of Tax Buoyancy And Elasticity And Taxable Capacity

8.1 Tax buoyancy and elasticity
(i) Tax Buoyancy
There is a strong connection between the government’s tax revenue earnings and economic
growth. The simple fact is that as the economy achieves faster growth, the tax revenue of the
government also goes up. Tax buoyancy explains this relationship between the changes in
government’s tax revenue growth and the changes in GDP. It refers to the responsiveness of
tax revenue growth to changes in GDP. When a tax is buoyant, its revenue increases without
increasing the tax rate.
Example
In a particular year, country A GDP growth rate was nearly 9 per cent. The tax revenue of the
government, especially, that of direct taxes registered a growth rate of 45 per cent in the same
year. We can say that the tax buoyancy was five (45/9). In the following year, the financial
crisis occurred. The GDP growth came down to six percent. Tax revenue growth also fell
steeply; to 18 per cent. This means tax buoyancy was 3 for the year. We can imagine that had
the GDP growth came down further in the following year, to say 4 per cent, tax revenue growth
would have fell to 8 per cent; indicating a tax buoyancy of 2.
Tax buoyancy, however, is a crude measure which does not distinguish between discretionary
and automatic growth of revenue. Tax buoyancy measures the total response of tax revenues
to changes in national income. It takes into account both the effect of increases in GDP and
discretionary changes on the revenues from a tax. Discretionary tax changes are under the
control of tax authorities. They are due to changes in tax rates, base definition, and collection
and enforcement procedures. Non-discretionary changes arise from the natural growth of
economy.
Tip
Tax buoyancy = change in tax revenue in response to one unit change in tax base/GDP
Higher Tax Buoyancy (More than 1)

 Tax Revenue rises faster than the economic growth
 As economy grows, the Government can expand its activities OR reduce tax rates
Low Tax Buoyancy (Less than 1)

 Tax Revenue rises slower than the economic growth
(ii) As economy grows, the Government will need to cut down its activities OR increase tax
rates
Tax Elasticity
A similar concept to Tax Buoyancy is tax elasticity. Tax elasticity, unlike tax buoyancy, tax elasticity
excludes the impact of discretionary effects (e.g. impact of changes in tax rates and tax bases) on
the increase of tax revenue. It measures the pure response of tax revenues to changes in the
national income. It reflects only the built-in responsiveness of tax revenue to movement in national
income/GDP. The value of the tax elasticity gives an indication to policy-makers of whether tax
revenues will rise at the same pace as the national income.
Suppose that in 2017 the tax on soda was TZS 200/liter and 8 million liters were sold, yielding a
revenue of TZS 1,600million. In 2018 the tax is raised to TZS 240/liter and 8.1million liters are sold,
for a revenue of TZS 1,944million. Inflation is running at 15% annually and real GDP is rising by
2.5%. Calculate the buoyancy and elasticity of the soda tax.
Tax buoyancy
Revenue in 2017: TZS 1,600million.
Revenue in 2018 adjusted for inflation: 1944/1.15 = 1690.
So increase in real revenue is 5.625% (90/1600)
Since real GDP rose by 2.5% during the same period, tax buoyancy is 2.25 (5.625%/2.5%).
Tax elasticity
The increase in tax revenue is due both to higher sales of soda (i.e. more liters sold – a
reflection of increased GDP) as well as change in the tax law (i.e. change in tax rate).
To determine tax elasticity we ask: What would have happened to tax revenue if the tax rate of
2017 (i.e. TZS 200/liter) had not been changed (to TZS 240/liter)?
Presumably the tax revenue in 2018 would have been 1,620m (200x8.1m) in nominal values.
The real value (adjusted for inflation) is 1,409m (=1620/1.15),
The revenue has declined by 11.9%.
The tax elasticity would therefore be -4.76 (= -11.9/2.5).
This indicates that if the tax rate had not been changed, then real revenue would have fallen
between 2017 and 2018, despite the increase in GDP.
8.2 The concept Taxable capacity

Taxable capacity refers to maximum capacity of a community to pay taxes or the maximum
limit up to which people can normally pay taxes. It is the ability of the tax payer to pay the tax
assessed to him/her and the same time retain a reasonable level of income to enable him/her
to live the life he/she is accustomed. i.e. ability of a nation to obtain from tax payer the
revenue necessary from the imposed taxes.
There are two types of taxable capacity
Absolute taxable capacity: means maximum amount or proportion of national income that
can be taken by the Government in form of taxes without producing disagreeable (unpleasant)
effects.
Relative taxable capacity: This is a comparative term. Is the ratio of the taxable capacity of
one unit to that of the other unit. Through it, the taxable capacity of two countries or two
individuals can be compared.
Measurement of taxable capacity
The taxable capacity represents the average or normal share of income that can be collected
in the country
Taxable capacity = (Estimated Tax revenue/ (GDP/national income)
Taxable capacity and tax effort
Tax capacity is the maximum level of tax revenue that a country can achieve and tax effort—the
ratio between actual revenue and tax capacity
Tax effort is the actual tax yield of a country relative to the tax capacity of the country.
 Tax effort = (Actual T/Y)/(Tax capacity T/Y)

 If tax effort > (or <) 1, then country is collecting more (or less) than the average tax yield for
countries with similar characteristics
 Tax effort is affected by both tax structure (tax rates, bases, etc) and tax administration and
compliance. Tax effort can be increased by increasing tax rates, expanding tax bases,
improving tax enforcement and compliance, etc
The following are determinants of the nation’s taxable capacity:

(i) The size of population: Taxable capacity is very much affected by the
increase in national income and by the rate of growth in population. If the
increase in national income is greater than the growth in population, the per
capita income goes up. The taxable capacity of the individuals rises. If the
rate of growth of population is higher than the national income, the taxable
capacity decreases.
(ii) The distribution of national income: Taxable capacity is also influenced by

the distribution of national income within a country. If there is unequal
distribution of wealth in the country, the taxable capacity of the nation will be
high, but if the income is equally distributed, then the taxable capacity will be
low. A man earning an income of Tsh. 50,000 a month is able to pay more to
the government than thirty persons earning Tsh. 300 per month.
(iii) Character of taxation: If taxes are planned wisely, then they give less
bitterness from people and bring forth a large yield, the taxable capacity will be
at high level.
(iv) Purpose of taxation: Purpose of taxation has a direct bearing on taxable

capacity of a nation. I citizens of a country are satisfied with purpose of
taxation i.e., the increase in welfare of people, then they show greater
willingness to pay taxes to government. Whereas, if they find that revenue will
be spent for unproductive purposes, they hesitate to pay taxes.
We conclude, therefore, that if state spends revenue for purposes such as

education, sanitation, fighting for famine, diseases, etc. then taxable capacity
shrinks.
(v) Psychological factor: Psychological factor, is a very important factor in

determining taxable capacity of a nation. If people are satisfied that
government is doing its utmost to raise standard of living of the masses and in
maintaining prestige of the country, then they try to sacrifice their lives what to
say of money for the government. A simple approach to patriotism (nationalism
or loyalty) brings forth (out or forward) tons of gold.
(vi) Standard of living of people: If standard of living of people is high, they work
more efficiently so that they may enjoy a still better standard of living. When
they work enthusiastically (actively), they receive higher wages from their
employers. Taxable capacity tends to increase then.
(vii) Effect of inflation: If a country is in grip of inflation, purchasing power of

people is reduced, taxable capacity of nation shrinks considerably. But if value
of money is high and country is not faced with unemployment, then taxable
capacity of people is quite high.
Explain the concept of excess burden and optimal taxation, explain the relation between tax
rate and revenue collection, explain the concepts tax incentives and tax competition
[Learning Outcome I, j, k]
9. The Concept of Excess Burden and Optimal Taxation

9.1 Excess burden
Excess burden or DWL of taxation, also known as distortionary cost of taxation, is the
economic loss that societies suffers as the result of the tax, over and above the revenue it
collects.
S’
Price
S

&

0
Q2 Q1 Quantity

After Tax
Consumer Surplus = A
Producer Surplus = D
Aggregate surplus = B + C + E + F
Tax Revenue = B + C
Deadweight loss = E + F
Deadweight
ϯͬϮϳͬϮϬϭϯ
loss can be calculated as: DWL = ½ x T x (Q1 – Q2) Ϯϲ
9.2 Optimal taxation

Tax system is said to be optimal if it attain the goals of revenue collection with a minimum
possible distortions in the economy. The level of distortion is measured by using excess
burden. So a tax system that minimizes excess burden and yet achieve the revenue collection
goals is optimal. The optimal taxation theory thus seeks to answer a crucial tax policy
question, “at what rates should various goods and services be taxed to raise target revenue
with minimum possible excess burden
The Ramsey Rule

i.Imagine that a government wants to raise a given amount of revenue with the minimum
dead weight loss. How must this be done? The philosopher Frank Ramsey
worked out the answer - now known as the "Ramsey rule" - in the 1920's.
ii.Given proportional taxation, linear (and independent) demand, and constant MC of
production, the Ramsey rule tells us to set tax rates inversely proportional to
demand elasticity’s. The more elastic the good, the less it is taxed.
If the elasticity of corn is .3, and the elasticity of grapes is .6, the Ramsey
rule tells us to set the tax rate on corn equal to twice the tax rate on
grapes.
iii.Under these assumptions, all quantities consumed fall by equal fractions.
iv.There is an enormous literature that relaxes the preceding assumptions in predictable
ways. Ramsey's intuition is quite robust.
v.If there is a fixed cost of taxing an item at all, DW loss minimization is likely to prescribe an
exclusive focus on low-elasticity items.
10. The Relation

10. The RelationBetween
Between Tax Tax RateRate and and RevenueRevenue Collection
Collection
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any kind has two
of spending has effects: it raises
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it raises and reduces the quantity.
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raising the tax
thewill
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tax base, it
will reduce revenue.
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of tradeoff with taxes
occurs on incomes
with taxes on incomesor onorassets.
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this revenue increase
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increase and baseerosion tradeoff,
erosion is there
tradeoff, a point
is there at which
a point at which
at which base base
at which
erosion dominates
erosion dominatesand and
hencehence reduce tax collection?
reduce tax collection? Professor ArthurArthur
Professor LafferLaffer
[1979][1979]
demonstrate
demonstrate usingusing
diagram, this kind
diagram, of complementarity
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between and revenue
tax rate and revenue
collection. The diagram
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11. The Concepts

11. The Tax Tax
Concepts Incentives and and
Incentives Tax Tax
Competition
Competition
11.1 11.1Tax Incentives

Tax Incentives
A taxAincentive is defined
tax incentive as ‘a as
is defined ‘a deduction,
deduction, exclusion or exemption
exclusion from from
or exemption a tax aliability, offered
tax liability, as anas an
offered
inducement to engage
inducement in a specified
to engage activity
in a specified such such
activity as investment in capital
as investment goodsgoods
in capital for a for
certain
a certain
period’. Tax incentives
period’. are granted
Tax incentives to attract
are granted FDI and/or
to attract to promote
FDI and/or specific
to promote economic
specific policies,
economic policies,
such such
as to as
encourage investment
to encourage in certain
investment sectors
in certain sectors
Arguments for: for:

Arguments
 Substantial increase
 Substantial in theinlevel
increase of investment
the level and economic
of investment activity.
and economic activity.
 Taxes are an
 Taxes areimportant impediment
an important to invest
impediment sincesince
to invest they reduce retained
they reduce earnings
retained earnings
and increase product
and increase or prices.
product or prices.
 Incentives may may
 Incentives makemakeunpromising investments
unpromising attractive
investments by permitting
attractive a rapid
by permitting a rapid
recovery of capital
recovery and aand
of capital higher rate of
a higher return.
rate of return.

 They also make available to the taxpayer funds that would not otherwise be at his
disposal.
 Tax incentives do publicize and enhance a country’s investment climate.
Arguments against:
 They reduce government revenue.

 Bring inequity as they cause differentials in tax burden.
 Different burdens upon tax administration.
 Increase compliance costs.
11.2 Tax Competition

– It refers to the competition between countries which compete for investment by lowering the
tax rates on business, or offering other tax advantages, in order to attract or keep companies
located within them.
Argument for tax competition

Proponents of tax incentives often argue that lower tax burdens give investors a higher net
rate of return and therefore free up additional income for re-investment. The host country thus
attracts increased FDI, raises its income and also benefits from the transfer of technology.
Argument against tax competition

(i) Result in a loss of current and future tax revenue
(ii) Create differences in effective tax rates and thus distortions between activities that are
subsidised and those that are not
(iii) Could require large administrative resources
(iv) Could attract mainly footloose firms
(v) Can be outside the budget and non-transparent
Question 1
Explain the distortionary effects of personal income tax and corporate income tax.
Question 2
(a) “Elasticity of demand and supply is an important determinant of the effects of taxation in
the economy”. Discuss.
(b) Briefly explain the extent to which taxes can be used to counteract inflationary pressures.
Question 3
In light of inflationary tendency in the economy, illustrate how effects of taxation on inflation are
dependent on the concept of elasticity.
Question 4
(a) Explain in detail the concept of incidence of taxation.
(b) A tax of two percent is charged on every onion produced by a farmer in Tanzania.
REQUIRED:
Explain in what circumstances the farmer will be able to pass on the entire tax to the
consumers.
Question 5
Taxation traces its origin to the ancient times as a major source of revenue needed for
governance. Kingdoms, monarchies, and even dynasties had an elaborate form of taxation
imposed on their subjects to source funds that were used to run affairs of the government.
Taxation has had a long and influential history in the shaping of civilizations throughout the World.
All the great ancient civilizations such as Egyptian, Romans, Greek, Persians, Zulu, Oyo, Malian,
Songhai, and Benin, taxed their people to achieve a collective greatness. The above sources of
revenue also apply to Tanzanian Tax system.
Required:
;ĂͿ Evaluate the requirements of a good tax system.
;ďͿ Explain the effect of taxes on savings.
Question 6
(a) One of the desirable characteristics of a good tax system is fiscal neutrality.
Required:
(i) Explain briefly the meaning of this characteristic.

(ii) What is the underlying assumption guiding this characteristic?
(b) Traditionally, economists argue against indirect taxes and in favour of direct taxes on
grounds that the former distorts consumer preferences between taxed goods and other
goods.
Required:
Comment on the above statement, highlighting the role that elasticity of demand may play
on such distortion.
Question 7
a) Identify two differences between the economic purpose and social purpose of taxation
b) Explain three advantages of indirect taxes as compared to direct taxes.
c) Explain any two cannons of taxation
Question 8
(a) Comment on the following statement: Taxation under the ‘benefits theory’ operates on the
similar lines as prices function in a free market.
(b) Briefly explain the sacrifice theory and discuss its relationship with the ability to pay theory
Question 9
(a) Briefly explain the benefit theory of taxation.
(b) How does the ability-to-pay principle of taxation differ from the benefit principle? What
problems are encountered in implementing both these tax philosophies?
(c) In the ability to pay approach, what should be the sacrifice of each taxpayer and how should it
be measured?
Question 10
(a) What is the difference between impact of tax and incidence of tax?
(b) Explain the concepts of statutory incidence and economic incidence.
(c) Explain the incidence of taxes in a competitive market.
Question 11
(a) Explain the meaning of consumer surplus and producer surplus.
(b) Briefly explain the effects of taxation on savings of individuals
(c) Briefly explain on the term “tax wedge”
(d) Explain the income and substitution effect
Question 12
(a) Briefly, define ‘taxable capacity’.
(b) Discuss briefly factors which may affect a taxable capacity of a country.
(c) Differentiate between ‘tax buoyancy’ and ‘tax elasticity’.
Question 13
(a) Explain the classification of taxes based on how they are levied.
(b) Explain the principle of economy of taxation
Question 14
In efforts to reduce alcohol consumption, the government is considering an introduction of Tshs 15
tax on each gallon (Q) of liquor sold. Suppose that:
 Demand function : PD=100-2Q
 Supply function : PS =10+Q
Required
(i) Calculate equilibrium quantity and price before taxation
(ii) Compute the price paid by consumer, the price received by producer and the quantity
sold after taxation
(iii) Calculate the consumer surplus and producer surplus before taxation and after taxation
(iv) Calculate tax revenue to the government and Dead Weight Loss (DWL)
(v) Calculate price elasticity of demand and price elasticity of supply
(vi) Calculate the share of tax revenue paid by consumer and share paid by producer.
(vii) Who pays more tax and why?
Question 15
It is a common practice for government revenue authorities in different countries to change tax
rates or introduce new taxes in both direct and indirect taxes.
Required:
Discuss the implication of changes in taxes on each of the following:
(a) Demand and supply of goods and services.
(b) Savings of individuals and companies.
(c) Producer and consumer surplus.
(d) Tax impact on consumption on wages and employment.
Question 16
(a) Briefly evaluate the ‘Sacrifice Theory’ and discuss its relationship with the ‘Ability to Pay
Theory’.
(b) Illustrate the key differences between the ‘Benefit Theory’ on one hand and the ‘Sacrifice
and Ability to Pay Theories’ on other hand.
Question 17
The use of investment tax incentives in developing countries has been very popular and very
controversial for decades. Despite the controversy, many countries around the world offer
investment tax incentives of one form or another.
Required:
(i) Describe the essential features of investment tax incentives
(ii) Discuss six (6) fundamental premises that underpin the use of investment tax
incentives in developing countries
(iii) What would be your arguments if you were to advise against tax incentives? (any
eight arguments)
Question 18
There is an emerging consensus that tax base erosion due to tax incentives in developing
countries is compounded by the lack of transparency and clarity of provision, administration, and
governance of tax incentives.
Required:
Give five (5) advises in line with best practices as to what measures the government might
implement to promote governance of tax incentives.
Question 19
Tax exemptions aimed at Foreign Direct Investment, (FDI) are especially important form of tax
expenditure in low income developing countries category and, in many cases, significantly
undermining their tax revenue base. The incentives for multinationals to negotiate tax breaks with
developing countries frequently results in a “race to the bottom” in which countries in this category
are made collectively worse off, to the benefit of the multinational investors. As such, fiscal
incentive based competition strategy to attract FDI continues to be a subject of debate.
Required:
Critically appraise this statement in the light of current tax exemption practices in Tanzania.
Answer to SEQ 1
The distortionary effects of the Personal Income Tax and corporate income tax are as follows:
(i) Effects on labour supply. The income tax alters labour; the leisure trade-off; based on
the income and substitution effects we can see that the substitution effect is negative in
that it reduces hours worked. On the other hand, the income effect may be positive or
negative. In that regard, the net effect is an empirical matter. It should be noted also
that, quantitative impact is likely to vary across individuals in different circumstances.
Hours worked by most working-age men are relatively insensitive to income tax
especially when most work on full-time basis. On the other hand, married women would
be more responsive since it could be easier to vary part-time hours.
(ii) Effect on Saving. With regard to income and substitution effects, an overall impact of
income tax on saving is ambiguous. The taxation of interest on savings for instance
without corresponding subsidy to interest paid on borrowings leads to a kink in the
budget line for the allocation of resources between present and future consumption. The
income tax systems vary in terms of relative taxation of earned income and unearned
income on interest and dividends. As it is clear that Tax Base would be Income minus
Net Saving whereas the effect would be to tax income when spent, not when earned.
(iii) Taxes reduce the income that the person has available to purchase goods and services.
(iv) Taxes reduce business output by raising prices (cost).
Answer to SEQ 2
(a) In their discussion, candidates are expected to include the following points which (may)
justify that the effects of taxation in the economy depend on the elasticity of demand and
supply. The discussion focuses on ‘allocative’ and ‘distributive’ effects of indirect taxation.
Effects of taxation (on resourced allocation, distribution and inflationary tendency) depend on
elasticity as follows:
 Given the elasticity of supply, the effect on demand for a good will be directly related
to its demand elasticity;
 Goods with higher elasticity of demand would be affected more and those with lower
elasticity of demand would be affected less by a given tax rate;
 Similarly, a good with a higher elasticity of supply would be affected more by tax on it
than a good with a lower elasticity of supply;
 It follows, therefore, the extent to which a given tax on a commodity would reduce its
output and release resources for other industries would depend upon its elasticity of
demand;
 Consequently, it is necessary we consider the relevant elasticity of demand and
supply of a good while using an indirect tax to shift its production and resource
appropriation.
OR
Alternative explanations (answer)

Candidates may alternatively discuss the following points:
 Goods having a high elasticity of demand and a low elasticity of supply are not likely to
show much inflationary tendencies;
 When indirect taxes are imposed on the cost of production of the goods having high
elasticity of demand and low elasticity of supply, a greater part of their incidence gets
settled on the suppliers themselves;
- This reduces their profits and has an effect of checking inflation.
 Inflationary price rise is mainly the case of those goods which have a low elasticity of
demand and high elasticity of supply
- If indirect taxes are imposed on such goods, their incidence will be shifted on the
buyer;
- This feeds the forces of inflation;
- If taxed goods are of consumption variety:
▹ Will raise the cost of living and will force the workers to demand higher
wages;
▹ Then, due to wage rise, cost of production in industries producing even
untaxed goods will go up.
 Therefore, rational choice should be made on commodities to be taxed and at what

rates of taxation
- E.g. luxuries may be taxed but not necessities (basic goods), which will raise the
cost of production all over;
- If necessities are to be taxed, then the rates should be quite low.
(b) Extent to which taxes can be used counteract inflationary pressures. Candidates are
expected to construct their arguments around the following two rationales:
 Taxes as built-in-stabilizer
 Belief that taxes can be used to curb prices and demand.
The above two arguments can be further explained as follows:
 Taxes do act to some extent as built in stabilizers;

 Given the level of government expenditure, the tax system itself tends to create a
budgetary surplus during a boom and a deficit during a depression;
 The created budgetary surplus would curb expenditure and demand while a budgetary
deficit created would have the opposite effect and thus an anti-cyclical pressure is
generated;
 This happens because revenue from direct and indirect taxes is dependent upon the
level of economic activities
 Also due to the fact that direct taxes are progressive.
Answer to SEQ 3
Effects of taxation on inflationary tendency depend on elasticity as follows:
 Goods having a high elastic of demand and a low elasticity of supply are not likely to show
much inflationary tendency.
- Therefore, when indirect taxes are imposed on the cost of production of the goods with these
elasticity characteristics, a greater part of their incidences get settled on the suppliers
themselves.
- This reduces profits and has an effect of checking inflation
 In contrast, inflationary price rise is mainly the case of those goods which have a low elasticity
of demand and high elasticity of supply
- If indirect taxes are imposed on such goods, their incidence will be shifted to
the buyer.
- This feeds the forces of inflation.
If the goods on which indirect taxes are imposed are of consumption variety:
- Will raise the cost of living and will force the workers to demand higher wages.
- Then, due to wage rise, cost of production in industries producing even un-taxed goods will
go up.
- Therefore, judicious choice should be made on commodities to be taxed and
at what rates of taxation.
- Thus, luxuries may be taxed but not necessities, which will raise the cost of production all
around.
- If necessities are to be taxed, then the rate should be quite low.
Answer to SEQ 4
(c) One of the important concepts of taxation is the incidence of tax. Taxes are not always borne
by the person who pays the tax; in many instances the burned of tax is shifted to another
person. Tax incidence s said to be on the person who ultimately bears the burden of tax
whereas impact of tax is on the person from whom government collects money in the first
instance. Burden of tax may be shifted from one person to another; shifting finally ends in
incidence. A person on who tax is levied may shift the burden of tax on another person either
entirely or partly or he may not be able to pass on the burden at all. One of the factors
determine tax incidence is the price elasticity of demand and supply. Prices elasticity of
demand is the responsiveness of the quantity demanded of a good or service to a change in
its price or in other words it is the percentage change in quantity demanded to a one
percentage change in price. Price elasticity of supply us the responsiveness of the quantity
supplied of a good or service to a change in its price.
(d) The farmer will be able to pass on the entire burden of tax on the consumers if the product is
price inelastic (that means if the price is increased, there would only be a small loss in demand
that will be compensated by the additional revenue by increase in price). In case the price of
the product inelastic, the farmer may be able to shift the burden of tax only partly on the
consumer or may not be able to shift at all.
Answer to SEQ 5
(a)
 The tax collected should be enough to meet public spending needs and contribute
to fiscal stability.
 The tax burden should be distributed fairly among actual or potential taxpayers.
 A good tax policy should consider minimizing the potential adverse economic costs
of taxation.
(b) Impact of Taxes on Savings of Individuals
 Wealthy individuals save more than poor citizens, so it is expected that the taxes
collected from higher tax brackets create more burden on savings than the ones
collected from lower tax brackets.
 Consequently, a more progressive income tax seems to be creating a heavier
burden on savings than a less progressive tax system.
 This claim suggests that a less progressive income tax system would be favorable
to the increase in savings of individuals.

Impact of Tax on Gross Savings of Companies
 If profit taxation law allows accelerated depreciation, then depreciation reserves
and company savings will increase in the first years following the purchase of fixed
assets.
 Profit is divided in the dividends distributed to company owners and undistributed
profit remaining in the company.
 Higher taxation of the retained profit will stimulate its distribution to dividends,
while lower taxation of the retained profit will increase the company’s savings.
Answer to SEQ 6
a) Fiscal neutrality
i. Fiscal neutrality argues that taxes must not alter the choices and preferences of the
members of society
ii. Assumptions underlying fiscal neutrality is that market mechanisms allocate
resources efficiently.
b) Indirect taxes are taxes on specific commodity thus when charged it may raise the price of
commodity. Therefore, according to the laws of demand and supply the consumer preferences
(demand) for the taxed commodity will decline (distorted). The extent of distortion of consumer
preferences will depend on the elasticity of demand of the commodities. Largest distortion will
occur when the commodity has perfect elastic demand and there will be no distortion where
elasticity of demand is zero (completely inelastic demand) .
c) Direct taxes on the other hand are not tax on specific commodity. Therefore, when the tax is
charged it does not affect the price of product and thus consumer preferences will not be
distorted.
Answer to SEQ 7
(a)
Economic purpose of Social purpose of taxation
Taxes aretaxation
used to promote goals Taxes are used to reduce the gap between
such as full employment, satisfactory poor and rich. Taxes are therefore used as a
rates of economic growth, and stability redistribution of wealth.
of the money supply.
Tax revenues are important because of In addition to taxing the rich more than
governments need to manage the the poor government can use cash transfer
economy, regulate society, develop system to reduce poverty and promote social
society and provide public goods. equality.
(b) The advantages of indirect taxes in comparison to direct taxes are as follows:
Indirect tax is convenient to both the Government and the taxpayer. It is convenient to
taxpayer as the taxpayer do not feel the burden much because they do not pay a lump sum
amount for tax and that tax is paid only when making purchases. Moreover, the tax is
"price-coated" i.e it is wrapped in price and therefore the burden cannot be easily felt. It
is convenient to the Government as well because the business owners collects the tax on
the Government’s behalf when they charge a price.
There is mass participation. Each and every person getting goods or services has to pay
tax. Indirect taxes are the only means of reaching the poor who are always exempted from
paying direct taxes. It is a sound principle that every individual should pay something,
however little, to the Government.
Unlike direct taxes, the indirect taxes have a wide coverage. Majority of the products or
services are subject to indirect taxes. The consumers or users of such products and services
have to pay them.
(c) Two canons of taxation are as follows:

(i) Canon of elasticity
An ideal system of taxation should consist of those types of taxes that can easily be
adjusted. This means that taxation must have built-in flexibility. Taxes, which can be
increased or decreased, according to the demand of the revenue, are considered ideal for
the system. An example of such a tax is the income tax, which is considered very much
ideal in accordance with the canon of elasticity. Taxation should be elastic in nature in
the sense that more revenue is automatically fetched when income of the people rises.
(ii) Administrative efficiency and simplicity

The collection and disbursement of taxes should take place with the lowest possible cost,
e.g. tax revenue must be collected in an efficient way. Efficiency is concerned with
neutrality, compliance and administrative efficiency. Taxes should be levied in an
economical manner that spurs a country’s economic development. Furthermore,
compliance of law should be at the lowest possible compliance costs. Compliance costs
are cost paid by taxpayers in fulfilling their obligation for keeping records, buying electronic
fiscal devices for VAT, paying for financial annual audit or tax preparers etc. The more
simple and efficient the tax system is, the ‘cheaper’ it becomes.
Answer to SEQ 8
(a) The benefit principle is an attempt to establish taxation on a similar basis as market
pricing; that is the tax is to be levied in accordance with the benefit received by the
individual. It is an attempt to achieve the goal of a neutral tax, one that would leave the
economic system approximately as it is, on the free market. It is an attempt to establish a
criterion of payment on the basis of benefit rather than sacrifice.
(b) The ability-to-pay approach treats government revenue and expenditures separately.
Taxes are based on taxpayers’ ability to pay; there is no quid pro quo. Taxes paid are
seen as a sacrifice by taxpayers, which raise the issues of what the sacrifice of each
taxpayer should be and how it should be measured:
(i) Equal sacrifice: The total loss of utility as a result of taxation should be equal
for all taxpayers (the rich will be taxed more heavily than the poor).
(ii) Equal proportional sacrifice: The proportional loss of utility as a result of
taxation should be equal for all taxpayers.
(iii) Equal marginal sacrifice: The instantaneous loss of utility (as measured by
the derivative of the utility function) as a result of taxation should be equal
for all taxpayers. This will entail the least aggregate sacrifice (the total
sacrifice will be the least).
Answer to SEQ 9
(a) Benefit principle: A principle of taxation in which taxes are based on the benefits
received by people using the goods financed with the tax. The benefit principle is often
difficult to implement because by their very nature, many government produced goods
(public goods) do not have easily measured benefits. But in those cases where benefits
are identifiable, government is not shy about establishing taxes, fees, or charges in
accordance with the benefit principle. Public college tuition, national park admission
fees, and gasoline excise taxes are three common examples. The beneficiaries of
education, a wilderness experience, and highway use are asked (required) to pay
accordingly.
(b) The benefits received principle of taxation asserts that people and businesses who
receive the benefit of a good or service financed by taxes should pay the tax it requires.
The ability to pay principle is the opposite of the benefits received principle. It can be
difficult for governments to implement the benefits received principle because of its
nature. It is not easy to measure the benefits that certain people receive from a public
good. Most governments, however, normally implement taxes in cases where benefits are
easily identified. Charges, fees and taxes are often levied against those who use public
universities, gasoline or national parks. Because the specific people who use these
government resources receive much of the benefit from their existence, those people are
asked to pay for the benefit they received. As an example, gasoline taxes are often used
to construct and repair highways. This is because those who buy gasoline are
assumed to be the users and the major beneficiaries of roads and highways. The ability
to pay principle is very different from the benefits received principle. The ability to
pay principle asserts that the tax burden should be split up according to how able
someone is to pay for government services.
(c) The ability-to-pay principle in taxation maintains that taxes should be levied according a
taxpayer's ability to pay. This progressive taxation approach places an increased tax
burden on individuals, partnerships, companies, corporations, trusts and certain estates
with higher incomes. The theory is that individuals who earn more money can afford
to pay more in taxes. The sacrifice of each taxpayer and the method of how should it be
measured is as follows:
i. Equal sacrifice: The total loss of utility as a result of taxation should be equal for all
taxpayers (the rich will be taxed more heavily than the poor).
ii. Equal proportional sacrifice: The proportional loss of utility as a result of taxation
should be equal for all taxpayers.
iii. Equal marginal sacrifice: The instantaneous loss of utility (as measured by the
derivative of the utility function) as a result of taxation should be equal for all
taxpayers. This will entail the least aggregate sacrifice (the total sacrifice will be the
least).
Answer to SEQ 10
(a) The impact of tax refers to the way the introduction of taxation, or the raising of tax
levels, on a particular product or service, affects the way the product or service is used.
The introduction or increase of tax, for example, usually results in the product or service
being purchased less often. As a result, the impact of tax, or tax impact, is usually
negative for the development of an economy, as it hinders and reduces spending, which
is necessary for the growth of an economy. On the other hand, the incidence of tax
refers to the people who carry the burden of tax. For example, if you own a large
portion of land, but your neighbour owns a small portion of land, and tax on land
goes up, you would be said to be part of the population subject to the incidence of tax.
Therefore, a simple way of describing the difference between the impact and the
incidence of tax would appear as follows: The incidence of tax relates to the effects upon
the people who pay the taxes, while the impact of tax relates to the effects upon the
goods and services which are taxed. It could be argued that the two are linked, as if taxes
on goods and services are raised, the impact of tax would mean that less people pay for
them - as a result, the government and other large bodies have to find a source of income
other than VAT, and therefore other taxes may be raised, effecting the incidence of tax
(b) The statutory / legal incidence refers to the person on whom the law says the tax
obligation falls. Legal incidence is established by law when new taxes are enacted, and
specifies which individuals or companies must physically remit tax payments to the
revenue authorities.
The statutory incidence of taxes is generally very different from their final economic
burden. Taxes, disrupt what otherwise would be an efficiently functioning market by
influencing the relative prices facing individuals, they lead to changes in individual
behaviour. This disruption is seen as a tax wedge between the demand price and the
supply price. Changes in the demand and supply prices after a tax, when compared to the
equilibrium price before the tax, is called incidence or burden of the tax. The economic
tax incidence identifies who ultimately pays the tax.
(c) Tax incidence is concerned with the effect of taxation upon prices and profits. Since
perfectly competitive firms earn zero profits, under perfect competition there is only a
price effect. Consumer prices increase by just the amount of the tax if the long run supply
curve is horizontal, and by less than that if it is upward sloping. Price rising by more than
the amount of the tax is not a possibility in this market. It is difficult to shift tax burden in
perfect market containing many buyers and sellers, full knowledge, no restrictions on exit
and entry as small increase in price lead to significant decrease in sales. In a perfectly
competitive partial equilibrium framework, the economic incidence of a tax is unaffected
by which side of the market the tax is levied on. Second, the economic burden of a tax is
borne more heavily by the side of the market that is less elastic (in absolute value). No
more than 100 percent of the tax can be shifted to a party. In the competitive market, if
the supply is completely inelastic or if demand is completely elastic or demand is
completely inelastic, the tax is entirely borne by consumers.
Answer to SEQ 11
(a) In a market without taxes, the difference between the market price of a good and the
highest amount consumers would be willing and able to pay for it is referred to as
consumer surplus. Consumer surplus occurs because first, every consumer has his
own maximum price he would be willing to pay for a good (although the market
aggregates this demand, along with supply, to produce a market price); secondly, is due to
the fact that demand is rarely perfectly elastic. Consumer surplus can be seen as the
total use or value that consumers get without paying for it. Producer surplus
represents the difference between the market price and the lowest amount for which
producers would be willing and able to sell a good in a market without taxation. It
is possible -- and, in fact, normal -- that there will be consumer surplus and producer
surplus for the same good. In the same way each consumer has her own maximum price
for a good, each producer has a minimum price for the good. In most cases, this is at or
slightly above the producer's costs, because there is no benefit to producing and selling
more cheaply than this. In effect, producer surplus means profit.
(b) Taxes can reduce economic growth by affecting savings and investment. The
higher the proportion of income that is being saved and invested, the higher will be
the future income level. The net savings of individuals, consisting of savings in
households and retained earnings of companies, represent the real potential, available
for new investments. The major part of these savings is accumulated in households, while
the retained earnings account for only a small part of them. If all individuals would save the
same proportion of income, then the impact of income tax on the total savings would be
the same, regardless of the pattern of the distribution of tax burden to individuals. But,
wealthy individuals save more than poor citizens, so it is expected that the taxes
collected from higher tax brackets create more burden on savings than the ones
collected from lower tax brackets. Consequently, a more progressive income tax
seems to be creating a heavier burden on savings than a less progressive tax
system. The propensity to save is affected by non tax factors like demography i.e. it
varies with stage in a life cycle: in youth and in old age it is much lower than in middle age
when income is highest and when people save for education of their kids, for a house or a
flat and for the old age. Income tax also affects savings by lowering the net return from
savings, that is, by lowering the interest rate on savings. Furthermore the savings of
individuals are motivated with various other reasons and their final amount does not have
to depend on interest rate trends only. Besides income tax, consumption tax also affects
savings of individuals. While income tax is generally progressive, consumption taxes are
mostly regressive, that is, they are mostly paid by lower-income households. Since
these households have a higher marginal propensity to consume than the households with
higher income and since their marginal propensity to save is lower than the one of
(c) wealthy individuals, consumption taxes burden total consumption more and savings
less. This is why it is often recommended to the countries with low level of savings that
they should direct their tax systems to taxation of consumption much more, because this
will boost savings and growth, too.
(d) Labour taxes drive a wedge between what workers receive and what firms pay, and
empirical analysis suggests that employment falls as a result, thereby lowering
potential output. The extent of the fall in employment depends on labour-market
institutions and the wage-bargaining framework. In countries with flexible labour markets,
the taxes tend to get shifted back onto labour, reducing the take-home wage. The effect
on labour supply of this lower wage appears to be empirically small for men, but appears
to be significant for women, for whom tax elasticity are high. In countries with inflexible
labour markets, by contrast, labour taxes tend to get shifted forward to producers, at least
in the short run, and therefore reduce labour demand. This reduces employment and
lowers growth if lower demand for labour is not replaced by higher demand for capital, for
example if investment reacts negatively to higher costs of production. Empirical work
shows that labour-demand elasticity are much higher than overall supply elasticity, so that
labour taxes tend to be much more distortionary in countries where there are inflexible
labour markets, and most of the tax effect falls on the demand rather than the supply
of labour. The absolute level of the labour-tax burden also tends to be high in such
countries.
(e) The substitution effect is the change in consumption patterns due to a change in the
relative prices of goods. For example, if private universities increase their tuition by 10%
and public universities increase their tuition by only 2%, then it is very likely that we would
see a shift in attendance from private to public universities (at least amongst students
accepted to both). The same can be said across brands, goods, and even categories of
goods. Examples would be the relative price of Pepsi vs. Coke, Red Meat vs.
Poultry and Clothes vs. Entertainment. The income effect is the change in
consumption patterns due to the change in purchasing power. This can occur from
income increases, price changes, or even currency fluctuations. For example, a
decrease in the price of all cars allows you to buy either a cheaper car or a better car for
the same price, thus increasing your utility. Goods typically fall into one of two
categories: normal and inferior. These categorizations relate consumption of a good with
a particular individual’s income. Normal goods increase in consumption as income
increase while inferior goods decrease as income increases. Also, some goods can be
normal or inferior only on certain ranges of an income spectrum. For example, education
is a normal good: as one’s income increases (family income), demand for education
increases. As one’s income increases, hot dog consumption, however, typically
decreases. The income effect is the change in consumption patterns due to the change
in purchasing power and the substitution effect is the change in consumption patterns
due to a change in the relative prices of goods.
Answer to SEQ 12
Taxable capacity
(a) A brief definition of a taxable capacity
 Refers to the maximum amount, which citizens of a country can contribute
towards the expenditure of the government without undergoing
unbearable strain OR
 It is the upper limit of squeezability OR
 It is the maximum amount of taxation that can be raised and spent to
produce the maximum economic welfare in the economy
(b) Factors which may affect a taxable capacity of a country

 The population size and the rate of growth
Taxable capacity is likely to be low given small population/few taxpayers
 The size and growth of Gross Domestic Product (GDP)
When GDP is rising tax will tend to increase
 Method of taxation
Tax policy/system that allows for diversity is important
 Income stability
Fluctuations, e.g. in production (due to factors such as weather etc) will affect the
certainty, hence taxable capacity
 Political stability
Political stability allows/provides conducive/favourable environment for people to work and
also induce foreign investors, thereby contributing to GDP
 Level and structure of trade openness
The higher the level of development of trade the higher is the taxable capacity
 Inflation
Inflation tend to lower the purchasing power
(c) The buoyancy of a tax system is an estimate of how tax revenue changes as some
general indicator of the economy such as Gross Domestic Product (GDP) changes. A
buoyancy estimate does not control for changes in tax rates or bases and so may hide a
number of changes in tax system. Still, in the long-run, buoyancy is a useful statistic that
gives some indication of the stability of a particular tax. In contrast, the elasticity of a tax
is the percentage growth in revenues relative to the percentage growth in GDP taking into
account tax policy changes. Calculating elasticity is more difficult because it requires
information on changes in both rates and bases and the necessary information on bases is
often difficult to obtain.
Answer to SEQ 13
(a) The basis on which taxes are levied, can also be bifurcated into following three categories:
 Progressive taxation: a tax such as the income tax demonstrates the progressive
principle. As income rises so does the proportion of tax i.e. the rate of tax rises as well as
the amount of tax. This can be considered as just and fair, as the higher tax payments
are made by those with higher incomes. Taxes which take a higher percentage of the
incomes of higher income earners are said to be progressive.
 Regressive taxation: This is the tax where, as the amount of income increases,
percentage of tax is reduced. So in this case, a tax payer in the high income group may
be paying more taxes in absolute terms but the percentage of income is falling.
 Proportional taxes: In this case, as the tax payer’s income increases, he pays more
tax but the amount that is paid as percentage of the tax payer’s income remains
unchanged.
(b) This principle states that the every tax should be framed in such a manner that is takes out
of the pockets of the people as little as possible, over and above what it brings into the
public treasury. A good tax system will ensure that the cost of collecting and paying tax
as well the compliance cost is minimum. For example, if there are many procedures for
payment of tax and filing of related documents or if a number of visits are required by the
tax payer to the tax office, then the tax system is said to be uneconomical. In a broader
sense, if very high tax is levied on the income of the tax payer, it will discourage savings
and the productive capacity of the economy will go down, which will be uneconomical for
the State. Taxes on products like alcohol, cigarettes etc are considered as economical
because they fetch revenue to the government as well as increase the price of those
products which will discourage their consumption.
Answer to SEQ 14
(i) Calculate equilibrium quantity and price before taxation
 At equilibrium
Ps = Pd
10 + Q = 100 – 2Q
2Q + Q = 100 – 10
3Q = 90
Q = 90/3
Q = 30
In order to get Price P, take one of the equations and substitute Q with 30
Let take P = 10 + Q
Then P= 10 + 30
P = 40
Therefore,
Quantity (Q) = 30
Price (P) = 40
(f) Compute the price paid by consumer and price received by producer and quantity sold
after taxation together with producer supply and consumer supply before and after taxation
In order to find the price paid and received by consumer and producer respectively you
need to equate zero for quantity to demand and supply functions to get those prices.
Therefore
Demand function: Pd = 100 - 2Q
Make Q the subject
Pd = 100 - 2Q
2Q = 100 - Pd
Q = (100/2) – ½ Pd
Q = 50 - ½ Pd
Then Q= 0
0 = 50 - ½ Pd
½ Pd = 50
Pd = 50 * 2
Pd = 100
Supply function: Ps = 10 + Q
Make Q the subject
Ps = 10 + Q
Q = Ps - 10
Then Q= 0
0 = Ps - 10
Ps = 10
Sketch graph of demand and supply before taxation

Price
100
Supply
Customer
surplus
40
Producer
surplus
Demand
10
0 30 Quantity
Using the graph above to compute
 Consumer surplus before taxation

= ½ * base * height
= ½ * 30 *60
= 900
 Producer surplus before taxation
= ½ * 30 *30
= 450
 Total economic surplus = consumer surplus + producer surplus
= 900 + 450
= 1350
 Producer supply and consumer supply after taxation
Step 1: add tax (t) to surplus function
Ps = 10 + Q + t
T is given, t = 15
Ps = 10 + Q + 15
Ps = Q + 25
Step 2: at New equilibrium Ps = Pd

Q + 25 = 100 - 2Q
Q + 2Q = 100 – 25
3Q = 75
Q = 75/3
Q = 25
Therefore in order to get P you substitute 25 to Q from any function
Ps = Q + 25
Ps = 25 + 25
P = 50
Therefore
 Price paid by consume P = 50
 Price received by producer (P – t) = 50 – 15= 35
 Quantity sold after taxation Q = 25
Sketch graph of demand and supply after taxation
Price
100
New Surplus
consumer
surplus
50
dĂǆĂƌĞĂ
40
dĂǆĂƌĞĂ
35 New producer
surplus
Demand
10
0 25 30
Quantity
Using the graph below to compute

 Consumer surplus after taxation
= ½ * 25 *50
= 625
 Producer surplus after taxation
= ½ * 25 *25
= 312.5
(g) Calculation of tax revenue to the Government and Dead Weight Loss (DWL)
 Tax revenue to the Government
= New quantity * tax
= 25 * 15
= 375
 Dead Weight Loss (DWL)
= ½ * tax * ΔQ
= ½ * 15 *(30 – 25)
= ½ * 15 * 5
= 37.5
(h) Calculation of price elasticity of demand and price elasticity of supply
 Price elasticity of demand ℮d
= ∂Q/∂p *(P/Q)
In order to get ∂Q/∂p make Q the subject
Pd = 100 - 2Q
Q = 50 - ½ Pd
Therefore
∂Q/∂p = - ½
Then
℮d = ∂Q/∂p *(P/Q)
= - ½ * 40/30
= - 0.67
 Price elasticity of supply ℮ s
= ∂Q/∂p *(P/Q)
In order to get ∂Q/∂p make Q the subject
Ps = 10 + Q
Q = Ps - 10
Therefore
∂Q/∂p = 1
℮d = ∂Q/∂p *(P/Q)
= 1 * 40/30
= 1.3
(i) Calculation for share of tax revenue paid by consumer and share paid by producer
 Consumer/buyer
= ℮s /( ℮s – ℮d)
= 1.3 / (1.3-(- 0.67))
= 1.3/ 2
= 0.65 * 100%
= 65%
 Producer / seller
= ℮d /( ℮d – ℮s)
= - 0.67 / (- 0.67- 1.3)
= - 0.67 / -2
= 0.335 * 100%
= 33.5%
(j) The one who pays more tax is producer, since he/she cannot shift the tax burden by
increasing price to the consumer
Answer to SEQ 15
(a) Tax on good and services distorts the relationship between demand and supply. Taxes
have an effect on the amount of supply produced and consumer’s demand for goods.
Taxation puts both consumers and producers in a worse position because with the
introduction of taxes, the price that consumers pay is higher than what they would have
paid before. On the other hand, the price that producers get after the introduction of taxes
is lower than what they would have received before taxation. The resulting change in
relative cost of goods and services will have an effect of motivating consumers to switch
from one product or activity to another. The act of switching from one product to another
as a result of a tax, given a certain income level, leads to substitution effect. The
substitution effect interferes with consumer choice and subsequently leads to economic
inefficiency.
Taxes that affect relative prices and influence consumers to substituting consumption of the
taxed commodity for another are also termed distortionary taxes and the substitution
changes the consumer’s tax liability.
The market has narrowed because lower quantity of goods is being exchanged. The
decrease in consumers’ and producers’ welfare turns into tax revenue of the state. Thus, for
the purpose of full understanding of the impact of taxes on welfare, the decrease in welfare
of consumers and producers should be compared with the tax revenue collected by the
state. Such an analysis will show that the decrease in consumers’ and producers’ welfare
exceeds the tax revenue collected by the state.
The loss of welfare that takes place after introduction of taxes (a part of which belongs to no
one – neither to a consumer or producer, nor to the state) represents a dead weight loss or
excess tax burden, or a degree of inefficiency that taxes introduce to the economy.
(b) Impact of tax on savings of individuals

The gross savings in private sector are accumulated in households and companies.
However, a large part of the gross savings is used for covering depreciation and is needed
for the maintenance of the existing capital. The net savings, consisting of savings in
households and retained earnings of companies, represent the real potential, available for
new investments. The major part of these savings is accumulated in households, while the
retained earnings account for only a small part of them.
If all individuals would save the same proportion of income, then the impact of income tax on
the total savings would be the same, regardless of the pattern of the distribution of tax
burden to individuals. But, wealthy individuals save more than poor citizens, so it is
expected that the taxes collected from higher tax brackets create more burden on savings
than the ones collected from lower tax brackets. Consequently, a more progressive income
tax seems to be creating a heavier burden on savings than a less progressive tax system.
Income tax also affects savings by lowering the net return from savings, that is, by lowering
the interest rate on savings. In such conditions, savings are expected to drop. However,
the savings of individuals are motivated with various other reasons and their final amount
does not have to depend on interest rate trends only. For example, many households will
not save less when interest rates are lower, because they are in that part of life cycle when
they have to save for retirement.
Besides income tax, consumption tax also affects savings of individuals. While income tax
is generally progressive, consumption taxes are mostly regressive, that is, they are mostly
paid by lower-income households. Since these households have a higher marginal
propensity to consume than the households with higher income and since their marginal
propensity to save is lower than the one of wealthy individuals, consumption taxes burden
total consumption more and savings less. This is why it is often recommended to the
countries with low level of savings that they should direct their tax systems to taxation of
consumption much more, because this will boost savings and growth, too.
Impact of tax on gross savings of companies
Retained earnings and depreciation reserves account for the predominant part of company
savings. Since profit is taxed after deduction of depreciation income tax does not reduce the
depreciation reserves. But if profit taxation law allows accelerated depreciation, then
depreciation reserves and company savings will increase in the first years following the
purchase of fixed assets. Profit is divided in the dividends distributed to company owners
and undistributed profit remaining in the company.
Different taxation of the dividends and retained profit has an impact on savings, too. Higher
taxation of the retained profit will stimulate its distribution to dividends, while lower taxation
of the retained profit will increase the company’s savings. The amount of savings also
depends on whether profit taxation system and income taxation system are reconciled. If
they are double taxation of the dividends on company level and again on the level of
individuals is thus avoided.
(c) Impact of tax on Producer and consumer surplus

The addition of the tax will also remove some consumer and producer surplus. Consumers
are forced to pay more for the same good because the price has risen. Meanwhile,
producers are losing out on potential profits because their revenue has not increased by as
much as the price rise would suggest. Total surplus will therefore be reduced, because
people and firms sell or buy less of a good when the tax adds to its price. The effective
price paid may rise, causing the demand curve to shift to the left, or the effective price
received may fall, causing the supply curve to shift to the left, creating the Deadweight Loss.
This means that some people that would have engaged in trade without the tax, no longer
are “willing and able” to buy or sell the good, meaning their surplus disappears, and the tax
revenue that would have been derived from their market participation disappears as well.
Thus, taxes always cause deadweight Losses for society and always negatively affects the
free market system.
(d) Tax impact on Consumption on wages and employment

Beside direct taxes, indirect taxes (that is, consumption taxes) also have impact on the
supply of labour by reducing the purchasing power of net wage. However, workers seem to
be reacting somewhat slower to a change in the consumption taxes, and the impact of the
consumption taxes on labour supply also appears within a longer period of time than
normally is the case with direct taxes.
Taxes on labour income and consumption spending encourage households to shift away
from work in the legal market sector and toward untaxed used of time such as leisure,
household production, and work in the shadow economy. Empirical evidence also show that
taxes affect work activity directly through labour supply-and demand channels and indirectly
through government spending responses to available tax revenues. Higher tax rates on
labour income and consumption expenditures lead to less work time in the legal market
sector, more time working in the household sector, a larger underground economy, and
smaller shares of national output and employment in industries that rely heavily on low-
wage, low skill labour inputs.
Answer to SEQ 16
(a) The sacrifice Theory
Impose taxes on basis that would involve equal sacrifice:
- Equality of sacrifice by itself does not necessarily imply progressive taxation.
- If the marginal utility of income or wealth decreases the richer ones is then a
given amount of tax falls more lightly on the richer than on the poor.
Ability to pay Theory
 People with higher incomes should pay more than those with
lower incomes.
 The value of an additional dollar of income falls as income rises.
 The ability to pay criterion does not necessarily justify regressive proportional or
progressive taxes.
Relationship
The ability to pay approach treats government revenue and expenditure separately. Taxes
are based on tax payers’ ability to pay, there is no guild pro quo. Taxes paid are seen as a
sacrifice by tax payers, which raise the issues of what the sacrifice of each tax payer
should be and how it should be measured.
(i) Equal sacrifice. Total loss of utility as a result of taxation. Should be equal for all
taxpayers the rich will be taxed more heavily than the poor.
(ii) Equal proportional sacrifice: The proportional loss of utility as a result of taxation
should be equal for all taxpayers.
(iii) Equal marginal sacrifice: the instantaneous loss of utility as measured by the
derivative of the utility function as a result of taxation should be equal for all tax
payers. This will entail the least aggregate sacrifice (the total sacrifice will be the
least).
(a) Benefit principle versus sacrifice and Ability to pay Theory:

The benefit principle differs radically from the sacrifice and ability to pay theories of
taxation.
The sacrifice and ability to pay principles depart completely from the principles of action
and the accepted criteria of justice on the market. On the market people act freely in those
ways which they believe will confer net benefits upon them. The result of these actions is
the monetary exchange system with its in exorable tendency toward uniform pricing and
the allocation of productive factors to satisfy the most urgent demands of all the
consumers.
The sacrifice and ability-to pay principles forget about. The free choice and uniform pricing
and the discussion is all interims of sacrifice, Burden etc.
If taxation is only a burden, it is no wonder that coercion must be exercised to maintain it.
The benefit principle on the other hand is an attempt to establish taxation on a similar
basis as market pricing that is, the tax is to be levied in accordance with the benefit
received by the individual.
It is an attempt to achieve the goal of a neutral tax one that would leave the economic
system approximately as it is on the free market. It is an attempt to achieve phraseological
soundness by establishing a criterion of payment on the basis of benefit rather than
sacrifice.
Answer to SEQ 17
Investment tax incentives
(i) Features of investment tax incentives
Tax incentives are special provisions in the tax laws which allow an exclusion from
income, a higher-than usual deduction or special deduction, a tax credit, or a
reduction in the tax rate. They are fiscal measures that are used to attract local or
foreign investment capital to certain economic activities or particular areas in a
country. Tax incentive comprise all measures that provide for a more favourable
tax treatment of certain activities or sectors compared to what is granted to
general industry or economy. Through tax incentives, governments try to
reallocate or attract domestic and foreign capital using selective tax incentives
that give a more favourable tax treatment to certain economic activities.
A key feature of any definition of tax incentives is the preferential treatment of

particular taxpayers relative to others. From these definition, any tax
provision that is applicable to all firms or all investment projects non-
discriminatorily does not constitute a tax incentive. Thus tax incentive
definition excludes “general tax incentives,” such as accelerated
depreciation that applies to all investments. Also, both local and foreign
investors may be targeted by the tax incentives policy.
(ii) Fundamental premises that underpin the case for tax incentives in developing
countries. Candidates are expected to discuss the arguments in favour of
investment tax incentives. There are several arguments, but a minimum of seven
(7) arguments is sufficient.
- Investment tax incentives enhance return on investment
Additional investment is needed to foster more rapid economic growth. Tax
breaks can be effective in stimulating investment.
- May be justified by positive externalities stemming from investment
- They are relatively easy to target and fine tune.
- They are necessary for responding to tax competition from other tax
jurisdictions.
- Compensate for other deficiencies in the investment climate.
- Enhance revenue by stimulating investment that generate other taxable
income via employment and linkage effects.
- Offer political advantages over direct expenditure programs to stimulate
investment.
- Tax incentives have been successfully used in well known cases/countries.
(iii) Case (arguments) against tax incentives (any eight arguments)

- The actual revenue cost can be high if the investment would have been viable
anyway.
- Abusive tax avoidance schemes (e.g. transfer pricing) further erode the tax
base.
- Tax incentives divert administrative resources from revenue collection.
- The revenue losses requires painful fiscal adjustments in the form of higher
taxes on other entities.
- Tax differentials can introduce serious distortions that reduce efficiency and
productivity.
- Tax preferences create inequities by favouring some tax payers over others.
This can undermine general compliance (encourages evasion and avoidance).
- As a development tool tax incentives score poorly in terms of transparency
and accountability (engender low level of transparency and political
accountability).
- Stimulate political manipulation and corrupt practices.
- Alternative instruments for promoting investment can have much more

favourable and lasting effects on productivity, growth and development
International experience shows that tax incentives most often do not deliver
favourable results.
Answer to SEQ 18
Advise on measures to improve governance in taxation
Government is advised to do the following:
Make public a statement of all tax incentives for investment and their objectives
within a governing framework.
Tax incentives should only be granted in accordance with a comprehensive policy, which
lays down principles and policy objectives for the introduction or continuation of a tax
incentive. Governments should provide a justification for tax incentives (e.g.
regional/territorial development, employment creation) with the expected costs and
intended benefits. This should be communicated publicly through a regularly updated
statement. Such a statement provides the basis for the assessment of the performance of
tax incentives, any overlap and duplication and allows for governments to be held
accountable for the tax incentives they have granted.
Provide tax incentives for investment through tax laws only
Tax incentives for investment are currently provided through tax laws e.g. income tax law),
but in many cases are also provided by laws governing investment, Export Processing
Zones, Special Economic Zones, etc. and in other cases, through decrees, agreements
and regulations. As a result their true extent may be hidden. All tax incentives provided,
along with their eligibility criteria, should be consolidated and publicized in the main body
of tax law. Bringing tax incentives into the tax laws (or mirrored in the tax laws) increases
transparency and may empower the tax administration to administer them. Those tax
incentives that are used should be as simple as possible to both apply for and
administer.
Consolidate all tax incentives for investment under the authority of one government
body, where possible
All tax incentives should be placed under the authority of one government body, ideally the
Ministry of Finance. Currently, the granting and administration of tax incentives may be
the responsibility of finance, trade, investment or other ministries, increasing the risk of
corruption and rent seeking. Consolidating them under a single body increases
transparency, helps to avoid unintended overlap and inconsistencies in incentive
policies, limits discretionary power and enables policy makers to address problems
that may arise with the governance of tax incentives. In countries where the granting
and administration of tax incentives is decentralized and/or carried out by both the central
and sub-national governments, to the extent possible, various levels of government should
coordinate to maximize the efficiency and transparency of their efforts.
Ensure tax incentives for investment are ratified through the law making body or
parliament
Tax incentives provided through executive decrees or agreements when not scrutinized by
the law making body do not provide sufficient transparency in their granting and operation.
Parliamentary oversight, or its equivalent, is fundamental to transparency and
accountability in the governance of tax incentives. This ensures incentives are subject
to scrutiny on their intended purpose and their costs as well as benefits to the country.
Administer tax incentives for investment in a transparent manner
Once provisions have been enacted in the relevant tax laws and regulations, tax incentives
may be claimed by a taxpayer by meeting the necessary conditions as prescribed, without
negotiating with any granting authority, except as provided for under the relevant tax laws.
A minimum necessary condition to be met by taxpayers in the case of a tax incentive
should be requirement to file a tax return in the case of VAT and Income Tax, and in the
case of other taxes a statement detailing the duty or other exemptions availed in the
prescribed period. In addition to enhancing efficiency transparency, such taxpayer
information contributes to data for deterring the efficiency and equity of tax incentives. Tax
authorities should also periodically carry out audits of cases where tax incentives have
been claimed to ensure that they are not misused.
Calculate the amount of revenue forgone attributable to tax incentives for

investment and release a statement of tax expenditures to the public
The amount of revenue loss attributable to tax incentives should be reported regularly,
ideally as part of an annual Tax Expenditures Report (covering all main tax incentives).
While cash expenditure budgets are usually scrutinized on a yearly basis, the revenue cost
of tax incentives is hidden when estimates of revenues forgone are not calculated and
reported. Embedding estimates of revenues forgone by tax incentives in the yearly budget
process provides policy makers with the required inputs on a timely basis to inform policy
decisions. It also supports medium term fiscal planning as what seems like a small
amount of foregone revenue in good fiscal times may become quite high during periods of
fiscal strain. The calculation of revenue forgone should recognize that the benefits of
some investments, mineral extraction, for example, may take many years to realise so
losses should be assessed over the life of the business concerned.
Highlight the largest beneficiaries of tax incentives for investment by specific tax
provision in a regular statement of tax expenditures, where possible
It may be possible ha a few investors, or sectors, benefit from most tax expenditures. The
tax expenditure statement should have sufficient detail to enable policy makers to identify
which sectors benefit from specific tax provisions and, where this is compatible with the
requirement of laws and regulations governing taxpayer confidentiality, authorities may
wish to consider detailing the major beneficiaries and the amount by which they benefit
from tax incentives. Making such information public can enhance the legitimacy of
governments and their revenue authorities in the eyes of citizens which in turn can
enhance compliance more broadly.
Collect data systematically to underpin the statement of tax expenditures for

investment and to monitor the overall effects and effectiveness of individual tax
incentives
Analysis of tax incentives is data intensive – required for public statement, budgeting,
periodic reviews, tracking of behavioral responses by business, etc. There is a need for
the periodic collection of taxpayer’s data and on-going analysis of these data by revenue
authorities. This may require introducing mechanisms to do so in some countries.
Enhance regional cooperation to avoid harmful tax competition
In many cases tax incentives are provided in response to what neighbouring countries and
competitors are offering or received to be offering. Hence the issues of tax incentives
cannot be tackled in isolation. Governments can work together on a regional basis to
increase cooperation in the area of tax to avoid a race to the bottom when they provide
competing tax incentives. Efforts to enhance regional cooperation should also cover the
use of non-tax instruments e.g. cash subsidies and loan guarantees which also provide
incentives for investment.
Answer to SEQ 19
Comment on the use of tax exemption/fiscal incentives strategy to induce FDI
In countries where the investment climate is good, the effect of lowering effective tax rates on FDI
is positive, while in countries with poor investment climate – that includes Tanzania and other
developing countries – the effect is almost non-existent. This important observation suggests that
it is more efficient for low income developing countries to focus on improving their investment
climate rather than granting tax exemptions to corporations. There is some (substantial) evidence
which has confirmed that before investing in Tanzania businesses will consider other (more
important) factors than the level of tax exemptions they could get (see the factors below). Most
important factors that impact decision to locate investment in a particular country, in the order of
importance, are market potential, electricity, good roads, raw input, water infrastructure, access to
finance, business support, labour costs, port proximity, local suppliers, access to land, free zone,
exchange rate, affordable labour, legal system, tax incentives, duty free imports, protective tariffs,
competitor presence, repatriate dividends, competitive labour.
In this list, tax incentives and duty free imports do not appear to be the most important criteria
investors base their decision while assessing/deciding where to locate their businesses. This is,
however, not to say tax benefits should be abolished completely or kept very low, rather should be
neutral and not necessarily over generous.
A4
SECTION A
Public finance and

National Income
STUDY GUIDE A4: PUBLIC

EXPENDITURE
Governments are entrusted with not only setting the legal code (“laws of the land”) that
organisations must abide by, but also with shaping the external environment or macro
economy that they have to operate in. Public expenditure is an important facet of
macroeconomics as it relates to the spending by public authorities like central, state and local
authorities on various activities for achieving social and economic objectives.
As an accountant, it is important that you understand the various facets of public expenditure
which are discussed in this Study Guide as public expenditure policies shape the economy.
This is because changes in a government’s economic policies will undoubtedly affect your
organisation in some way.
This Study Guide will provide you with meaning, objectives and cannon of public
expenditure, an analysis of the classification of government expenditure, the factors which
affect the size and growth of public expenditure, an understanding of the institutions which
implement expenditure policies and the project evaluation techniques which can be used by
public bodies.
a) Explain the meaning, objectives, classification and canons of public expenditures.

b) Examine factors affecting size and growth of public expenditure.
c) Describe theories of public expenditure (Wagner’s laws of increasing state activities and
Wiseman-Peacock Hypothesis)
d) Identify the criteria of assigning public expenditure across different levels of government.
e) Describe the institutions and instruments involved in implementation of expenditure policy
(executive, parliament audit).
f) Describe public sector expenditure management tools (budget, parliamentary process, and
accounting and audit)
g) Apply the decision rules in project evaluation under different budget scenarios (budget size
fixed, budget size variable, lumpy projects)
h) Describe issues and challenges relating to government expenditure
Explain the meaning, objectives, classification and canons of public expenditures; examine
factors affecting size and growth of public expenditure; Describe theories of public
expenditure (Wagner’s laws of increasing state activities and Wiseman-Peacock Hypothesis)
[Learning Outcome a, b, c and d]
1. Meaning, Objectives, Classification and Canons of Public Expenditures.

1.1 Meaning of public expenditure
Government or public expenditure can be defined as the spending by public
authorities like central, state and local authorities on various activities for achieving
social and economic objectives. Therefore it also includes amounts spent for protecting
citizens and amounts incurred to satisfy the general common needs of the public at large.
Thus it brings about social as well as economic development of the state.
1.2 Objectives of Government Expenditures

i) To provide essential goods and services to the public such as education and health.
ii) Regulation of economic activities in the public interest, example control of monopoly.
iii)Influence allocation of resources in order to improve efficiency example by providing subsidies
to small scale firms.
iv) Allocation function: This is where appropriate corrective action is taken in circumstances where
private markets fail to provide the combination of goods and services desired by people.
v) Redistribution of incomes by providing loans and free social services to the poor.
vi) Stabilization of the economy, example controlling unemployment problem by increasing
expenditures on economic and social services which help to stimulate investments.
1.3 Classification of government expenditure
Government spending can be analysed in three ways:
1. Administratively
This classification is based on the terms of who is responsible for the expenditure and by
implication the activities that drive it.
Responsibilit Example of government expenditure Amount incurred

Central
y Defence, providing infrastructure relating Total amount incurred by central
government to national highways, airways, sea ports, government for providing the
building industrial zones various services (discussed in the
adjacent column
Local Primary education, local health service, Total amount incurred by local
government Agriculture extension and livestock government for providing the
development, water supply and local road various services (discussed in the
maintenance. adjacent column)
Total amount Total amount
The above classification will split the entire expenditure of an economy into central government
expenditure and local government expenditure.
Public Expenditure: 87
2. Functionally
This classification is based on the terms of what the spending has been upon. Therefore the total
public expenditure of an economy is split up based on the nature of services provided i.e. the
total expenditure is split into defence expenditure, national highways expenditure, total local
health services incurred by various local governments, total local road maintenance
expenditure incurred by the various local governments of the economy, and so on.
Type of expense (examples) Total

amount
Defence expenditure XX incurred
National highways expenditure XX during a
Total local road maintenance expenditure incurred by XX period
the
Total
variouslocal
localpublic health of
governments expenditure incurred by the
the economy XX
various local governments of the economy
Total expenditure of the economy XXXX
3. Economically
This classification is based on the terms of its purpose such as infrastructure, social,
health or other policy purpose. Therefore the total expenditure of the economy will be split up
in this way.
(a) Recurrent expenditure is expenditure incurred for the day to day operations
of the government like salaries and wages of employees and other overheads,
healthcare services, education etc.
(b) Development expenditure is expenditure incurred towards improving
infrastructure like roads, bridges, supply of electricity and water etc.
Other classifications
4. Classification based on necessity
This classification was advocated by Professor Mill. He classified public expenditure as
necessary and optional, and advocated that the state may undertake ‘optional’ expenditure.
5. Classification based on nature

This classification is based on the nature of the expenditure. Public expenditure is incurred
for individuals or groups of individuals. It is classified as fixed and variable expenditure.
(a) Fixed expenditure is that portion of public expenditure which is fixed and has
no relationship to the quantum of usage of services. For example, defence
expenses, amounts incurred on street lighting etc. Major portion of the expense
incurred is fixed in nature; however, it does have an element of variability in it.
(b) Variable expenditure is that portion of public expenditure which is variable i.e. the
amount incurred has a direct relationship with the quantum of usage of services. For
example amounts incurred for postal service, railway services etc.
6. Classification based on urgency

This classification based on the urgency of usage is as follows:
(a) Necessary expenditure is expense which cannot be avoided

(like defense expenses).
(b) Useful expenditure is expense which can be postponed for some time (like
construction of an additional bridge over a river).
(c) Superfluous expenditure is expense which can be avoided altogether as it is

neither useful nor profitable.
7. Classification based on productivity

This classification of government expenditure is as follows:
(a) Productive expenditure relates to expenditure which causes increase in

national income due to development / more efficient usage of national or human
resources of the economy (e.g. expenditure for setting up an industrial estate in a
city).
(b) Non-productive expenditure relates to expenses which do not cause increase

in national income (e.g. war expenses).
Structure of Government Expenditure in Tanzania

Public expenditure in Tanzania is broadly classified into two main heads: recurrent and
development expenditure.
(c) Recurrent expenditure is expenditure incurred for the day to day operations
of the government like salaries and wages of employees and other overheads,
healthcare services, education etc.
(d) Development expenditure is expenditure incurred towards improving
infrastructure like roads, bridges, supply of electricity and water etc.
This expenditure is further divided into Ministerial and Regional and Local
government expenditure.
(a) Ministerial and regional expenditure is the expenditure for which the responsibility is
on the Ministers of Central Government.
(b) Local government expenditure is incurred by the local authorities like
municipalities for the local jurisdiction.
1.4 Principles of public expenditure
The main principles of public expenditure are:
i. Maximum social benefit: it is necessary that all public expenditure be utilised for the
general welfare of the society at large, and not for the benefit of a particular section of
the society.
ii. Economy: public expenditure has to ensure economy, i.e. all wasteful and unprofitable
expenditure has to be avoided. It should be ensured that the tax-payer is not burdened
to the extent that his savings are affected.
iii. Approved expenditure: it is necessary to ensure that public expenditure is approved
by a competent authority and that funds are used for the purpose for which they were
approved.
iv. Flexibility: it is necessary that an element of flexibility exists so that expenditure can be
varied according to needs and circumstances.
2. Factors Affecting Size and Growth of Public Expenditure.

Several factors have led to an increase in public expenditure in Tanzania overtime include the
following:
(a) Growing Population
A high growth rate of population naturally calls for increase in public expenses as all state
functions are to be performed more extensively, Population growth has made necessary
for governments of most countries to spend increasing amounts on education, health,
infrastructure, subsidies and social security.
(b) Defense Expenditure

The defense expenditure of the Central Government has increased over the years due to
modernization of defense equipment by Navy, Army, and Air forces to prepare the country
for war or prevention. Furthermore the defense expenditure minimizes the possibility of
external threats, which in turn creates a good environment for social and economic
activities of the nation.
(c) Interest Payments
Government borrowings are on increase. The government borrows funds from domestic
market and foreign sources to meet expenditure on various government activities. As a
result, the government has to incur huge interest payments. Example borrowing from IMF,
WORLD BANK, AFRICA DEVELOPMENT BANK. The extent of past government
borrowing: governments indulge in external borrowings in order to fund development, in
times when they face budget deficits. This in turn implies that the government will have to
incur recurrent expenditure towards payment of interest and repayment of principal amount
of borrowing.
(d) Subsidies
Government of Tanzania has been providing subsidies on number of items such as food,
fertilizers, education. Because of massive amount of subsidies, the government
expenditure has increased over the years. In order to reduce unproductive expenditure,
Central Government must make attempts to reduce subsidies.
(e) Administration
The Central Government expenditure on administration has increased due to growth in
population and economic development.
(f) Rise in National income
The national income of the country has shown an increasing growth rate over the last 10
years. The increase in national income resulted in more revenue to the government by
way of tax revenue and other income, which in turn enabled the government to increase its
expenditure.
(g) Urbanization
Urbanization has led to increasing expenditure on civil administration. Government
expenditure on courts, police, transport, railways, schools and colleges, public health
measures, water and electricity supply, public parks, libraries have increased due to
growth of towns and cities.
(h) Rural Development
In developing countries, government has to undertake community development projects
and other social measures to promote rural development. Such measures cause a rise in
public expenditure.
(i) Increase in Inflation
Rise in prices have caused an increase in public expenditure. The cost of supplying public
goods and services has increased. Rising prices have also necessitated the payment of
higher salaries and allowances.
(j) Democratic Government
A democratic government has to incur increasing expenditure on elections, legislatures,
ministries, international conferences, embassies abroad. Public expenditure also
increases when a country becomes a member of international organizations like UN,
WHO, AU.
(k) Social Security Measures
For the welfare of the people government provides social security measures which
increase its expenditure. It provides measures such as sickness benefits, old – age
pensions, free education, medical facilities, public work and relief programmes.
(l) Growth of Transport and Communication
The government has to incur huge expenditure on construction of railways, roadways,
national highways, and bridges so as promote mobility and economic development. Thus
with growth of transport and communication public expenditure have increased.
(m) Development of Agriculture

The government may develop agriculture by providing seeds, fertilizers, irrigation facilities,
modern implements, cheap loans, all these will increase public expenditure. The
intervention to increase government spending aimed at expansion and construction of new
irrigation infrastructures, purchases of agricultural implements and inputs, improving
marketing infrastructure. National Food Reserve to assure food security for Tanzanians
on a Sustainable basis and provision of loans and credit services to smallholder Farmers
through Tanzania Investment Bank and Agriculture Development.
(n) Development of Industry
The government may encourage the growth of private industries through protection,
subsidies to exporters, and loans at cheap rate of interest causing a rise in public
expenditure.
(o) Poverty Alleviation Programmes
In developing countries, government are spending a good amount of funds on poverty
alleviation and employment generation programmes, some of the programmes like KILIMO
KWANZA, MKUKUTA and MKURABITA.
(p) Research and Development
Research and Development is important to improve quality and to reduce costs. The
government finances Research and Development projects undertaken by non-government
organizations, universities and other educational organizations.
(q) Economic Planning
To promote rapid economic development modern governments adopt economic planning.
The public sector outlay on various sectors has been increasing with the increasing role of
government.
3. Theories of Public Expenditure

(a) Wagner’s law of increasing state activities
According to this theory, there are inherent tendencies for the activities of different layers
of a government such as central and local governments to increase both intensively and
extensively.
 There is functional relationship between growth of an economy and government activities.

 The following reasons support inherent long-term tendency of increasing public expenditure
- Expansion in the traditional functions of the government
- Growing population
- The size and nature of public services
- The need to provide an expand public goods
- Price tendency (of going up)
- Etc.
(b) Wiseman-Peacock Hypothesis

i) According to this hypothesis, public expenditure does not increase in a smooth
and continuous manner, but in jerks or step-like fashion.
ii) That is, at times, social or other disturbances take place, creating a need for
increased public expenditure which the existing public revenue cannot meet.
Hence, the government is forced to increase field of activities with corresponding increase
in public expenditure.
4. Criteria of Assigning Public Expenditure Across Different Levels of

Government.
Public expenditure should be incurred bearing in mind the main principles of public
expenditure. Therefore at the most fundamental level government spending decisions could
be seen as part of the overall economic problem of allocating scarce resources amongst
competing needs and requirements. However with government spending the process
is not undertaken within a free market pricing system that works based on the
interplay of supply and demand to satisfy those consumers who are able and also willing to
participate to acquire economic goods.
With government spending the allocation of scarce resources is based on decisions in
a democratic process that supports primarily the provision of what most people would
see as social goods that they believe should not command a price like economic goods.
Therefore the criteria used in assigning public expenditure across government sectors are as
follows:
(i) Strategic significance: Public expenditure needs to be spent in accordance with key
strategic government objectives such as the MKUKUTA strategic interventions. Is the
sector already prioritized in the national strategy? Does it contribute to the country’s
profile? Does the sector have central strategic significance as an enabler for other
sectors? If it has these significances, it needs to be a priority sector for government
spending.
(ii) Economic growth: Public expenditures need to be assigned towards sectors that
account for a significant proportion of the country’s GDP. If the sector has a quick
growth and is such that in the future will contribute largely to the national income, it
deserves to be a priority sector.
(iii) Extent of employment: The government priority in spending shall also consider the
sectors which provide significant employment opportunities. Thus, if the sector
employs a large number of workforces it needs attention and is thus a priority sector.
If employment is likely to grow significantly it potentially propels income growth and so
deserves to be a priority sector.
(iv) Productivity: Another criterion that needs consideration when assigning public expenditure is
the sector productivity level or the potential for the sector to become a high
productivity area.
(v) Enterprise, innovation, and investment: If a sector provides potential for new
startup, it is innovative, it use new technologies, includes a significant number of
companies that trade in new international markets, and attracts substantial inward
investment; it deserves to be a priority growth sector.
Describe the institutions and instruments involved in implementation of expenditure

policy (executive, parliament audit); Describe public sector expenditure management
tools (budget, parliamentary process, and accounting and audit); Apply the decision
rules in project evaluation under different budget scenarios (budget size fixed, budget
size variable, lumpy projects); Describe issues and challenges relating to government
expenditure
[Learning Outcome e, f, g, and

h]
5. Institutions and Instruments Involved in Implementation of Expenditure

Policy
(a) Par
lia
me
nt
In a parliamentary democracy, leaders, parties and candidates for key presidential positions,
cabinet membership, parliamentary seats or local government positions have to present
plans in the form of papers, presentations, and arguments in debate and in published
manifestos. Once elected, these leaders, cabinet ministries, etc. and later
communications provide a mandate for the government in power to operate including
many aspects that impact on public spending. The democratically elected government has
to work within parliamentary democracy in putting forward proposals, papers and
ultimately legislation that is worked upon subject to amendment and then voted for to become
law. Once again, this will drive many public spending decisions. Parliament is often described
as the legislature since that is its purpose and function. Parliament may sometimes delegate
matters to parliamentary or cross parliamentary committees who will then propose
legislation and amendments to parliamentary votes. Government and the cabinet has
power, but power within a framework of supervision and approval by the legislature or
parliament to whom they are accountable.
(b) Exec
utive
s
Whilst governments and parliamentarians may come and go with democratic elections, a
permanent executive exists below them as a structure of largely full-time paid management
and staff. Employees do come and go but their offices and positions are more permanent
institutional structural mechanisms and process elements. Sometimes some are referred to
as the civil service.
Civil servants and public sector staff work in a range of different entities with different
functions and purposes:
Example
Sometimes called MDAs they are the ministries, departments and agencies of central and
local government.
Ministries
Funds
Independent departments
Authorities
Agencies
Boards
Councils
Commissions
Local
governme
nt etc.
There are also other state entities:
Embassies
Hospitals
Education
And not forgetting the legal

bodies and courts:
The
judiciary and
its courts
Ministries are particularly important in providing policy advice and support to government
through working on proposals given to them and putting proposals forward that support
government policy. All MDAs and state bodies have budgets with a variety of funding and
revenue streams and expenditure plans.
Government can influence, control and use these budgets for policy purposes. However the
bodies may have statutory obligations to fulfil such as defence, policing, law, social or
educational provision etc. and have to provide these by law.
(c) Audit
To support accountability, most of these bodies are subject to independent audit by the state
audit function or National Audit Office of Tanzania. Their audit work is of systems and operations
in terms of compliance, efficiency, economy and effectiveness in process and procedure.
Heads of government bodies are also accountable for their spending to the office (CAG) of
the Controller and
Auditor General who then focuses on four key issues:
The account of expenditure

Comparison against appropriated or agreed amounts
Performance against agreed targets in terms of effectiveness
Asset analysis and spend
Audit plays a key part in ensuring spending is properly authorised and reflects decisions made
through budgets laws and regulations as well as statutory obligations.
6. Public Sector Expenditure Management Tools

One of the important functions of the government is to collect resources from the economy
and use them for implementing policies relating to achievement of social and economic
objectives. The economic objectives can be met only if the resources are used efficiently and
effectively. Management of public expenditure is very critical for any economy. Public
expenditure is the means through which public policies are implemented. Misallocation or
misuse of public funds can pose serious problems to the society. Tax payers are concerned
about the amount they pay to the government in the form of taxes and the benefits that they
receive from the government in return.
Efficient management of public expenditure is necessary in order to ensure credibility of the
government. Economists / analysts working on fiscal policies need to understand thoroughly
how the expenditure side of public finance is managed. Public expenditure management is
concerned primarily with the budgeting total revenue and expenditure, allocation of resources
among various sectors and efficiency of execution of budgets. Budgets should take into
account all the expected expenditures which are to be met as per the decisions made by the
government at the stage of planning itself, and should focus on priority areas.
Efficient public expenditure management can be achieved with the help of the following tools:
(i) Accuracy in budget preparation

Budget planning and preparation is very critical to good public expenditure management. While
formulating a budget, it is necessary to obtain consistent and reliable data on past
public expenditures in order to budget for the current period. Past experience should be
taken into account so that past errors may be rectified. A number of other factors need to be
taken into account to ensure a sound budget:
 Completeness of coverage of all expected expenditure

 Usage of realistic and reasonable assumptions
 Usage of realistic projections for expected revenue
 Inclusion of provision for change in costs
 Inclusion of provision to meet unexpected expenditures
It is necessary to ensure proper control over total expenditure and minimise the cost of
budget management.
Productive efficiency and efficient allocation of resources also helps in public
expenditure management.
Disclosure of all relevant public revenue and expenditure information is important for
accountability of government and to reduce corruption.
Public participation in the budget process for a pre-defined part will also help in better
accountability and transparency.
Priority areas need to be identified at the time of budget preparation itself so that funds
are not spent excessively on non- priority areas. It is also necessary that proper classification is
made between implementing agency (administrative function), purpose of expenditure
(functional classification) and use of expenditure (economic classification).
(ii) Budget execution

Once the budget is approved at the Central Government level, the responsibility of execution
generally lies with the ministries and other appointed agencies. The ministries should ensure
that they adhere to the spending limits laid down by the Central Government and regularly
report to the government. Monitoring is generally done at the central level on an
aggregate basis and appropriate responsibility should be placed for the monitoring. It is
necessary for the Ministry of Finance to ensure that it obtains reliable data on expenditure from
the executing agencies at regular intervals and analyse it effectively. This will help in overall
control of expenditure.
Factors that are important in budget execution are whether the targets are likely to be met and
whether the expenditure is likely to exceed budgets. It is important that the monitoring process is
such that expenditure incurred will be within the budgeted amount and appropriate measures, if
required, are taken to control expenditure.
(iii) Cash planning

Adequate cash planning is necessary to so that the government is able to meet budgeted
expenses and unexpected expenditures without resorting to additional borrowings. It also helps
in ensuring that the budget targets are met and the economic policies are implemented
smoothly. Even though the budget has been prepared well and with adequate planning,
liquidity problems may arise as the timing of cash inflows and outflows may vary. In order
to ensure timely availability of cash for meeting expenditure, the government needs to prepare
an annual cash flow forecast (bifurcated month-wise) at the beginning of each year.
It can take into account the past experience and future projections while preparing the cash flow
forecast. If a shortfall of cash is expected in a particular month, the government can either
postpone the expenditure or make arrangement for collecting additional revenue. The monthly
projected cash flow should be updated with actual figures on a regular basis so that it helps
in achieving budgeted targets. Quick updating of information is possible only with a well-
established reporting system.
(iv) Well-defined expenditure policies

Policies that are well defined need to be framed along with projections of estimated expenditure
to be incurred in relation to those policies.
(v) Information on public revenue

It is necessary to inform the citizens about the sources and amounts of public revenue and how
these are managed by the government since the quantum of revenue determines the amount
available for public expenditure. This will help citizens to monitor how public funds are being
used and managed.
(vi) Public expenditure tracking

The tracking of public funds will ensure that funds are used for the purpose for which they were
allocated and were intended to be used. This tracking must be quantitative as well as qualitative.
Quantitative tracking is in the form of verifying records whereas qualitative tracking may be in the
form of assessing from beneficiaries their opinion on the quality of services, technical reviews
etc.
(vii) Accounting
The accounting categories and classification for budgeting as well as actual accounting should
be common at the Central Government level so that accurate analysis is feasible. Accounting
needs to be done on a timely basis and should be reliable. Appropriate processes for analysis of
the accounts should be established.
(viii) Audit
An independent authority should be responsible for undertaking the audit of the entire
process of public expenditure management.
8. Decision Rules In Project Evaluation Under Different Budget

Expenditure evaluation for many is seen as a way of evaluating competing priorities for
spending from the scarce resources of a revenue budget.
The theories help build a model for evaluating one priority

against another.
Many of the theories use a form of financial cost benefit analysis where social and economic
benefits and costs are compared in financial terms assuming that social costs and benefits can
be measured in that way.
(a) Let us now look at different types of budgets to evaluate projects:

Fixed budget
The fixed budget approach suggests that the evaluation is first seen in the context of being
given a fixed budget and deciding on the priorities for expenditure. The theory is then similar
to that of a household determining its expenditure with a fixed income and knowledge of
utilities and marginal utilities of available goods and services and their market prices. There is
assumed to be a classical rationality in that the state wished the community to receive the
maximum net benefit.
DiagramDiagram
3: Variable budgetsbudgets
3: Variable / marginal
/ marginal
The diagram
The diagram
above shows
abovetwo
shows
potential
two potential
candidatecandidate
projects projects
for government
for government
expenditure.
expenditure.
For For
eachthe
each project project the marginal
marginal benefits benefits areagainst
are plotted plotted expenditure
against expenditure
incurred.incurred.
Theare
The curves curves areon
based based onthat
a view a view
the that the marginal
marginal or extra or extraof
benefit benefit of each spent
each Shilling Shilling spent falls.
falls.
On this On
basisthisa basis
state a state
that that to
wished wished to maximise
maximise the net the net of
benefit benefit of its spending
its spending availableavailable
will will
allocate allocate
outlays so outlays
as to so as tothe
equate equate the marginal
marginal benefits benefits of the candidate
of the candidate projects projects for spending.
for spending.
The objective
The objective of the
of the state state
is to is to maximise
maximise net benefits.
net benefits.
(b) Let (b)

us Let
nowuslook
nowatlook
howatexpenditure
how expenditure evaluation
evaluation is affected
is affected by the by the nature
nature of of
projectsprojects
and the and the complexity
complexity in objectives
in objectives before the
before using using the marginal
marginal theory
theory as a as a
general general
theory. theory.
(i) (i)
DivisibleDivisible
projectsprojects
DivisibleDivisible
projects projects
are those are thosethe
where where the government
government can spendcanany
spend any amount
amount of money of money
to the
to finance finance the project.
project. The amount The amount of the spending
of the spending could becould be anything
anything from one from one
ShillingsShillings to a and
to a billion billiononeandShillings.
one Shillings. With divisible
With divisible projects projects the marginal
the marginal
theory
theory can can beapplied
be easily easily applied
since any since any amount
amount can be allocated
can be allocated to a such
to a project project such
that expenditures
that expenditures can be can be allocated
allocated in proportion
in proportion to the marginal
to the marginal benefits benefits
of the of the
projects.projects. A proposal
A proposal to spendtohoursspendofhours
caringofsupport
caring support in hospital
in hospital wardsbecould be
wards could
seen as seen as examples
examples of relatively
of relatively divisible divisible
projects.projects.
(ii) (ii) Lumpy projects

Lumpy projects
Lumpy projects
Lumpy projects are quiteare
different.
quite different.
The projects
The projects
have relatively
have relatively
steppedstepped
costs. Road
costs. Road
building building
projects projects are type
are of this of this typethese
since sinceprojects
these projects
may have may have outlays
outlays that arethat are
either
either spent orspent or notThe
not spent. spent. The are
outlays outlays are indivisible
indivisible and cannotandbecannot
spentbe spent by
shilling shilling by
shilling. shilling.
Some argueSomethatargue
the that the projects
projects should be should
rankedbe or
ranked
put inororder
put in
of order of their
their net net benefit
benefit
to cost to cost
ratio ratioagiving
giving measurea measure
of returnofperreturn per spent.
shilling shillingThe
spent. The projects
projects with thewith the
highesttoreturn
highest return spendtoshould
spendbe should be undertaken
undertaken until the until
budgetthehas
budget
been has been spent.
spent.
Example
Following is the information relating to three projects which are being evaluated by a local
government.
Project Cost Benefit

Road A Tshs 80m Tshs
Road B Tshs 100m Tshs
250m
Road C Tshs 120m Tshs
260m
480m
Required:
Using the above information, evaluate the project expenditure and choose the most efficient
projects if the local government follows:
(a) Fixed budget
(b) Variable budget (c) Divisible projects (d) Lumpy projects
Answer
(a) Fixed budget

To make the expenditure allocation the state should rank the projects by their benefit to cost
ratio and undertake each project until the budget is spent. So if the budget was fixed at
Tshs200 million only projects A and C would be undertaken. The table below explains the
evaluation made.
P C Ben Net Benefit R

Rr oTs Tsh
efit Tsh
benef to cost 4 1 a
R
oo Tsh
shs Tsh
s it Tsh
s 2.6 . 3 n
R
o
aj Tsh
s
t 80 Tsh
s
250 Tsh
s
170 4 1 2 k
o
a
de s
100
m s
260
m s
160
m 2
a
dc 120
m 480
m 360
m 5
d
Variable budget
At m m m
B
C is a variable budget the state sector and its constituent parts have to extend their
Where there
view of the opportunity cost of projects from merely comparing public sector projects against one
another to consider the opportunity cost of increasing the state expenditure budget and creating
opportunity costs to the private sector as a result.
Divisible projects
In theory we need to add private sector projects into the analysis so that the marginal benefits of
all projects are considered.
Lumpy projects
Again in theory we need to add private sector projects into the mix.
9. Issues And Challenges Relating To Government Expenditure
1 . Issues relating to public expenditure:
(i) Spending to be in accordance with key strategic government objectives such as

the MKUKTA
strategic interventions in Tanzania.
Example
MKUKTA has at its heart the fundamental objectives of economic growth and poverty
reduction. The Tanzanian government has to carefully balance capital spending on
infrastructure and current spending on purchases, wages and salaries and services. Whilst
current spending provides instant social support it does not build infrastructure such
as transport, communications and energy that may be essential in supporting longer-term
economic growth. Current spending may however include vital maintenance work on existing
infrastructure to maintain its effectiveness thereby supporting economic growth.
(ii) Making spending decisions as part of overall decisions on budgetary stimulation or

restraint using
Keynesian fiscal policy tools.
Remember that in times of unemployment we may seek to use a budget deficit to stimulate
demand. The amount of deficit is as important as the nature of spending in terms of its
multiplier effect. For Tanzania, this is complicated by its reliance on overseas aid.
Government spending decisions cannot be entirely separated from fiscal policy decisions.
After the global banking crisis and ensuing recessionary impact, Tanzania has had to use a
fiscal stimulus to support economic stability and employment. Exiting from the stimulus
inevitably means some expenditure reductions.
(iii) Supporting a scale of public sector activity that involves maintenance and
expansion of spending on goods and services or wages and salaries, which in turn
will maintain or enhance public sector service provision.
Example
Many areas of public service provision such as social support, health and education are not
easily reversible. In the context of Tanzania, poverty reduction is a major spending objective
and such expenditure is a long term commitment that may require incremental expansion.
Key sectors in Tanzania are:
Education
Health
Water
Roads
Agriculture
Energy
(iv) Continuing to fund subsidies that may be almost committed to support

enterprise activity i.e.
essential public spending on the provision of goods and services at a reasonable price.
(v) Having to support agriculture, transport,

water and energy.
(vi) Having to spend on social security to a greater or lesser extent depending on

how economic fluctuations affect payments to the unemployed and families requiring
support. This issue is however more relevant to advanced economies in which transfer
payments of social security support are a significant part of the budget.
(vii)Accepting that an ageing population requires support as does a substantial child

population element.
(viii) Being burdened by past government deficits that have driven up borrowing and
borrowing costs and payments for interest and repayments of capital
Therefore we can conclude that government spending discretion is limited since

much is already committed and in place.
2. Challenges relating to public expenditure
The challenges can be seen as:
(a) Finding sufficient sources of funding as revenue to support current levels of capital and
revenue spending
(b) Making difficult decisions to achieve priorities
(c) Ensuring long-term economic growth is being supported
(d) Making decisions in a challenging environment where election and re-election are
important
(e) Making compromises with political alliances, and coalitions being important to maintain
(f) Dealing with sometimes powerful stakeholder groups such as public sector workers who
may resist change and act in self-interest to expand the sector and sector remuneration
(g) The fundamental problem of only being able to make relatively marginal or incremental
changes in public spending
Question 1
‘In Tanzania, discretion on government spending is limited’.
Required:
Justify the above statement.
Question 2
The Tanzanian government has a fixed budget of Tshs3.6 million to invest in seven different
infrastructure facilities. The cost of each project is represented by its required investment
amount. The benefit assessment gives the total benefit for each project. Refer to the table below
for details:
Project Present value Present value of Net benefits

of benefits investment cost
Tshs Tshs Tshs

A 430,000 140,000 290,000
B 360,000 230,000 130,000
C 600,000 420,000 180,000
D 380,000 340,000 40,000
E 1,130,000 870,000 260,000
F 1,440,000 860,000 580,000
G 1,370,000 570,000 800,000
5,710,000 3,430,000 2,280,000
Required:
Based on the information provided above, determine the projects to be selected and the net
benefits from the projects selected.
Question 3
Describe the role of budgeting as a public sector expenditure management tool.
Question 4
Increase in public expenditure is not a new phenomenon. Factors contributing to the tendency of
increasing public expenditure are explained in economics by two prominent theories.
Required
State the two theories, and briefly explain what is propounded in each theory.
Question 5
Since its independence Tanzania had experienced an increasing trend of its public expenditure
without corresponding increases of public revenues leading to a high public debt. Discuss the
factors which have led to this trend overtime.
Question 6
How would you consider the applicability of the Wagner’s law of increasing public expenditure in
today’s modernized world?
Question 7
Public expenditure management is a key policy instrument for influencing on how public resource
are allocated and used towards realizing public policy goals, namely: growth, stability and equity,
and poverty reduction. Tanzania Public Expenditure Management (PEM) system had been
assessed by various institutions worldwide including IMF and the World Bank and found to have
multiple failures and few areas that need improvement.
Required:
Describe ways on how Tanzania public expenditure management systems can be improved.
Question 8
Under the current regime in power, Tanzania has witnessed major government efforts to reduce
government expenditure by employing some measures including banning public servant foreign
travels, postponing of public holiday celebrations and the like and at the same time strengthening
public spending in education, health sector and road construction. However, under public
expenditure policy there are predetermined principles of public expenditure;
Required:
Explain main principles of public expenditure.
Question 9
Identify tools that can be used by a government to achieve efficient public expenditure
management.
Answer to Self-Examination Questions
Answer to SEQ 1
 Spending in accordance with key strategic government objectives such as the

MKUKTA strategic interventions. Therefore the Tanzanian government has to carefully
balance capital spending on infrastructure and current spending on purchases, wages and
salaries and services. Current spending provides instant social support it does not build
infrastructure
 Making spending decisions as part of overall decisions on budgetary stimulation or

restraint using Keynesian fiscal policy tools. This means that government spending decisions
are not independent of fiscal policy decisions.
 Supporting a scale of public sector activity that involves maintenance and expansion of
spending on goods and services or wages and salaries, which in turn will maintain or enhance
public sector service provision. In the context of Tanzania poverty reduction is a major
spending objective and such expenditure is a long term commitment that may require
incremental expansion.
 Funding subsidies that may be almost committed to incur public spending on the provision
of goods and services at a reasonable price.
 Incurring expenditure in the area of agriculture, transport, water , energy, social security
expenditure like health of children and aged
Answer to SEQ 2
In dealing with the case above, one can consider those infrastructure projects
which will have a higher ranking in terms of benefits to cost analysis and also will
fit into the fixed budget. Refer to the table below to perform the ranking.
Project Present value Present Net benefits B/C Ratio B/C

of benefits value of ranking
Tshs Tshs
investment Tshs
A 430,000 cost 140,000 290,000 2.1 1
B 360,000 230,000 130,000 0.6 4
C 600,000 420,000 180,000 0.4 5
D 380,000 340,000 40,000 0.1 7
E 1,130,000 870,000 260,000 0.3 6
F 1,440,000 860,000 580,000 0.7 3
G 1,370,000 570,000 800,000 1.4 2
Based on the rankings determined in the last column of the table, Projects
A, G, F and B should be chosen. The total present value of investment cost in
these 4 projects is Tshs1.8 million and the present value of benefits is Tshs1.8
million.
The net benefit of these four projects is therefore

Tshs1.8 million.
Answer to SEQ 3
The role of budgeting as a public sector expenditure management

tool is as follows:
1. Accuracy in budget preparation

Budget planning and preparation is very critical to good public expenditure management.
While formulating a budget, it is necessary to obtain consistent and reliable data on
past public expenditures in order to budget for the current period. Past experience
should be taken into account so that past errors may be rectified.
A number of other factors need to be taken into account to ensure a sound budget:
(a) Completeness of coverage of all expected expenditure
(b) Usage of realistic and reasonable assumptions
(c) Usage of realistic projections for expected revenue
(d) Inclusion of provision for change in costs
(e) Inclusion of provision to meet unexpected expenditures
It is necessary to ensure proper control over total expenditure and minimise the cost of
budget management.
Productive efficiency and efficient allocation of resources also helps in public
expenditure management.
Disclosure of all relevant public revenue and expenditure information is important for
accountability of government and to reduce corruption.
Public participation in the budget process for a pre-defined part will also help in better
accountability and transparency.
Priority areas need to be identified at the time of budget preparation itself so that funds
are not spent excessively on non- priority areas. It is also necessary that proper classification is
made between implementing agency (administrative function), purpose of expenditure
(functional classification) and use of expenditure (economic classification).
2. Budget Execution
Once the budget is approved at the Central Government level, the responsibility of execution
generally lies with the ministries and other appointed agencies. The ministries should
ensure that they adhere to the spending limits laid down by the Central Government and
regularly report to the government.
Monitoring is generally done at the central level on an aggregate basis and appropriate
responsibility should be placed for the monitoring. It is necessary for the Ministry of Finance to
ensure that it obtains reliable data on expenditure from the executing agencies at regular
intervals and analyse it effectively. This will help in overall control of expenditure. Factors that
are important in budget execution are whether the targets are likely to be met and whether
the expenditure is likely to exceed budgets. It is important that the monitoring process is such
that expenditure incurred will be within the budgeted amount and appropriate measures, if
required, are taken to control expenditure.
Answer to SEQ 4
Two theories (or laws) which explain the tendency of increasing public expenditure:
(i)Wagner’s laws of increasing state activities
(ii) Wiseman-Peacock Hypothesis
Wagner’s law of increasing state activities
 According to this theory, there are inherent tendencies for the activities of different
layers of a government such as central and local governments to increase both
intensively and extensively.
 There is functional relationship between growth of an economy and government
activities.
 The following reasons support inherent long-term tendency of increasing public
expenditure
- Expansion in the traditional functions of the government
- Growing population
- The size and nature of public services
- The need to provide an expand public goods
- Price tendency (of going up)
- Etc.
Wiseman-Peacock Hypothesis
 According to this hypothesis, public expenditure does not increase in a smooth and
continuous manner, but in jerks or steplike fashion.
 That is, at times, social or other disturbances take place, creating a need for increased
public expenditure which the existing public revenue cannot meet.
 Hence, the government is forced to increase field of activities with corresponding

increase in public expenditure.
Answer to SEQ 5
Candidates are expected to give the following or similar points:
 Inflation: which reduces current purchasing power
 Public debt: which requires continuous servicing
 Tax revenue: whose increase tends to increase government spending
 Population growth or other demographic variables: which have a bearing on the
demand for government services
 Economic growth: which tends to influence the demand for government services
 Foreign aid
 Trade openness
 Geographical distributions by political bonded (The list is not exhaustive)
Answer to SEQ 6
 Wagner, in his law of rising public expenditures’, hypothesized that with the
development of industrial societies there would be an inevitable and increasing
public pressure and political ‘pressure for social progress’ and an increasing
demand for ‘social considerations’ in business conduct.
 Evidence in the late nineteenth and twentieth century supports this view as many
economies were on the developing stage.
 However in the current century this statement does not hold good for developed
economies as fiscal restraint is used to tackle with high government borrowings
and also fiscal flexibility is used when economies inevitably turn down at times.
Answer to SEQ 7
Ways on how Tanzania public expenditure management (PEM) system can be

improved includes:
 Capacity building to staff involving in PEM

 Strengthening external audit functions
 Controlling accumulation of new arrears by enforcing a commitment control system
 Developing and empowering internal audit functions in a systematic manner
 Strengthening the fiscal reporting system
 Enhancing accountability and transparency
Answer to SEQ 8
Main Principles of Public expenditure

(i) Maximum Social Benefit: It is necessary that all public expenditure is utilised for
general welfare of society at large and not for the benefit of a particular section of the
society.
(ii) Economy: Public expenditure has to ensure economy that means all wasteful and
unprofitable expenditure has to be avoided and that it has to ensure that the tax-payer
is not burdened to the extent that savings are affected.
(iii) Approved expenditure: It is necessary to ensure that public expenditure is approved

by a competent authority and that funds are used for the purpose for which they are
approved.
(i) Flexibility: It is necessary that an element of flexibility exists

so that expenditure can be varied according to needs and
circumstances.
Answer to SEQ 9
Tools that can be used by the government to achieve efficient public expenditure
management
 Accuracy in budget preparation
 Budget execution
 Cash planning
 Well-defined expenditure policies
 Information on public revenue
 Public expenditure tracking
 Accounting
 Audit
ECTION A
NCE AND NATIONAL

ACCOUNTING
A5
SECTION A
Public finance and

National Income
STUDY GUIDE A5: GOVERNMENT BUDGET
What do you do when you receive your pocket money? Do you spend the entire amount on the same
day? No, you understand that the money that you have received today is to finance your needs for the
entire month. So you make a plan of how you are going to spend the money. You ascertain how much
money you need to keep aside for necessary expenses like purchasing books, travelling cost,
canteen bills etc. You also decide how much you can afford to spend on entertainment like discos
and movies. Sometimes, you want to save some amount from your pocket money each month so that
after a few months, you can buy an expensive bike for yourself.
This process is budget. Budgeting is the process of creating a plan to spend your money. This plan
helps you to determine in advance whether you will have enough money to do the things you need to
do or would like to do. If the money that you have is not sufficient to do everything you would like to do,
then you need to prioritise and spend your money on the things that are most important to you.
This is the process every individual, every family, every organisation and even every country needs to
do - balancing the expenses with the income. This process is important because if you spend more
than what you get, you will slowly sink deeper into debt.
In this chapter, we will learn about government budget – the meaning of government budget, the
various types of budget, how the money collected from the public is allocated to different expenses
according to different priorities etc.
a) Explain the meaning of government budget and describe the various types of a national budget
b) Discuss the approaches for financing of government budget deficit
c) Explain the bases of government budget
d) Explain objectives and functions of a national budget
e) Describe government budgeting process in Tanzania
f) Explain techniques used in preparing national budgets
Explain the meaning of government budget and describe the various types of a national
budget; discuss the approaches for financing of government budget deficit; explain the
bases of government budget.
[Learning Outcome a, b, c]
1. Meaning of Government Budget and Describe the Various Types of a National Budget
1.1 Meaning
Government budget, in simple terms, means the economic document which contains the
forecast by a government of its expenditures and revenues for a specific period of time. A budget
usually covers a period of one year, known as a financial or fiscal year, which may or may not
correspond with the calendar year.
1.2 Types of budget
Budgets can be broadly divided into three types as:

1. Balanced budget
2. Deficit budget
3. Surplus budget
1. Balanced budget
When the total revenue that a government collects in a year is equal to the amount it plans to
spend on providing public goods and services and debt interest, it is called a balanced budget. The
traditional economists advocated the principle of the balanced budget. Like an individual or a family, the
government is also expected to be prudent and not spend more than its income/revenue.
However, modern economists have a different view. It is argued that a government budget is different
from a private budget both in terms of its objectives and designs. The aim of a government budget is to
maximise the social gain and this objective may not be achieved with a balanced budget.
Also, a balanced budget does not necessarily guarantee the non-existence of uneconomical
/unnecessary expenditure.
For instance, if an on-going project is stopped midway because of the fact that the expenditure expected
in the year on the project is more than what was budgeted for that year, this will result in delaying the
overall completion of the project which will increase the cost of the project. This is detrimental to the
economic development of a country.
2. Deficit
budget
A budget deficit is a situation when the expenditure is more than the revenues of the government. Thus,
there is a shortfall of funds to finance the expenses, which needs to be made good by borrowing.
Some economists criticise the deficit budget on the following grounds:
(a) It is likely to result in increasing the money supply which may further result in creating inflationary
pressure in the economy. This causes a fall in the value of money and creates social and
economic disturbance in the country.
(b) There is a threat of increased expenditure by the government when the ideology of deficit
budget is accepted in the country.
However, some economists support the deficit budget policy on the ground that increased government
Government Budget: 107
expenditure helps in creating accelerated income flow in the economy which boosts the demand for the
goods and services of the household sector. This leads to a healthier economy
3. Surplus budget
The opposite of deficit budget is surplus budget. When the revenue generated by the Government is
more than the public expenditure, it is a situation of surplus budget. In simple words, budget surplus
is the saving of the Government. Some economists praise the surplus budget as a surplus is
considered a sign that the government is being run efficiently. A surplus budget enables the
government to use the funds to pay off the national debt or to make improvements in the public
services such as creating more employment opportunities, construction of roads, good education,
affordable healthcare facilities etc.
2. Approaches For Financing of Government Budget Deficit

A budget deficit is when a country's government spends more than what it collects from the public
in the form of taxes and duties. Individuals, families, companies and other organisations all make
budgets. So, sometime or the other, they all experience situations of surplus and deficit. In situations
of deficit, the deficit is financed through short or long term borrowings. However, although the
borrowing fulfils the immediate need for funds, it is costly as interest needs to be paid on the borrowed
funds. Also, the repayment terms need to be strictly observed, otherwise the creditors will come
calling. Also, non repayment of the borrowed funds results in losing the credibility of the person or the
organisation, which makes further borrowing difficult and expensive.
The same philosophy applies to the government, when its budget runs into deficit. Deficit
budget is not uncommon; most governments can run moderate deficits for years. However, there
are consequences of budget deficit even for the government, although the consequences aren't
immediate. Therefore, sooner or later, the government needs to find out ways to finance the budget
deficit.
The various methods of financing a deficit budget are discussed as

follows:
 Financing a deficit through borrowing from the country’s central bank: This form of borrowing
from the central bank basically means that the government prints money to finance the deficit.
 Financing a deficit through borrowing from the other sectors of the economy such as household
sector, business sector and financial sector by selling government securities such as treasury bonds.
 Financing a deficit by increasing the tax rates. Higher tax rates would earn higher revenue
for the government.
 Financing a deficit through borrowing from international financial markets or World
Bank.
 Financing a deficit by selling government assets. However, this form of financing is not sustainable
and can only be used on a ‘one off’ basis.
3. Bases of Government Budget
Government budget is prepared based on different approaches or bases as discussed below:
(a) Legal basis

The legal basis comprises of the following:
– various laws governing the preparation of the government budgets
– administrative regulations concerned with the regulation of the format of the budgets
– formal allocation of rights and responsibilities of various entities involved in the budget
cycle
In Tanzania, the following legal provisions act as guidelines for preparing the national budget:
i) The Constitution of the United Republic of Tanzania of 1977 (as amended from time to
time): this includes the provisions relating to the finances of the United Republic of Tanzania
(URT). This indicates as to who has the mandate of preparing the national budget and submitting
the same to the Parliament, permissible categories of revenue receipts, points of authorisation of
payments, etc.
ii) The Public Finance Act of 2004: this outlines the legal framework within which the country’s
budget should be drawn up, including provisions relating to revenue, control of expenditures and
parties accountable for the budget.
iii) (The Annual Appropriation Act: this Act gives the required powers to the Finance Minister to
draw and allocate funds from the Consolidated Fund to various votes and also provides for the
ways in which funds can be reallocated between votes.
iv) The Annual Finance Act: this provides the required powers to the Finance Minister decide upon
collecting revenues from the public by means of taxation.
(b) Legislative basis
The role played by the Government in formulating rules and regulations which govern budget
preparation, authorisation, execution and control is what forms the legislative base. The National
Assembly which is responsible for overseeing the legislative aspects of budgeting in Tanzania
consists of:
(i) Parliamentary Standing Committee
(ii) Budget Committee
(iii) Finance, Economic and Industrial development Committee
(iv) local Authorities Accounts Committee (LAAC)
(v) Public Accounts Committee (PAC)
(c) Political base

Ruling party election manifesto, which is the contractual document setting out the agreement
between the ruling political party and the voters, is taken into account when the Government
budget is prepared to ensure that the promises and commitments made to the voters are
implemented.
(d) Economic base
Consideration of tax payer’s ability to contribute towards Government revenue is the paramount
factor when considering realistic budget preparation. In doing so, the incorporation of various
economic variables in the determination of the economic ability to pay is considered.
(e) Administrative base
The budget administration process is divided into the following:
(i) The cabinet It is the cabinet which approves the government budget in principle through the
appropriate cabinet economic committee.
(ii) Central ministries
This includes the Treasury planning, Planning Commission, Public service Management,
Presidential Bureau and Prime Ministers’ Office. They issue budget instructions to coordinate
budget preparation across all ministries, regions, independent departments and executive
agency.
(iii) Sectorial ministries
These include regions, independent departments and executive agencies where they have the
authority to identify programmes, prepare and submit the budget to central ministries,
implement the budget and be accountable by preparing reports submitted to the central
ministries.
Explain objectives and functions of a national budget; describe government budgeting

process in Tanzania; explain techniques used in preparing national budgets.
[Learning outcome c, d, and e]
4. Objectives and Functions of a National Budget

A government budget has the following objectives:
i) To assist policy makers of a nation to develop policies that will lead the nation to achieve its main
objectives.
ii) To estimate the total income of the government to support its expenditure plans and
developments.
iii) To give authority to future spending; it is a means of authorising expenditure.
iv) To provide a mechanism to control the nation’s revenue and expenditure.
v) To set standards to enable performance to be monitored and evaluated.
vi) To serve as a motivating method for both government employees and departmental managers.
vii) To bring together the separate subsystems of the nation to enable them to work together towards
the achievement of the objectives of the nation.
Functions of a Budget
(i) To redistribute incomes: Through a budget the government can redistribute incomes by
increasing expenditures in social services and providing subsidies to the small scale businesses.
(ii) To correct a deficit in the balance of payments: Through the budget the government can
discourage imports and correct a deficit in the balance of payment by increasing import duty.
(iii) To control inflation: Through the budget the government can control demand pull inflation by
increasing direct tax to reduce the purchasing power of the people.
(iv) To stimulate employment: The government can stimulate more employment through the budget
by increasing expenditures on economic and social services and providing subsidies to sectors
which increase the level of employment such as agriculture, also by reducing tax on inputs in order
to encourage investments and therefore create jobs.
(v) Economic stabilization: A budget can be used as an instrument of stabilizing the economy, for
example during economic recession the government can reduce tax and increase expenditures to
stimulate consumption and a create employment.
5. Government Budgeting Process In Tanzania
A budget process refers to the process by which governments create and approve a budget.
The budget process comprises stages which feed into one another in a circular process. We can
think of four main phases:
1. Budget formulation (Planning how to spend the money)

2. Debating and Approval of the Budget
3. Budget Execution (Spending the money)
4. Oversight and Control
The below diagram explains the budget process:

6. Techniques Used in Preparing National Budgets

Public sector budgeting has been reformed over many years in Tanzania, especially under the Public
Financial Management (PFM) programme. This has led to the following types of systems of budgeting:
(a) The traditional budget

This is the initial system of budgeting that was developed and the main objective was to plan how to
utilise the financial resources of the nation to control these resource and also to ensure accountability
from the stewards, who are the officials who lead in the use of these resources. Two main features of
this type of budget are:
(i) Line Item feature
This system classifies the revenue and expenditure by the nature or type of income and
expenditure. The normal types of income are tax, loans, grants etc. The budget is prepared
after estimating the revenue to be generated through these. The normal expenditure items are
materials, travel and transport, salaries, equipment, repairs and maintenance etc.
(ii) Instrumentalism feature
With the instrumentalism feature, the budget for any year is prepared by making adjustments
in the form of either increases or decreases in the preceding year’s budget figures. The
advantage is seen in the way budget authorities are made to make annual reviews of activities
and policies. The traditional budget is also known by these two features, i.e. either as the line
item budget or the incremental budget.
Advantages
Some of the advantages of the traditional budgeting system are as follows:
 This budget system is simple to prepare
 It is a means of expenditure control
 It ensures that moneys are used only for their assigned purposes, and it ensures the protection of
the finances of the organisation.
 Changes can be made in the line items easily.
 It is also easy to make detailed comparisons between budgeted and actual revenues and
expenditures.
Disadvantages
Some of the disadvantages of the traditional budgeting system are as follows:
 The budget is concerned more with conforming to legal requirements rather than looking at proper
planning and development.
 It stresses on the importance to spend exactly the amount budgeted for a type of expenditure,
without being concerned about the achievement.
 It encourages inefficient spending habits by public officers.
 Expenditure items are not scrutinised because of the incrementalism.
 Again, items of expenditure are often not easily taken out of the budget, so inefficient items at
times are still spent on.
(b) Performance Budgeting
This budget stresses on the functions, and projects which are undertaken in the budget as against the
traditional budget which stresses on inputs, or expenditure items like materials, wages and stationery.
The functions and projects refer to the output of the expenditure; hence the budget was known as
‘output budget’. For this system of budgeting, the attention is on the general character and relative
importance of the work to be done. Attention is centered on the function or activity, and on the
accomplishment of the purpose. Requirements are submitted for budget preparation through
programme classification, indicating the past activities of the organisation, their costs, the activities to
be undertaken during the next year, the results expected and the pattern of responsibilities
assignment.
Advantages
The advantages of using performance budgeting includes:
 This budgeting system gives sufficient information since it includes a narrative description of each
project and the services provided by the organisation.
 Inputs and outputs are both shown and measured.
 This is a monitoring device since the result of each activity is noted and measured.
 Emphasis is on the activities of the organisation, as well as on controlling costs.
Challenges in implementing performance budgets
The challenges faced in implementing performance budgeting includes:
 Many times entities face difficulty regarding the classification of programmes and the provision of
cost data in respect of many activities.
 The process of allocation of cost estimates over the activity or programme elements is challenging
 Availability of suitable personnel for project costing and analysis is difficult another challenge faced
by the public sector.
 Most public sector activities are not easily measurable in output terms. Therefore availability of
complete date makes the analysis less meaningful.
 The technique dies not focus on long-term objectives of the government, just as the traditional
budget.
(c) The Zero-Based Budgeting (ZBB)
The budgeting technique stresses that every item of expenditure needs to be budgeted for, and should be
scrutinised and justified as to why such item should be funded in the budget. The technique expects that
organisations should even justify the reasons that they should continue to exist.
The budget by implication tries to discourage wasteful expenditure, and is aimed at ensuring that useless
projects are not undertaken in the government budget. Organisations and personnel are encouraged to do
better analysis of their activities of the past and to ensure that only the relevant ones are budgeted for.
This type of budgeting follows three main procedures:
(i) Various decision units are identified, which involve clearly defined and measurable objectives
of the organisation or units of the organisation and managers or leaders responsible for such
objectives. The effects or impacts of the objectives are also clearly noted.
(ii) Decision packages are developed or determined, which refer to the means of achieving the
decision units above, in the form of the services to be performed to achieve the decision units,
and the relevant costs or the finance for such services.
(iii) The decision packages are reviewed and then ranked in order of priority. Those decision
packages that can be applied very efficiently to the relevant decision units are then selected
by the authorities or managers responsible for the achievement of the objectives or
programmes. The arrangement of the packages in the order of priority can often be subjective.
Advantages
 Items of expenditure are reviewed and justified before they are accepted.
 It is a mark of financial discipline which is imposed on the organisation.
 The process involves all the personnel in the units, departments or organisations, which is
commendable, since it enables every person to feel a part of decision making.
Disadvantages
However, this system also has problems:
 The technique requires a lot of time and resources to identify.

 The decision units cannot be developed easily because objectives and outputs of public
organisations are not easy to identify and measure clearly.
 The decision packages or programmes cannot be arranged easily in order of priority; such actions
are very subjective, and politicians can decide to carry out certain activities even though the
activities are very costly and uneconomical.
(d) Planning Programming Budgeting System (PPBS)
The main features of this budgeting technique are identified in the three main words in the concept:
(i) Planning
This involves the development of long range objectives and goals of the public sector
institutions. Such goals and objectives are at times prioritised for the purposes of their
achievement.
(ii) Programming
Programmes are developed to achieve the objectives or goals as identified under the planning
stage. Alternative programmes are identified here and compared.
(iii) Budgeting
This involves placing money values on the programmes, putting together the costing of the
programmes and the relevant benefits that would be derived from the programme.
Subsequently, a full system is developed and implemented from an integrated set of selected
efficient programmes. This is followed by constant monitoring and reviews.
Advantages
 It stresses more on the future, since planning involves looking into the future.
 It enables budget authorities to evaluate programmes to determine their efficiency and
effectiveness.
 It encourages constant review of programmes.
 The system prevents programmes that often overlap through departments; similar programmes
in different organisations are well coordinated.
Disadvantages
 The long range planning process is often difficult since going deep into the future is very
subjective.
 Planning cannot be done well since most of the goals or objectives in the public sector system
cannot be physically identified and measured easily.
 The process requires a lot of time, money and personnel who can do good analysis, financially
and technically.
 There is also the problem that most public sector outputs cannot be quantified and measured;
hence performance cannot be measured easily through such budgeting system
(e) Medium Term Expenditure Framework (MTEF)
MTEF is a practical tool or decision-making mechanism to integrate policy priorities into the annual
budget, in a multi-year perspective (3-5 years), for fiscal soundness and effective resource allocation
and for operational effectiveness and performance management. MTEF contains:
(i) a macro-economic framework setting out the three years, underlying assumptions and
evaluation and the analysis of macro-economic projection for the preceding three years.
(ii) fiscal strategy document setting out the following:
 Government’s medium-term financial objectives
 The Government policies for medium term relating to taxation, recurrent expenditure, borrowings,
lending and investments and other liabilities.
 The strategies and the economic, social and development priorities of the Government for the next
three years.
 An explanation of the financed objectives, strategies, and economic, social and development
priorities as well as fiscal measures.
(iii) an expenditure and revenue framework which will set out:
 estimates of aggregate revenue for the Government for each financial year based on pre-
determined tax revenue projections
 aggregate expenditure for each of the next three years
 minimum capital expenditure projection in the Government for the next three years
(iv) a consolidated debt statement indicating and describing the fiscal significance of the debt
liability and measures to reduce the liability.
Medium Term Expenditure Framework (MTEF) preparation process
The MTEF budget preparation involves the same process as the traditional budget in terms of effort and
time, however ceilings are given for 3years and the budget documentation only provides details for the
year that the budget is being presented.
Benefits of the MTEF concept
The following are some of the benefits of MTFEF.
(i) It is a system which has helped to solve the problem between what can be afforded by the
government, which is given from the top ( top down approach) and the needs of the organisation
which are presented from the bottom (bottom up approach).
(ii) It gives more and better information, which enhances transparency and accountability.
(iii) It is a decision-making framework for the consideration of different organisational (ministerial and
departmental) policies and agreements among them.
(iv) It enables authorities to predict with some certainty the possible funding support from international
organisations.
Self-Examination
Self-Examination
Questions
Questions
Question
Question
1 1
What What
are the
are
various
the various
ways in
ways
which
in which
the government
the government
can use
cana use
budget
a budget
surplus?
surplus?
Question
Question
2 2
Explain
Explain
the risk
theinvolved
risk involved
in borrowing
in borrowing
moneymoney
from overseas
from overseas
to finance
to finance
a deficit
a deficit
budget.
budget.
Question
Question
3 3
Explain
Explain
how ahow
deficit
a deficit
budgetbudget
may result
may result
in increased
in increased
interest
interest
cost. cost.
Question
Question
4 4
In some
In some
cases,cases,
budgetbudget
makersmakers
preferprefer
to operate
to operate
at a atdeficit
a deficit
whereby
whereby
government
government
expenditure
expenditure
is is
deliberately
deliberately
plannedplanned
to exceed
to exceed
revenues.
revenues.
REQUIRED:
REQUIRED:
(i) (i) What What
are the
are
advantages
the advantages
of designing
of designing
a deficit
a deficit
budgetbudget
over the
over
balanced
the balanced
budgetbudget
approach?
approach?
(ii) (ii)State State

the weaknesses
the weaknesses
of a deficit
of a deficit
budget budget
approach.
approach.
(iii) (iii)State State
any two
any(2)
two
fiscal
(2) fiscal
measures
measures
appropriate
appropriate
in addressing
in addressing
government
government
budgetbudget
deficits.
deficits.
Question
Question
5 5
Compare
Compare
and contrast
and contrast
the balanced,
the balanced,
deficit,deficit,
surplus surplus
budgets,
budgets,
and with
andreasons
with reasons
state which
state which
budgetbudget
policypolicy
could could
the Tanzanian
the Tanzanian
5th Phase
5th Phase
Government
Government
followfollow
to meet
to its
meetdevelopment
its development
goals.goals.
Question
Question
6 6
Identify
Identify
and discuss
and discuss
the role
theofrole
the of
major
the major
institutions
institutions
involved
involved
in the in
budgetary
the budgetary
process
process
in Tanzania.
in Tanzania.
Question
Question
7 7
DiscussDiscuss
any four
anymain
four factors
main factors
that need
that to
need
be taken
to be taken
into account
into account
to ensure
to ensure
an effective
an effective
and sound
and sound
country’s
country’s
budget.budget.
Question
Question
8 8
One of Onetheofchallenges
the challenges
facingfacing
developing
developing
countries
countries
including
including
Tanzania
Tanzania
is resting
is resting
on how on to
how
finance
to finance
their their
budgetbudget
deficits.
deficits.
This problem
This problemis further
is further
compounded
compounded
by thebyfact
thethat
factsome
that some
alternatives
alternatives
of financing
of financing
the the
deficitdeficit
budget budget
might might
negatively
negatively
impactimpact
on theon
country’s
the country’s
economy.economy.
Required:
Required:
CitingCiting
one disadvantage
one disadvantage in each in each
case, case,
explain
explain
any five
anymeasures
five measures
that athat
government
a government
could could
undertake
undertake
to to
financefinance
a budget
a budget
deficit.deficit.
Question
Question
9 9
Explain
Explain
the differences
the differences
between
between
‘’public
‘’public
debt’’debt’’
and ‘’government
and ‘’government
budget
budget
deficitdeficit
‘’ ‘’
Question
Question
10 10
Explain
Explain
how deficit
how deficit
spending
spending
could could
be a burden
be a burden
to future
to future
generations
generations
Question
Question
11 11
Since Since
the overall
the overall
level of
level
employment
of employment
and prices
and prices
depend
depend
on theonlevel
the of
level
total
of demand
total demand
relative
relative
to capacity
to capacity
output,
output,
stabilization
stabilization
budgetbudget
actionaction
is needed
is needed
to maintain
to maintain
stablestable
aggregate
aggregate
demand.demand.
Required:
Required:
Explain
Explain
how stabilization
how stabilization
budgetbudget
actions
actions
work during
work during
depression
depression
and inflation.
and inflation.
Question 12
Experiences show that most less developed countries face deficit budget for a number of decades and they
pursue their fiscal policy objectives by partly depending on developed economies.
Required:
Discuss the features of deficit budget using an example of any country of your choice.
Answer to SEQ 1
The government can use a budget surplus in various ways as
follows:
1. The government can use the surplus to repay the debts taken in previous years to finance previous
deficits. This will result in reducing the interest payments. Interest payments saved by the
government can then be used to fund other areas of future expenditure.
2. The surplus can be used to fund government expenditure on infrastructure and the purchase of
assets.
3. The surplus can also be used to fund tax cuts.
Answer to SEQ 2
Borrowing money from overseas is a common method of deficit financing. However, if the borrowed
money is not put to productive use, it will not generate sufficient returns. This, in turn, will result in
problems in servicing the debt. And it will ultimately show up in the form of an unstable currency. This will
make further borrowing difficult.
Answer to SEQ 3
A deficit budget situation occurs when a government’s spending exceeds its income. To bridge the
shortfall, the government needs to borrow funds. The increase in borrowing results in increased
interest cost. Thus, the higher the debt, the higher is the interest. This may weaken the economy as
government revenue is used to pay for finance costs rather than being used for productive purposes.
Answer to SEQ 4
Advantages, weaknesses and measures of/for deficit budget
(i) Advantages
- Help the economy in fighting a depression/may help economy in recovering from a
depression
- Can be used to raise the level of economic activities and income
- Since direct saving capacity of the people is limited, it is easier through deficit financing
for the purpose of financing the growth of public sector
(ii) Weaknesses of deficit budget over balanced budget
- Deficit budget is usually (must be) financed by borrowing money, hence,
o Interest must be paid

o Deficit budget adds to the currency and money supply in the country, thereby
adding to/strengthening inflationary pressures
- May give rise to wasteful expenditure, i.e. deficit budgets create inflationary pressures
- With appropriate qualifying conditions, even a balanced budget can raise the level of
economic activities and income, provided the size of the budget is increased (hence,
deficit budget is less/weakly justifiable)
-
(iii) Measures to address government budget deficit
- Cutting spending
- Raising taxes
- Combination of the two (cutting government expenditure + raising taxes)
Answer to SEQ 5
Balanced budget
When the total revenue that a government collects in a year is equal to the amount it plans to spend on
providing public goods and services and debt interest, it is called a balanced budget. The traditional
economists advocated the principle of the balanced budget. Like an individual or a family, the government
is also expected to be prudent and not spend more than its income/Revenue.However, modern economists
have a different view. It is argued that a government budget is different from a private budget both in terms
of its objectives and designs. The aim of a government budget is to maximize the social gain and this
objective may not be achieved with a uneconomical/unnecessary expenditure. For instance, I an on-going
project is stopped midway because of the fact that the expenditure expected in the year on the project
which will increase the cost of the project. This is detrimental to the economic development of a country.
Deficit budget
A budget deficit is a situation when the expenditures more than the revenues of the government. Thus,
there is a shortfall of funds to finance the expenses, which needs to be made good by borrowing. Some
economists criticize the deficit budget on the following grounds.
(a) It is likely to result in increasing the money supply which may further result in creating
inflationary pressure in the economy. This causes a fall in the value of money and creates
social and economic disturbance in the country.
(b) There is a threat of increased expenditure by the government when the ideology of deficit
budget is accepted in the country. However, some economists supported deficit budget
policy on the ground that increased government expenditure helps in creating accelerated
income flow in the economy which boosts the demand for the good and services of the
household sector. This leads to a healthier economy.
Surplus budget
The opposite of deficit budget is surplus budget. When the revenue generated by the Government is more
than the public expenditure, it is a situation of surplus budget. In simple words, budget surplus is the saving
of the Government.
Some economists praise the surplus budget as a surplus is considered a sigh that the government
is being run efficiently. A surplus budget enables the government to use the funds to pay off the
national debt or to make improvements in the public services such as creating more employment
opportunities, construction of roads, good education, and affordable healthcare facilities etc. Given,
low tax compliance level the Government should continue using deficit budget policy otherwise,
many projects may not be accomplished.
Answer to SEQ 6
(b) Major Acts in the Tanzania Budgetary Process in public sectors
A number of individuals and public institutions are involved in the annual preparation and
implementation of the Tanzania budgetary process in public sectors. The following are the major
Actors in the Tanzania budgetary process.
Tanzania Revenue Authority

The Tanzania Revenue Authority (TRA) acts as a central body for the assessment and collection of
specified revenue, administers and enforces the laws related to such revenue and provides for
related matters of revenue in Tanzania mainland and Zanzibar. The TRA becomes operational in
July 1996, replacing the former independent Treasury Departments of Income Tax, Customs, Sales,
Inland Revenue and the Institute of Tax Administration.
President and Cabinet

The Cabinet through the Minister for Finance and Economic Affairs (MOFEA) is responsible for
presenting the budget before the legislature for approval. The various cabinet ministers also present
their respective Sectoral budgets for their Ministries, Departments and Agencies (MDAs) for debate
and approval by the legislature. The Cabinet has the responsibility of defending the budget and
ensuring that it is passed by the legislature.
Ministry of Finance
The Ministry of Finance plays a central role in the budget process and justifies separate mention.
MOF makes projections, sets ceilings for budget allocations, negotiates priorities with all
departments, collects revenues, and disburses funds. The Ministry also plays an important
controlling function through the Accountant General, who is responsible for ensuring that all financial
transactions and reporting is done according to the proper regulations.
Budget Guidelines Committee
The Budget Guideline Committee includes representatives from MOFEA, Public Service
Management, and the Prime Minister’s Office – Regional Administration & Local Government (PMO-
RALG). This committee is responsible for developing the Planning & Budget Guideline.
Donors
Given the sizeable contribution of foreign aid to Tanzania’s budget, donors also have an impact on
the ways in which the budget is prepared and implemented. Donors (also called development
partners or DPs) participate in consultations that inform budget formulation, disburse funds, and
monitor public spending and expenditure systems.
Parliament
The main responsibilities of Parliament in relation to the budget process are: securitizing the budget
through various standing committees; adopting or rejecting the budget in Parliament, monitoring the
implementation of the budget and the performance of the MDAs; and overseeing the use of public
funds. Parliament can refuse to adopt the budget presented by the executive, the consequences of
this step are profound the President has the constitutional power to dissolve Parliament in response.
Controller and Auditor General

The controller and Auditor General (CAG) is the Audit Institution in Tanzania. The CAG is
responsible for, among other things, ensuring that the expenditure of public monies has been
properly authorized and applied for the intended purposes. It should also ensure that economy,
efficiency and effectiveness have been achieved in the use of public resources. The CAG has
extensive powers to subpoena officials and to obtain information. The willful obstruction of the work
of the CAG, or failure by any public official to provide the CAG with access to any item of information,
constitutes a criminal offence.
Private Sector
In addition to contributing the majority of domestic tax revenue, the private sector plays a consultative
role in the budget process. Most notably, the private sector participates actively in an annual
consultation on the revenue framework, which occurs before the budget is formulated each year.
Their concerns are often taken on board when designing or revising tax policies.
Civil Society
Civil society plays a number of different roles in thebudget process, through its formal role is limited to
a consultative one. The formal role of civil society has been participation in the Public Expenditure
Review (PER) and related processes. Informal roles include analyzing public budgets, producing
simplified and popular versions of the budget and related documents, playing a watchdog role,
tracking expenditure at the local level, and advocating for improvements in terms of specific requests
and overall transparency and accountability. Civil society’s informal roles are arguably more
effective, particularly when combined with strategic use of media and citizen engagement.
Answer to SEQ 7
Factors that need to be take into account to ensure a sound budget
(i) Completeness of coverage of all expected expenditure
(ii) Usage of realist and reasonable assumptions
(iii) Usage of realist projections for expected revenue

(iv) Inclusion of provision for change in cost
(v) Inclusion of provision to meet unexpected expenditure

(vi) Involvement of skilled and qualified personnel
Answer to SEQ 8
The various methods of financing a deficit budget are discussed as follows:
(i) Financing a deficit through borrowing from the country’s central bank:
This form of borrowing from the central bank basically means that the government prints
money to finance the deficit. The downward risk of this approach is outshot of inflation rate
in the economy.
(ii) Financing a deficit through borrowing from the other sectors of the economy such as
household sector, business sector and financial sector by selling government
securities such as treasury bonds:
This approach reduces many in circulation and may pose difficulties in trading activities in
the economy.
(iii) Financing a deficit by increasing the tax rates:

Higher tax rates would earn higher revenue for the government at expense of distorting trade
levels and increasing likelihood for increased level of tax evasion practices in the economy.
(iv) Financing a deficit through borrowing from international financial markets or World
Bank:
This is the mostly used source though for developing countries it reduces economic
independent of the country as result of complying with loan conditions.
(v) Financing a deficit by selling government assets:

However, this form of financing is not sustainable and can only be used on a ‘one off’ basis.
Answer to SEQ 9
Differences between the public debt and the government budget deficit
 Budget deficit is basically the excess of government’s total expenditure over total revenue. Total
expenditure can be of two types, capital expenditure and revenue expenditure. These are financed out
of revenue receipts and capital receipts.
 Public debt, which is also sometimes referred to as government debt, is all of the money owed at any
given time by any branch of the government. It encompasses debt owed by the federal government,
the state government, and even the municipal and local government. Public debt accrues over time
when the government spends more money than it collects in taxation. As a government engages in
more deficit spending, the amount of debt increases.
Answer to SEQ 10
How budget deficit spending could be a burden to future generations.
 Creating additional debt has two negative consequences aside from any intergenerational equity
concerns. First, increasing taxes to pay the interest adds to the scale of tax distortions in the economy.
 Second, it seems likely that additional government debt will to some extent crowd out investment in
productive capital, and this is a cost if, as also seems likely, we currently have less than the optimum
amount of productive capital.
Answer to SEQ 11
 During depression, aggregate demand is to be raised through expansionary revenue – expenditure
policy.
 In a period of inflation, demand may exceed available output and thus restrictive policy is needed to
curtail total expenditure.
Answer to SEQ 12
A candidate is expected to discuss based on the following Features of Deficit Budget:
(i) Low rates of taxes in the economy.

(ii) High rate of investment as low taxes motivates the investors.
(iii) Monetary expansion due to low tax rates.
(iv) Expansion of employment opportunities from more investments
(v) Expansion of aggregate demand due to much money in circulation.
A6
SECTION A
Public finance and

National Income
STUDY
STUDYGUIDE
GUIDEA6:
A6:PUBLIC
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1. Meaning and Classification of Public Debts

1.1 The meaning
Public debt is defined as how much a country owes to lenders outside of itself. These can include
individuals, businesses, and even other governments. Classifications of Debts
Debts can be categorized into the following groups
a) Internal or external debts:
i) Internal Debts
This refers to money owed by the government to
institutions/individuals/commercial bank within the country.
ii) External Debts

This refers to money owed by the government to institutions outside the country
and donor countries.
b) Long term and short term debts

i) Long Term Public Debts:
These are debts which are repaid after a long period of time, e.g between 5
and 20 years.
ii) Short Term Debts:

These are debts which are repaid after a short period of time.
c) Reproductive and non-reproductive debts:

i) Reproductive Debts
These are debts which a government use the money borrowed for productive
expenditures such as construction of roads or provision of social services.
ii) Non-Reproductive Debts
These are the debts which the government use the money borrowed for non-
productive expenditures such as buying of arms.
2. Causes, Consequences And Repayment Of Public Debt

2.1 Causes and justification of public debt
Quite often, governments have greatly depended on borrowing and this can be justified by a number of
reasons.
i) Inadequate tax revenue. Poor countries incur debts because the revenue collected from taxes is
insufficient to finance government programmes. At times, the expected revenue tends to fluctuate.
ii) To reduce the burden of taxation. Borrowing is often resorted to, as a means of reducing the tax
burden from the people.
iii) Overcome natural calamities. Debts are also incurred to meet the unexpected occurrences such as
floods, drought, etc.
iv) Debt servicing. It is a common practice y some developing national to incur fresh debt in order to
repay the old ones.
v) Political instability. The prevailing political turmoil in developing countries (especially in Africa), has
greatly necessitated government borrowing thereby incurring public debts.
2.2 Positive Consequences of a Public Debt

A Public debt could have some positive consequences to the country.
i) The debt incurred can lead to an increase in GDP, if it is used appropriately to exploit and mobilize
the domestic production for increased output.
ii) More employment prospects can be generated, when the debt is a self-liquidating one (i.e. aimed at
stimulating production activities).
iii) A public debt (borrowing) tends to reduce political resistance to high taxation which is likely among
the citizens of developing countries.
iv) A public debt can reduce political instability e.g. through borrowing to finance wars. A stable
political atmosphere, there is no doubt, can encourage production for development.
Public Borrowing and Debt: 123
2.3 Negative Consequences of a Public Debt

i) The burden falls on the citizens who are taxed to cover an internal debt, so that the size of the debt
may influence the level of taxation.
ii) The effect is great on the level of consumption as high taxes on individuals deprive them of
consumption.
iii) The future generation is affected as a result of the debt incurred sometime back, to finance services
that it never enjoyed.
iv) Debt repayment reduces expenditure on capital goods for investment and thus limited capital
formation.
v) A public debt encourages over dependence on external sources, and yet this cannot promote the
spirit of self-reliance
vi) The debt incurred (in form of tied aid) is always accompanied with strings (conditions) attached
which often conflict with the development programmes of the recipient country.
2.4 Repayment of public debts

This refers to attempts by the government to pay public debts. Approach to repay public debt
i) Refunding
Refunding of debt implies the issue of new bonds and securities by the government in order to
repay the matured loans. In the refunding process, usually short-term securities are replaced by
issuing long-term securities. Under this method the money burden of public debt is not relinquished
but it is accumulated owing to the postponement of debt redemption.
ii) Conversion
Conversion of public debt implies changing the existing loans, before maturity, into new loans at an
advantage in servicing charges. In fact, the process of conversion consists generally, in converting
or altering a public debt from a higher to a lower rate of interest. Thus, the obvious advantage of
such conversion is that it reduces the burden of interest on the taxpayers. Furthermore, lower
interest rates on public loans would means a less unequal distribution of income.
iii) Surplus budgets
Quite often, surplus budgets (i.e. by spending less than the public revenue obtained) may be
utilised for clearing off public debts. But in recent years due to ever-increasing public expenditures,
surplus budget is a rare phenomenon.
iv) Sinking fund
A sinking fund is a fund created by the government and gradually accumulated every year by
setting aside a part of current public revenue in such a way that it would be sufficient to pay off the
funded debt at the time of maturity. Perhaps, this is the most systematic and best method of
redemption.
v) Negotiation for Debt cancellation
Similarly public debt can be settled through round table negotiation between countries in exchange
for future services or as way of providing grant especially in developing countries.
3. Measures That Can Be Used To Reduce The Burden Of Debts In Less Developed
Countries
Apart from debt management policies, certain measures can be used to reduce the debt burden in
developing nations
i) Self-reliance: LDC’s can reduce dependency on foreign debts by boosting domestic production to
have a self-reliance economy hence reduce foreign dependency.
ii) Import control measures: The government can apply import control measures such as tariffs to
reduce spending on imports which is one of the reasons for increase in foreign debt.
iii) Reduction in government expenditures: The government can reduce expenditures on non-priorities
to avoid borrowing of money.
iv) Strengthening of tax collection: The government should increase efforts in tax collection to get
enough revenue to finance its expenditures instead of depending on foreign aid.
Question 1
Government borrowing and debt levels have always been central to fiscal policy but they have rarely been
so high profile in both policy discussion and media coverage concerning the economy as they are at
present. Given current and projected economic circumstances, this seems likely to remain the case for the
foreseeable future.
Required
a) Define the term Public Sector Net Debt.
b) Distinguish between government borrowing and government debt
c) Discuss how traditional Keynesian theory expected government borrowing to behave over the
life of an economic cycle.
Question 2
Public debt enables governments to invest in critical areas of the economy where the capacity of tax
revenue to undertake these projects may be limited or in situations where printing additional money will
disrupt the stability of the economy. It permits an equitable alignment of benefits and costs for long-
gestation projects by shifting taxation away from current generations.
Required:
i) What is public debt?
ii) Critically examine Public debt as an alternative to Taxation and its effect on the economy.
Question 3
The current level of government borrowing has become a topical issue for discussion causing observers to
wonder whether borrowing is good or bad.
Required
Evaluate the effect of government borrowing on the economy of Tanzania.
Question 4
Explain the differences between the ‘public debt’ and government budget deficit.
Question 5
Briefly describe recommended approaches in retiring a public debt.
Question 6
With public sector debt increasing around the world, an important issue to consider is how much can a
country borrow.
Required:
Discuss four factors which determine the borrowing level of a country
Question 7
It is evident that most of Less Developed Countries (LDC) are facing persistent increase in public debts
from their counterpart developed countries. However, there is a contention that it is not whether these
countries are indebted or not rather it is how these debts were utilized by the recipient countries.
Required:
By your own views, discuss this contention.
Answer to SEQ 1
(a) Public Sector Net Debt is the total consolidated debt of all branches of government minus the amount of
short-term liquid assets held by the public sector.
(b) Borrowing represents a flow of funds from a borrower to a lender. The government borrows, e.g. from
financial institutions, to make up shortfalls between its current revenue and current expenditure. Debt
is a stock of liabilities generated by past borrowing which have yet to be repaid. Government borrowing
in a given period of time will add to its stock of debt.
(c) ‘Keynesian’ theory refers to the economic theory propounded by John Maynard Keynes, which informed
much UK economic policy from 1945 to the 1970. The economic cycle consists of cyclical variations
over time in real gross domestic product. Economies experience periods of expansion and contraction
in an economic cycle typically lasting several years, although historically on a long term upward trend.
Keynes believed that governments should deliberately unbalance their budgets across the economic
cycle i.e. in pursuit of an acceptable combination of the following policy objectives:
 full employment
 price stability
 economic growth
 balance of payments health
Much of the above occurred automatically i.e. In economic downturns reduced incomes led to lower
tax revenues and increased government expenditure on e.g. social security benefit payments,
meaning that the government needed to borrow to make up the shortfall.
The opposite typically occurred in economic upswings as buoyant income increased tax revenues
and prosperity e.g. reduced the eligibility for social security payments. In such periods Keynes
expected government finances to be in surplus.
Keynes also advocated discretionary policy measures to reinforce such automatic effects across the
cycle. For example, tax rates might be reduced in downswings to stimulate economic activity and
increased in upswings to help dampen down inflationary pressures.
The theoretical outcome of all this was that government budget deficits in the downturns and
surpluses in the upturns would match each other and thus the government budget would broadly
balance across the cycle.
Answer to SEQ 2
(i) Public debt is defined as how much a country owes to lenders outside of itself. These can include
individuals, businesses, and even other governments. The term "public debt" is used
interchangeably with the term sovereign debt. Public debt is the accumulation of annual budget
deficits. It's the result of years of Government spending more than they take in via tax revenues.
Public debt includes Treasury bills, notes, and bonds, which are typically bought by large
investors. In the short run, public debt is a good way for countries to get extra funds to invest in
their economic growth. Public debt is a safe way for foreigners to invest in a country's growth by
buying government bonds.
(ii) Public debt as an alternative to Taxation and its effect on the economy.
When Public Debt is used as an Alternative to Taxation
 Public borrowing has an important advantage over taxation. Taxation beyond a certain limit
tends to affect economic activity adversely owing to its disincentive effect. There is no such
danger in public borrowing. It does not have any unfavorable repercussions on economic
activity by being disincentive, partly because of its voluntary nature and partly because of
expectation of return and repayment.
 Public debts enable governments to facilitate growth take-offs by investing in a critical mass of
infrastructural projects and social sectors of the economy where taxation capacity may be
limited. Public Debt for financing fruitful investment produces supplementary, creative capability
in the financial system which or else would not have been achievable.
 Public Debt also facilitates tax smoothing and counter-cyclical fiscal policies, essential for
reducing output volatility; and it permits an equitable alignment of benefits and costs for long-
gestation projects by shifting taxation away from current generations.
 Public debt is a safe way for foreigners to invest in a country's growth by buying government
bonds. This is much safer than foreign direct investment. That's when foreigners purchase a
percentage interest in the country's companies, businesses or real estate. It's also less risky
than investing in the country's public companies via its stock market. Public debt is attractive to
risk-averse investors since it is backed by the government itself.
 When used correctly, public debt improves the standard of living in a country whilst Taxation
increase the cost of living of citizens. That's because it allows the government to build new
roads and bridges, improve education and job training, and provide pensions. This spurs
citizens to spend more now, instead of saving for retirement, further boosting economic growth.
Consequences of Public Debt on the Economy
 Large public debt implies high interest payments and these are borne by tax payers. Governments
have virtually no means of repaying debt other than through future taxation. While there is a
multiplier effect to government spending, high levels of government debt essentially saddle future
generations with the deadweight loss of higher taxation with no offsetting multiplier to the GDP from
government spending.
 Government borrowing increases the total demand for credit in the economy, driving up the cost of
borrowing in the process. Higher borrowing costs make it more expensive to finance investment in
equipment, stock and other capital goods in the private sector. This increases the cost of doing
business in the private sector.
 Currency collapse or currency depreciation when monies are printed to finance public debts.
Answer to SEQ 3
Effects of Public Debt
(i) Effects on Production

Public debts are raised to finance productive enterprises of various kinds, e.g., steel works, cement,
multipurpose projects, construction of ships, railway lines and highways, heavy electrical and
engineering works, mining, oil refining,
(ii) Effects on Consumption
When people subscribe to government loans, they generally have to curtail consumption. Since
investment of funds raised by borrowing raises the level of employment and as a result raises the
level of consumption
(iii) Effects on Distribution of wealth
Public loans transfer money from rich to government. The fiscal operations of the government are to
benefit the poor primarily. The incomes of the poor increase directly through increased employment
or it benefit them in directly through the enlargement of social services.
(iv) Effects on the Level of Income and Employment
In modern times, public borrowing is resorted to in order to raise funds for financing agriculture,
industry, mining, transportation, communication, etc. It increases employment opportunities, the
level of income and standard of living.
Answer to SEQ 4
Differences between the public debt and the government budget deficit.
 Budget deficit is basically the excess of government’s total expenditure over total revenue. Total
expenditure can be of two types, capital expenditure and revenue expenditure. These are financed out
of revenue receipts and capital receipts.
 Public debt, which is also sometimes referred to as government debt, is all of the money owed at any
given time by any branch of the government. It encompasses debt owed by the federal government,
the state government, and even the municipal and local government. Public debt accrues over time
when the government spends more money than it collects in taxation. As a government engages in
more deficit spending, the amount of debt increases.
Answer to SEQ 5
Recommended approaches in retiring a public debt:
 Repudiating (rejecting) the debt
 Create a sinking fund
 Surplus budgets
 Conversion
Answer to SEQ 6
Factors which influence how much a government can borrow:
 Domestic savings
If consumers have a high savings ratio, there will be a greater ability for the private sector to
buy bonds. With high domestic savings there has been a willingness by the private sector to
buy the government debt.
 Relative interest rates

If government bonds pay a relatively high interest rate compared to other investments, then
ceteris paribus, it should be easier for the government to borrow. Sometimes, the government
can borrow large amounts, even with low interest rates because government bonds are seen
as more attractive than other investments.
 Lender of last resort

If a country has a Central Bank willing to buy bonds in case of a liquidity shortages, investors
are less likely to fear a liquidity shortage. If there is no lender of last resort, then markets have
a greater fear of liquidity shortages and so are more reluctant to buy bonds.
 Prospects for Economic Growth

If one country faces prospect of recession, then tax revenues will fall, the debt to GDP ratio will
rise. Markets will be much more reluctant to buy bonds. If there is forecast for higher growth.
This will make it much easier to reduce debt to GDP ratios. The irony is that cutting
government spending to reduce deficits, can lead to lower economic growth and increase debt
to GDP ratios.
 Confidence and Security

Usually, governments are seen as a safe investment. Many governments have never defaulted
on debt payments so people are willing to buy bonds because at least they are safe. However,
if investors feel a government is too stretched and could default, then it will be more difficult to
borrow. Therefore, some countries like Argentina with bad credit histories would find it more
difficult to borrow more. Political uncertainty can make investors more concerned.
 Inflation
Financing the debt by increasing the money supply is risky because of the inflationary effect.
Inflation reduces the real value of the government debt, but, that means people will be less
willing to hold government bonds. Inflation will require higher interest rates to attract people to
keep bonds. In theory, the government can print money to reduce the real value of debt; but
existing savers will lose out. If the government creates inflations, it will be more difficult to
attract savings in the future.
Answer to SEQ 7
A candidate is expected to explain the meaning of public debt and explicitly show whether all debts
are burden to future generations.
The discussion should capture the following:
It depends on what the government spends the money on. If the government borrows money and then
invests it in productive assets – building or repairing infrastructure, researching new ideas, improving
schools, roads, bridges, electrical grids and broadband infrastructure, - and if those productive assets have
real rates of return that exceed the rate at which the government borrowed, then the debt (or rather, the
debt-financed spending) transferred consumption from us to our descendants, not the other way around.
And note that this is true whether the government borrows domestically or from foreigners. But if the
government spends the money on consumption – for example, buying everyone in the country a birthday
cake – then the debt-financed spending has transferred consumption from our descendants to us and it has
imposed a burden on future generations. That means, if our government borrows to invest in those things,
it will be doing our grandkids a favour, not imposing a burden.
Therefore to conclude; the size of government debt is not a good indicator of any burden. It is possible that
government debt is positive, but there has been no attempt at intergenerational transfer due to the following
reasons:
 Taxes on the young are cut, and the young save all the tax cut by holding the extra debt.
 Borrowing for a capital project that benefits current and all future generations equally.
A7
SECTION A
Public finance and

National Income
STUDY GUIDE A7: FISCAL POLICY
When policymakers seek to influence the economy, they have two main tools at their disposal—
monetary policy and fiscal policy. Central banks indirectly target activity by influencing the money
supply through adjustments to interest rates, bank reserve requirements, and the sale of government
securities and foreign exchange; governments influence the economy by changing the level and types of
taxes, the extent and composition of spending, and the degree and form of borrowing. In this chapter, we
will learn about fiscal policies – the meaning and objectives, tools of fiscal policy and problem in using
fiscal policies.
a) Explain the meaning and objectives of fiscal policy

b) Describe tools/mechanisms of fiscal policy
c) Describe Forms of fiscal policy
d) Describe problems in using fiscal policy
Explain
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and objectives
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of fiscal
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describe
describe
tools/mechanisms
tools/mechanisms
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policy.
policy.
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reduce
to reduce
unemployment
unemployment
(ii) Price
(ii) stability
Price stability
However However
lowering lowering
expenditure
expenditure
is not is
advisable
not advisable
in lessindeveloped
less developed
countries
countries
to fighttoinflation.
fight inflation.
So So
also an also
increase
an increase
in taxation
in taxation
may notmay benot
possible
be possible
as taxable
as taxable
capacity
capacity
is low.isHence
low. Hence
in timeinoftime of
inflation,
inflation,
fiscal policy
fiscal should
policy should
be supplemented
be supplemented
by monetary
by monetary
policy to
policy
control
to control
inflation.
inflation.
(iii) To(iii)
accelerate
To accelerate
the rate the
ofrate
economic
of economic
growthgrowth
Taxation,Taxation,
government
governmentexpenditure
expenditure
and public
and public
borrowings
borrowings
shouldshould
be used be used
to encourage
to encourage
consumption,
consumption,
production
production
and distribution.
and distribution.
2. Tools/Mechanisms
2. Tools/Mechanisms Of Fiscal
Of Fiscal
PolicyPolicy
Tools Tools
of Fiscal
of Fiscal
PolicyPolicy
The followings
The followings
are theare
tools
theoftools
fiscal
ofpolicy.
fiscal policy.
(i) (i)Government
Government
expenditures.
expenditures.
(ii) (ii)Taxation.
Taxation.
(iii) (iii)
Borrowings.
Borrowings.
Mechanisms/types
Mechanisms/types
of Fiscal
of Fiscal
PolicyPolicy
There There
are twoare
mechanisms
two mechanisms
of fiscal
ofpolicy
fiscal policy
(i) Expansionary
(i) Expansionary
fiscal policy
fiscal policy
(ii) Contractionary
(ii) Contractionary
fiscal policy
fiscal policy
(i) (i)Expansionary
Expansionary
FiscalFiscal
PolicyPolicy
In this Inpolicy
this policy
the government
the government
increases
increases
its expenditures
its expenditures
and reduces
and reduces
the amount
the amount
of tax of
in tax
an in an
attempt attempt
to increase
to increase
aggregate
aggregate
demand. demand.
Expansionary
Expansionary
fiscal policy
fiscal policy
is designed
is designed
to influence
to influence
aggregate
aggregate
demand demand
since when
since expenditures
when expenditures
are increased
are increased
on thingson things
such as sucheducation,
as education,
health,health,
road construction,
road construction,
salary salary
to civilto
servants
civil servants
it results
it results
to an increase
to an increase
in incomes
in incomes
to the people
to the people
which which
act as act
a stimulant
as a stimulant
to aggregate
to aggregate
demand. demand.
When When
the economy
the economy
is in a is
contraction
in a contraction
or recession,
or recession,
the the
government
government
will enact
will an EXPANSIONARY
enact an EXPANSIONARY FISCAL FISCAL
POLICY POLICY
to "expand"
to "expand"
the economy. There There
the economy.
Fiscal Policy: 131
by increasing
by increasing
GDP, disposable
GDP, disposable
income income
and lowering
and lowering
unemployment.
unemployment.
A result
A result
of thisof
policy
this policy
is an isincrease
an increase
in theinprice
the price
level. level.
This will
Thisincrease
will increase
the aggregate
the aggregate
demanddemand
by doing
by doing
the the
following:
following:
i) i) Decreasing
Decreasing
Taxes Taxes
(more (more
moneymoney
in people's
in people's
pockets)
pockets)
ii) ii)Increasing
Increasing
Transfer
Transfer
Payments
Payments
(more (more
moneymoney
in people's
in people's
pockets)
pockets)
iii) iii)Increase
Increase
Government
Government
Spending
Spending
on social
on programs
social programs
(more (more
moneymoney
in people's
in people's
pockets
pockets
(ii) (ii)Contractionary
ContractionaryFiscalFiscal
PolicyPolicy
This isThis
a policy
is a policy
in whichin which
the government
the government
attemptsattempts
to reduce to reduce
aggregate
aggregate
demand demand
by increasing
by increasing
tax tax
and reducing
and reducing
expenditures.
expenditures.
The aimTheis aim
to control
is to control
inflation.inflation.
When When
the economy
the economy
is in anisexpansion
in an expansion
which which
resultsresults
in highinprices,
high prices,
the government
the government
will enact
will aenact
contractionary
a contractionary
fiscal policy
fiscal policy
to "contract"
to "contract"
the economy.
the economy.There There
by decreasing
by decreasing
GDP andGDP increasing
and increasingunemployment.
unemployment.
a resulta ofresult
this of
policy
this is
policy
a is a
decrease
decrease
in the in price
the level.
price level.
Remember
Remember
that fiscal
that policy
fiscal policy
is a tool
is atotool
helptostabilize
help stabilize
prices prices
and and
controlcontrol
unemployment.
unemployment.Since Since
unemployment
unemploymentis linkedis linked
to GDP, to GDP,
it is possible
it is possible
that whenthat when
the the
government
government
enactsenacts
a contractionary
a contractionary
policy to
policy
decrease
to decrease
aggregateaggregate
demand, demand,
that unemployment
that unemployment is is
going to
going
increase.
to increase.
However,However,
mild unemployment
mild unemploymentis better is better
than hyperinflation.
than hyperinflation.
This willThisdecrease
will decrease
the aggregate
the aggregate
demand demand
by doing
by the
doing
following.
the following.
  Increasing
Increasing
taxes (less
taxesmoney
(less money
in people's
in people's
pockets)
pockets)
  Decreasing
Decreasing
transfer
transfer
payments
payments
(less money
(less money
in people's
in people's
pockets)
pockets)
  Decrease
Decrease
government
government
spending
spending
(less money
(less money
in people's
in people's
pockets)
pockets)
Describe
Describe
FormsForms
of fiscal
of fiscal
policy,
policy,
and describe
and describe
problems
problems
in using
in using
fiscalfiscal
policypolicy
[Learning
[Learning
Outcome
Outcome
c andcd]and d]
3. Forms
3. Forms
Of Fiscal
Of Fiscal
PolicyPolicy
There There
are 2 forms
are 2 of
forms
fiscal
ofpolicy
fiscal policy
(i) Discretionary
(i) DiscretionaryFiscalFiscal
PolicyPolicy
The discretionary
The discretionarychanges changes
in government
in government
expenditures
expenditures
and/orand/or
taxes in
taxes
order
in to
order
achieve
to achieve
certaincertain
nationalnational
economic economic
goals which
goals are
which theare
realm
the of
realm
fiscal
ofpolicy.
fiscal policy.
(i) High (i) employment
High employment(low unemployment)
(low unemployment)
(ii) Price
(ii) stability
Price stability
(iii) Economic
(iii) Economic
growthgrowth
(iv) Improvement
(iv) Improvement
of international
of international
paymentspayments
balancebalance
Discretionary
Discretionary
fiscal policy
fiscal policy
involves involves
changeschanges
in the government
in the government
which which
is designed
is designed
to change
to change
level level
of real of
gross
real domestic
gross domestic
product product
(GDP),(GDP),
unemployment,
unemployment,
incomeincome
or price
orlevel.
price level.
Specific
Specific
actionsactions
are are
neededneededin a in discretionary
a discretionary
fiscal fiscal
policy policy
that involves
that involves
changes changes
in government
in government
spending
spending
(increasing/decreasing)
(increasing/decreasing) and taxation
and taxation
(increasing/decreasing
(increasing/decreasing
tax rates).
tax rates).
(ii) Automatic
(ii) Automatic
or Built-In
or Built-In
Stabilizers
Stabilizers
(Non Discretionary
(Non Discretionary
FiscalFiscal
Policy)Policy)
Changes Changes
in government
in government
spending
spending
and taxation
and taxation
that occur
that automatically
occur automatically
withoutwithout
deliberate
deliberate
action action
of government
of government
Non-discretionary
Non-discretionary
fiscal policy
fiscal policy
occursoccurs
automatically
automatically
through through
built inbuilt
stabilizers
in stabilizers
such as such
progressive
as progressive
tax rates.
tax rates.
As GrossAs Gross
Domestic
Domestic
Product
Product
(GDP)(GDP)
increases,
increases,
the average
the average
tax tax
rate will
rate
increase
will increase
in progressive
in progressive
tax system.
tax system.
The increases
The increases
averageaverage
tax willtax
reduce
will reduce
people’s
people’s
incomes incomes
and hence
and hence
demand demand
for goods
for goods
and services
and services
4. Problems In Using Fiscal Policy.

There are several problems in involved in implementing fiscal policy. They include:
1. Crowding Out Effect
When the government increases spending by borrowing money (like with Treasury bonds), that
leaves fewer funds available for firms to borrow for investment and for consumers to borrow to
purchase goods and services. In others words, the government "crowds out" private
investment.
2. Time Lags.
If the government plans to increase spending this can take a long time period to filter into the
economy and it may be too late spending plans are only set once a year. It takes time for the
government to recognize the need for intervention, to agree on a policy, to implement the
policy, and for the policy to start affecting the behavior of consumers and firms. For example, it
may take months for government to recognize that the economy is in a recession. Then
months will pass as political parties argue over appropriate spending hikes or tax cuts. When
the tax cut finally takes effect, it may take many more months before consumers and firms
finally start spending again. The whole process could easily take two years. In the meantime
during those two years, the economy is suffering. By the time the tax cut starts working, the
recession could be over
3. Side effects on public spending.

Reduced government spending to decrease inflationary pressure could adversely affect public
services such as public transport and education caused by market failure.
4. Disincentive of tax cuts

Increasing taxes reduces AD may cause disincentive to work , if this occurs there will be a fall
in productivity and AS could fall. However higher taxes do not necessary reduce incentives to
work if the income effect dominates
5. Theoretical problems
Monetarists and Keynessian do not seem to agree on the efficiency of fiscal policy.
 Monetarists claim that various type of budget deficit or surplus will have little impact or no
effect upon the real national income while having adverse effects upon the rate of interest
and prices.
 Kenesian view that various type of budgets have different effects, the empirical evidence is
that the net effects of taxes and expenditure are influenced by marginal propensinties to
consume of those being taxed and government expenditure
6. Inflexibility of government finance

Much government expenditures go to wages and salaries and it is not possible to play around
with these to suit the short run needs of the government
Fiscal Policy: 133
Self-Examination
Self-Examination
Questions
Questions
Question
Question
1 1
The fiscal
Thepolicy
fiscalhas
policy
far has
morefarchances
more chances
of success
of success
during aduring
depression,
a depression,
but muchbutless
much
in an
lessinflationary
in an inflationary
situation.
situation.
Required:
Required:
(i) (i)
Do you Do
agree
youoragree
disagree
or disagree
with thewith
above
thestatement?
above statement?
Explain.Explain.
(ii) (ii)
DiscussDiscuss
the extent
the toextent
whichtothewhich
working
the working
of taxation
of taxation
as a fiscal
as apolicy
fiscalinstrument
policy instrument
can be can be
used to used
counteract
to counteract
inflationary
inflationary
pressure.
pressure.
Question
Question
2 2
It is pertinent
It is pertinent
to identify
to identify
the possible
the possible
links between
links between
macroeconomic
macroeconomic
policies policies
and theandlong-
the long-
run growth
run growth
rate potential
rate potential
Gross National
Gross National
ProductProduct
(GNP). (GNP).
In the following
In the following
policies policies
below, you
below,areyou
required
are required
to to
explain explain
the likelythe
growth
likely effects
growth ofeffects
each of
and
each
every
andpolicy
everyinpolicy
influencing
in influencing
long-runlong-run
growth; growth;
(a) Fiscal(a) Policies.

Fiscal Policies.
(i) (i)
IncreaseIncrease
in tax toinGross
tax toDomestic
Gross Domestic
ProductProduct
(GDP) ratio
(GDP) ratio
(ii) (ii)
ReductionReduction
in fiscal in
deficit
fiscaltodeficit
GrosstoDomestic
Gross Domestic
ProductProduct
(GDP) ratio.
(GDP) ratio.
(iii) (iii)
ReductionReduction
in non-capital
in non-capital
expenditure
expenditure
to GNP to
ratio
GNP ratio
(iv) (iv)
Cuts in Cuts
income,
in income,
corporate, corporate,
and indirect
and indirect
taxes with
taxes
base
withbroad
basewidening:
broad widening:
harmonization
harmonization
of of
indirect indirect
taxes taxes
(b) (b)
Monetary Monetary
and Interest
and Interest
Rate Policies.
Rate Policies.
(i) (i)
Avoidance Avoidance
of excessive
of excessive
expansionexpansion
of money of supply.
money supply.
(ii) (ii)
Achievement
Achievement
and maintenance
and maintenance
of flexible
of flexible
and positive
and positive
real interest
real interest
rates, improved
rates, improved
bank bank
supervision,
supervision,
growth ofgrowth
money of and
moneyequity
andmarkets.
equity markets.
(c) (c)
External
External
policiespolicies
i. i. RealisticRealistic
and flexible
and flexible
exchange-rate
exchange-rate
policy and
policy
avoidance
and avoidance
of overvalued
of overvalued
real exchange
real exchange
rates rates
ii. ii. Liberalization
Liberalization
of foreign
of trade
foreignand
trade
direct
andinvestment.
direct investment.
Other policies
Other policies
especially
especially
reformsreforms
in agricultural
in agricultural
pricing pricing
and marketing,
and marketing,
in country
in country
enterprises,
enterprises,
and in and in
labour market.
labour market.
Question
Question
3 3
Explain Explain
briefly what
briefly
is crowding-out
what is crowding-out
effect and
effect
whatand
arewhat
the criticisms
are the criticisms
underlying
underlying
it. it.
Question
Question
4 4
(a) Briefly
(a) explain
Briefly explain
the extent
thetoextent
whichtotaxes
whichcantaxes
be used
can beto used
counteract
to counteract
inflationary
inflationary
pressures.
pressures.
(b) Mention
(b) Mention
briefly any
briefly
fourany
appropriate
four appropriate
fiscal measures
fiscal measures
that government
that government
may usemay to bring
use to
about
bringstability
about stability
in the economy.
in the economy.
(c)
Answers to Self-Assessment Questions
Answer to SEQ 1
(i) The statement is TRUE (YES)

The government dishes out more expenditure (manipulating expenditure) in projects and
increase productivity while reduced tax:
ALTERNATIVE SOLUTION TO a (i)
The statement is INCORRECT (NO) if the government will focus on increase taxes so that to
collect more revenues and hence will not be solving the depression problem.
(ii) Explanation on the extent to which Taxation as a fiscal policy instrument can be used to
counteract inflationary pressure:
-Taxes as built in stabilizer can be used to curb prices and demand in a given level of
government expenditure.
- The tax system itself tends to create a budgetary surplus to curb expenditure and
demand while a created budgetary deficit would have the opposite effects during the
boom and depression respectively.
- Expansionary effect during depression requires a charge in taxation which will have a
decreasing effect in the tax revenue and hence result into budget deficit, thereby
increase in the GDP and prices.
- Concretionary effect during a boom requires a charge that result into an increase in the
tax revenues will lead to lower price and lower output.
- Therefore, taxation as a fiscal policy instrument can be used in such a way that, when
economy is in recession, government should plan for a budget deficits through a
mechanism that lowers tax revenue. On the other hand, revenue in a view of lowering
prices during a boom.
- Both actions above are intended to offset changes in aggregate spending by consumers
and private investors and lead to smooth fluctuations in the business cycle
Answer to SEQ 2
(a) Fiscal Policies

(i) Increase in tax to GDP ratio. This will raise the rates of domestic savings and
investments in physical and human capital. However, depending on composition of
taxes, possible distortions and disincentives may have an adverse impact on export
performance, saving, employment and growth.
(ii) Reduction in fiscal deficit to GDP ratio. This will release resources towards the private
sector and slow the rate of monetary expansion and, hence, the expected rate of
inflation, thereby stimulating private investment and saving rates and thus increasing
long-run growth.
(iii) Reduction in non-capital expenditure to GNP ratio. This will directly raise domestic
saving rate via higher rate of government saving. There are also positive growth effects
indirectly transmitted through favorable impact on private investment and saving rates of
a fall in ratio of fiscal deficit to GNP.
(iv) Cuts in income, corporate, and indirect taxes with base broad broadening:
Harmonization of indirect taxes. This will raise effective supplies of labour and capital,
improve capital’s marginal product, and encourage efficiency in resource allocation.
These tax reforms, however, should be carefully designed to minimize revenue loss
which is detrimental to domestic saving rate and long-run growth.
(b) Monetary and Interest rate Policies

(i) Avoidance of excessive expansion of money supply. This will increase long-run
growth by reducing expected rate of inflation, thereby stimulating private saving rate
and improving climate for private saving and investment. Price stability will also
enhance prospects for successful financial reforms.
(ii) Achievement and maintenance of flexible and positive real interest rates,
Harmonization of indirect taxes. This will raise effective supplies of labour and capital,
improve capital’s marginal product, and encourage efficiency in resource allocation.
These tax reforms, however, should be carefully designed to minimize revenue loss
which is detrimental to domestic saving rate and long-run growth. Fiscal Policy: 135
(b) Monetary and Interest rate Policies

(i) Avoidance of excessive expansion of money supply. This will increase long-run
growth by reducing expected rate of inflation, thereby stimulating private saving rate
and improving climate for private saving and investment. Price stability will also
enhance prospects for successful financial reforms.
(ii) Achievement and maintenance of flexible and positive real interest rates,
improved bank supervision, growth of money and equity markets. This will
enhance efficient allocation of capital and may raise private saving rate. Even if later
is interest-insensitive, increase in productive investments will raise long-run growth,
Stabilization and strengthened bank supervision will ensure that interest rates do not
rise to risky levels under the impact of interest-rate liberalization.
(c) External policies

(i) Realistic and flexible exchange-rate policy and avoidance of overvalued real
exchange rates. This will promote long-run growth to the extent this policy leads to
expansion and diversification of export wit consequent improvement in factor productivity
associated with production and demand, technology transfer, development of efficient
and internationally competitive management, and training of skilled workers. This
favorable growth effect, however, would be partly offset by increase in the debt-service
burden (in local currency), particularly for heavily indebted countries.
(ii) Liberalization of foreign trade and direct investment. This will improve factor
productivity by removing barriers to imported inputs and to the inflow of risk capital.
(d) Other policies especially reforms in agricultural pricing and marketing, in country enterprises,
and in labor market. This will promote greater efficiency in resource allocation; raise factor
productivity and thus economic growth.
Answer to SEQ 3
Crowding-out effect and criticisms underlying it: Crowding out effect is the displacement effect
caused by government policy to borrow excessively from money market or extracting money from the
market by imposing excessive taxes. Crowding out effect is alternative to financing budget deficits by
borrowing from the banking systems (and thereby expanding the money supply). The government can
borrow money by selling gilt treasury bills or bonds securities to the public. Public may only buy
securities when underlying interest rates are higher than effective or prevailing interest market rates. In
order to persuade the general to buy the extra debt, the guaranteed annual interest rate offered on new
securities raised. The effect of issuing higher than normal interest rates is to draw money from market
and raising effective interest rates, the effect of which arises general interest rates levels. Increased
interest rates in turn raises generally and crowds out or displaces private sector investment by making it
more expensive to borrow or raise funds on the capital market through issue of shares or bonds.
Crowding out may be in form of:
 Financial crowding out or

 Resources crowding out.
To finance the government budget deficit, the government borrows money market.
Criticisms of crowding out effect:
 Crowding out can only occur when economy is at full employment.
Answer to SEQ 4
(a) Extent to which taxes can be used counteract inflationary pressures. Candidates are expected to
construct their arguments around the following two rationales:
To finance the government budget deficit, the government borrows money market.
Criticisms of crowding out effect:
136 Public Finance and Crowding

National Income
out can only occur when economy is at full employment.
Answer to SEQ 4
(a) Extent to which taxes can be used counteract inflationary pressures. Candidates are expected to
construct their arguments around the following two rationales:
 Taxes as built-in-stabilizer
 Belief that taxes can be used to curb prices and demand.
The above two arguments can be further explained as follows:
 Taxes do act to some extent as built in stabilizers;

 Given the level of government expenditure, the tax system itself tends to create a budgetary
surplus during a boom and a deficit during a depression;
 The created budgetary surplus would curb expenditure and demand while a budgetary deficit
created would have the opposite effect and thus an anti-cyclical pressure is generated;
 This happens because revenue from direct and indirect taxes is dependent upon the level of
economic activities
- Also due to the fact that direct taxes are progressive.

(b) Appropriate fiscal measures (any 4) which may bring stability in the economy.
From economic point of view, stability is lacking in the economy if there are recurring cyclical
phases of upward and downward cumulative movement in income, employment, prices, demand,
supply and other macroeconomic variables.
Fiscal policy measures, to some extent, can be effectively used by the government to neutralize
the destabilizing forces through the following theoretical framework
 Increasing public expenditure;

 Encouraging private expenditure;
 Restricting public expenditure;
 Limiting/curbing private expenditure.
The framework (scheme) may be implemented as follows:
 Incurring public investment;

 Subsidies, with or without tax concessions, can be used to encourage private consumption
and investment; General reduction in tax rates or abolition of various taxes to encourage
expenditure in private sector:
- Push up profits and reduce cost of production and prices
- Lower prices are expected to increase demand, production and employment, which
eventually bring about effective demand.
 Similar action in the field of customs;
- e.g. raising import duties diverts the domestic demand from imports to home-produced
goods;
- Reducing or abolishing export duties or giving export subsidies increases the demand for
exports and contributes towards recovery from depression.
 Changes in budgetary
- Discretionary policy measures may be taken to affect the level of aggregate demand.
 Built in responses
- Changes in economic activities may also affect public expenditure and tax revenue.
A8
National Income Accounting: 137
SECTION A
Public finance and

National Income
STUDY GUIDE A8: NATIONAL INCOME

ACCOUNTING
We all have learned the concept of ‘balance of nature’ in our childhood, which explains how there exists
a self-sufficient ecosystem that needs no support from the outside to sustain itself. Nature maintains
balance between all living things as well as the environment - all living things feed off each other to help
nature maintain its balance. There is a circular flow, the plants are grown in the soil, animals like the
deer eat the plants, tigers eat the deer and the cycle continues. If even one of the elements of nature
goes extinct, the balance will be disturbed. So, if all the tigers become extinct, then the deer will be
allowed to flourish and plants will start to diminish. This will cause an imbalance in nature.
A similar principle applies to the economy. An individual earns salary, he pays money to the
shopkeeper to buy grocery etc. - so this is the income for the shopkeeper, the shopkeeper spends this
money to buy clothes from a retail store, the retail store deposits the money in the bank, the bank uses
the money to lend, the borrower uses this money to produce goods in his factory and pay salary to his
staff, the staff gets salary and pay tax to the government, the government uses the tax to provide
facilities and so on. Thus, the expenditure of one sector becomes the income of another sector and the
supply of goods and services by one section of the community becomes the demand of the other
sections. In this Study Guide, we will discuss the meaning and concepts of national income. We will
also discuss the various sectors of the economy and the flow of income in the economy.
a) Describe the meaning of national income and national income accounting

b) Describe the concepts of national income
c) Describe measurements methods of national income
d) Describe determinants of the size of national income
e) Identify the role of the government in national income
f) Describe uses of national income statistics
g) Describe problems of computing/compiling national income
h) Explain weaknesses of using per capital income (PCI) statistics to compare standard of living
among countries
i) Describe the role of the public sector in the circular flow of income and expenditure.
j) Explain the determination of equilibrium income in an economy with Two, Three and Four
Sectors Models.
Describe
138 the meaning
Public Finance of national
and National Income income and national income accounting; describe
the concepts of national income; describe measurements methods of national
Describedescribe
income; the meaning of national
determinants ofincome
the sizeand nationalincome.
of national income accounting; describe
the Describe
concepts the
of meaning
national
[Learning Outcome a, b, c, and d] of
income; national income
describe and national
measurements income of
methods accounting;
national describe
income;
the describe
conceptsdeterminants of the size
of national income; of national
describe income. methods of national
measurements
[Learning Outcome a, b, c, and d]
income; describe determinants of the size of national income.
1. Meaning
[Learning Of National
Outcome a, b,Income
c, andAnd
d] National Income Accounting.
National income is the total value of all goods and services produced in the country in a given time
1. period. National
Meaning Of National income accounting
Income is a setIncome
And National of methods and principles used for measuring an
Accounting.
economy’s
National overall
incomeOf performance,
is National
the total value focusing
of all especially
goods on
and services the overall level in of
theproduction
country inofa goods and
1. Meaning Income And National Income produced
Accounting. given time
services. National
period.National
Nationalincome income
incomeis accountingaccounting provides
is aof set the
of methods necessary information
and principles which is used to
the total value all goods and services producedused in thefor measuring
country an
in a given time
assess
economy’s the health
overall of an economy
performance, and to forecast
focusing especially future growth and development of a country.
period. National income accounting is a set on of the overalland
methods levelprinciples
of production
usedoffor goods and
measuring an
services. National income accounting provides the necessary information which is used to
economy’s overall performance, focusing especially on the overall level of production of goods and
assess the health of an economy and to forecast future growth and development of a country.
services. National income accounting provides the necessary information which is used to
2. The Concepts Of National Income
assess the health of an economy and to forecast future growth and development of a country.
There are different concepts of National Income, namely; GNP, GDP, NNP, Personal Income and
Disposable Income etc.
2. The Concepts Of National Income
(i) Gross
There are differentDomestic concepts Product (GDP) Income, namely; GNP, GDP, NNP, Personal Income and
of National
2.Gross
TheDomestic
Concepts Of National Income
Disposable Income etc. Product is the market value of the final goods and services produced within the
(i)
There are
domestic different
territory of
Gross Domestic
concepts
a country
Product
of
(GDP)
National
during one year Income, namely;
inclusive GNP, GDP, NNP, Personal Income and
of depreciation.
Disposable IncomeProduct
Gross Domestic etc. is the market value of the final goods and services produced within the
(ii) (i)Net Gross
Domestic Domestic
Product
domestic territory of a country Product
at Market (GDP)
during Price
one year inclusive of depreciation.
Gross Domestic
Net Domestic Product Product is the market
is the market value value of finalof the
goods finaland
goods and services
services produced produced
by all within
the the
(ii) producers in
domesticProduct
Net Domestic the domestic
territory at of a territory
country
Market of a country during an
during one year inclusive of depreciation.
Price accounting year exclusive of
consumption
Net DomesticofProduct fixed capital.is the It is equal to
market valuethe net valuegoods
of final added.and services produced by all the
(ii)producers
Net Domestic Product at Market Price
in the domestic territory of a country during an accounting year exclusive of
(iii) Gross National
Net
consumption Domestic Product
of fixed Product
capital.(GNP)
It is the market
is equal to the net value of added.
value final goods and services produced by all the
GNP at market price is sum total of
producers in the domestic territory of a country all the goods and services
during produced in a country
an accounting yearduring a
exclusive of
(iii) year and net
Grossconsumption income
National Product from
of fixed abroad. GNP is the sum of
capital. It is equal to the net value added.
(GNP) Gross Domestic Product and Net Factor
Income
GNP at frommarket abroad.
price is sum total of all the goods and services produced in a country during a
(iii) Gross
year and net National
income from Productabroad. (GNP)GNP is the sum of Gross Domestic Product and Net Factor
(iv) Net factor income from abroad
IncomeGNP fromatabroad.
market price is sum total of all the goods and services produced in a country during a
Difference between the factor incomes earned by our residents from abroad and factor income
year and net income from abroad. GNP is the sum of Gross Domestic Product and Net Factor
earned by non-residents within our country.
(iv) Net factor
Income income from abroad
from abroad.
(v) Net National Product (NNP)
earnedNet
(iv) by non-residents
factor incomewithin from our country.
abroad
In the process of production of goods and services, there will be some depreciation of fixed
capital also called as consumption of fixed capital, if the value of depreciation is deducted from
(v) Net National
earned Product (NNP) within our country.
by non-residents
the value of gross national product in a year, we obtain the value of net national product.
In the process of production of goods and services, there will be some depreciation of fixed
capitalNet
alsoNational
called as consumption of fixed capital, if the value of depreciation is deducted from
(vi) (v)GNP/GDP at MarketProduct Price and (NNP) at Factor Cost
the value of
In thecan gross
process national product in a year, we obtain the value of net
will national product.
GNP/GDP either of be production
measured of at goods
marketand priceservices, there
or at factor cost, be
whensomeit isdepreciation
measured at of fixed
market price it includes indirect taxes imposed by the government but excludes subsidies from
capital also called as consumption of fixed capital, if the value of depreciation is deducted
(vi) GNP/GDPtheby at Market
value Price and atproduct
Factor Cost
provided the of gross
government national
to producersinand a year, we obtainwhen
consumers, the value of net national
it is measured product.
at factor cost it
GNP/GDP can either be measured at market price or at factor cost, when it is measured at
includes only factor costs i.e. factor incomes this means that in order to get GNP/GDP at factor
market price it includes indirect taxes imposed by the government but excludes subsidies
(vi) GNP/GDP
cost, we must deduct at Market
indirect Price
tax andandadd at Factor
subsidies. Cost
provided by the government to producers and consumers, when it is measured at factor cost it
GNP at market price = GNP at factor cost + indirect taxprice
GNP/GDP can either be measured at market or at factor cost, when it is measured at
– subsidies
market price it includes indirect taxes imposed by the government but excludes subsidies
cost,
GNP we must cost
atprovided
factor deduct =indirect
GNP at tax and add
market price subsidies.
– indirect tax + subsidies
by the government to producers and consumers, when it is measured at factor cost it
GDP at market price = GDP at factor cost + indirect tax – subsidies
cost, we must deduct indirect tax and add subsidies.
GDP at factor cost = GDP at market price – indirect tax + subsidies
(vii) National income

Net National Product at factor cost is also called as national income.
(viii) Private Income

Private Income is defined as “the total of factor income from all sources and current transfers
from the government and rest of the world accruing to private sector” or in other words the
private income refers to the income from socially accepted source including retained income of
corporation.
(ix) Personal Income

Prof. Peterson defines Personal Income as “the income actually received by persons from all
sources in the form of current transfer payments and factor income.”
(viii) Private Income
corporation.
corporation.
(x) Disposable Income
Prof. Peterson defined Disposable Income as “the income remaining with individuals after
(x) Disposable Income
deduction of all taxes levied against their income and their property by the government.”
Prof. Peterson defined Disposable Income as “the income remaining with individuals after
Disposable Income refers to the income actually received by the households from all sources.
deduction of all taxes levied against their income and their property by the government.”
The individual can dispose this income according to his wish, as it is derived after deducting
Disposable Income refers to the income actually received by the households from all sources.
direct taxes.
The individual can dispose this income according to his wish, as it is derived after deducting
direct taxes.
(xi) Personal savings
It is disposable income left after paying Personal consumption expenditure
(xi) Personal savings
It is disposable income left after paying Personal consumption expenditure
(xii) Per capita Income
Per capita Income is derived from dividing national income from the total population of the
(xii) Per capita Income
country.
Per capita Income is derived from dividing national income from the total population of the
country.
(xiii) Nominal GDP and Real GDP
Nominal GDP is the market value of all final goods and services produced in a geographical
(xiii) Nominal GDP and Real GDP
region usually a country, on the other hand, Real GDP is a macroeconomic measure of the
Nominal GDP is the market value of all final goods and services produced in a geographical
value of the output economically adjusted for price changes. Values for real GDP are adjusted
region usually a country, on the other hand, Real GDP is a macroeconomic measure of the
for difference in price levels while figures for Nominal GDP are not adjusted. Nominal values of
value of the output economically adjusted for price changes. Values for real GDP are adjusted
GDP from different time periods can differ due to change in quantities of goods and services
for difference in price levels while figures for Nominal GDP are not adjusted. Nominal values of
and/or changes in general price levels while for Real GDP the difference depict solely the
GDP from different time periods can differ due to change in quantities of goods and services
changes in quantities produced. Generally, Real GDP is a better index of welfare of the people,
and/or changes in general price levels while for Real GDP the difference depict solely the
when Real GDP rises, flows of goods and services tends to rise, other things remaining constant.
changes in quantities produced. Generally, Real GDP is a better index of welfare of the people,
This means great availability of goods per person, implying higher level of welfare.
when Real GDP rises, flows of goods and services tends to rise, other things remaining constant.
This means great availability of goods per person, implying higher level of welfare.
3. Determinants Of The Size Of National Income

The size of nation income will depends on the following factors
3. Determinants Of The Size Of National Income
(i) size
The The ofAvailable Stock will
nation income of Natural
dependsResource
on the following factors
Availability of large stock of natural resources such as minerals, water sources, soils, weather
condition precipitates the growth of national income where low stock of natural resources leads
to low production consequently to low national income.
(ii) Stock of Capital Goods
The size of the national income depends on the size of the capital goods available in a country;
if the size of capital goods such as factories, machines, infrastructures and raw materials is
large a country would experience faster growth of the national income unlike when a nation is
facing a shortage of capital goods.
(iii) Level of Technology
The size of national income depends on the level of technology a country has achieved, if in a
country production is done by using advanced technology output will be large as well as the
national income.
(iv) Human Resources Available
National income depends on the available labour, both skilled and unskilled labour, managerial
capacity, efficiency and the number of entrepreneurs.
(v) Political Situation
When there is political stability in a country investors become confident to invest their capital
therefore resulting in the increase in the national income.
4. Measurement Methods Of National Income

There are three approaches for measuring GDP; the income approach, Value added
approach and the expenditure approach.
(i) Expenditure Approach

According to the expenditure approach, the GDP is the total amount spent on
goods and services by the household sector, business sector, government sector
and international sector. Spending by the household sector is consumption (C),
spending by the business sector is investment in capital goods (I), Government
therefore resulting in the increase in the national income.
spending is (G) and exports is (X)
Thus, Total expenditure of a nation = C + I + G + (X – M)
spending is (G) and exports is (X)
(ii) Income Approach
Thus, Total expenditure of a nation = C + I + G + (X – M)
According to the income approach, the GDP is the total income earned by the household
(ii) Income Approach
sector in a year, the income of the household sector is the interest received in exchange for
According to the income approach, the GDP is the total income earned by the household
capital, profit received in exchange for enterprise, rent received in exchange for land and
sector in a year, the income of the household sector is the interest received in exchange for
wages received in exchange for labour.
capital, profit received in exchange for enterprise, rent received in exchange for land and
Thus,
wages received in exchange for labour.
Total income of a nation = interest + profit + rent + wages
Thus,
(iii) Value-added Approach
Total income of a nation = interest + profit + rent + wages
The method measures GDP as the sum of value added at each stage of production (from
(iii) Value-added Approach
initial to final stage).The main sectors whose production value is added up are: (i) agriculture
The method measures GDP as the sum of value added at each stage of production (from
(ii) manufacturing (iii) construction (iv) transport and communication (v) banking (vi)
initial to final stage).The main sectors whose production value is added up are: (i) agriculture
administration and defense and (vii) distribution of income.
(ii) manufacturing (iii) construction (iv) transport and communication (v) banking (vi)
administration and defense and (vii) distribution of income.
Example 1
Example
The 2018 1National Income accounts for a Country Zinduna include the following:-
The 2018 National Income accounts for a Country Zinduna include the following:- Zin Million
Wages and Salaries 430,000
Imports of Goods and Services 220,000
Rent 50,000
Value Added in Agriculture 100,000
Govt. Current Expenditure on goods and services 130,000
Capital consumption 70,000
Value added in Construction 50,000
Consumers’ Expenditure 450,000
Dividends 500,000
Income from self-employment* 60,000
Exports of goods and services 650,000
Undistributed Profit* 110,000
Gross Domestic Fixed Investment 150,000
Value added in Distributive Trades 150,000
Value added in Manufacturing 600,000
Value of Physical increase in stocks 10,000
Trading surplus of public corporations* 20,000
Value added in other sectors 270,000
*Gross of Depreciation
Required
(i) Classify these items into separate accounts of GNP, GNI, and GNE.
(ii) Calculate Net National Product, Net National Expenditure and Net National Income.
Value of Physical increase in stocks 10,000
Trading surplus of public corporations* 20,000
Value added in other sectors 270,000

*Gross of Depreciation
Required
(i) Classify these items into separate accounts of GNP, GNI, and GNE.
(ii) Calculate Net National Product, Net National Expenditure and Net National Income.
Answer
Gross Tsh Gross Gross

National s National National
Product ,000 Expenditure Tshs’00 Income Tshs’00
, 0’ 0’
Value Consumer Wages &

added in Expenditure. 450 salaries 430
Government Self-
Agriculture 100 exp 130 employed * 60
Gross fixed Company

Mining 600 investment 150 Profit 500
Constructi Change in
on 50 stocks 10 Dividends 110
Public
Distributio corporation
n 150 Exports 650 . 20
Other
Sector 270 Import (220) Rent 50
1,17
GNP 0 GNE 1,170 GNI 1,170
Less: Less
Depreciati Less: :Depreciati
on (70) Depreciation (70) on (70)
Net Net
National 1,10 Net National National
Product 0 Expenditure 1,100 income 1,100
This is because income from self-employment profit and trading surplus of public corporation are gross of
depreciation for example factor income are normally reported before making allowance for depreciation, had
these figure been net of depreciation the income from these source would have been less by (60+610+20-
70=620) adding these figure along with wages and salaries (430) and rent (50) we will get NNI at 1100 to this we
shall add depreciation (70) to get finally GNI at 1170
Identify
Identify
the the
rolerole
of the
of the
government
government
in national
in national
income;
income;
describe
describe
usesuses
of of
national
national
income
income
statistics;
statistics;
describe
describe
problems
problems
of computing/compiling
of computing/compiling
national
national
income;
income;
explain
explain
weaknesses
weaknesses of using
of using
per per
capital
capital
income
income
(PCI)
(PCI)
statistics
statistics
to compare
to compare
standard
standard
of living
of living
among
among
countries.
countries.
[Learning
[Learning
Outcome
Outcome
e, f,e,
g f,
andg and
h] h]
5. Uses
5. Uses
Of National
Of National
Income
Income
Statistics
Statistics
(i) They
(i) They
showshow
the distribution
the distribution
of income
of income
amongamong
the various
the various
factors
factors
of production
of production
and sectors
and sectors
of theof the
economy
economy
namely:
namely:
the household,
the household,
business
business
and the
and government
the government
sectors.
sectors.
This This
is important
is important
in in
planning
planning
for taxes
for taxes
and government
and government
expenditure.
expenditure.
(ii) National
(ii) National
income income
statistics
statistics
can becan used
be used
to showto show
the growth
the growth rate rate
of the of national
the national economyeconomyby by
comparing
comparingthe GNPthe GNP
of different
of different
years,years,
for example
for example
if theifGNPthe GNP
of country
of country
X in X theinyear
the year
2000 2000was was
Tshs.Tshs.
20 million
20 million
and GNP
and GNP
of theofyear
the 2001
year 2001
was Tshs.
was Tshs.
40 then40 the
thengrowth
the growth
rate ofrate
theofnational
the national
income income
was was100 percent.
100 percent. National
National
incomeincome
statistics
statistics
can be canusedbe usedto compare
to compare the standard
the standard of living
of living
of of
different
different
nationsnations
by computing
by computing
the per
thecapital
per capital
incomesincomes
of each of each
country.
country.
Per capital
Per capital
income income
is income
is income
per head,
per head,
it means
it means
the average
the average
incomeincome
of each
of each
citizens
citizens
in a certain
in a certain
period period
of time.
of time.
Per capital
Per capital
income income= = GNP_________
GNP_________
Total Total
population
population
(iii) They
(iii) They
are important
are important
in estimating
in estimating
the level
the level
of international
of international
transactions
transactions
and theanddegree
the degreeto which
to which
an an
economyeconomydependsdepends
on other
on other
economies.
economies.This This
can becanestimated
be estimated from from
the figures
the figures
of imports
of imports
and and
exports.
exports.
(iv) Per(iv)capita
Per capita
income income
(national
(national
income income
divideddivided
by total
by population)
total population) is used is used
in comparing
in comparing the standard
the standard
of of
livingliving
of a country
of a country over time.
over time.
(v) They(v) They
showshow the patterns
the patterns of expenditure,
of expenditure, this isthis
shown
is shown
by figures
by figuresof private
of private
and public
and publicexpenditure.
expenditure.
This is This
important
is important in theinmaking
the making
of theofnational
the national
budget budget
wherewheretherethereis theisneedthe needto estimate
to estimate
private private
and and
publicpublic
expenditure.
expenditure.
(vi) They
(vi) They
are used
are used for international
for international comparisons
comparisons whichwhichare necessary
are necessary if improvement
if improvement in economic
in economic
performance
performance is to be is toachieved.
be achieved.
(vii) They
(vii) They
measure measure the size the ofsize various
of various
economiceconomicsectorssectors
i.e. agriculture,
i.e. agriculture, industryindustry
and infrastructure
and infrastructure or or
monetarymonetaryand subsistence
and subsistence sectorsector
whichwhichis veryis very
crucialcrucial
in planning
in planning and designing
and designing of development
of development
strategies.
strategies.
(viii) (viii)They They
will also will give
also us giveinformation
us informationon the onstability
the stability
of performance
of performance of theofeconomy
the economy over time.
over time.
(ix) They
(ix) They
showshow the rate the of rate
resource
of resourceutilization
utilization
as anasincrease
an increasein national
in national
income income may be mayattributable
be attributable
to to
increased
increased
utilization
utilization
of national
of national
resources.
resources.
(x) They(x) They
give us givefigures
us figureson the onsavings
the savings level level
in a country.
in a country. This This
helpshelps in coming
in coming up withup investment
with investment
projections.
projections.
(xi) Economic
(xi) Economic problems problems can easily
can easily
be knownbe knownthroughthrough
the national
the national income incomestatistics
statistics
example
example of these
of these
problemsproblems
are such are suchas inflation,
as inflation,
fall infall
income,
in income,
an employment
an employment etc. etc.
(xii) National
(xii) National
income income
can be canusedbe used
to show to show
the welfare
the welfare
of theofcitizens
the citizens
of a country,
of a country, the increase
the increasein national
in national
income income
implies implies
improvement
improvement in theinwelfare
the welfare
whenwhentherethere
is a fair
is adistribution
fair distributionof theofnational
the national
income. income.
(xiii) (xiii)Estimates
Estimates of national
of national
income income
are veryare very
important
important
in theinformulation
the formulation of a national
of a national
budget budget
by theby the
government
government i.e. the i.e. government
the government uses usesthe national
the national
income income
statistics
statistics
to estimate
to estimateits revenue
its revenueand and
expenditures
expenditures for the forcurrent
the current
year likewise
year likewisethe government
the government uses uses
the national
the nationalincome income
data todataformulate
to formulate
nationalnational
plansplans and policies.
and policies.
6. Problems Of Computing/Compiling National Income

There are many difficulties in measuring national income of a country accurately. The difficulties
involved in national income accounting are both conceptual and statically in nature. Some of these
difficulties involved in the measurement of national income are discussed below:
(i) Non Monetary Transactions
The first problem in National Income accounting relates to the treatment of non-monetary
transactions such as the services of housewives to the members of the families. For
example, if a man employees a maid servant for household work, payment to her will appear
as a positive item in the national income. But, if the man were to marry to the maid servant,
she would performing the same job as before but without any extra payments. In this case,
the national income will decrease as her services performed remains the same as before.
There are many difficulties in measuring national income of a country accurately. The difficulties
involved in national income accounting are both conceptual and statically in nature. Some of these
difficulties involved in the measurement of national income are discussed below:
(i) Non Monetary Transactions
The first problem in National Income accounting relates to the treatment of non-monetary
transactions such as the services of housewives to the members of the families. For
example, if a man employees a maid servant for household work, payment to her will appear
as a positive item in the national income. But, if the man were to marry to the maid servant,
she would performing the same job as before but without any extra payments. In this case,
the national income will decrease as her services performed remains the same as before.
(ii) Problem of Double Counting

Only final goods and services should be included in the national income accounting. But, it is
very difficult to distinguish between final goods and intermediate goods and services. An
intermediate goods and service used for final consumption. The difference between final
goods and services and intermediate goods and services depends on the use of those goods
and services so there are possibilities of double counting.
(iii) The Underground Economy

The underground economy consists of illegal and uncleared transactions where the goods
and services are themselves illegal such as drugs, gambling, smuggling, and prostitution.
Since, these incomes are not included in the national income, the national income seems to
be less than the actual amount as they are not included in the accounting.
(iv) Petty Production

There are large numbers of petty producers and it is difficult to include their production in
national income because they do not maintain any account.
(v) Public Services
Another problem is whether the public services like general administration, police, army
services, should be included in national income or not. It is very difficult to evaluate such
services.
(vi) Transfer Payments
Individual get pension, unemployment allowance and interest on public loans, but these
payments creates difficulty in the measurement of national income. These earnings are a
part of individual income and they are also a part of government expenditures.
(vii) Capital Gains or Loss
When the market prices of capital assets change the owners make capital gains or loss such
gains or losses are not included in national income.
(viii) Price Changes

National income is the money value of goods and services. Money value depends on market
price, which often changes. The problem of changing prices is one of the major problems of
national income accounting. Due to price rises the value of national income for particular
year appends to increase even when the production is decreasing.
(ix) Wages and Salaries paid in Kind

Additional payments made in kind may not be included in national income. But, the facilities
given in kind are calculated as the supplements of wages and salaries on the income side
(x) Illiteracy and Ignorance
The main problem is whether to include the income generated within the country or even
generated abroad in national income and which method should be used in the measurement
of national income.
Besides these, the following points are also represents the difficulties in national income
accounting:
 Second hand transactions;

 Environment damages;
 Calculation of depreciation;
 Inadequate and unreliable statistics; etc
7. Roles Of The Government In National Income

The government policies influence the national Income of a country in many ways. Some of these are
explained below.
(i) Education and health care policies: increased investment in this sector contributes in
improving the quality of human capital of a country which results in increased production. When
production increases, the national income also increases and therefore GNP increases. It is
 Second hand transactions;
 Environment damages;
 Calculation of depreciation;
 Inadequate and unreliable statistics; etc
7. Roles Of The Government In National Income

The government policies influence the national Income of a country in many ways. Some of these are
explained below.
(i) Education and health care policies: increased investment in this sector contributes in
improving the quality of human capital of a country which results in increased production. When
production increases, the national income also increases and therefore GNP increases. It is
important that a government aims to increase the quality of its workforce by increasing
educational and professional training opportunities.
(ii) Institutional infrastructure: improvements in the institutional infrastructure of the country in
areas such as law and order, judiciary system, banking and insurance sector and stable and
efficient government organisations are important to GNP growth.
(iii) Infrastructure policies: improvement in the physical infrastructure of the country is
fundamental to supporting economic activity and encouraging GNP growth. It includes
development of roads, railway lines, airlines, bridges, dams, power generation plants etc.
(iv) Social policies: strong policies to reduce unemployment, to control population, to improve
social security, to make better education available, to formulate good environmental policies etc.
play a vital role in the development of a country’s economy and therefore have a significant
impact on GNP. However, there is also a different view that needs to be understood. Although
GDP and GNP reflect the overall health of the economy, an increased GDP does not always
mean development. Economic wealth does not always mean good quality of life. More money
within a country does not always mean better quality of life for everybody.
8. Weaknesses Of Using Per Capital Income (PCI) Statistics To Compare Standard

Of Living Among Countries
Per capita income =National Income/Total Population
Per capita income is also referred to as income per head. This is calculated as shown above by
taking total income divided by total population. It’s the average income. It gives the amount of output
per person in a given economy at a particular time. It indicates the amount of goods and services
that are available for each individual in an economy. It also indicates the standards of living of
people i.e. their material well being.
It assists to provide a rough estimate of the average amount of goods and services per person produced
in the economy which also assists to compare productivity among regions and countries.
PCI Shortcomings:
PCI Shortcomings:
(i) It does
(i) Itnotdoesshownot who
showearnswho what
earnsinwhat
an economy
in an economy
because because
it is just
it is
a crude
just a figure
crude offigure
the general
of the general
prevailingprevailing
situation.
situation.
(ii) It cannot
(ii) It cannot
depict equitable
depict equitable
distribution
distribution
as it is just
as itaiscrude
just afigure.
crude figure.
(iii) It does
(iii) Itnot
does
account
not account
for all activities
for all activities
e.g. trafficking,
e.g. trafficking,
smugglingsmuggling
which arewhichregarded
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economy with Two, Three and Four Sectors Models.
[Learning outcome i, and j]

9. Role Of The Public Sector In The Circular Flow Of Income And Expenditure
A study of the economy reveals that money flows in a circular fashion in the economy; from individuals
to businesses and back to individuals. The expenditure of individuals becomes the income for the
businesses and the expenditure of the businesses becomes the income of the individuals.
An individual spends his income (salary, rent, dividends) for buying consumable goods and services
from the businesses, for paying taxes to the government and for savings in the form of investments.
The businesses use the money (spent by individuals while buying the goods and services and while
making investments) to set up their business, to buy material to manufacture goods and to pay their
employees.
Thus, the economy of any country can be divided into five sectors:
 Household sector: this includes all individuals and families
 Business sector: this includes the firms and organisations
 Financial sector: this includes banks and financial institutions
 Government sector: this includes the ruling bodies of the state and the central government
 International sector: this includes the import and export
 Based on the above classification, various models are framed to understand the circular flow
process. The following diagram explains the five sector circular flow model
Diagram 1: Five sector circular flow model
 We will use the above diagrammatical representation to understand how money flows through
the economy through various sectors.
Two sector model
The two important sectors that exist in any economy are the household sector and the business sector.
 We will use the above diagrammatical representation to understand how money flows through
the economy through various sectors.
Two sector model
The two important sectors that exist in any economy are the household sector and the business sector.
The four flows shown in the diagram are explained as follows:
1. Output (O): the most obvious flow is the provision of goods and services by the business
sector to the household sector.
2. Expenditure (E): the household sector needs to pay for the goods and services supplied by the
business sector.
4. Income (Y): the returns for factors of production are interest or dividend (for capital), profit (for
3. Resources (R): the household sector provides the resources i.e. the factors of production to the
enterprise), rent (for land) and wages (for labour)
4. business
Income (Y): the The
sector. returns for of
factors factors of production
production areenterprise,
are capital, interest orland
dividend (for capital),
and labour (CELL). profit (for
enterprise), rent (for land) and wages (for labour)
In
4. the two sector
Income model,
(Y): the as the
returns forcash keeps
factors flowing in the
of production are economy,
interest orthe state of(for
dividend equilibrium
capital), is defined
profit (for
as aenterprise),
situation inrent
which
(forthere
land)noandscope
wagesfor(for
thelabour)
variations in levels of income (Y) , expenditure (E) and
In the two sector model, as the cash keeps flowing in the economy, the state of equilibrium is defined
output (O) to change i.e. Y = E = O
as a situation in which there no scope for the variations in levels of income (Y) , expenditure (E) and
In the two
output sector
(O) to model,
change as=the
i.e. Y E =cash
O keeps flowing in the economy, the state of equilibrium is defined
Three
as sector model
a situation in which there no scope for the variations in levels of income (Y) , expenditure (E) and
output (O) to change
Three sector model i.e. Y = E = O
The three sector model expands the simple two sector economy by introducing one more sector – the
financial
Three sector.
sector model
The three sector model expands the simple two sector economy by introducing one more sector – the
financial sector.
With three
The the introduction
sector model of one new sector,
expands two new
the simple flows arise
two sector in theby
economy economy (seeone
introducing diagram
more1):sector – the
financial
With the sector.
introduction of one new sector, two new flows arise in the economy (see diagram 1):
5. Savings (S): savings flow from households to the banks.
With the introduction
5. Savings of one
(S): savings new
flow sector,
from two new
households to flows arise in the economy (see diagram 1):
the banks.
6. Investments (I): money goes back from banks to the business sector in the form of investments.
5.
6. Savings (S): (I):
Investments savings flow
money from
goes households
back to the
from banks banks.
to the business sector in the form of investments.
Thus, money for investments in the business sector is procured from savings that the household
sector
6. puts in the banks.
Investments
Thus, money for(I):investments
money goesinbackthe from bankssector
business to the is
business sector
procured fromin savings
the formthat
of investments.
the household
sector puts in the banks.
Four sector
Thus, moneymodelfor investments in the business sector is procured from savings that the household
sector puts in the
Four sector model banks.
Now, let’s go one step further and introduce the fourth sector - the
government
Four sector. As one new sector is introduced, two new flows arise in
Now, sector
let’s gomodel
one step further and introduce the fourth sector - the
the economy (see diagram):
government sector. As one new sector is introduced, two new flows arise in
7. Taxes
Now, let’s (T):
go taxesstep
one are a flow from the household sector to the
the economy (see diagram):further and introduce the fourth sector - the
government.sector. As one new sector is introduced, two new flows arise in
government
7. Taxes (T): taxes are a flow from the household sector to the
the economy (see diagram):
government.
8. Government
7. Taxes (T): taxesspending
are a(G):
flowgovernment then puts sector
from the household the money (collected in the form of taxes) back
to the
in the flow system by way of government spending.
government.
8. Government spending (G): government then puts the money (collected in the form of taxes) back
8. Government spending (G): government then puts the money (collected in the form of taxes) back
Five sector model
Five sector model
We are living in a very globalised world and we deal more and more with the international sector.
Therefore
Five sectorthemodel
most realistic representation of the flow system is to include the international sector.
We are living in a very globalised world and we deal more and more with the international sector.
Therefore the most realistic representation of the flow system is to include the international sector.
The two new
We are livingsectors that globalised
in a very arise in theworld
economy
and on
weinclusion of the
deal more andinternational
more with sector are:
the international sector.
Therefore the most realistic representation of the flow system is to include the international
The two new sectors that arise in the economy on inclusion of the international sector are: sector.
9. Import (M): the household sector buys goods and services from overseas
The Import
9. two new sectors
(M): that arise sector
the household in the economy on and
buys goods inclusion of the
services international
from overseas sector are:
10. Export (X): the businesses sell goods and services to overseas customers
9. Export
10. Import (M): the businesses
(X): the household sector buysand
sell goods goods and services
services from customers
to overseas overseas
Thus, to summarise:
10. Export (X): the businesses sell goods and services to overseas customers
Thus, to summarise:
Thus, to summarise:
There are five sectors in an economy (household, business, financial, government, international).
There are four types of flows between the household sector and the business sector (output,
expenditure, resources, and income).
There are three flows going out from the household sector (savings, taxes and imports).
Collectively, these are called ‘leakages’.
There are three flows going into the business sector (investments, government spending and
exports).
Collectively these are called ‘injections’.
In a five sector model, the state of equilibrium occurs when the total leakages are equal to the total
injections that occur in the economy.
This can be shown in equation form as:
Savings + taxes + imports = Investments + government spending + exports
S+T+M = I+G+X
In other words,
If injection > leakages; this means the economy is growing
If injection < leakages; this means the economy is diminishing
If injection = leakages; this means the economy is stable
10. Explain the determination of equilibrium income in an economy with Two, Three and Four
Sectors Models.
To simplify the analysis, it has been classified into a two-sector model, a three-sector model and a
four-sector model.
First two sectors are related to a closed economy in which there is no foreign trade and the last
sector is concerned with the open economy.
Two-Sector Model:
A two-sector model of income determination of an economy consists only of domestic and business
sectors.
Assumptions:
The income determination in a closed economy is based on the following assumptions:
(i) It is a two-sector economy where only consumption and investment expenditures take place.
Thus the total output of the economy is the sum of consumption and investment expenditure.
(ii) Investment relates to net investment after deducting depreciation.
(iii) It is a closed economy in which there are no exports or imports.
(iv) There are no corporate firms in the economy so that there are no corporate undistributed
profits.
(v) There are no business taxes, no income taxes and no social security taxes so that
disposable personal income equals NNP.
(vi) There are no transfer payments.
(vii) There is no government.
(viii) There is autonomous investment.
(ix) The economy is at less than full employment level of output.
(x) The price level remains constant up to the level of full employment.
(xi) The money wage rate is constant.
(xii) There is stable consumption function.
(xiii) The rate of interest is fixed.
(v) There are no business taxes, no income taxes and no social security taxes so that
disposable personal income equals NNP.
(vi) There are no transfer payments.
(vii) There is no government.
(viii) There is autonomous investment.
(ix) The economy is at less than full employment level of output.
(x) The price level remains constant up to the level of full employment.
(xi) The money wage rate is constant.
(xii) There is stable consumption function.
(xiii) The rate of interest is fixed.
(xiv) The analysis relates to the short period.
Explanation:
Given these assumptions, the equilibrium level of national income can be determined by the equality of
aggregate demand and aggregate supply or by the equality of saving and investment.
Aggregate demand is the summation of consumption expenditure on newly produced consumer goods by
households and on their services (C), and investment expenditure on newly produced capital goods and
inventories by businessmen (I).
It is shown by the following identities:
Y = C+I ….(1)
Personal Income: Yd = C+S….(2)
But Y= Yd
C+I=C+S
Or I = S
Where Y = national income, Yd = disposable income, C = consumption, S = saving, and I = investment.
In the above identities, C + l relate to consumption and investment expenditures which represent
aggregate demand of an economy. C is the consumption function which indicates the relation between
income and consumption expenditure.
The consumption function is shown by the slope of the C curve in Fig. 1 which is MPC (marginal
propensity to consume). I is investment demand which is autonomous. When investment demands (I) is
added to consumption function (C), the aggregate demand function becomes C+I.
C+S identity is related to the aggregate supply of an economy. That is why, consumer goods and
services are produced from total consumption expenditure and aggregate savings are invested in the
production of capital goods.
In an economy, the equilibrium level of national income is determined by the equality of aggregate
demand and aggregate supply (C+I=C+S) or by the equality of saving and investment (S=I).
We explain these two approaches one by one with the help of Figure 1 (A) and (B).
In an economy, the equilibrium level of national income is determined by the equality of aggregate
demand and aggregate supply (C+I=C+S) or by the equality of saving and investment (S=I).

We explain these two approaches one by one with the help of Figure 1 (A) and (B).
Equality of Aggregate Demand and Aggregate Supply:
The equilibrium level of national income is determined at a point where the aggregate demand function
(curve) intersects the aggregate supply function. The aggregate demand function is represented by C+I
in the figure. It is drawn by adding to the consumption function C the investment demand I.
The 45° line represents the aggregate supply function, Y = C+S. The aggregate demand function C+I
intersects the aggregate supply function Y= C+S at point E in Panel (A) of Figure 1 and the equilibrium
level of income OY is determined.
Suppose there is disequilibrium in aggregate supply and aggregate demand of the economy.
Disequilibrium can be in either case, aggregate supply exceeding aggregate demand or aggregate
demand exceeding aggregate supply. How will the equilibrium level of income be restored in the two
situations?
First, take the case when aggregate supply exceeds aggregate demand. This is shown by OY 2 level of
income in Panel (A) of the figure. Here aggregate output or supply is Y2E2 and aggregate demand is Y2k.
The disposable income is OY2 (=Y2E2). At this income level OY2, consumers will spend Y2d on
consumption goods and save dE2.
But businessmen intend to make investment equal to dk in order to buy investment goods. Thus the
aggregate demand for consumption goods and investment goods is Y2d + dk = Y2k. But aggregate supply
(or output) Y2E2 is greater than aggregate demand Y2k by kE2 (=Y2E2 – Y2k).
Therefore, the surplus output of goods worth kE2 accumulated by businessmen in the form of unintended
inventories. In order to avoid further inventory accumulation, they will reduce production. As a result of
the reduction in output, income and employment will fall and the equilibrium level of income will be
restored at OY where the aggregate supply equals aggregate demand at point E.
The second situation of disequilibrium when aggregate demand exceeds aggregate supply is shown by
the income level of OY1 in Panel (A) of the figure. Here the aggregate demand is Y1E1 and the aggregate
output is Y1a. The disposable income is OY1 (=Y1a).
At this income level, consumers spend Y1b on consumption goods and save ba. But businessmen intend
Therefore, the surplus output of goods worth kE2 accumulated by businessmen in the form of unintended
inventories. In order to avoid further inventory accumulation, they will reduce production. As a result of
the reduction
150 Public in National
Finance and output, Income
income and employment will fall and the equilibrium level of income will be
restored at OY where the aggregate supply equals aggregate demand at point E.
The second situation of disequilibrium when aggregate demand exceeds aggregate supply is shown by
the income level of OY1 in Panel (A) of the figure. Here the aggregate demand is Y1E1 and the aggregate
output is Y1a. The disposable income is OY1 (=Y1a).
At this income level, consumers spend Y1b on consumption goods and save ba. But businessmen intend
to invest bE, to buy investment goods. Thus the aggregate demand is Y1b + bE1= Y1E1 which is greater
than the aggregate supply of goods Y1a by aE1.
To meet this excess demand worth aE1, businessmen will have to reduce inventories by this amount. In
order to stop further reduction in their inventories, businessmen will increase production. As a result of
the increase in production, output, income and employment will increase in the economy and the
equilibrium level of income OY will be restored again at point E.
Equality of Saving and Investment:
The equilibrium level of income can also be shown by the equality of the saving and investment
functions. Since the equilibrium level of income is determined when aggregate supply (C+S) equals
aggregate demand (C + I) in the economy, intended (or planned) saving also equals intended (or
planned) investment. This can be shown algebraically
C+S=C+l
S=I
The equilibrium level of income in terms of the equality of saving and investment is shown in Panel (B) of
Figure 1, where I is the autonomous investment function and S is the saving function. The saving and
investment functions intersect at point E which determines the equilibrium level of income OY.
If there is disequilibrium in the sense of inequality between saving and investment, forces will operate in
the economy and the equilibrium position will be restored. Suppose the income level is OY 2 which is
above the equilibrium income level OY.
At this income level OY2, saving exceeds investment by gE2. It means that people are consuming and
spending less. Thus aggregate demand is less than aggregate supply. This will lead to the accumulation
of unintended inventories with businessmen. To avoid further accumulation of inventories, businessmen
will reduce production. Consequently, output, income and employment will be reduced till the equilibrium
level of income OY is reached at point E where S=I.
On the contrary, if the income level is less than the equilibrium level, investment exceeds saving. This is
shown by OY1 level of income when investment Y1E1 is greater than saving. The excess of intended
investment over intended saving means that aggregate demand is greater than aggregate supply by eE1.
Since aggregate output (or supply) is less than aggregate demand, businessmen will decrease
inventories held by them. To stop further reduction in their inventories, they will increase production.
Consequently, output, income and employment will increase in the economy and the equilibrium level of
income OK will be again reached at point E.
The determination of equilibrium level of income simultaneously by the equality of aggregate demand and
aggregate supply and of saving and investment is explained in Table I below.
Table
Consequently, output, income and employment will increase in the economy and the equilibrium level of
income OK will be again reached at point E.
The determination of equilibrium level of income simultaneously by the equality of aggregate demand and
aggregate supply and of saving and investment is explained in Table I below.
Table
Determination of National Income in Three-Sector Economy
Determination of equilibrium level of income in an economy that has only two sectors, namely, the
households’ and the producers’ sectors. Such economies do not survive in real world for long.
They need a regulatory authority for their smooth functioning sooner or later. Invariably, a government
sector becomes inevitable, more so, when the state is a welfare state. Apart from acting as a producer,
the government of a welfare state acts as a watchdog to all the activities of production and consumption.
Taxation – direct and indirect – provides a source of income for the government and public expenditure
and transfer payments, as channels of its spending.
(A) When Taxation is Autonomous:
The aggregate demand (AD) for an economy with three sectors, namely, the households’ sector, the
producers’ sector and the government sector, can be expressed as
AD = C + I + G
Here, G = government spending on goods and services.
I = Ia, the autonomous investment.
(In this section, we will proceed with the assumption that investment is fixed) The Aggregate Supply (AS),
in like manner, can be expressed as
AS = C + S + T
Here, T = tax revenue net of transfer payments. Taxation assumed fixed at Ta and the transfer payments
assumed fixed at R, the tax revenue net of transfer payments, T = T a– R.
AS = Y, as in 6.1, would again lead to a 45° line while AD = C + I a + G would be a vertical displacement
of C = Ca + bYd, first by Ia and then by G. Here, Yd is the disposable income given as
Yd = National Income – Tax Revenue net of Transfer payments.
= Y-[Ta-R]
= Y-Ta+R
Equilibrium level of income would refer to the condition AD = AS. The reader can easily verify that the
equilibrium condition would stand modified to
Ia + G = S + T
where, Ia + G = injections
= Y-Ta+R
Equilibrium
152 Public Finance level of income
and National would refer to the condition AD = AS. The reader can easily verify that the
Income
equilibrium condition would stand modified to
Ia + G = S + T
where, Ia + G = injections
and, S + T = withdrawals.
Algebraically, combining AS = Y and AD = C + Ia + G, we have
Y = C + Ia + G
= Ca+ bYd + Ia + G
= Ca + b[Y – (Ta – R)] + Ia + G
= Ca+ bY – bTa + bR + Ia + G
(1 – b)Y = Ca– bTa + bR + Ia + G
Y = 1 / (1 – b) [Ca – bTa + bR + Ia + G]
This, as evident, has been obtained from the equality of AD and AS. The same result can be obtained
through the equality of injections and withdrawals as in the lower panel.
Ia + G = S + T
= – Ca + (1 – b) Yd + T
= -Ca + (1 – b) [Y – Ta + R] + Ta – R
(Yd = Y – T = Y – Ta + R and T = Ta – R)
= – Ca + (1 – b) Y – (1 – b)Ta + (1 – b)R] + Ta – R
= – Ca + (1 – b) Y – Ta + bTa + R – bR + Ta – R
(1 – b)Y = Ca – bTa + bR + Ia + G
Y = 1 / (1 – b) [Ca – bTa + bR + Ia + G]
We can now define three more multipliers, namely, the government expenditure multiplier (dY/dG), the
taxation multiplier (dY/dTa) and the transfer payments multiplier (dY/dR) as follows:
KG = dY / dG = 1 / (1 – b)
KTa = dY / dTa = -b / (1 – b)
KR = dY / dR = b / (1 – b)
An illustration would be in order here to explain the concepts.
Illustration
For a hypothetical economy with three sectors, the following specifications are provided:
C = 20 + 0.75Yd
Ia = 20
G = 25
Illustration
For a hypothetical economy with three sectors, the following specifications are provided:
C = 20 + 0.75Yd
Ia = 20
G = 25
Ta = 25
Determine:
(i) The equilibrium level of income through the equality of the AS and AD as well as through that
of the injections and withdrawals.
(ii) Investment multiplier, Govt expenditure multiplier and tax multiplier.
(iii) Disposable income, consumption expenditure and the level of savings at equilibrium.
(iv) Effect on the national income of each of the following changes:
1. Investment increases to 30.
2. Govt expenditure increases to 40.
3. Tax decreases to 20.
(v) (dY/dTa) + (dY/dG). Can you interpret the result?
Solution:
(i) AD = AS. We have
Y = 1 / (1 – b) [Ca – bTa + bR + Ia + G]
Substituting data from the question, b = 0.75, Ca = 20, G = Ta = 25, Ia = 20, R = 0; we have
Y = 1 / (1 – 0.75) [20 – 0.75 x 25 + 0.75 x 0.00 + 20 + 25]
Y = 4.00 [20 – 18.75 + 0.00 + 45] = 185.
Equality of injections (Ia + G) to withdrawals (S + T) can be verified to yield the same result.
The investment multiplier, KIa (using subscript Ia to distinguish it from other multipliers and to have
identical notation for it), we have
KIa = 1 / (1 – b)
= 1 / (1 – 0.75) = 4.00
Government expenditure multiplier, KG can be calculated as
KG = 1 / (1 – b)
= 4.00 (as above)
Tax multiplier, KTa from equation 6.23, is
KTa = -b / (1 – b)
= – 0.75 / (1 – 0.75)
= – 3.00
Likewise transfer payments multiplier,
KR = b / (1 – b)
= 0.75 / (1 – 0.75) =3.00

KTa = -b / (1 – b)
= – 0.75 / (1 – 0.75)

= – 3.00
Likewise transfer payments multiplier,
KR = b / (1 – b)
= 0.75 / (1 – 0.75) =3.00
(iii) Disposable income, Yd, at the equilibrium,
Yd = Y – Ta+ R
= 185 – 25 + 0.00 = 160
Consumption expenditure at the equilibrium level of income,
C = Ca + bYd
= 20 + 0.75 x 160
= 20 + 120 = 140
Savings at the equilibrium,
S = – Ca + (1 – b) Yd
= – 20 + (1 – 0.75) × 160 = 20
Even directly, savings,
S = Yd – C = 160 – 140 = 20
(iv) ∆I = 30 – 20 = 10, KIa = 4.00
∆Y= (KIa) ∆Ia = 4.00 x 10 = 40.
Thus when investment increases from 20 to 30, increase in income would be 40.
∆G = 40 – 25 = 15, KG = 4.00
∆Y = (KG) ∆G
= 4.00 × 15 = 60.00
That is, an increase in government spending by 15 increases national income by 60.
∆Ta = 20 – 25 = – 5.00, KTa = – 3.00
∆Y = (KTa ) × ∆Ta
= (- 3.00) × (- 5.00) = 15.00
That is a decrease in tax from 25 to 20, increases income by 15.00.
(v) Note that the sum of the government expenditure multiplier and the tax multiplier,
KG + GTa = 4.00 + (-3.00) = 1.00
Even directly, [1 / (1 – b)] + [-b / (1 – b)] = (1 – b) / (l – b) = 1.00

The result that the sum of the government expenditure multiplier and the tax multiplier is unitary, is at
times referred to as the unit budget multiplier theorem or even as the balanced budget multiplier theorem.
The significance of this theorem is that the national income increases only by the amount of the increase
in tax financed government spending under a balanced budget. To explain, let
∆T = 10
∆G = 10
Then, increase in income due an increase in taxes by 10 is
∆Y = (KTa) × ∆T
= (- 3.00) × (10)
= – 30.00
Increase in income due to an increase in government expenditure by 10 is given as
∆Y = (KG) ∆G
= 4.00 × 10 = 40.
Total increase in income due to an increase in taxes by 10 under the balanced budget, thus, is given as
(-30) + (40) = 10. That explains the significance of the theorem.
(B) When Taxation Is Progressive/Digressive:
In our analysis of equilibrium of a three-sector economy, we assumed that taxation is purely autonomous
in character. The assumption was intended to simplify the model at its introduction stage. Now that the
purpose is served, we relax the assumption and take taxation in its most common form, the one in which
it is a function of income..
The equation describes it as a function of income comprising of two components, one, purely
autonomous (Ta) and the other, purely progressive (tY) in character. A tax is termed as progressive when
its rate increases with increasing income.
The incomes for the purpose are divided into several income-slabs with the lowest slab subjected to the
lowest rate of taxation and the highest, to the highest rate. When incomes, high or low, are subjected to
the same rate, taxation is termed as proportional and when incomes up to a certain slab are subjected to
progressive taxation and thereafter to proportional taxation, the system of taxation is termed as a
digressive one. Income tax in India, for example, is a digressive tax. Returning to the tax function,
T = Ta + tY
Where, Ta is autonomous component and ‘t’, the rate of tax and ‘Y’, the income. Aggregate demand (AD)
under purely progressive component, tY transforms as
AD = C + Ia + G
= Ca + bYd + Ia + G
= Ca + b[Y – (T – R)] + Ia + G
= Ca + b [Y – T + R] + Ia + G
= Ca + b [Y – tY + R] + Ia + G
= C + bY – btY + bR + Ia + G
Aggregate supply (AS) remaining unchanged, is given as
AS =Y
For equilibrium, AD = AS = Y.
Hence,
Y = Ca+ bY – btY + bR + Ia + G
(1 – b + b t)Y = Ca + b R + Ia + G
Y = 1 / (1 – b + bt) [Ca + bR + Ia + G]
Equation 6.26 gives the equilibrium level of income, with the following multipliers
dY / dG = 1 / (1 – b + bt)
dY / dIa = 1 / (1 – b + bt)
dY / dR = b / (1 – b + bt)
Apart from the above, with which the reader is already familiar, we have yet another multiplier, the tax
rate multiplier, given as
dY / dt = [-b / (1 – b + bt)2] [Ca + bR + Ia + G]
= [-b / (1 – b + bt)] × [1 / (1 – b + bt)] [Ca + bR + Ia +G]
= -bY / (1 – b + bt)
Y = {1 / (1 – b + bt)} {Ca + bR + Ia +G}, and t = (t + dt)}
Aggregate demand (AD) under the tax function), transforms to

AD = C + Ia + G
= Ca + bYd + Ia + G
= Ca + b [Y – (Ta + tY – R)] + Ia + G
= Ca + b [Y – Ta – tY + R] + Ia + G
=Ca + bY – bTa – btY + bR + Ia + G
Aggregate supply (AS) remaining unchanged,
AS = Y
For equilibrium, AD = AS. Hence,
Y = Ca + bY – bTa – btY + bR + Ia + G
= (1 – b +bt)Y = Ca – bTa + bR + Ia + G
Y = 1 / (1 – b + bt) [Ca – bTa + bR + Ia + G]
This gives the equilibrium level of income, with the following multipliers
dY / dG = 1 / (1 – b + bt)
dY / dIa = 1 / (1 – b + bt)
dY / dR = b / (1 – b + bt)
dY / dTa = -b / (1 – b + bt)
Hence, we have
dY / dTa + dY / dG = (1 – b) / (1 – b + bt) < 1
In part (A) of this section, we showed that the sum of the government expenditure multiplier (dY/ dG) and
the tax multiplier (dY / dTa) is 1 under autonomous taxation,
dY / dTa + dY / dG = 1
We also identified this result as unit multiplier theorem.
Under digressive taxation, the unit multiplier theorem collapses.
Let us have an illustration to demonstrate the three-sector model with digressive taxation.
Illustration
For a hypothetical economy with following specifications,
C = 2000 + 0.80 Yd
Ia = 500
G = 400
R = 100
T = 100 + 0.25 Y
Determine:
1. Equilibrium level of Income, tax revenue, disposable income, consumption and savings
2. Relevant multipliers
3. Effect on income of each of the following
(а) Increase in government spending by 20
(b) Increase in autonomous taxation by 20
(c) Decrease in autonomous investment by 50
(d) Decrease in transfer payments by 50.
(e) Increase in tax rate by 5%
4. Budget Surplus at equilibrium

Four Sector Model: Income Determination in Open Economy:
We shall now show how national income is determined in an open economy. For this, we relax the
assumptions that there are no exports or imports and government expenditures. This means that we shall
have to add imports and exports and government expenditures and taxation in our analysis.
It may be noted that government expenditures are like investment because they raise the demand for
goods. They are injections in the national income. On the other hand, taxes are leakages in the national
income like savings because they tend to reduce the demand for consumer goods.
The impact of exports and imports is similar to that of the government expenditure. Exports are injections
because they increase the demand for goods in the same economy. Imports, on the other hand, are
leakages in the national income because they represent the supply of goods to the given economy.
Assumptions:
The analysis of the determination of income in an open economy is based on the following
assumptions:
1. The domestic economy’s international trade is small relative to total world trade.
2. There is less than full employment in the economy.
3. The general price level is constant up to the full employment level.
4. Exchange rates are fixed.
5. There are no tariffs, trade and exchange restrictions.
6. Gross exports are determined by external factors.
7. Exports (A), investment (I) and government expenditure (G) are autonomous.
8. Consumption (C), imports (M), savings (S) and taxes (I) are each a fixed proportion of national income
(Y) and their relationships with national income are linear.
Determination of Equilibrium Level of Income:
Given these assumptions, an open economy is in equilibrium when its national expenditure (E) is equal to
its national income (Y).
This can be shown in the following equation for the equilibrium level of income:
Y= E=C+I+G+(X-M)
But Y = C+S+T
C+S+T= C+I+G+(X-M)
In the above analysis, C+S+T is gross national income (GNI) and C+I+G+(X-M) is gross national
expenditure (GNE). Thus the equilibrium level of income in an economy is determined when aggregate
supply, GNI=GNE, aggregate demand, or, C+S+T=C+I+G+(X-M).
Question 1
You are given the following data of a country:
Tshs
’Billions’
1 National income 5,050

Income from property and entrepreneurship to gov.
2 administrative department 500
3 Saving of non-department public enterprises 100
4 Corporation tax 80
5 Current transfer from govt: administrative depart 200
6 Net factor income from abroad (50)
7 Direct personal tax 150
8 Indirect taxes 220
9 Current transfer from Raw 80
10 Saving of private corporate sector 500

Required:
Calculate
;ŝͿ Private income
;ŝŝͿ Personal disposable income
Question 2
Tshs’
Billions’
1 Factor income from NDP accruing to private sector 300

Income from entrepreneurship and property accruing to
2 government administrative department 70
3 Savings of non-departmental enterprises 60
4 Factor income from abroad 20
5 Consumption of fixed capital 35

6 Current transfer from rest of the world 15
7 Corporation taxes 25
8 Factor income to abroad 30
9 Current transfer from govt governmental admi depart 40
10 Direct taxes paid by house hold 20
11 National dept interest 5

Required:
Calculate
(a) Private income
(b) Personal income
(c) Personal disposable income.
Question 3
Tshs’Billions’
1 Net indirect tax 5
2 Net domestic fixed capital formation 100
3 Net exports (20)
4 Gov.: final consumption expenditure 200
5 Net current transfer from abroad 15
6 Private final consumption expenditure 600
7 Change in stock 10
8 Net factor from abroad 5
9 Gross domestic fixed capital formation 125
Required
Calculate national income and gross national disposable income.
Question 4
Tshs’Billions’
1 Net indirect taxes 90
2 Compensation of employers 400
3 Personal taxes 100
4 Operating surplus 200
5 Corporation profit tax 80
6 Mixed income of self-employed 500
7 National debt interest 70

8 Saving of non-departmental enterprises 40
9 Current transfer from govt 60
Income from property and entrepreneurship to govt
10 administrative department 30
11 Net current transfer from RAW 20
12 Net factor income from abroad (50)
Required:
Calculate
(a) Net national Disposable Income
(b) Personal Income.
Question 5
(a) Measures of national income and output are used in public finance to estimate the value of
goods and services produced in the country. They use a system of national accounts or national
accounting. Some of the more common measures are Gross National Product (GNP), Gross
Domestic Product (GDP), Gross National Income (GNI), Net National Product (NNP) and Net
National Income (NNI).
Required:
(i) Briefly explain THREE approaches on how the above measures can be obtained.
(ii) Why these approaches give the same results?
(iii) Under what circumstances they may produce the different results.
(b) Gross National Product (GNP) per person is often regarding as a measure of a person’s welfare.
Countries with higher GNP may score highly on other measures of welfare, such as life
expectancy. However, there are serious limitations to the usefulness of GNP as a measure of
welfare.
REQUIRED
Briefly explain five of such limitations.
Question 6
Various Expenditures and Incomes in Bahiti country are provided below
Amount
(millions)
Household consumption spending 750
Business purchases of capital 120
Government spending 250
Purchases of new homes 30
Additions to inventory stocks 60

Government transfer payments 40
Personal income tax payments 55
Indirect business taxes 35
Depreciation of capital stock 25
Imports of goods and services 25
Exports of goods and services 10
Factor payments from abroad 60
Factor payments to foreigners 45
Corporate income tax payments 75
Wages and salaries 750
Rent 120
Interest income 115
Subsidies 165
Profits 315
Question 7
Using the following national income accounting data, compute (a) GDP, (b) NDP, (c) NI.
Compensation of employees 194,200,000

Exports of goods and services 17,800,000
Consumption of fixed capital 11,800,000
Government purchases of goods and services 59,400,000
Indirect business taxes 14,400,000
Net private domestic investment 52,100,000
Transfer payments 13,900,000
Imports of goods and services 16,500,000
Personal taxes 40,500,000
Net foreign factor income earned 2,200,000
Personal consumption expenditures 219,100,000
Question 8
(a) Calculate the national income and personal disposable income from the following information
Billions
GDPMmp 6,000
Receipts of factor income from the rest of the world 150
Receipts of factor income to the rest of the world 225
Depreciation 800
Indirect taxes minus subsidies 700
Corporate profits 1,200
Dividends 600
Transfer payments to persons 1,300
Personal taxes 1,500
(b) Calculate Net Domestic Product at Market Prices and National Income, from the following data
Billion
Subsidies 10
Sales 1,000
Closing stock 100
Indirect taxes 50
Intermediate consumption 300
Opening stock 200
Consumption of fixed assets 150
Net factor income from abroad 10
Question 9
(a) Discuss four factors which should be considered when comparing national income statistics from
different countries.
(b) Explain the concepts of leakages and injection from the circular flow of income.
Question 10
Explain how Tanzania’s Gross Domestic Product (GDP) could be affected by any two of the following.
(i) An increase in Child Benefit payments.
(ii) A foreign-owned company, operating in Tanzania, sends back to their home country all the
profits they have earned in Tanzania.
(iii) An oil spill off the Tanzania coast costs the Tanzania Government significant clean-up costs.
Question 11
(a) Describe the problem of ‘double counting’ when compiling National Income statistics
(b)
(a) Given that Gross National Product at Current Market Prices is Tshs 200b, price subsidies
Tshs 5b, depreciation Tshs 12b and indirect taxes Tshs 30b.
(b) Calculate the value of each of the following: Show all your workings.
(i) Gross National Product at Factor Cost;
(ii) Net National Product at Factor Cost/National Income.
(c) State and explain four reasons why care should be taken when using National Income Statistics
as a measure of economic performance of a country.
Question 12
Economists use Gross Domestic Product (GDP) and Gross National Product (GNP) as measures of
economic activity.
a) Define each of the underlined terms.
b) Which of these terms do you consider to be a more useful measure of economic activity
for Tanzania? Explain your answer.
c) Discuss three limitations of national income statistics.
Question 13
The following is the hypothetical data that relates to the Tanzania economy for the year ended 30 th June,
2018 (All figures are in billion TZS):
Income receipts from rest of the world 329.1

Statistical discrepancy 25.6
Government consumption of fixed capital 218.1
Income payments from rest of the world 273.9
Gross National Product 11059.3

Private consumption of fixed capital 1135.9
Required:
From the above information, determine Tanzania’s national income for the year 2018.
Question 14
Below, is the information extracted from the accounts of a certain manufacturing enterprise. These data
can be related in some way with the national accounts data in order to determine the contribution of the
enterprise to the Gross Domestic Product (GDP):
Tshs.
Opening stock of intermediate inputs 5,000,000
Purchases 100,000,000
Sales 200,000,000
Manufacturing cost of complete work transferred to finished 145,000,000
goods stock
Closing stock (intermediate goods) 15,000,000
Factory wages 50,000,000
Opening stock (inventories of goods produced) 22,500,000
Closing stock (inventories of goods produced) 17,500,000
Cost of sales 145,000,000
Gross profit 55,000,000
Salaries 15,000,000
Sales wages 10,000,000
Interest 5,000,000
Depreciation 7,500,000
Rent 2,500,000
Net profit 15,000,000
Required:
Determine the contribution of this enterprise to the GDP using:

(i) Income method
(ii) Product method
Question 15
(a) National income accounting is a set of methods and principles used for measuring an economy’s
overall performance, focusing especially on the overall level of production of goods and services.
Required:
Discuss why it is important to analyse the National Income Accounts of a Country.
(b) (i) Discuss the extent to which government policies influence Gross
Domestic Product (GDP) and National Income (NI) of a country. Give examples in the
context of Tanzania.
(ii) Show the limitation of Gross Domestic Product (GDP) application.
Question 16
In a single day Mr. Jiriani, the barber, collects TZS.50,000 from haircuts, over this day, his equipment
depreciates in value by TZS.5,000 of the remaining TZS.45,000 Mr. Jiriani pays value added tax worth
TZS.3,000 takes home TZS.20,000 and retains TZS.22,000 for improvement and buying of new
equipment. He further pays TZS.20,000 as income tax from his income.
Required:
Based on this information, compute Mr. Jiriani’s contribution to the following measures of income:
(i) Gross Domestic Product.
(ii) NNP at Market Price.
(iii) NNP at Factor Cost.
Question 17
The table below shows the national income of a country in 2018. Use the data to answer the questions
that follow:
Currency units in
billions’
Personal consumption 3,657
Depreciation 400
Wages 3,254
Indirect business taxes 500
Interest 530
Domestic investment 741
Government expenditures 1,098
Rental income 17
Corporate profit 341
Subsidies 15
Exports 673
Net foreign factor income 20
Proprietor’s income 403
Imports 704
Required:
Calculate the:
(i) Gross Domestic Product (GDP) using expenditure approach
(ii) Gross Domestic Product (GDP) using income approach
(iii) Net Domestic Product (NDP)
(iv) Determine the National Income at factor cost from the Net National Product (NNP)
Question 18
For each of the three approaches of estimating national income, state one limitation which may affect the
estimates.
Question 19
All individuals and entities within an economy are influenced by the economic production and growth in a
country, which is the Gross Domestic Product (GDP) of that country. In a bad economy, businesses
would make lower profits, leading to a bad influence on the stock market. On the other hand, in a good
economy, there is a high level of employment and higher income which results to higher Gross National
Product (GNP).
Therefore, appropriate measures need to be taken in the country to improve the GNP, which in turn will
result in improving the economy of a country. As the economic policies for a country are decided by the
government, it plays a very important role in the growth of a country’s economy”.
Required:
Discuss how government policies influence the GNP and the National Income of a country.
Answer to SEQ 1
(i) Private Income = 1 – 2- 3 + 5 + 9
5050 – 500 – 100 + 200 + 80
5430 – 500
Private Income = Tshs 4,930 billions
(ii) PDI = Private Income – 4 -10 -7
4930 -80 -500 -150
PDI = Tshs 4,200 billions
Answer to SEQ 2
(i) Private Income = 1 + 5 + 7 -9 + 10 + 12
= 300 + 20 + 15 -30 + 40 + 05
Private Income = Tshs 350 billions
(ii) Personal Income = Private income – 8 – 13

= 350 – 25 – 80
Personal Income = Tshs 245 billions
(iii) PDI = Personal Income – 11

= 245 – 20
PDI =Tshs 225 billions
Answer to SEQ 3
(i) National Income (NNP FC)
= (4) + (6) + (2) + (7) + (3) = NDP MP
= 200 + 600 + 100 + 10 + (-20)
= 910 -20 = 890
NDP MP = Tshs 890 billions
NNP FC = NDP MP + (8) – (1) = 890 + 5 -5
NNP FC = 890
Depreciation = (9) – (2)
125 – 100 = Tshs 25 billions
(ii) GNDI = NNP FC + Net Indirect Tax + Net Current transfers from abroad + depreciation
= 890 = 05+ 15 + 25
GNDI = Tshs 935 billions
Answer to SEQ 4
Net national Disposable Income
NDPfc = (2) + (4) + (6)
400 + 200 + 500 = Tshs 1100 billions
NNDI = NDP fc + (12) + (1) + (11)
=1100 + (-50) + 90 + 20
NNDI = 1210 – 50
= Tshs 1160 billions
Personal Income
Private Income = NDP FC –(8) – (10)
1160 -40 – 30= Tshs 1,090 billions
1090 + 7 + 9 +11 +12
1090 + 70 + 60 + 20 + (-50) = 1,190 billions
Personal income = Private Income – Corporation Profit Tax – Savings of private corporate
Sectors
1190 – 80 – 20= Tshs 1,090 billions
Answer to SEQ 5
(a)
(i) There are various ways of calculating national income and out fact:
 The expenditure approach determines aggregate demand, or Gross National Expenditure,
by summing consumption, investment, government expenditure and net exports.
 The income approach and the closely related output approach summing wages, rents,
interest, profits, non-income charges, and net foreign factor income earned.
 Product approach.
(ii) The three methods must yield the same result because total expenditures on goods and
services (GNE) must by definition equal the value of goods and services produced (GNP)
which must equal total income paid to the factors that produced the goods and services
(GNI).
(iii) They may produce different result under two circumstances:
 Changes in inventory levels

Minor differences are obtained from the various methods due to changes in inventory levels.
This is because goods in inventory have been produced (and therefore included in GDP), but
not yet sold (and therefore not yet included in GNE).
 Timing
Similar timing issues can also cause a slight discrepancy between the value of goods produced
(GDP) and the payments to the factors that produced the goods, particularly if inputs are
purchased on credit.
(b) Limitations of GNP as measure of welfare
(i) Measures of GNP typically exclude unpaid economic activity, most importantly domestic
work such as childcare. This leads to distortions; for example, a paid childminder’s income
contributes to GNP, but an unpaid parent’s time spent caring for children will not, even
though they are both carrying out the same economic activity.
(ii) GNP takes no account of the inputs used to produce the output. For example, if everyone
worked for twice the number of hours, then GNP might roughly double, but this does not
necessarily mean that workers are better off as they would have less leisure time. Similarly,
the impact of economic activity on the environment is not measured in calculating GNP.
(iii) Comparison of GNP from one country to another may be distorted by movements in
exchange rates. Measuring national income at purchasing power parity may overcome this
problem at the risk of overvaluing basic goods and services, for example subsistence
farming.
(iv) GNP does not measure factors that affect quality of life, such as the quality of the environment
(as distinct from the input value) and security from crime. This leads to distortions – for example,
spending on cleaning up an oil spill is included in GNP, but the negative impact of the spill on
well-being (e.g. loss of clean beaches) is not measured.
(v) GNP is the mean wealth rather than median wealth. Countries with a skewed income
distribution may have a relatively high per-capital GNP while the majority of its citizens have
a relatively low level of income, due to concentration of wealth in the hands of a small
fraction of the population.
Answer to SEQ 6
1. GDP from the expenditure approach GDP = Consumption + Govt. Expenditure + Investments +
(Exports - Imports)
GDP = 750 + 250 + 120 + 30 + 60 + (10 - 25) = 1,195
2. GDP from the income approach
GDP = Wages + Interest + Rent + Profits + Depreciation + Indirect taxes – Subsidies
GDP = 750 + 115 + 120 + 315 + 25 + 35 - 165 = 1,195
3. GNP = GDP + (Net Payment from Abroad)
= GDP + Payments Received from Abroad – Payments to Foreigners
= 1,195 - 45 + 60 = 1,210
4. Net National Product (NNP)
= NNP = GNP – Depreciation
= 1,210 - 25 = 1,185
5. National Income (NI)
NI = Wages + Profits + Interests + Rents + Net Payment from Abroad
= 750 + 315 + 115 + 120 - 45 + 60 = 1,315
Answer to SEQ 7
4. Personal consumption expenditures (C) 219.1m
Government purchases (G) 59.4m
Gross private domestic investment (Ig) 63.9m
(52.1 + 11.8)
Net exports (Xn) (17.8 - 16.5) 1.3m
Gross domestic product (GDP) 343.7m
5. Consumption of fixed capital -11.8m

Net domestic product (NDP) 331.9m
6. Net foreign factor income earned in -2.2m

Indirect business taxes -14.4m
National income (NI) 315.3m
Answer to SEQ 8
(i)
(i) National income is Net National product at factor cost
N1 or NNP =GDPmp –Depreciation-Net Indirect Taxes +Net Factor income from
abroad
=6,000-800-700+ (150-225)
=6,000-1,500-75
=6,000-1,575
= 4,425
(ii) Personal disposable income=National income-Retained corporate profits +Transfers
payments to persons-personal Taxes
=4425-(1200-600)+1300-1500
=4425-600+1300-1500
=3625
(ii) NDPmp and National income be obtained through value added method.Net domestic product at
market price is the sum of net value added by all enterprises in the economy.
Value of output =Sales +change in stock
=1000+ (closing stock-opening stock)
=1000+ (closing stock-opening stock)
=1000 +(1000-200) = 900
Net value added (NVA) at market prices (NDPmp)=Value of output-intermidiate consumption-

consumption of fixed fixed capital
=900-300-150
=450
National income (NNPfc) =NDPfc- Net Indirect Taxes +Net Factor income from abroad
=450-(50-10) +10
Net value added (NVA) at market prices (NDPmp)=Value of output-intermidiate consumption-
consumption of fixed fixed capital
=900-300-150
=450
National income (NNPfc) =NDPfc- Net Indirect Taxes +Net Factor income from abroad
=450-(50-10) +10
=450-40+10
=420
Answer to SEQ 9
(i) Population/ Should be done on a per capita basis The population in different countries
must be considered with changes in national income when assessing a country’s economic
performance. If national income grows at a slower rate than population, then income per
head decreases and the average standard of living will fall. Per capita income is a more
meaningful measure of living standards than national income.
(ii) The price levels / levels of inflation An increase in prices will increase national income but
standard of living may fall. So changes in national income must be compared with changes in
prices to consider the impact on standard of living / economic performance. GDP at constant
prices is a better indicator of economic growth than GDP at market prices.
(iii) Common currency/ Must express each countries National Income in a common
currency This conversion is usually by means of foreign exchange rates which are based on
the prices of internationally traded goods and services/ Usually done in US dollar. Non-
internationally traded goods and services form a greater part of the national product of LDCs.
So these national income statistics would be understated.
(iv) Distribution of national income and poverty within each country National Income
statistics give headline figures as to the overall economic performance. Further research
needs to be undertaken to find how income is distributed. E.g., two countries might have the
same level of GNP. However, the income distribution might be very different in both countries
with consequences for the welfare of the citizens.
(v) Size of the black economy The black economy is excluded from the calculation of national
income. The value of unreported transactions is difficult to ascertain, thus underestimating
the level of national income.
(vi) Nature of government expenditure / statistics ignore economic wellbeing A country
which spends a small amount on military equipment and a larger amount on health,
education etc. will have a better standard of living than one where the reverse is the case i.e.
much of its wealth is on armaments. There is a large difference in terms of relative economic
well-being between the two countries yet the National Income data doesn’t reflect this
difference.
(vii) Government services at cost price / Non- marketable goods and services Government
services are included at cost while private services are included at selling price. A country
where the government provides many services will record a lower GDP / national income.
(viii) Issues specific to individual countries which affect the standard of living in different
countries: Climate /pollution/working conditions etc.
(b) Leakages are the withdrawals from the circular flow of income. The household sector does not
put all their income in business sector, some income is put aside in the form of saving, some is
paid to government in the form of taxes and some is used to buy goods from other countries.
Thus, the savings (S), taxes (T) and imports (M), collectively are called as leakages from the
circular flow of income. Injections into the circular flow are additions to the circular flow from
other sectors. This includes investment from business sector, government spending and
income from exports to other countries An economy is in equilibrium when: injections = leakages
Answer to SEQ 10
This has no impact on GDP Child benefit is a transfer payment i.e. it is a payment for which
no good or service is given in return. It is therefore not included in GDP. It is financed
through taxation and has no impact on GDP.
There will be no impact on the calculated figure for GDP when the foreign-owned company
sends back to their home country all the profits. GDP measures the value of all production in
Tanzania regardless of who owns the productive assets. Thus profits earned by a foreign-
owned company in Tanzania are included in GDP. However, the returned profits will be part
This has no impact on GDP Child benefit is a transfer payment i.e. it is a payment for which
no good or service is given in return. It is therefore not included in GDP. It is financed
through taxation and has no impact on GDP.
There will be no impact on the calculated figure for GDP when the foreign-owned company
sends back to their home country all the profits. GDP measures the value of all production in
Tanzania regardless of who owns the productive assets. Thus profits earned by a foreign-
owned company in Tanzania are included in GDP. However, the returned profits will be part
of net factor income from abroad and will lower the GNP figure.
(iii) An oil spill off the coast costs the Tanzania Government significant clean-up costs.
This will increase GDP. The extra spending by the Government on environmental clean-up
is added to GDP. GDP does not take into account environmental degradation.
Answer to SEQ 11
(a) ‘Double counting’ occurs if the expenditure on intermediate goods is included in the calculation
of national output. When measuring economic activity using the output method, care needs to
be taken to distinguish between final and intermediate goods to avoid the problem of double
counting. Sometimes it is very difficult to distinguish between intermediate and final goods/To
avoid the problem of double counting statisticians could include the final value of all finished
goods, with the value of intermediate goods excluded or sum the value added at each stage of
production/As a good goes through the various stages of production, it increases in value and it
is this increase in value which is included in the national income accounts
(b)
(i) Gross National Product at Factor Cost
GNP at Market Prices + Price Subsidies – Indirect Taxes = GNP at Factor Cost
Tshs 200 million + Tshs 5 million – Tshs 30 million = Tshs 175 million*
(ii) Net National Product at Factor Cost/National Income
GNP at Factor Cost – Depreciation = NNP at FC
Tshs 175 million* – Tshs 12 million = Tshs 163 million
(c)
(i) Population changes
If national income grows at a slower rate than population, then national income per head
decreases and the average standard of living will fall. Hence population changes must be
considered with changes in national income when assessing a country’s economic
performance.
(ii) Inflation/deflation
An increase in prices will increase national income but standard of living may fall. So,
changes in national income must be compared with changes in prices to determine the
impact on standard of living / economic performance.
(iii) Employment / Unemployment
If a person is unemployed rising national income will not necessarily mean that this person’s
average standard of living is rising.
(iv) Levels of taxation
When considering a person’s standard of living one should take into account rates of income
tax and levels of indirect tax within the country. An increase in either of these may result in a
drop in a person’s standard of living.
(v) Levels of social welfare
For a person who is unemployed the rates of social welfare payable is of more relevance that
the average standard of living in the country.
(vi) Measures flow of wealth not welfare
Rising GNP may be accompanied by changing working/living conditions which may cause a
loss of welfare e.g. more traffic congestion and so a person’s standard of living may fall.
(vii) Hidden social costs attached to increases in national income. If a firm increases output
national income increases. However, a hidden cost may be increased pollution etc.
(viii) Distribution of national income. If increases in national income make their way into the
pockets of a small minority, there may be no improvement in the standard of living of the
whole community.
(ix) Exclusion of important activities from calculation of national income.
The black economy is excluded from the calculation of national income. The work of
housewives & voluntary activities is also excluded. Such activities are important to the
welfare of its citizens.
national income increases. However, a hidden cost may be increased pollution etc.
(vii) Hidden social costs attached to increases in national income. If a firm increases output
(viii) Distribution
national income of increases.
national income.
However,Ifaincreases in may
hidden cost national income make
be increased theiretc.
pollution way into the
(viii) Distribution of national income. If increases in national income make their way into the
174 Public Finance whole
and National Income
community.
whole community.
welfare of its citizens.
(x) Nature of its
welfare thecitizens.
goods produced
A country which spends a small amount on military equipment and a large amount on health,
(x) Nature of the goods produced
education etc. will have a better standard of living that one where the reverse is the case.
A country which spends a small amount on military equipment and a large amount on health,
(xi) Government
education etc.services
will have at cost price.
a better standard of living that one where the reverse is the case.
(xi) Government services are included
Government services at cost price. at cost while private services are included at selling price.
A country where the government provides many services will record a lower GDP / national
Government services are included at cost while private services are included at selling price.
income
A country where the government provides many services will record a lower GDP / national
income
Answer to SEQ 12
(a)
Answer to SEQ 12

(a) GDP Gross Domestic
 measures the value Product can beand
of all goods defined as the
services total output
produced in theproduced
country inbythetheperiod.
factorsIt of
is
production
the fundamental in the domestic
measureProduct
of economic economy irrespective
activity. of whether the factors are owned by
Gross Domestic can be defined as the total output produced by the factors of
Tanzania
 The difference nationals
between or foreigners.
GDP and GNP is significant in Tanzania as the
NFIA is a relatively large
production in the domestic economy irrespective of whether factors are owned by
 Gross
negative in National
Tanzania’s Product
case. is
Tanzania nationals or foreigners. defined as the total output produced (value of goods and
 NFIA services) bybecause
Tanzania theowned factors of by
production in Tanzania and elsewhere. It is a
 isGross
negative
National Product profits
is earned
defined as the MNCs
total and
output repatriated
produced (valueback to
of their
goodshome and
countriesmeasure
exceedofthethe income
profits accruing
earned to a country’s
by factors
Tanzania residents.
services) by Tanzania owned of MNCs located
production abroad and
in Tanzania andreturned to Tanzania
elsewhere. It is a
(b) and the interest payments on Tanzania debt held by non-residents also cause the ‘Net Factor
measure of the income accruing to a country’s residents.

(b) GNP
Income = GDP
from +Net Factor
Abroad’ Income
figure from Abroad (NFIA)
to be negative.
 The
GNPnet repatriation
= GDP of profits
+Net Factor Incomeandfrom
the interest repayments on the national debt to non-residents
Abroad (NFIA)
are both outflows hence GDP is consistently and considerably larger than GNP in Tanzania.
(c)
(i) Population distortions
Population changes must be considered with changes in national income when
assessing a country’s economic performance. If national income grows at a slower rate
than population, then average income per head may decrease and the average standard
of living may fall. Per capita income may be a more meaningful measure of living
standards than national income.
(ii) Constant prices and current prices / Inflation
An increase in prices will increase national income but the standard of living may fall. So
changes in national income must be compared with changes in prices to consider the
impact on standard of living / economic performance. GDP calculated at constant prices
is a better reflection of economic growth than GDP at market prices.
(iii) Hidden social costs attached to increases in national income / externalities
involved
If a firm increases output national income increases. However, a hidden cost may be
increased pollution etc. Positive and negative externalities such as congestion, waste
disposal and attractiveness of areas are excluded.
(iv) Distribution of national income and poverty
National Income statistics give headline figures as to the overall economic performance.
Further research needs to be undertaken to find how income is distributed. e.g., two
countries might have the same level of GNP. However, the income distribution might be
very different in both countries with consequences for the welfare of its citizens.
(v) Shadow economy transactions not measured
The black economy is excluded from the calculation of national income. The value of
unreported transactions is difficult to ascertain thus underestimating the level of national
income.
(vi) Nature of the goods produced
A country which spends a small amount on military equipment and a larger amount on
health, education etc. will have a better standard of living than one where the reverse is
the case i.e. much of its wealth is on armaments. There is a large difference in terms of
relative economic well-being between the two countries yet the National Income data
doesn’t reflect this difference.
Answer to SEQ 13
health, education etc. will have a better standard of living than one where the reverse is
the case i.e. much of its wealth is on armaments. There is a large difference in terms of
relative economic well-being between the two countries yet the National Income data
doesn’t reflect this difference.
Answer to SEQ 13
Computation of the national income:
National income (Billions of TZS)
Period Ending 2008

Gross national product 11,059.3
Net income receipts from rest of the 55.2
World
Income receipts 329.1
Income payments 273.9
Gross Domestics Product 11,004.1
Private Consumption of fixed capital 1,135.9
Government consumption of fixed capital 218.1
Statistical discrepancy 25.6
National Income 9,679.7
Answer to SEQ 14
Calculation of GDP
(i) According to income method
GDP = Wages (W) + Rent (R) + Depreciation (D) + Profit (P)
Wages = (15,000,000 + 10,000,000 + 50,000,000) = 75,000,000
Rent = = 2,500,000
Depreciation = = 7,500,000
Profit = (5,000,000 + 15,000,000) = 20,000,000
Contribution to GDP 105,000,000
(ii) According to Product Method
GDP = Total Sales + Closing Opening Stock of

Stock of produced – Intermediate inputs +
Opening Stock of - Purchases – Closing
produced Stock of Intermediate
= Total Output = (Intermediate Inputs + Purchases)
Sales 200,000,000
Changes in finished goods (17,500,000 – (5,000,000)

22,500,000)
Changes in Intermediate (15,000,000 – 10,000,000

goods 5,000,000)
Less: Purchase 100,000,000
Answer to SEQ 15
(a) National income accounting is important for the following reasons:
1. It studies where the income is being generated and how it is spent.
2. It helps calculate the total production of final goods and services in the country. Thus, it
Answer to SEQ 15
(a) National income accounting is important for the following reasons:
1. It studies where the income is being generated and how it is spent.
2. It helps calculate the total production of final goods and services in the country. Thus, it
provides useful insight into how well the economy is functioning.
3. It helps assess the health of the economy by comparing the output per person across
countries and across time periods.
4. It helps in assessing the effectiveness of the economic policies of a country.
(b) (i) The government policies influence the GDP and the NI (National Income) of a country
in many ways.
Some of these are explained below (Candidates are expected to give examples in each
point):
1. Education and health care policies: increase investment in this sector contributes
in improving the quality of human capital of a country which results in increased
production. When production increases, the national income also increases and
therefore GDP increases. It is important that a government aims to increase the
quality of its workforce by increasing educational and professional training
opportunities.
2. Institutional infrastructure: improvements in the institutional infrastructure of the
country in areas such as law and order, judiciary system, banking and insurance
sector and stable and efficient government organizations are important to GDP
growth.
3. Infrastructure policies: improvement in the physical infrastructure of the country is
fundamental to supporting economic activity and encouraging GNP growth. It
includes development of roads, railway lines, airlines, bridges, dams, power
generation plants etc.
4. Social policies: strong policies to reduce unemployment, to control population, to
improve social security, to make better education available, to formulate good
environmental policies etc. play a vital role in the development of a country’s economy
and therefore have a significant impact on GNP.
(ii) Limitations of GDP are:
1. GDP does not account for non-market activities. GDP does not include productive
activity that does not have a market transaction. For example, unpaid domestic
services such as housework, do-it-yourself home improvements etc. are not
considered while measuring the GDP.
2. GDP does not account for the value of leisure. Leisure contributes to the quality of
life. A country could increase its output (and GDP) if its people worked all seven days
of the week. However, having more products might not mean people are better off if
they have no leisure time to enjoy them.
Answer to SEQ 16
Given value added taxes = TZS.3,000 Personal tax = TZS.2,000
Depreciation TZS.5,000, Retained earnings = TZS.22,000

GDPMP = TZS.5,000
NNPMP = GDPMP – Depreciation
= 50,000 – 5,000
= TZS.45,000
NNPFC = NNPMP – NIT
= 45,000 – 3,000
= TZS.42,000
Answer to SEQ 17
GDP = Y = C + 1 + G + NX
Y = 3,657 + 741 + 1,098 + (673 – 704)

= 50,000 – 5,000
= TZS.45,000
NNPFC = NNPMP – NIT
= 45,000 – 3,000
= TZS.42,000
Answer to SEQ 17
GDP = Y = C + 1 + G + NX
Y = 3,657 + 741 + 1,098 + (673 – 704)
Y = 3,657 + 741 + 1,098 – 31
Y = 5,465 billions
(ii) Gross Domestic Product (GDP) using income approach

National Income = Compensation to Employees (Wages) + Rents + Interest +
Proprietor’s Income + Corporation Profits
National Income = 3,254 + 17 + 530 + 403 + 341 = 4,545
Y = National Income + Indirect Business Taxes + Depreciation + NFFI
Y = 4,545 + 500 + 400 + 20 = 5,465 billions
(iii) Net Domestic Product (NDP)

NDP = GDP – consumption of fixed capital (i.e. Depreciation)
= 5,465 – 400
= 5,065 Billions
(iv) National Income at factor cost from the Net Domestic Product (NDP)
National Income at factor cost = NDP at market price – Indirect taxes + Subsidies
= 5,065 – 500 + 15
= 4,580 Billions
Answer to SEQ 18
Three approaches of estimating national income and one limitation for each
 1st Approach of estimating national income: Value added/net output approach
Limitation:
(1) How to account for subsistence output/producers’ own consumption. These are
goods produced and used by their producers/not exchanged for money. Activities
of subsistence sector usually take place outside the market, hence, difficult to
establish their monetary values.
(2) Double counting – some firms produce outputs that are used as other inputs by
other firms and these other firms in turn produce outputs that are used as inputs by
yet other firms.
 2nd Approach of estimating national income: Income approach
Limitation: Focus on items or factors of production, i.e. focuses on the flows of
payments of services or primary factors. Hence, excludes some items from income on
grounds that they do not add value in a product or service. In other words, the approach
is not detailed in terms of production function as ‘transfer payment income’ such as
social security benefits, pension, grants, gifts, relief payment etc. are excluded
 3rd Approach of estimating national income: Expenditure approach

Limitation:
(1) Private consumption does not necessarily depend on market, hence, difficult to
estimate national income perfectly.
(2) Difficult to capture spending by non profit making institutions or other informed
sectors.
(3) Private expenditure excludes purchases of assets which are not part of current
production.
(4) Government output is typically valued at cost rather than at the market value.
Answer to SEQ 19
Way through which governments Policies influences GDP and NI
(i) Education and health care policies: increased investment in this sector contributes in improving
the quality of human capital of a country which results in increased production. When production
increases, the national income also increases and therefore GNP increases. It is important that a
government aims to increase the quality of its workforce by increasing educational and professional
training opportunities.
(ii) Institutional infrastructure: improvements in the institutional infrastructure of the country in areas
such as law and order, judiciary system, banking and insurance sector and stable and efficient
government organizations are important to GNP growth.
(iii) Infrastructure policies: improvement in the physical infrastructure of the country is fundamental to
supporting economic activity and encouraging GNP growth. It includes development of roads,
railway lines, airlines, bridges, dams, power generation plant etc.
(iv) Social policies: strong policies to reduce unemployment, to control population, to improve social
security, to make better education available, to formulate good environmental policies etc. Play a
vital role in the development of a country’s economy and therefore have a significant impact on
GNP.
SECTION B: TAX LAWS,
B1
SECTION B
Tax Laws, Administration

ADMINISTRATION AND PRACTICE
and Practice in Tanzania
IN TANZANIA
STUDY GUIDE B1: TAX

ADMINISTRATION IN TANZANIA
Taxation in Tanzania is administered by the Tanzania Revenue Authority. The Tanzania Revenue
Authority (TRA) was established by Act of Parliament No. 11 of 1995, and started its operations on 1st
July 1996. In carrying out its statutory functions, TRA is regulated by law, and is responsible for
administering impartially various taxes of the Central Government. Other taxes are administered through
Local Government Authorities in their respective jurisdictions.
In this Study Guide, we review the historical background of the establishment of Tanzania Revenue
Authority, its functions in tax administration, tax administered by the TRA the tax administration
provisions relating to tax consultants in Tanzania.
a) Explain the historical background of TRA establishment

b) Explain the functions of the TRA
c) Identify the TRA departments and their roles in tax administration
d) Identify the taxes administered by the TRA
e) Explain the concept of tax compliance
f) Explain the tax administration provisions relating to tax consultants in the Tax Administration Act
2015.
g) Describe Taxpayer’s Charter
180 Tax Laws, Administration and Practice in Tanzania
1. Explain
1. Explain
the historical
the historical
background
background
of TRAofestablishment;
TRA establishment;
explainexplain
the functions
the functions
of the of
TRA;
the identify
TRA; identify
the TRA
thedepartments
TRA departments
and their
androles
their in
roles
tax in
administration;
tax administration;
identify
identify
the taxes
the taxes
administered
administered
by theby
TRA.
the TRA.
[Learning
[Learning
outcome
outcome
a, b, ca,
andb, c
d]and d]
1. The 1. Historical
The Historical Background
Background Of TRA OfEstablishment
TRA Establishment
Substantial
Substantial
reform reform
efforts efforts
have beenhave madebeen to made
improve
to improve
taxationtaxation
in Tanzania.
in Tanzania.
In 1969In Sales
1969 Tax Saleswas Tax was
introduced
introduced
followed followed
by newby Income
new Income
Tax ActTax in 1973.
Act inThe1973. government
The government
abolished abolished
some excise
some excise
duty and dutyin and in
1979 and1979 export
and export
duty induty 1989.in In
1989.
1989Inthe
1989 government
the government re-introduced
re-introduced
the abolished
the abolished
excise excise
duty. After
duty. After
nearly 30
nearly
years 30ofyears
independence,
of independence,
in 1989,in the
1989,
government
the government saw thesaw needthetoneed
make tothorough
make thorough
review review
of its of its
tax administration
tax administrationestablishments
establishments
and taxand structure.
tax structure.
There a There
Presidential
a Presidential
CommissionCommission
was formedwas formed
to to
study and
studyreview
and review
the existing
the existing
central central
and localandgovernment
local government tax systems
tax systems
and its and
administration
its administration
and make and make
recommendations
recommendations to the government.
to the government.
The Commission
The Commission recommended,
recommended,
among amongother things,
other things,
the need thefor
needwidening
for widening
of tax base,
of tax reducing
base, reducing
tax tax
rates and
ratesintroducing
and introducingValue Added
Value AddedTax (VAT)
Tax to(VAT)replace
to replace
sales taxsales
andtax excise
and excise
duty. The duty.
government
The government
implemented
implemented
the recommendations
the recommendations in the 1992/93
in the 1992/93
budget budget
and experienced
and experienced
significant
significant
fall in tax
fallrevenues
in tax revenues
collections
collections
in that year.
in thatTheyear.
major
Thereasons
major reasons
for the for
fall the
were fallnoted
wereto noted
be fall
to in
berevenues
fall in revenues
collected collected
throughthrough
sales and
salesexcise
and excise
taxes and taxesimport
and duties.
import duties.
It was learnt
It was that
learntthethat
rates
thewere
ratesreduced
were reduced
withoutwithout
widening widening
the the
base andbasetheandtax the
administration
tax administration
departmentsdepartments
were not werestrengthened
not strengthened
enoughenoughto handleto handle
the reforms
the reforms
given given
the short
theduration.
short duration.
During During
this time thistax
time
administration
tax administrationwas underwas three
under department
three department
of the of Ministry
the Ministry
of of
Finance:Finance:
Sales Tax Sales Department,
Tax Department,
Customs Customs
DepartmentDepartment
and Incomeand Income
Tax Department;
Tax Department;as such, asfell
such,
within
fell within
the normal
the normal
civil service
civil service
framework.framework.
Due toDue
the to
noted
the weaknesses
noted weaknesses
in the intaxthe
administration
tax administration
and taxand policy
tax formulation,
policy formulation,
widespread
widespread
tax tax
aversion,
aversion,
the desire
the desire
to limittopolitical
limit political
interference
interference
and toand
freetotax
free
administration
tax administration
from civil
fromservice
civil service
constraints,
constraints,
Tanzania
Tanzania
Revenue Revenue
AuthorityAuthority
was established
was established
throughthrough
the Acttheof Act
Parliament
of Parliament
in 1995in and
1995 and
becamebecame
operational
operational
in 1 July
in 1992.
1 July 1992.
Test Yourself
Test Yourself
1 1
When reviewing
When reviewing
the fiscal
thehistory
fiscal history
of Tanzania,
of Tanzania,
especially
especially
betweenbetween
1989 and
1989
1993,
andwhat
1993,dowhat
you do
findyou
to be
find to be
the likely
thereasons
likely reasons
for the establishment
for the establishment
of TRA?of TRA?
2. The2. Functions
The Functions
Of TheOfTRAThe TRA
TRA was TRAestablished
was established
on 31st on
July311995
st Julyas
1995
an autonomous
as an autonomous
agencyagency
of the government
of the government
of Tanzania;
of Tanzania;
it it
becamebecame
operational
operational
in 1 July1996
st in 1 July1996
st under the
under
supervision
the supervision
of the Ministry
of the Ministry
of Finance
of Finance
and Economic
and Economic
affairs. affairs.
The general
The general
aim of aim
establishing
of establishing
TRA wasTRAto was
bringtoefficiency
bring efficiency
in revenue
in revenue
administration
administration
and and
collection.
collection.
Since1996TheTanzaniaRevenueAuthorityhasbeenperformingthefollowingfunctionsasprescribedinthe
Since1996TheTanzaniaRevenueAuthorityhasbeenperformingthefollowingfunctionsasprescribedinthe
establishment
establishment
Act -The
Act
Tanzania
-The Tanzania
RevenueRevenue
Authority
Authority
Act, Section
Act, Section
5(1) (a)):
5(1) (a)):
To implement
To implement
tax lawstax
in laws
orderintoorder
assess,
to assess,
collect and
collect
account
and account
the collected
the collected
tax revenue;
tax revenue;
To ensure
To ensure
effective,
effective,
fair andfair
efficient
and efficient
administration
administration
of unionoftax
union
laws;
tax laws;
To monitor
To monitor
and ensure
and ensure
the collection
the collection
of otheroftaxes
othernot
taxes
collected
not collected
by it butbythe
it but
revenue
the revenue
is for union
is for union
government.
government.
To advise the Minister and other relevant organs regarding suitability of fiscal policy;
To encourage voluntary tax compliance;
To increase taxpayers’ services given by revenue departments to increase revenues collection;
To take actions against tax evasion and avoidance;
To provide trade statistics and publications on a quarterly basis; and
To perform other functions as direct by the minister of finance.
3. TRA Departments And Their Roles In Tax Administration
Basically there are four main TRA departments responsible in tax administration and management
namely; Domestic revenue department, Large Taxpayers department, Customs & Excise department
and Tax Investigation department. All the departments are manned by Commissioners who in turn
advise the Minister
To encourage voluntaryandtaxother relevant organs regarding suitability of fiscal policy;
compliance;
encourage
To increase voluntaryservices
taxpayers’ tax compliance;
given by revenue departments to increase revenues collection;
increase
To take actions against services
taxpayers’ tax evasiongiven byavoidance;
and revenue departments to increase revenues collection;
take actions
To provide tradeagainst taxand
statistics evasion and avoidance;
publications on a quarterly basis; and
Tax Administration in Tanzania: 181
provide trade
To perform other statistics
functionsand publications
as direct on a quarterly
by the minister basis; and
of finance.
3. TRAToDepartments
perform other functions
And Their as direct
Roles by In
theTax
minister of finance.
Administration
3. Basically
TRA Departments
there are four And
main Their
TRA Roles In Tax
departments Administration
responsible in tax administration and management
BasicallyDomestic
namely; there arerevenue
four main TRA departments
department, responsible
Large Taxpayers in tax administration
department, and management
Customs & Excise department
namely;
and Tax Domestic
Investigationrevenue department,
department. Large
All the Taxpayersare
departments department,
manned by Customs & Excise who
Commissioners department
in turn
and Tax
report Investigation
to the Commissioner department.
GeneralAll departments are manned by Commissioners who in turn
of the Authority.
report to the Commissioner General of the Authority.
Large Taxpayers Department
Large
The LTDTaxpayers
was formed Department
with the view to administer taxes from large taxpayers. The department has more
The LTD
than was formed
400 taxpayers whowith the viewaround
contribute to administer
70% of taxes fromrevenues
domestic large taxpayers. The department has more
than 400 taxpayers who contribute around 70% of domestic revenues
Domestic Revenues Department
Domestic
The Revenues
integration of VATDepartment
and Income Tax Departments was implemented in July 2005 whereby the DRD
The integration
was formed. Theofdepartment
VAT and Income Tax Departments
administers was implemented
taxes from medium in July 2005
and small taxpayers. whereby for
It accounts theabout
DRD
was formed.
30% The department
of the domestic revenue. administers taxes from medium and small taxpayers. It accounts for about
30% of the domestic revenue.
Customs and Excise Department
Customs
The and Excise
department Department
administers international trade taxes and accounts for 42% of total TRA collections.
The department administers international trade taxes and accounts for 42% of total TRA collections.
Tax Investigation Department
Tax Investigation
The Department is to minimize the occurrence of tax fraud through identification and
department responsibility
The department
investigation responsibility
of fraudulent cases,is collecting
to minimize the occurrence
evaded of tax fraud through
taxes and recommending identification
prosecution and
of offenders
investigation
with a view toof fraudulent
improve cases, collecting
compliance evaded taxes and recommending prosecution of offenders
with tax laws.
with Taxes
4. a view to improve compliance
Administered By The withTRA
tax laws.
4. Taxes Administered By The TRA
TRA administers Central Government taxes. These include:
TRA administers Central Government taxes. These include:
1.2 Income Tax

1.2 Income Tax
Income Tax is charged and paid in varieties of ways as indicated below:
Income Tax is charged and paid in varieties of ways as indicated below:
Individuals Income Tax: Individuals are categorized in three groups, small individual traders who are
Individuals
not required Income Tax:audited
to maintain Individuals are categorized
accounts, the medium in individual
three groups, smallwho
traders individual traders
are required who are
to maintain
not required
audited to maintain
accounts audited accounts,
and employees. the medium
Small traders individual
are taxed traders who
by presumptive taxare required
system, to maintain
medium sized
audited accounts
traders are and employees.
taxed based Small
on the annual traders
profit are taxed
determined frombythepresumptive tax system,
audited accounts medium sized
and employees are
traders are taxed
taxed through Paybased on the
As You Earnannual
(PAYE) profittax
determined
system. Itfromis athe audited accounts
withholding and employees
tax on taxable incomesareof
taxed through
employees. Paythis
Under As system,
You Earn (PAYE) tax
an employer system. by
is required It law
is atowithholding tax on
deduct income tax taxable
from an incomes
employee'sof
employees.
taxable salaryUnder this system, an employer is required by law to deduct income tax from an employee's
or wages.
taxable salary or wages.
Corporations Tax: Corporation Tax is a tax charged on the taxable incomes (profits) of entities such as
Corporations Tax: Corporation
limited companies and other Tax is a tax charged
organizations on theclubs,
including taxablesocieties,
incomes (profits) of entities
associations andsuch as
other
limited companies
unincorporated bodies.and other organizations including clubs, societies, associations and other
unincorporated bodies.
Withholding Taxes: Withholding tax is the amount of income tax retained by payer when making
payments to another person (payee) in respect of goods supplied or services rendered by the
payee.Withholding taxes is applicable for certain specific type of payments mentioned in S.81, 82 and 83
of Income Tax Act 2004. PAYE above is an example of withholding tax.
Capital Gain: This is a tax charged on gains made when a person realizes an interest in land or
buildings. A person is treated as realizing an interest in an asset when the person parts with ownership of
such interest including when it is sold, exchanged, transferred, distributed, cancelled, redeemed,
destroyed or surrendered and in the case of interest of an entity when it ceases to exist, immediately
before the entity ceases to exist.
1.3 VAT
It is a consumption tax charged on taxable goods, services immovable property of any economic activity
whenever value is added at each stage of production and at the final stage of sale. VAT is charged on
both locally produced goods and services and on imports.
1.4 Excise Duty

Excise Duty is a duty charged on specific goods and services manufactured locally or imported on
varying rates. It is charged in both specific and ad valorem rates. Items charged include: Wine, spirits,
before the entity ceases to exist.
1.3 VAT
It is a consumption tax charged on taxable goods, services immovable property of any economic activity
whenever
182 Tax value is added
Laws, Administration and at each stage
Practice of production and at the final stage of sale. VAT is charged on
in Tanzania
both locally produced goods and services and on imports.
1.4 Excise Duty

Excise Duty is a duty charged on specific goods and services manufactured locally or imported on
varying rates. It is charged in both specific and ad valorem rates. Items charged include: Wine, spirits,
beer, soft drinks, mineral water, fruit juices, Recorded DVD, VCD, CD and audio tapes, cigarettes,
tobacco, petroleum products and Natural gas, money transfer services, electronic communication
services, pay to view television services, imported furniture, motor vehicles, plastic bags, specified
aircrafts, firearms, specified cases, cosmetics and medicaments.
1.5 Stamp Duty

All chargeable instruments by any person in Tanzania Mainland shall be stamped. An instruments is
defined as to include every document by which any right or liability is, or purports to be, created,
transferred, limited, extended, extinguished or recorded. Instruments that attract stamp duties include:
affidavit, cheque, valuation, power of attorney, agreement or memorandum of agreement, lease
documents, transfers of shares, transfer of debentures etc.
1.6 Gaming Tax

The Gaming tax is charged on six types of gaming activities namely Casinos, Sports Betting, SMS
Lottery, National Lottery, Slots (Route) Operations and Forty Machines Site.
1.7 Skills Development Levy

Skills Development Levy is charged at 4.5% of gross emoluments made by the employer to the
employees employed by such employer in the particular time.
1.8 Customs Tariffs

This includes tariffs (import duty) on goods imported from non-East African Community member states as
well as export tariffs.
1.9 Motor Vehicle Registration, Transfer and Licensing Fees

The TRA is responsible to collect tax when a motor vehicle is first registered in Tanzania, transferred
from one owner to another in Tanzania, and annual licensing fees.
2. Explain the concept of tax compliance; explain the tax administration provisions
2. Explain the concept of tax compliance; explain the tax administration provisions
relating to tax consultants in the Tax Administration Act 2015 and describe Taxpayer’s
relating to tax consultants in the Tax Administration Act 2015 and describe Taxpayer’s
Charter.
Charter.
[Learning outcome e, f and g]
[Learning outcome e, f and g]
5. The Concept Of Tax Compliance

5. The Concept Of Tax Compliance
Tax compliance means complying fully with the requirements of tax laws by reporting and paying the
Tax compliance means complying fully with the requirements of tax laws by reporting and paying the
correct amount of tax on time.
correct amount of tax on time.
Aspects of tax compliance
Aspects of tax compliance
Filing various returns and documents by the statutory due dates
Filing various returns and documents by the statutory due dates
(a) Accompanied by reporting correct income or tax due.
(a) Accompanied by reporting correct income or tax due.
(b) Avoid understatement.
(b) Avoid understatement.
 Payment of the correct tax on or before the statutory due dates.
 Payment of the correct tax on or before the statutory due dates.
- Filing without payment is not sufficient.
- Filing without payment is not sufficient.
 Tax avoidance , mitigation and planning form compliance
 Tax avoidance , mitigation and planning form compliance
- Should be discouraged by setting accurate legal provisions
- Should be discouraged by setting accurate legal provisions
Types of Tax compliance
 Voluntary compliance;
 Forced/Involuntary compliance
Voluntary Compliance: Situation where by taxpayers and their advisors faithfully abide by the
Voluntary Compliance: Situation where by taxpayers and their advisors faithfully abide by the
requirements of the tax laws without compulsion.
Benefits:
Benefits:
 Saves the government the costs of revenue collections.
 Promotes the realization of the tax policy , i.e non – revenue goals;
Tax Administration
Voluntary Compliance: Situation where by taxpayers and their in Tanzania:
advisors faithfully abide by183 the
Benefits:

 Promotes the realization of the tax policy , i.e non – revenue goals;
 Guarantees/ensure steady flow of revenue for development.
 Taxpayers avoid unnecessary penalties.
Forced tax compliance

The Tax Administrator calculates the tax liability of the taxpayer and informs him, according to which the
taxpayer pays the tax
Less superior to voluntary compliance, and may result into high cost of tax administration.
Achieving maximum voluntary compliance
 Education to taxpayers through interview; radio, TV’s seminars/ workshops/ training; publication, etc.
 Assist the tax payers, e.g tax consultant may assist in the completion of the returns, identifying the
due dates and related penalties, etc.
 Cooperation of other government agencies, departments, ect.
6. Tax Administration Provisions Relating To Tax Consultants In The Tax

Administration Act 2015.
The Tanzanian Tax system is a self-assessment one where taxpayers are obliged to self-declare
their taxable activities and pay tax accordingly. However experience show that self – assessment, is
not a simple straight forward affair, the complexity of tax legislations and even the time required to file
various returns by tax payers, they are given the option of filing a return with the assistance of a tax
consultant. The most common role of tax consultants is to help people prepare and file their tax
returns. This can be a valuable service, as failing to do so properly can leave a taxpayer liable to
paying penalties.
Definition
Tax Consultants (or professional, practitioner, advisor) is a person recognized by TRA as sufficiently
qualified to provide professional service consistent with tax legislation.
A person shall not practice or (in return of a payment) hold out to be an Income Tax Consultant unless
the person is an approved tax consultant. The provision prohibits any person, including authorized
accountants, or auditors to practice as tax consultants until the Commissioner for domestic revenue
legally registers such person. Indeed TRA exercises elaborate oversight functions on tax consultants.
Tax consultant’s duties include representing taxpayers before a tax administration concerning tax payers’
rights, privileges or liabilities and preparing documents to be filed before the tax Authority. In order to
ensure that tax practitioners’ are capable of playing the role expected of them, their conducts is
typically regulate under the law in different countries.
1.10 Registration
A person shall not practice as a Tax Consultant unless that person has been registered as a tax
consultant by the Commissioner General. The individual shallbe registered and approved to offer his
services after a successful application to the Commissioner General. The application shall be made by
filling aprescribed form and payment of the prescribed fees.
Tip
An entity cannot be registered as a tax consultant. Only individual may be registered. Registered
individual(s) on behalf of entities take(s) full responsibility for the misconducts of other tax consultants of
the entity as well as other employees of the entity.
Minimum Registration Requirements
The Commissioner General shall register every person who has made an application and meets the
following conditions:
An entity cannot be registered as a tax consultant. Only individual may be registered. Registered
individual(s) on behalf of entities take(s) full responsibility for the misconducts of other tax consultants of
the entity as well as other employees of the entity.
Minimum Registration Requirements
The Commissioner General shall register every person who has made an application and meets the
following conditions:
Academic qualifications
Bachelor: The applicant shall be a holder of a degree in accountancy, finance, financial management,
commerce, economics, customs and tax management or laws awarded by any university or other
recognized institution of higher learning
Postgraduate: Where the applicant does not hold the above bachelor degree, then he/she needs to hold
a postgraduate diploma in tax management or equivalent qualification as may be recognized by the
Commissioner General.
Tax Expertise and Professional Conduct
The applicant shall also be a person of good reputation, has sufficient knowledge and experience with
matters regulated under tax laws, his professional and general conduct render him fit and proper person
to be registered.
For purpose of assessing an applicant’s qualifications and expertise, the Commissioner General may
require the applicant to take an examination or other forms of assessment.
Approval and Registration
The Commissioner shall grant an applicant an approval as a tax consultant within thirty days from the
date of receipt of application. The approval as a tax consultant issued shall expire after a period of two
years from the date of approval, and may be renewed. A person registered and approved as tax
consultant shall be issued with a certificate of registration and approval as the case may be.
1.11 Deregistration
The Commissioner General shall deregister any tax consultant upon:
 occurrence of the death of the tax consultant;
 a tax consultant tendering a resignation to cease to practice as a tax consultant;
 leaving the country without an intention to return to the United Republic;
 conviction of a criminal offences carrying a maximum penalty of a fine of not less than thirty five
currency points or imprisonment;
 becoming bankrupt;
 expiry of approval of the tax consultant without being renewed;
 occurrence of gross professional misconduct by the tax consultant;
 the Commissioner General receiving recommendation of the Committee of the Inquiry under
regulation 12(6)(c); or
 Breaching any of the conduct and behavior of tax consultants
1.12 Conduct and Behavior of Tax Consultant

A tax consultant shall, provide quality services to clients so as to enable them to comply with the
provisions of any tax laws and regulations made thereunder, and in so doing shall specifically:
a) when handling clients affairs, be well mannered, honest, sincere and truthful and shall furnish the
Commissioner General or other officers of the Tanzania Revenue Authority with such information as
to the best of his knowledge and belief, is correct;
b) refrain from using information acquired in the course of practicing as a tax consultant to the personal
advantage of the tax consultant or any of his associate;
c) advise clients accurately and in a timely manner on the progress of their tax affairs;
d) use funds entrusted to him by clients only for the purposes for which the funds were provided, and
provide clients with appropriate receipts and evidence of expenditure including proof of payment of
tax, on a timely basis;
Tax Administration in Tanzania: 185
e) refrain from entering into any arrangement whereby the consultant authorizes tax advice prepared by
another person other than an employee of the consultant;
e) refrain from entering into any arrangement whereby the consultant authorizes tax advice prepared by
f) exhibit a high degree of skill and professional competency, including high level of conversancy with
another person other than an employee of the consultant;
tax laws and tax practice and ensure that the tax consultant’s technical knowledge is kept up to date;
f) exhibit a high degree of skill and professional competency, including high level of conversancy with
g) to the best of the consultant’s ability, ensure that all returns and tax computations submitted to the
tax laws and tax practice and ensure that the tax consultant’s technical knowledge is kept up to date;
Tanzania Revenue Authority are properly completed, with required supporting statements and
g) to the best of the consultant’s ability, ensure that all returns and tax computations submitted to the
schedules, and that such submissions are in compliance with the law;
Tanzania Revenue Authority are properly completed, with required supporting statements and
h) take cases and advise clients with respect to matters that are within the consultant’s experience and
schedules, and that such submissions are in compliance with the law;
competency;
h) take cases and advise clients with respect to matters that are within the consultant’s experience and
i) when making appeals against any tax decision, take proper care to ensure that such appeals are
competency;
based on valid grounds;
i) when making appeals against any tax decision, take proper care to ensure that such appeals are
j) educate clients on the importance of maintaining proper records of all transactions, especially clients
based on valid grounds;
engaged in business;
j) educate clients on the importance of maintaining proper records of all transactions, especially clients
k) advise clients of the necessity to make sufficient provision for the payment of tax as well as the
engaged in business;
importance of keeping to installment plans for the payment of tax so as to avoid late payment interest
k) advise clients of the necessity to make sufficient provision for the payment of tax as well as the
and penalties;
importance of keeping to installment plans for the payment of tax so as to avoid late payment interest
l) quote the consultant’s registration number on all correspondence with the Commissioner General;
and penalties;
m) avoid express an opinion or permit the consultant’s name to be used with respect to a tax matter
l) quote the consultant’s registration number on all correspondence with the Commissioner General;
unless the consultant (or an employee under the direct supervision of the consultant) has been
m) avoid express an opinion or permit the consultant’s name to be used with respect to a tax matter
appropriately instructed by the client;
unless the consultant (or an employee under the direct supervision of the consultant) has been
n) be personally responsible for the actions of any employees of the Consultant in providing tax services
appropriately instructed by the client;
to clients;
n) be personally responsible for the actions of any employees of the Consultant in providing tax services
o) keep and maintain a register in which the name of every client is recorded together with-
to clients;
i] the client’s Tax Identification Number;
o) keep and maintain a register in which the name of every client is recorded together with-
ii] the client's home or business address as well as the client postal address;
i] the client’s Tax Identification Number;
iii] the date the person became a client;
ii] the client's home or business address as well as the client postal address;
iv] the due dates for submission of the client's return or any other statements or documents;
iii] the date the person became a client;
v] the due dates for payment of tax and dates when tax is paid;
iv] the due dates for submission of the client's return or any other statements or documents;
vi] consultancy fees charged to and paid by the client; and
v] the due dates for payment of tax and dates when tax is paid;
vii] such other information as the Commissioner General may specify by notice in writing; and
vi] consultancy fees charged to and paid by the client; and
p) Inform the Commissioner General in writing when the consultant ceases to act for a particular client,
vii] such other information as the Commissioner General may specify by notice in writing; and
including the client's name and Taxpayer Identification Number.
p) Inform the Commissioner General in writing when the consultant ceases to act for a particular client,
including the client's name and Taxpayer Identification Number.
7. Taxpayer’s Charter
The Taxpayer’s Charter is a document developed by the TRA in close cooperation and consultation
7. Taxpayer’s Charter
with its stakeholders and clients. The Charter addresses the fundamental rights and obligations of the
The Taxpayer’s Charter is a document developed by the TRA in close cooperation and consultation
taxpayer and the TRA in fulfillment of its responsibility of enhancing awareness and promoting equity
with its stakeholders and clients. The Charter addresses the fundamental rights and obligations of the
and fairness to all taxpayers.
taxpayer and the TRA in fulfillment of its responsibility of enhancing awareness and promoting equity
Taxpayers’
7.1 and fairness rights
to all taxpayers.
The Charter states in simple language the general rights of a taxpayer and those under the tax law.
The rights identified include the following:
1. Impartial treatment
Taxpayer has a right to an impartial application of the tax laws when fulfilling his/her tax obligation, so
as to enable the taxpayer pays the required amount of tax.
2. Privacy and Confidentiality
Taxpayer has a right to privacy and confidentiality for private and business information supplied to
TRA unless the law allows the exposure of such privacy and or confidentiality.
3. Presumption of Honesty
The taxpayer has a right to be presumed honest unless evidence to the contrary exists.
4. Objection of Tax Assessment
Taxpayer has a right to object to an assessment or any other decision made by TRA to the extent of
which that right is restricted by the law.
5. Tax incentives and Exemption under the Tax Laws

Taxpayers have the right to plan their tax affairs so as to obtain incentives and exemption allowed
under the tax laws. TRA shall apply the tax laws in a consistent manner to all taxpayers.
7.2 Taxpayers’ Obligations

The Charter considers that paying tax is a civic obligation of every citizen/person and therefore sets
out responsibilities that must be adhered to by taxpayers as follows:-
which that right is restricted by the law.
5. Tax incentives and Exemption under the Tax Laws

Taxpayers have the right to plan their tax affairs so as to obtain incentives and exemption allowed
under
186 Tax Laws, the tax laws.and
Administration TRA shall apply
Practice the tax laws in a consistent manner to all taxpayers.
in Tanzania
7.2 Taxpayers’ Obligations

The Charter considers that paying tax is a civic obligation of every citizen/person and therefore sets
out responsibilities that must be adhered to by taxpayers as follows:-
1. Registration
If the person is eligible to pay any of the taxes administered by TRA and has not been registered
by any of the revenue departments, has an obligation to register himself with TRA.
2. Filing Returns and Payments

It is the obligation of every person who is registered for Income Tax, VAT, and other taxes
administered by TRA to file a tax return within the period stipulated under the respective Acts and
accompany the return with tax payments due.
3. Accuracy of Returns, Entries and Refund Claims

When filling tax returns, lodging a refund claim or making a declaration for any imported goods,
taxpayers have an obligation to ensure that the returns claims and declarations represent full and
true disclosure of the transactions for the period covered.
4. Timely Payment of Taxes
Taxpayers have an obligation to pay taxes promptly as they fall due so as to avoid unnecessary
penalties and interests under the tax laws.
5. Cooperation with TRA officers

Taxpayers have an obligation to give TRA employees adequate cooperation by disclosing or
producing all relevant information or documents required by them. Taxpayers are also obliged to
accord them with their due respect and freedom to carry out their lawful duties and they should
not intimidate, abuse, threaten or influence them in any manner whatsoever, whether financial or
otherwise.
Conversely TRA employees shall be courteous, polite, service-oriented and not arrogant,
harassing and authoritarian. Taxpayers have the right to report to higher authorities any
7.3 Problems Associated
departure With The
from the norms of aEnforcement Of Taxpayers’ Rights
good tax administrator.
1. Lack of Professional Experts
7.3 Problems Associated With The Enforcement Of Taxpayers’ Rights
Since tax law is a developing area in Tanzania, there are few experts on tax matters. As a result
1. Lack of Professional Experts
taxpayers do not get timely advice on their tax obligations and do not know when and how their
Since tax law is a developing area in Tanzania, there are few experts on tax matters. As a result
rights are violated.
taxpayers do not get timely advice on their tax obligations and do not know when and how their
2. Lack of Tax Education and Ignorance of Tax Rights
rights are violated.
Most taxpayers are not aware of their tax obligations and rights due to lack of massive tax
2. Lack of Tax Education and Ignorance of Tax Rights
education in this country. As a result, most taxpayers are not aware of their tax rights and
Most taxpayers are not aware of their tax obligations and rights due to lack of massive tax
obligations. At the same time, they do not fully appreciate the importance of taxes. All these
education in this country. As a result, most taxpayers are not aware of their tax rights and
culminate into taxpayers not knowing how to enforce their tax rights.
obligations. At the same time, they do not fully appreciate the importance of taxes. All these
3. Inefficient Investigation Procedures
culminate into taxpayers not knowing how to enforce their tax rights.
The procedures of investigating and following up of taxpayers complaints in Tanzania are slow
3. Inefficient Investigation Procedures
and poor. This leads to dragging in handling of tax cases
The procedures of investigating and following up of taxpayers complaints in Tanzania are slow
and poor. This leads to dragging in handling of tax cases
2 Answers to Test Yourself

Answer to TY 1
The Presidential Tax Commission had several recommendations on the restructuring of the tax system of
Answer to TY 1
the country. These recommendations were started to be implemented in FY 1992/93, a year after the
The Presidential Tax Commission had several recommendations on the restructuring of the tax system of
Commission’s report. The time span required to prepare the taxation departments to undertake the
the country. These recommendations were started to be implemented in FY 1992/93, a year after the
recommendations with efficiency was too short. That’s partly why the revenues declined in 1992/93 FY.
Commission’s report. The time span required to prepare the taxation departments to undertake the
The tax administration during the time also proved to be very inefficient due to widespread tax evasion
and lacked independence from political interference as the departments were sections in the Ministry of
Finance. Therefore, establishment of effective and efficient tax administration organ which will be
independent from the political interference was initiated and Tanzania Revenue Authority was later
enacted in 1995.
independent from the political interference was initiated and Tanzania Revenue Authority was later
enacted in 1995.
Question 1
independent from the political interference was initiated and Tanzania Revenue Authorityinwas
Tax Administration later 187
Tanzania:
enacted in 1995.
Question 1
What are the minimum conditions for registration of an individual as a tax consultant?
Question 2
What are the tax administration duties of the four functional departments of the TRA?
Question 3
Tanzania Revenue Authority (TRA) was established on 31st July 1995 as an autonomous agency of the
government of Tanzania; it became operational on 1st July 1996 under the supervision of the Ministry of
Finance. The general aim of establishing TRA was to bring efficiency in revenue administration and
collection.
Required:
Analyse the role of the Tanzania Revenue Authority (TRA
Answer to SEQ 1
The minimum registration conditions include a bachelor degree in business related studies, economic or
law; or a postgraduate diploma in taxation. Also an applicant shall provide proof of reasonable
expertise/experience in taxation and good reputation and professional conduct.
Answer to SEQ 2
The four main TRA departments are Domestic revenue department, Large Taxpayers department,
Customs & Excise department and Tax Investigation department. Large Taxpayers Department
administers taxes from large taxpayers. Domestic Revenues Department administers taxes from medium
and small taxpayers. Customs and Excise Department administers international trade. Tax Investigation
Department responsibility is to minimize the occurrence of tax fraud through identification and
investigation of fraudulent cases, collecting evaded taxes and recommending prosecution of offenders
with a view to improve compliance with tax laws.
Answer to SEQ 3
TRA was established on 31st July 1995 as an autonomous agency of the government of Tanzania; it
became operational in 1st July 1996 under the supervision of the Ministry of Finance and Economic
affairs. The general aim of establishing TRA was to bring efficiency in revenue administration and
collection. Since 1996 the Tanzania Revenue Authority has been performing the following roles as
prescribed in the establishment Act – The Tanzania Revenue Authority Act, Section 5(1)(a):-
(i) To implement tax laws in order to assess, collect and account the collected tax revenue;
(ii) To ensure effective, fair and efficient administration of union tax laws;
(iii) To monitor and ensure the collection of other taxes not collected by it but the revenue is
for union Government.
(iv) To advise the Minister and other relevant organs regarding suitability of fiscal policy;
(v) To encourage voluntary tax compliance;
(vi) To increase taxpayers’ services given by revenue departments to increase revenues
collection;
(vii) To take actions against tax evasion and avoidance;
(viii) To provide trade statistics and publications on a quarterly basis; and
(ix) To perform other functions as directed by the minister of finance.
(x) Goals/objectives of TRA may also be accommodated when mentioned.
B2
SECTION B

STUDY TEXT GUIDE B2: SOURCES AND

INTERPRETATION OF TAX LAWS
The tax administration in any country shall be governed by law. Therefore, a person shall not be charged
tax unless there is a clear legal provision requiring the person to be charged such tax. In other words, a
tax charge must be established by law.
In this Study Guide we review the sources of tax laws i.e. where we can derive the legal rulings related to
tax chargeability and tax administration in general. The Guide will also introduce the doctrines followed in
interpreting these legal provisions.
a) Describe the different sources of Tax Laws in Tanzania

b) Identify the general rules for interpretation of tax laws
DescribeDescribe
the different
the different
sourcessources
of Tax Laws
of TaxinLaws
Tanzania;
in Tanzania;
and identify
and identify
the general
the general
rules for
rules
interpretation
for interpretation
of tax laws.
of tax laws.
[Learning
[Learning
outcomeoutcome
a and b]a and b]
1. The1.
Different
The Different
Sources
Sources
Of Tax Of
Laws
TaxIn
Laws
Tanzania
In Tanzania
The sources
The sources
of income
of tax
income
laws tax
arelaws
the following:
are the following:
1. Statutes
1. Statutes
A statuteA is
statute
a formal
is a written
formal enactment
written enactment
(act) of (act)
a parliament
of a parliament
of a particular
of a particular
state governing
state governing
various various
taxation taxation
for that state.
for thatIt state.
is a primary
It is a primary
authorityauthority
on matterson matters
of income of tax,
income
yet tax,
mustyetbemust
constitutional.
be constitutional.
In In
Tanzania,Tanzania,
tax statutes
tax statutes
are made areupmade
of both
up the
of both
principal
the principal
legislations
legislations
and the and
subsequent
the subsequent
Finance Finance
Acts Acts
which amends
which amends
the principal
the principal
legislation
legislation
from timefrom
to time.
time Usually
to time. the
Usually
Finance
the Finance
Acts areActs
passed
are during
passedtheduring the
annual parliamentary
annual parliamentary
budget sessions.
budget sessions.
TanzaniaTanzania
Tax Statutes
Tax Statutes
The following
The following
are tax statutes
are tax statutes
applicableapplicable
in Tanzania:
in Tanzania:
Tax Administration
Tax Administration
Act 2015Act 2015
Income Tax
Income
Act Cap.
Tax Act
332Cap.
Revised
332 Revised
Edition 2008
Edition 2008
The ValueTheAdded
ValueTax
Added
Act,Tax
2014 Act, 2014
The PortThe
Service
Port Charges
Service Charges
Act Cap Act264Cap 264
The MotorThevehicle
Motor(Tax
vehicle
Registration
(Tax Registration
and Transfer)
and Transfer)
Act cap 124
Act cap 124
The Airport
TheService
Airport Charges
Service Charges
Act Cap Act
365Cap 365
The Road TheandRoad
Fueland
TollFuel
Act Cap.220
Toll Act Cap.220
The StampTheDuty
StampActDuty
Cap.Act
189Cap. 189
The EastTheAfrican
EastCommunity
African Community
CustomsCustoms
Management
Management
(Amendment)
(Amendment)
Act, 2011
Act, 2011
The EastTheAfrican
EastCommunity
African Community
CustomsCustoms
Management
Management
Act, 2004
Act,
(Revised)
2004 (Revised)
The Gaming
The Gaming
Act, Cap.Act,
41 Cap. 41
Vocational
Vocational
EducationEducation
And Training
And Training
Act, Cap.Act,
82 Cap. 82
The Foreign
The Vehicle
Foreign Transit
VehicleCharges
Transit Charges
Act, Cap.84
Act, Cap.84
The TaxTheRevenue
Tax Revenue
Appeals Appeals
Act Cap.Act
408Cap. 408
The Hotels
TheActHotels
Cap.Act
105Cap. 105
The Tanzania
The Tanzania
RevenueRevenue
AuthorityAuthority
Act Cap.399
Act Cap.399
The Oil and
TheGasOil and
Revenues
Gas Revenues
ManagementManagement
Act, 2015Act, 2015
The UrbanTheAuthorities
Urban Authorities
(Rating) (Rating)
Act, CAPAct,
289CAP 289
2. Regulations
2. Regulations
The principal
The principal
legislation
legislation
allows the
allows
Minister
the Minister
responsible
responsible
with tax with
administration
tax administration
[in this case,
[in this
thecase,
Minister
the Minister
of Finance]
of Finance]
to prepare
to prepare
regulations
regulations
where necessary
where necessary
as additional
as additional
provisions
provisions
with respect
with to
respect
tax laws
to tax
for laws for
the better
the
implementation
better implementation
of the principles,
of the principles,
purposespurposes
and provisions
and provisions
of the principal
of the principal
Acts. The Acts.
regulations
The regulations
usually carry
usually
thecarry
samethe authority
same authority
as that ofasthe
that
principal
of the principal
act. act.
TanzaniaTanzania
Tax Regulations
Tax Regulations
The Tax Administration (General) Regulation, 2016

The Income Tax Regulation
The income Tax (Transfer Pricing) Regulations, 2014
Transfer Pricing Guidelines
The Value Added Tax (General) Regulations, 2015
EAC Customs Management (Duty Remission) Regulations, 2008
EAC Customs Management Regulations, 2010
EAC Customs Management (compliance and enforcement) Regulations, 2012
The excise (Management and Tariff) The Films and Music Products (Tax Stamps) Regulations
2013
GN No 218 of 2012 - Tourism Development Levy
The
The income
Income TaxTax (Transfer Pricing) Regulations, 2014
Regulation
Transfer Pricing Guidelines
The income Tax (Transfer Pricing) Regulations, 2014
The Value
Transfer AddedGuidelines
Pricing Tax (General) Regulations, 2015
EACValue
The Customs
AddedManagement (Duty
Tax (General) Remission)2015
Regulations, Regulations, 2008
EAC Customs Management Regulations, 2010 Sources of Tax Laws and Its Interpretations: 191
EAC Customs Management (Duty Remission) Regulations, 2008
EAC
EAC Customs
Customs Management (compliance and
Management Regulations, 2010enforcement) Regulations, 2012
The excise
EAC Customs (Management
Management and Tariff) Theand
(compliance Films and MusicRegulations,
enforcement) Products (Tax Stamps) Regulations
2012
2013
The excise (Management and Tariff) The Films and Music Products (Tax Stamps) Regulations
GN
2013No 218 of 2012 - Tourism Development Levy
Road
GN NoTraffic
218 of(Motor
2012 -Vehicles
TourismRegistration)
DevelopmentRegulations
Levy
The Road Traffic (Motor vehicle Registration) (Amendments) Regulations, 2014
Road Traffic (Motor Vehicles Registration) Regulations
Tax Administration General Amendment Regulations 2017 Regulations, 2014
The Road Traffic (Motor vehicle Registration) (Amendments)
The Administration
Tax Electronic Revenue Collection
General System
Amendment 2017
Regulations 2017
The Electronic Revenue Collection System 2017
3. Practice Notes
The Commissioner
3. Practice Notes responsible with tax administration is allowed by the respective principal Acts to
prepare practice
The Commissioner notes to achieve
responsible withconsistency in the administration
tax administration is allowed byof the
the respective
principal actprincipal
and to Acts
provide
to
guidance to persons
prepare practice affected
notes by it.consistency
to achieve The practice
in notes usually carryofthe
the administration thesame authority
principal as that
act and of the
to provide
principal
guidanceact.
to persons affected by it. The practice notes usually carry the same authority as that of the
principal act.
4. Case Laws
These
4. Caseare sets of rules of law which have been established based on previous court cases. Basically,
Laws
previous courts’
These are sets of decisions
rules ofset
lawprecedence
which havethat may
been be used tobased
established judge on
subsequent
previous similar cases.Basically,
court cases. Where a
legal case is decided today (by the High Court or Court of Appeal), it becomes an authority
previous courts’ decisions set precedence that may be used to judge subsequent similar cases. Where over which
a
similar subsequent
legal case cases,
is decided todaypresided
(by the in anyCourt
High other or
court of law
Court or tribunal
of Appeal), in that particular
it becomes jurisdiction,
an authority may
over which
be decided
similar on the authority
subsequent of such previous
cases, presided case.
in any other court of law or tribunal in that particular jurisdiction, may
be decided on the authority of such previous case.
Test Yourself 1
Differentiate
Test Yourselfbetween
1 a Regulation and a Principal Act
Differentiate between a Regulation and a Principal Act
2. General Rules For Interpretation Of Tax Laws

2. General Rules For Interpretation Of Tax Laws
Taxation, even fair taxation, is a pervasive form of state interference in the lives of individuals. Yet, it
must happen.
Taxation, evenTherefore,
fair taxation,in the
is ataxation
pervasive process,
form ofthe government
state interference should
in theoperate
lives of under the law
individuals. and
Yet, it
citizens shouldTherefore,
must happen. be able successfully
in the taxation to process,
plan andtheorganize
governmenttheir should
lives within
operatetheunder
law, the
by law
deriving
and
guidance from the
citizens should be law
ableitself. This requires
successfully the and
to plan taxpayer, or his
organize agent,
their livesto within
have thethe ability
law, byto interpret
deriving
and derive the meaning intended by tax laws. The courts, in that regard have developed
guidance from the law itself. This requires the taxpayer, or his agent, to have the ability to interpret different
interpretation
and derive thedoctrines
meaning in interpreting
intended by taxfiscal
laws. legislations.
The courts, Each
in thatoneregardhashave
its own strengths
developed and
different
weaknesses.
interpretation doctrines in interpreting fiscal legislations. Each one has its own strengths and
weaknesses.
Doctrines of tax laws Interpretation
i] Strict
Doctrines Construction
of tax laws Interpretation
ii] Purposive Approach
i] Strict Construction
iii] Plain Meaning Rule
ii] Purposive Approach
iii] Plain Meaning
iv] Words Rule
– in Total – Context - Approach
2.1 Strict Construction

Strict Construction doctrine requires that tax statutes be construed literally and strictly i.e. should not be
subject to interpretation, but applied strictly as written. This means that, under strict constructionism,
there is no room for considering the context in which the law was made, any legislative purpose or spirit
other than the raising of revenue, or taking into account the specific circumstances of any individual case.
Therefore, any ambiguity in a provision charging/imposing a tax charge should be resolved in favor of the
taxpayer; while any ambiguity in a provision setting out deductions or exemptions should be resolved
against the taxpayer.
Notwithstanding the dominance of strict construction some judges took different approaches:
1. Objects and Intentions

For some judges, tax statutes should, like other statutes, be interpreted according to the object or
purpose of the statute and the intention of the legislature.
Ϯ͘ŽŶƚĞǆƚƵĂůŶĂůǇƐŝƐ
Other courts rejected the narrow literalism of strict construction in favour of a contextual approach to the
interpretation of statutes language. In this case, judges adhere to the literal construction unless the
Notwithstanding the dominance of strict construction some judges took different approaches:
1. Objects and Intentions

For some judges, tax statutes should, like other statutes, be interpreted according to the object or
purpose of the statute and the intention of the legislature.
Ϯ͘ŽŶƚĞǆƚƵĂůŶĂůǇƐŝƐ
Other courts rejected the narrow literalism of strict construction in favour of a contextual approach to the
interpretation of statutes language. In this case, judges adhere to the literal construction unless the
context renders it plain that such a construction cannot be put on the words.
ϯ͘'ŽůĚĞŶZƵůĞ
The third alternative to strict construction is the Golden Rule. It stipulates that courts can depart from the
literal words of a statute to avoid the absurdity and inconsistency but no father.
2.2 Purposive Interpretation

In contrast to strict construction, purposive interpretation emphasizes the reasons for which the statutory
text was enacted and the objectives at which it aims, and interprets the text in light of these reasons and
objectives. The purposive interpretation begins with the objectives underlying the statutory text and the
reasons for which it was enacted, and interprets the text in light of these objectives and reasons.
2.3 Plain Meaning Rule

While purposive interpretation begins with the objectives underlying the statutory text and the reasons for
which it was enacted, and interprets the text in light of these objectives and reasons, the plain meaning
rule to statutory interpretations begins with the words of the text, which are to be given their ordinary or
literal meaning unless they are ambiguous, in which case the court may then consider the scheme of the
Act, the object of the Act and the intention of the Parliament in order to resolve the ambiguity.
The plain meaning of a statute is the “ordinary or natural meaning.” By natural meaning, it is meant a
commonsense meaning. By ordinary meaning it is meant an idiomatic sense that is the same way that
ordinary people in common usage might speak or use the word.
Test Yourself 2
Differentiate between Strict Construction and Plain Meaning Rule doctrines
2.4 Words–In–Total Context Approach

The words in total context approach affirms a more pragmatic view, according to which the meaning of a
statutory provision is best understood by reading the words of the provisions in their entire context,
harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.
2.5 The Best Approach

The Australian High Court has synthesized all the doctrines; in the case of Cooper Brookes
(Wollongong) Pty Limited Vs Commissioner of Taxation [1980] 147 CLR 297; into the following
principles:
 The fundamental rule of interpretation is to ascertain what the parliament intended as expressed
in the words it has used;
 Context is vital. Sections are not to be construed in isolation
 Where the language of a statute is clear and unambiguous and consistent with the context it
must be given its ordinary and grammatical meaning, even if the result is incontinent.
 Where two constructions are open the court will prefer the construction that avoids
inconvenience or injustice.
 Where the literal meaning of words is to be deported from it must be clear that the literal meaning
does not give effect to the intention of the legislature that a departure from the literal meaning
will.
 The literal meaning will be departed from where it gives rise to an operation that is capricious or
irrational.
 The Court cannot construe a provision, in a manner, which violates the Constitution.
Answer to TY 1
The principal legislation and the Act have the same effect, however they are different. The principal
legislation refers to written statutes passed by the parliament that govern a particular subject e.g. income
taxation. On the other hand the regulations refer to standards and rules set-up by the Minister showing
how the principal legislation shall be enforced. Its provisions when read holistically indicate the context
will.
irrational. Sources of Tax Laws and Its Interpretations: 193
Answer to TY 1
The principal legislation and the Act have the same effect, however they are different. The principal
legislation refers to written statutes passed by the parliament that govern a particular subject e.g. income
taxation. On the other hand the regulations refer to standards and rules set-up by the Minister showing
how the principal legislation shall be enforced. Its provisions when read holistically indicate the context
and objectives of the law. For the Minister to have legal grounds to institute regulations, the principal
legislation shall provide for it.
Answer to TY 2
The Strict Construction doctrine relies on the literal meaning of words to interpret the provisions of law. It
ignores the context, objects of law and intentions of the parliament. The Plain Meaning Rule, on the other
hand, considers both the ordinary meaning of the text as well as the context of the matter, objectives of
the law, and the intentions of the parliament in interpretation of the law. However, the Plain Meaning Rule
provides precedence to the ordinary and natural meaning of the text unless it is ambiguous in which case
the court shall consider the context, objects of the law and intention of the parliament to get the meaning
out of laws.
Question 1
Explain the differences between the four doctrines for interpretation of tax laws by focusing on how they
give preference to wording of the text on one hand and context, objects of the law and intention of the
parliament on the other hand.
Question 2
Briefly explain the principles for interpretation of tax laws derived from the case of Cooper Brookes
(Wollongong) Pty Limited vs. Commissioner of Taxation [1980] 147 CLR 297 presided in the
Australian High Court.
Answer to SEQ 1
Strict Construction gives precedence to literal meaning of words of the law and completely ignores the
context, objects of the law and intention of the parliament.
Purposive interpretation gives precedence to the context, objects of the law and intention of the
parliament. Therefore, it interprets word of the law in light of the context, objects of the law and intention
of the parliament.
Plain meaning rule gives precedence to the ordinary meaning of the words of the law but consider the
context, objects of the law and intention of the parliament where the ordinary meaning of the words is
ambiguous.
Words-in-total context approach gives precedence to both wording and the context, objects of the law
and intention of the parliament.
Answer to SEQ 2
The Australian High Court has synthesized all the doctrines; in the case of Cooper Brookes (Wollongong)
Pty Limited Vs Commissioner of Taxation [1980] 147 CLR 297; into the following principles:
context, objects of the law and intention of the parliament where the ordinary meaning of the words is
ambiguous.
Words-in-total context approach gives precedence to both wording and the context, objects of the law
and intention of the parliament.
Answer to SEQ 2
The Australian High Court has synthesized all the doctrines; in the case of Cooper Brookes (Wollongong)
Pty Limited Vs Commissioner of Taxation [1980] 147 CLR 297; into the following principles:
will.
irrational.
B3
Tax Avoidance and Evasion: 195
SECTION B

STUDY TEXT GUIDE B3: TAX AVOIDANCE AND

EVASION
For many years individuals have found imaginative ways of avoiding liability to tax. Large companies
employ highly skilled tax planners in a bid to legally reduce their overall tax liability. There have been
many instances of individual’s under-declaring their income to reduce their tax liability. The question here
is whether these activities constitute tax avoidance or tax evasion.
a) Differentiate between tax avoidance and evasion

b) Explain main causes of tax avoidance and evasion
c) Identify general practices through which a taxpayer can eliminate or minimize tax liability through
tax avoidance and evasion
d) Explain the ways that can be employed to minimize tax avoidance and evasion
e) Discuss statutory measures against tax avoidance in Tanzania
f) Describe judicial anti-avoidance doctrines (Business purpose rule, substance over form principle,
sham transaction, step transaction doctrine etc)
1.0 Differentiate
1.0 Differentiate
between
between
tax avoidance
tax avoidance
and evasion;
and evasion;
explain
explain
main main
causes
causes
of taxof tax
avoidance
avoidance
and evasion;
and evasion;
and Identify
and Identify
general
general
practices
practices
through
through
whichwhich
a taxpayer
a taxpayer
can can
eliminate
eliminate
or minimize
or minimize
tax liability
tax liability
throughthrough
tax avoidance
tax avoidance
and evasion.
and evasion.
[Learning
[Learning
outcome
outcome
a, b and
a, bc]and c]
1. Differentiate
1. Differentiate Between BetweenTax Avoidance
Tax Avoidance And Evasion
And Evasion
Tax evasion
Tax evasion
is a deliberate
is a deliberate
act by act
an by
individual
an individual
or company
or company
to mislead,
to mislead,
misinform
misinform
or otherwise
or otherwise
mis- mis-
state their
statetax
their
position
tax position
to the toTanzanian
the Tanzanian
IncomeIncome
tax authorities
tax authorities
in order
in to
order
evade
to evade Tax evasion
taxes. taxes. Tax evasion
is illegal
is illegal
and is and
punishable
is punishable
by hefty byfines
heftyand
fines
imprisonment.
and imprisonment.
Tax avoidance
Tax avoidanceis legal. It involves
is legal. It involves
the arrangement
the arrangement
of individuals’
of individuals’
or companies’
or companies’
tax affairs
tax affairs
in a way
in a way
which which
reduces reduces
the taxthe liability.
tax liability.
For example,
For example,
using incentivized
using incentivized
tax savings
tax savings
schemes schemes
OR establishing
OR establishing
an offshore
an offshore
company company
in a taxin haven
a tax haven
or by forming
or by forming
a limited
a limited
company company
to availtoofavail
more of favourable
more favourable
tax tax
deductions.
deductions.
Tax incidence
Tax incidence
can becan reduced
be reduced
through through
tax avoidance
tax avoidance
or tax evasion.
or tax evasion.
Tax evasion
Tax evasion
and avoidance
and avoidance
are are
pervasive
pervasive
in all countries
in all countries
worldwideworldwide
and taxandsystems
tax systems
are striving
are striving
towards towards
reduction.
reduction.
1.1 Tax
1.1
evasion
Tax evasion
Tax evasion
Tax evasion
involves
involves
efforts efforts
by individuals,
by individuals,
firms, trusts
firms, and
trusts
other
and entities
other entities
to evade
to evade
the payment
the payment
of taxes
of taxes
by breaking
by breaking
the laws.
the Itlaws.
is anIt intentional
is an intentional
and fraudulent
and fraudulent
attemptattempt
to escape
to escape
payment
payment
of taxes
of in
taxes
whole
in whole
or or
part. part.
Tax evasion
Tax evasion
usuallyusually
entailsentails
taxpayers
taxpayers
deliberately
deliberately
misrepresenting
misrepresenting
or concealing
or concealing
the true
thestate
true of
state
theirof their
affairs affairs
to the tax
to the
authorities
tax authorities
to reduce
to reduce
their tax
their
liability,
tax liability,
and includes,
and includes,
in particular,
in particular,
dishonest
dishonest
tax reporting
tax reporting
(such as(such
under
as declaring
under declaring
income,income,
profits profits
or gains;
or gains;
or overstating
or overstating
deductions).
deductions).
1.2 Tax1.2
avoidance
Tax avoidance
Tax avoidance
Tax avoidance
is the legal
is theexploitation
legal exploitation
of the of
taxthe
region
tax region
to one’s
to own
one’sadvantage
own advantage
to attempt
to attempt
to reduce
to reduce
the the
tax payable
tax payable
using means
using means
that are
that
within
are within
the lawthe
while
law making
while making
a full disclosure
a full disclosure
of the of
material
the material
information
information
to the tax
to the
authorities.
tax authorities.
Tax avoidance
Tax avoidance
is any is
legal
anywaylegal
ofway
reducing
of reducing
the amount
the amount
of tax payable – involving
of tax payable – involving
a sensible
a sensible
arrangement
arrangement
of the taxpayers’
of the taxpayers’
affairs affairs
so as tosominimise
as to minimise
the liability
the liability
to tax. to
Alltax.
activities
All activities
must remain
must remain
legal atlegal
all times.
at all times.
It It
is the is
utilisation
the utilisation
of “taxofloopholes”
“tax loopholes”
within within
the legislation
the legislation
in an ingenious
in an ingenious
way, thereby
way, thereby
affording
affording
the taxthe tax
payer, payer,
legally,legally,
a favourable
a favourable
tax position.
tax position.
Sometimes
Sometimes
avoidance
avoidance
is considered
is considered
as amoral
as amoral
dodgingdodging
of one’sof one’s
responsibilities
responsibilities
to society
to society
or rightorofright of
every citizen
every citizen
to find to
allfind
the all
legaltheways
legalto
ways
avoid
to paying
avoid paying
too much
too tax.There
much tax.There
is no moral
is no obligation
moral obligation
to paying
to paying
maximummaximum
tax. Onetax.isOne
supposed
is supposed
to paytonot
pay
morenot and
morenotand
less
notthan
lesswhat
thanthe
whatlawthesays.
law Examples
says. Examples
of tax of tax
avoidance
avoidance
are: taxare:
deductions,
tax deductions,
changing
changing
one’s business
one’s business
structure
structure
throughthrough
incorporation,
incorporation,
or establishing
or establishing
an offshore
an offshore
company company
in a tax in haven.
a tax haven.
(Ref. IRC
(Ref.v.IRC
Dukev. of
Duke
Westminster
of Westminster
(1936)(1936)
19 TC19 490,
TC1936AC1;
490, 1936AC1;
AyshireAyshire
PullmanPullman
Motor Services
Motor Services
and Rirchie
and Rirchie
v. IRC v.
(1929)
IRC (1929)
14 TC 14754)TC 754)
Definition
Tax resisters are the ones who refuse to pay tax because they do not want to support the government or
some activities carried out by the government and sometimes breaking the law do so-hence practicing
tax evasion.
Some tax resisters may donate their unpaid tax to charities and/or some make creative deductions; their
basis for resisting is not against the tax laws, neither are they motivated by the derive to keep their
money. The issue is they don’t want to pay for what they oppose (e.g. against huge defense budget)
Definition
Some have suggested tax avoidance for people who adopt the tax avoidance techniques in the service
of tax resistance – thereby doing tax resistance legally-hence practicing tax avoidance.
tax
someevasion.
activities carried out by the government and sometimes breaking the law do so-hence practicing
tax evasion.
Some tax resisters may donate their unpaid tax to charities and/or some make creative deductions; their
basis
Some fortax resisting
resisters is
may notdonate
against theunpaid
their tax laws, neither
tax to are and/or
charities they motivated
some make by creative
the derive to keep their
deductions;
money.
basis forThe issue isisthey
resisting not don’t want
against theto tax
paylaws,
for what they are
neither oppose
they(e.g. againstby
motivated Tax
huge Avoidance
thedefense and
budget)
derive to Evasion:
keep their 197
money. The issue is they don’t want to pay for what they oppose (e.g. against huge defense budget)
Definition
Definition
Some have suggested tax avoidance for people who adopt the tax avoidance techniques in the service
of tax resistance
Some – thereby
have suggested tax doing tax resistance
avoidance for peoplelegally-hence
who adopt thepracticing tax avoidance.
tax avoidance techniques in the service
of tax resistance – thereby doing tax resistance legally-hence practicing tax avoidance.
1.3 Differences between tax evasion and tax avoidance

Essentially, the difference
1.3 Differences between tax between tax avoidance
evasion and tax evasion is legality.
and tax avoidance
Essentially, the difference between tax avoidance and tax evasion is legality.
Tax avoidance is legally exploiting the tax system to reduce current or future tax liabilities by means not
intended by parliament.
Tax avoidance It often involves
is legally exploiting artificial
the tax system to transactions
reduce current that are contrived
or future to produce
tax liabilities a not
by means tax
advantage.
intended by parliament. It often involves artificial transactions that are contrived to produce a tax
advantage.
Tax evasion is illegal crime in almost all countries and subjects the guilty party to penalties such as fines
or
Tax even imprisonment
evasion while in
is illegal crime taxalmost
avoidance is not punishable.
all countries and subjects the guilty party to penalties such as fines
or even imprisonment while tax avoidance is not punishable.
2. Main Causes Of Tax Avoidance And Evasion
2. Main Causes
General causesOf of Tax Avoidance
tax avoidance and And Evasion
evasion are:-
i) High marginal
General causes taxofrates and frequent
tax avoidance andchanges
evasion in tax rates.
are:-
ii)
i) Administrative
High marginal tax inefficiency,
rates andcollusion
frequent with taxpayers
changes in taxand bribery of tax officials.
rates.
iii)
ii) Inadequate
Administrativetraining and experience
inefficiency, of tax
collusion with administrators
taxpayers coupled
and bribery with
of tax lack of exposure to business
officials.
iii) Inadequate training and experience of tax administrators coupled with lackschemes.
practices may limit their abilities to analyze complex issue, e.g international of exposure to business
iv) Multiplicity of taxes
practices may limit their abilities to analyze complex issue, e.g international schemes.
v) Multiplicity
iv) Low prospect of detection and punishment.
of taxes
vi) Wasteful manner
v) Low prospect of detection in whichand thepunishment.
revenue is spent and lack of clear benefits to taxpayers through
improved manner
vi) Wasteful social services.
in which the revenue is spent and lack of clear benefits to taxpayers through
vii) improved
Deficiencies in the
social legal structure of the tax laws and complexity which allow tax avoidance.
services.
viii)
vii) Deficiencies in the legaltendency
Traditional and culture structuretoofhate andlaws
the tax evadeandtax (low tax morality)
complexity which allow tax avoidance.
3. Traditional
viii) General Practices Through
and culture tendency Which
to hate and A Taxpayer
evade Can
tax (low tax Eliminate Or Minimize Tax
morality)
3. General Practices
Liability Through TaxThrough
Avoidance Which AndAEvasion
Taxpayer Can Eliminate Or Minimize Tax
Liability Through Tax Avoidance And Evasion
3.1 Tax Evasion Methods
Tax Tax
3.1 payers may evade
Evasion tax through the following practices:
Methods
Tax payers may evade tax through the following practices:
i] Tax payers may avoid tax by making a false return of income by omitting income or overstating
expenses.
ii] expenses.
Tax payers also evade tax by preparation or maintenance of false books of accounts or records.
This payers
ii] Tax may involve manipulation
also evade of stock sheets
tax by preparation and valuations,
or maintenance of false destruction of or defacing
books of accounts of
or records.
accounting
This records,manipulation
may involve non-issue of of
sales receipts
stock sheetsetc.and valuations, destruction of or defacing of
accounting
iii] The records,
importers non-issue
purport to evadeof customs
sales receipts etc.(a) under-invoicing and (b) mis-declaration of
duty by
quantity and product-description. When there is ad valorem import duty, the tax base is reduced
through under-invoicing. Mis-declaration of quantity is more relevant for products with specific
duty.
iv] Smuggling is importation or exportation of foreign products through unauthorized route.
Smuggling is resorted to for total evasion of leviable customs duties as well as for importation of
contraband items.
v] Traders who collect VAT from the consumers may evade tax by under-reporting the amount of
turnover.
Tax Avoidance Mechanisms
Tax avoidance is usually practiced through the following practices:
i] Transfer Pricing
This is an economic term which refers to the valuation process for transactions between related
entities/persons. Improper transfer pricing methods lead to unjustified profit transfers. For
example, artificially deflated or inflated prices on transactions would reduce or increase the
taxable profits of associated companies.
ii] Income Splitting

This entails the splitting of income between more than one taxpayer so as to reduce the marginal
tax rate. If you can manage to split one figure into several the applicable marginal tax rate will be
i]
Transfer Pricing
This is an economic term which refers to the valuation process for transactions between related
entities/persons. Improper transfer pricing methods lead to unjustified profit transfers. For
example, artificially deflated or inflated prices on transactions would reduce or increase the
taxable profits of associated companies.
ii] Income Splitting

This entails the splitting of income between more than one taxpayer so as to reduce the marginal
tax rate. If you can manage to split one figure into several the applicable marginal tax rate will be
lower and therefore little taxable income.
iii] Thin Capitalization

The term “Thin Capitalization” is commonly used to describe “hidden equity capitalization”
through excessive loans. It is the artificial use of interest – bearing debt instead of equity by
shareholders with the sole or primary motive to benefit from its tax advantages. The loan may be
provided on a market rate of interest but the size of the loan cannot be justified on bona fide
business considerations. Such excessive interest payments constitute hidden distributions that
should be properly treated as dividend on equality capital.
iv] Asset Shifting

This is achieved by shifting the asset producing income to another person or entity that is taxed
preferentially, i.e. is taxed less than the person shifting the asset, e.g. Company vs. Trust.
v] Sheltering of Income
This is done by receiving incomes in tax havens Jurisdiction. These are jurisdictions with lower
tax rates or no tax charge at all.
vi] Income Capitalization

This means the conversion of taxable income into capital, e.g. dividends are not declared but put
available as capital.
2.0 Explain the ways that can be employed to minimize tax avoidance
and evasion; discuss statutory measures against tax avoidance in
Tanzania; an describe judicial anti-avoidance doctrines
[Learning outcome d, e and f]
4. Ways That Can Be Employed To Minimize Tax Avoidance And Evasion

i) Keep the marginal tax rates low, realistic and not subject to frequent changes.
ii) Promote administrative efficiency, e.g by providing better tools, motivating staffs, etc.
iii) Technical staff training, e.g tax laws; accountancy, exchange visits with other countries.
iv) Avoid multiplicity of taxes by retaining the major taxes only.
v) Serious punishment to evaders and corrupted tax officials.
vi) Judicious expenditure of revenue by the government because where tax monies are well spent, may
improve voluntary compliance.
5. Statutory Measures Against Tax Avoidance In Tanzania

In order to reduce tax avoidance practices, tax laws in Tanzania have come up with the following
measures:
i] Specific Provisions: The Income Tax Act, 2004 ss. 27 – 35 enact specific provision that identify
with precision the type of transactions to be dealt with and prescribe against the tax
consequences of such treatment.
ii] General Provisions: the enactment of general provisions to hit broad types of avoidance
practices in specific areas
iii] Arm’s Length Approach – the transactions between related parties should be similar to
transactions between independent parties. see s. 33(1) of ITA.
iv] Administrative Approach – there possibility to control tax avoidance is left to the discretion of the
tax authority. see s. 33(2); 34(1); 35(1).
6. Judicial Anti-Avoidance Doctrines

Courts have stated certain principles intended to curb tax avoidance. They have stated doctrines or
General Anti-Avoidance Rules (GAAR). Three main guiding principles are:-
(a) The Business purpose Rule.
(b) The substance or form rule.
iii] Arm’s Length Approach – the transactions between related parties should be similar to
transactions between independent parties. see s. 33(1) of ITA.
iv] Administrative Approach – there possibility to control tax avoidance is left

TaxtoAvoidance
the discretion of the 199
and Evasion:
tax authority. see s. 33(2); 34(1); 35(1).
6. Judicial Anti-Avoidance Doctrines

Courts have stated certain principles intended to curb tax avoidance. They have stated doctrines or
General Anti-Avoidance Rules (GAAR). Three main guiding principles are:-
(a) The Business purpose Rule.
(b) The substance or form rule.
(a) The Business Purpose Rule:

The business purpose rule attacks tax avoidance schemes that do not have a business purpose and
those artificially designed merely to avoid tax. Under the business purpose doctrine, a transaction
must have a main or predominant business purpose (i.e. commercial justification) other than tax
avoidance. The mere tax advantage cannot be an acceptable business purpose; it must show a
business or non-tax purposes. Thus, it must have a valid business or economic purpose other than
reduction of tax liability. If the primary purpose is something other than tax avoidance, the transaction
represents acceptable tax planning. On the other hand, if the primary purpose is to obtain tax
benefits and the transaction would not be carried out without those benefits, the transaction is treated
as unacceptable tax avoidance.
(b) Substance over Form Rule:

Under the substance over form principle, the acts must be assessed according to bona fide economic
and commercial substance and not the formal content. It requires establishment of the underlying
economic reality. Under the substance over Form Principle there are 4 doctrines.
(i) Lack of Economic Substance.
It applies where due to the legal form used for the transaction a taxpayer has the real
economic power over the taxable income without the tax liability.
(ii) Sham Transactions:

Sham transactions refer to transactions where the parties say one thing while intending
another. In a Sham Transaction, they give effect to a transaction, which they do not carry out,
or do not intend to carry out. The transactions are said to have happened that have not really
happened, or are a cover up for another transaction. In short, they do not crate the legal
rights and obligations, which they give the appearance of creating, since the relationships
that are alleged to exist do not exist. A sham transaction hides the economic reality of a
transaction that exists only in form.
For example, an entity may be legally set up as a partnership but it is not intended to
operate as a partnership. Similarly, an employee may be deemed as an independent
contractor. In a sale and lease back transaction; the transfer of the related rights and
obligations of ownership may not accompany the sale of assets. Where the court holds that
a transaction is a sham, they normally apply the tax rules based on the true economic
position. The form of the transaction is disregarded when compared with the underlying
substance.
(iii) Doctrine of Label
The parties use an incorrect “label” or description to classify the nature of the actual rights
and liabilities in a transaction. Unlike a sham, the transactions do create rights and liabilities
which do exist or which are not different from those that actually do exist. They are not
artificial or fraudulent. For example, a loan may have a non-arm’s length rate of interest and
no repayment terms. The label may describe the transaction as a loan when it should be
treated as equity. In Ridge Securities vs IRC 44 TC 373, the court rejected a loan with
interest at over 400% per annum as a loan transaction. In Council of India vs. Scobie 4TC
618, the court rejected a purchase consideration described as an annuity payable over a
period of 47 years. The doctrine has also been involved to decide the price allocations in
composite transaction. In Vestey vs. ITC [1949] 40 TC 112, the taxpayer had agreed to sell
his shares at a consideration payable over 125 yearly installment, and treated the entire price
as a capital receipt. The court held that a proportion should be treated as an interest
payment. The label that the parties chose to attach to their payments was not conclusive of
their character for tax purposes.
(iv) The Step Transaction Doctrine:

A step-transaction-doctrine has evolved which regards a series of connected transactions as
a single transaction under the ‘substance-over-form” principle. In a step transaction, the
intermediate steps in a chain of pre-ordained, even if bona fide, transactions may be
disregarded and several related transactions treated as a single composition transaction.
Alternatively the transaction may be broken into its distinct steps to determine their
acceptance for tax purposes. The step transaction doctrine maintains that “purely formal
distinctions cannot obscure the substance of a transaction.”
Question 1
Which is legal and permitted: tax avoidance or tax evasion?
Question 2
What are the strategies used by taxpayers to evade tax? (5 marks)
Question 3
What are the reasons cited as excuses for tax evasion? (7 marks)
Question 4
(a) Distinguish between ‘tax evasion’ and ‘tax avoidance’.
(b) Enumerate at least five ways through which tax evasion and tax avoidance are committed.
(c) Summarise at least six consequences of tax evasion.
Question 5
The problem of tax avoidance and evasion is inherent in all tax systems. In fact, tax avoidance and
evasion are as old as the taxes themselves and the Tanzanian taxation system is not exception to the
fact.
Required:
;ĂͿ Briefly discuss the effects of tax evasion and avoidance in Tanzania
;ďͿ With examples, discuss international and national perspective of tax evasion and avoidance.
;ĐͿ Briefly discuss measures taken by the government of the United Republic of Tanzania to deal
with the problem of tax evasion and avoidance.
Answer to SEQ 1
Tax avoidance is legal and permitted whereas tax evasion is illegal.
Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their
affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting
(such as under declaring income, profits or gains; or overstating deductions).
Tax avoidance is the legal exploitation of the tax region to one’s own advantage to attempt to reduce the
tax payable using means that are within the law while making a full disclosure of the material information
to the tax authorities.
Answer to SEQ 2
expenses.
ii] Tax payers also evade tax by preparation or maintenance of false books of accounts or records.
This may involve manipulation of stock sheets and valuations, destruction of or defacing of
accounting records, non-issue of sales receipts etc.
iii] The importers purport to evade customs duty by (a) under-invoicing and (b) mis-declaration of
duty.
Answer to SEQ 2
expenses.
ii] Tax payers also evade tax by preparation or maintenance of false books of accounts or records.
This may involve manipulation of stock sheets and valuations, destruction of or defacing of
accounting records, non-issue of sales receipts etc.
iii] The importers purport to evade customs duty by (a) under-invoicing and (b) mis-declaration of
duty.
iv] Smuggling is importation or exportation of foreign products through unauthorized route.
Smuggling is resorted to for total evasion of leviable customs duties as well as for importation of
contraband items.
v] Traders who collect VAT from the consumers may evade tax by under-reporting the amount of
turnover.
Answer to SEQ 3
i] Low quality of the service in return for taxes
In general, citizens expect some kind of service or benefit in return for the taxes paid.
If the government fails to provide basic public goods and services or provides them insufficiently,
citizens may not be willing to pay taxes and tax evasion and avoidance will be the consequence
ii] Tax rates

Some studies suggest that high tax rates foster evasion. The intuition is that high tax rates
increase the tax burden and, hence, lower the disposable income of the taxpayer.
iii] Perceived tax system fairness

The structure of the overall tax system has an impact on taxpayers’ willingness to pay tax. If, for
example, the tax rate on corporate profits is relatively low, but individuals are facing a high tax
rate on their personal income, they may perceive their personal tax burden as unfair and choose
to declare only a part of their income. Similarly, large companies can often more easily take
advantage of tax loopholes, thereby contributing to the perceived unfairness of the system.
iv] Low transparency and accountability of public institutions

Lack of transparency and accountability in the use of public funds contributes to public distrust
both with respect to the tax system as well as the government. This, in turn, increases the
willingness to evade taxes.
v] High level of Corruption

Corrupt tax officials influence both the willingness of the taxpayers to evasion and the role of tax
administration in fighting evasion. A tax-payer might consider evading taxes if the cost of bribing
a tax auditor is lower than the potential benefit from tax evasion.
vi] Lack of rule of law and weak fiscal jurisdiction

Strong fiscal courts are essential to protect taxpayer’s rights and safeguard them from
arbitrariness. If the legal system does not operate in accordance with the rule of law, citizens
have to fear arbitrariness, discrimination, unequal attendance in court, etc. The lack of rule of law
reduces transparency of public action and fosters distrust among citizens. As a result, citizens
may not be willing to finance the state through taxes, and decide to evade these liabilities.
vii] Incapacity in detecting and prosecuting inappropriate tax practices

A well-functioning body of tax investigation is essential for the detection and prosecution of cases
of tax fraud. The lack of sufficient capacities in tax administrations reduce the probability of
detection that again influences the decision of a taxpayer as to whether evade or not.
Additionally, the legal frame-work is an important prerequisite for any enforcement activity. For
example, the size and nature of penalties that are incurred after evasion has been detected is
directly connected to the level of tax compliance
Answer to SEQ 4
(a) Tax Avoidance

Is the practice and technique whereby one so arrange his business affairs such that he pays little
or no tax at all but without contravention of tax laws. Tax avoidance takes advantage of any
loophole and weaknesses, deficiencies and loose or vague clause in tax legislation to minimize
tax liability. Therefore it is sometimes considered as legally allowed.
Tax evasion
of tax fraud. The lack of sufficient capacities in tax administrations reduce the probability of
detection that again influences the decision of a taxpayer as to whether evade or not.
Additionally, the legal frame-work is an important prerequisite for any enforcement activity. For
example, the size and nature of penalties that are incurred after evasion has been detected is
directly connected to the level of tax compliance
Answer to SEQ 4
(a) Tax Avoidance

Is the practice and technique whereby one so arrange his business affairs such that he pays little
or no tax at all but without contravention of tax laws. Tax avoidance takes advantage of any
loophole and weaknesses, deficiencies and loose or vague clause in tax legislation to minimize
tax liability. Therefore it is sometimes considered as legally allowed.
Tax evasion
Tax evasion on the other hand involves a tax payer’s deliberate contravention of the tax laws in
order to eliminate or minimize tax liability. It is the application of fraudlent practices in order to
minimize or eliminate tax liability. For example:
- Making a false return of income
- Making a false statement in a return affecting tax liability
- Preparation and maintenance of false books of account or records
Tax evasion constitutes fraud which is heavily punishable by law.
(b) There are several ways of committing tax fraud that include
1. Keeping two sets of books to record business transactions. One records the actual business
transactions while the other is falsified intentionally understating the taxable amount which is
shown to the tax authorities. Some evaders use two cash registers.
2. Moonlight for cash. Working an extra job is perfectly legal. However, the income received
on such jobs is often paid in cash rather than by cheque. Hence, no legal record exists, and
the income is not reported to the tax authorities.
3. Barter. When you receive payment in kind instead of money, it is legally a taxable
transaction. However, such income is seldom reported.
4. Deal in cash. Paying for goods and services with cash and cheques made out to “cash”
makes it very difficult for the tax authorities to trace transactions.
5. Under-invoicing of imports.
6. Under-reporting of income especially where income is earned and paid in cash to hide
transactions or exchanged in a barter way – receiving payment in kind instead of money.
7. Smuggling. Refers to business transactions which are done illegally and therefore not
subjected to the requirements of paying taxes.
8. Money Laundering. Deals with dirty money which is normally covertly cleansed through legal
business transactions.
9. Loopholes and weaknesses in the Law
10. Tax planning /Tax Arrangements
11. Transfer pricing
12. Changing Form of business eg from Sole Trader to Limited Company
13. Capitalization – Debt to Equity Ratio.
(c) Consequences of Tax Evasion
1. Less Government revenue: for provision of public goods, deficits and its consequences.
- Non realization of other non-revenue goals of taxation e.g. inequality.
2. Heavy burden on those who comply leading to unequal income distribution.

11. Transfer pricing
12. Changing Form of business eg from Sole Trader to Limited Company

13. Capitalization – Debt to Equity Ratio.
(c) Consequences of Tax Evasion
1. Less Government revenue: for provision of public goods, deficits and its consequences.
- Non realization of other non-revenue goals of taxation e.g. inequality.
2. Heavy burden on those who comply leading to unequal income distribution.
3. Unfair competition.
- Bring inequality in the tar system
4. More cost to tax authority.
- Fine and Penalties and imprisonment.
5. Renders redistribution plan ineffective.
- Punishment to tax payer.
6. Understating taxable capacities for countries.
- Cost of goodwill/reputation of business.
7. Promote inefficiency allocation of resources.
- Non Realization of government objective and plan
- Non Realization of cannon of principles of tax
Answer to SEQ 5
(a) Effect of Tax Avoidance and Evasion
Tax avoidance is a practice and technique used by tax payers to minimize the taxpayer’s tax
burden without going against the tax laws. Tax avoidance takes place within the legal context
of the tax system that individuals or firms take advantage of the tax code and exploit
“loopholes”, i.e. engage in activities that are legal but run counter to the purpose of the tax law.
Usually, tax avoidance encompasses special activities with the sole purpose to reduce tax
liabilities. An example for tax avoidance is strategic tax planning where financial affairs are
arranged such in order to minimize tax liabilities by e.g. using tax deductions and taking
advantage of tax credits.
In contrast evasion on the other hand is a practice and technique used by tax payers to
minimize tax liability by contravening tax laws. In general tax evasion refers to illegal practices
to escape from taxation. To this end, taxable income, profits liable to tax or other taxable
activities are concealed, the amount and/or the source of income are misrepresented, or tax
reducing factors such as deductions, exemptions or credits are deliberately overstated.
Both tax evasion and avoidance aim at reducing the taxpayer’s tax burden. As tax can be used
to achieve a number of objectives, a high degree of tax avoidance and evasion may hinder the
achievement of taxation objectives, both revenue and non revenue objectives. This included
 Serious government revenue short falls which may bring about budget deficits that may
ultimately lead into foreign loans grants dependency causing heavy foreign debt burden
plus unfavorable conditions attached to grants.
 Non realization of other government economic and social development

 Creates inequality in the tax system as some law abiding citizens or those with no
opportunities to evade or avoid tax bear disproportionally heavier tax burden than others.
achievement of taxation objectives, both revenue and non revenue objectives. This included
 Serious government revenue short falls which may bring about budget deficits that may
ultimately
204 Tax Laws, Administration and lead intoinforeign
Practice loans grants dependency causing heavy foreign debt burden
Tanzania
plus unfavorable conditions attached to grants.
 Non realization of other government economic and social development

 Creates inequality in the tax system as some law abiding citizens or those with no
opportunities to evade or avoid tax bear disproportionally heavier tax burden than others.
(b) International and national perspective of tax evasion and avoidance
The international dimension of tax evasion and avoidance can be divided into two stylized strands:
On the one side, one can find – legal or natural – persons taking advantage of differences in tax
laws or rates and the resulting tax liabilities between countries resulting in attempts to shift tax
liabilities to low-tax countries. This starts with efforts to reduce tax payments in a private
environment, e.g. tax-induced cross-border shopping and tank-tourism, and ends with the flight
of financial capital to low tax destinations or tax havens.
On the other side, the international dimension of tax evasion and avoidance covers all kinds of
tax evasion and avoidance activities which occur as a result of international trade, the
international division of labour, and international competition for foreign investment. In this
field, one can find multinational enterprises’ (MNE) tax driven shifting of profits, tax evasion and
avoidance against the background of investment incentives and special enterprise zones, as
well as various kinds of VAT and tariff fraud accompanying international trade in goods and
services.
Besides the international perspective there also exists a national dimension. This relates to all
incidents in which individuals or firms evade or mitigate taxes within their country of residence
while no transactions with companies or individuals abroad are involved. The national
perspective comprises incomes and revenues generated in the domestic informal economy,
income not reported by a legal or natural person and other means of ‘getting around’ solely
domestic tax liabilities.
(c) Measures taken by the government of Tanzania to solve tax avoidance and evasion problem:
Due to the negative effects of tax evasion and avoidance, it is the interest of the government to
keep the level of tax avoidance and evasion to the minimum level possible. This has been
reflected, among others, through the following ways;
 Imposition of disciplinary measures against those evading taxes
 Timely amendments of the tax acts whenever it is detected that certain provisions of the law
allows tax avoidance in the major scale. For example in the fiscal year 2012/2013 the
definition of Income Tax was amended to include a person with unrelieved loss to pay tax on
their turnover. Definition of the term “exempt amount” has been amended by deleting the
figure “54” appearing in the definition. This is a consequential amendment emanating from
the amendment of Section 54 (2).
 Major tax reforms, for example the VAT Act 1997 has been replaced by VAT Act 2014 to
address weaknesses and loopholes in the previous law.
 The introduction of electronic fiscal devices
 Promotion of voluntary tax compliance to tax payers through education.
 Anti-avoidance provision
C1
Introduction to Income Taxation: 205
SECTION C
Income Tax
SECTION C: INCOME TAX
STUDY GUIDE C1: INTRODUCTION TO INCOME

TAXATION
This Study Guide introduces to the concept of income taxation. The focus of this Study Guide is primarily
the Income Tax Act, Cap 332
a) Explain the concept of income for income taxation

b) Explain the legal sources of income tax laws
c) Explain the basis of income taxation(Chargeable income and total income)
d) Determine the residential status of an individual, a partnership, trust and corporation
e) Describe the source of income and loss rules for income taxation
f) Explain relevant matters underlying income taxation (year of income and basis of accounting )
g) Explain Quantification, Characterization & Allocation rules and the Income Tax Act, Cap 332
206 Income Tax
Explain the concept of income for income taxation; explain the legal sources of
Explain the concept of income for income taxation; explain the legal sources of
income tax laws and explain the basis of income taxation (Chargeable income and
income tax laws and explain the basis of income taxation (Chargeable income and
total income).
total income).
[Learning outcome a, b,
[Learning outcome a, b,
and c]
and c]
1. The Concept Of Income For Income Taxation

1. The Concept Of Income For Income Taxation
The following terms are very important for income taxation. They will be referred to from time to time in
The following terms are very important for income taxation. They will be referred to from time to time in
the rest of this book.
the rest of this book.
1.1 Income
1.1 Income
In an effort to define the term "income tax", we need to ascertain the exact meaning of the term "income".
In an effort to define the term "income tax", we need to ascertain the exact meaning of the term "income".
Indeed, whether income is an accurate measure of tax paying ability depends on how income is defined.
Indeed, whether income is an accurate measure of tax paying ability depends on how income is defined.
However it has been difficult to give a concise and all-embracing definition of income, and any attempt to
However it has been difficult to give a concise and all-embracing definition of income, and any attempt to
define the term merely creates considerable problems of semantics and hence litigation and possibly
define the term merely creates considerable problems of semantics and hence litigation and possibly
confusion.
confusion.
The Act has considered it expedient not to define income but rather to enumerate all the possible sources
The Act has considered it expedient not to define income but rather to enumerate all the possible sources
of income that are liable to income taxation.
of income that are liable to income taxation.
Definition
Definition
Income is defined to mean a person's income from any employment, business or investment and an
Income is defined to mean a person's income from any employment, business or investment and an
aggregation of such income as calculated in accordance with the Income Tax Act
aggregation of such income as calculated in accordance with the Income Tax Act
As it can be seen the above definition does not really define income but describes it in terms of its
As it can be seen the above definition does not really define income but describes it in terms of its
various sources. This leaves the term income not defined in the Income Tax Act, however, several
various sources. This leaves the term income not defined in the Income Tax Act, however, several
definitions have been offered as described below:
definitions have been offered as described below:
Definition
Definition
The Hicksian concept of income defines income as the maximum value which a man can consume
The Hicksian concept of income defines income as the maximum value which a man can consume
during the period and still expect to be as well off at the end of the period as he was at the beginning.
during the period and still expect to be as well off at the end of the period as he was at the beginning.
The term “to be well off [equity] as at the beginning” refers to capital maintenance which calls for inflation
The term “to be well off [equity] as at the beginning” refers to capital maintenance which calls for inflation
adjustment of the earlier figure. ‘Hicksian income’ is the standard concept of income as traditionally used
adjustment of the earlier figure. ‘Hicksian income’ is the standard concept of income as traditionally used
by accountants and also by the more thoughtful economists. Income, thus defined, must not contain any
by accountants and also by the more thoughtful economists. Income, thus defined, must not contain any
element of capital.
element of capital.
Hicks, (1939)
Hicks, (1939)
Another definition that has been found to be theoretically ideal and free from anomalies is the Haig-
Another definition that has been found to be theoretically ideal and free from anomalies is the Haig-
Simons definition of income, based on the work by American economists Robert M. Haig and Henry
Simons definition of income, based on the work by American economists Robert M. Haig and Henry
Simons.
Simons.
The basic Haig–Simons definition of income is the value of what one could consume in that year, while
keeping the wealth constant. It is the value of all consumption in a given year plus the change in net
worth.
Notice that it’s not what a person does consume in a year which is the basis for Haig–Simons income; it’s
what she could consume if she chose to keep the value of her wealth constant. So it is based on potential
consumption, not actual consumption. The idea is that how well–off a person is should be measured by
how much she could afford to consume each year. According to Haig and Simons the measure of one’s
income should be not what one actually did with it (spend it or save it), but what one could do with it.
For many reasons, both practical and political, the actual definition of income in the income tax code falls
considerably short of that definition. A full Haig-Simons concept of income, for example, would include
the value of ALL consumption and ALL changes in net worth. As we have seen and will continue to see,
in actual practice the definition of income used on the ITA is quite different.
Notice that it’s not what a person does consume in a year which is the basis for Haig–Simons income; it’s
what she could consume if she chose to keep the value of her wealth constant. So it is based on potential
consumption, not actual consumption. The idea is that how well–off a person is should be measured by
how much she could afford to consume each year. According to Haig andIntroduction
Simons thetomeasure of one’s 207
Income Taxation:
income should be not what one actually did with it (spend it or save it), but what one could do with it.
For many reasons, both practical and political, the actual definition of income in the income tax code falls
considerably short of that definition. A full Haig-Simons concept of income, for example, would include
the value of ALL consumption and ALL changes in net worth. As we have seen and will continue to see,
in actual practice the definition of income used on the ITA is quite different.
Others define income as some benefit, monetary or otherwise, which an individual "enjoys" periodically.
This definition is somehow incomprehensive since it is hard to define enjoyment.
Despite difficulty in defining the term income, economists refer to the Hicks definition to provide ways of
measuring income, while accountants use realisation concept to measure income for a particular period.
(i) Equity or economic concept of income

The definition provided by Hick, (1939) requires calculation of capital at the beginning of the period
and at the end of the period. From basic accounting knowledge the equity or capital is the difference
between total assets and total liabilities. Hence, any incremental amount from the earlier capital
amount is deemed to be income, strictly to attain what Hicks intended it must be after inflation
adjustment of the earlier equity. Since taxation is paid on cash basis, any tax based on this definition
might be perceived unfair as the associated income is not actually received.
(ii) Realisation or accounting concept of income

This concept is more popular and widely adopted by tax officials, and tax practitioners in income
based tax system in the world. According to this concept, income arises only at the time of sale,
disposal or exchange of a product or goods, which creates the income or gain. Therefore income is
not realised earlier at the production stage during which period an asset is held while its values or
prices rise (inflationary gains).
3. Classification of income
The following are classification of income:
(a) Cash income and benefit / income in kind

Cash income is income received or to be received in monetary terms e.g. salary, interest, dividend etc.
Income in kind on the other hand is the income received in non-monetary terms such as free house, car,
air time and a driver. Income in kind may further be categorised into convertible and non convertible
income.
i] Convertible income is where the benefit may be converted into money or money’s worth.
ii] Non-convertible income in kind is where the benefit cannot be converted into money or money’s
worth.
Example
i] Convertible income
A bonus of 100 bags of cement may be converted into cash by selling in cash or may be exchanged
for another product say floor tiles
ii] Non-convertible income

Free lunch or free use of employer’s motor vehicle
(b) Exempt income or income exempt

Exempt income is income not taxed because the source is exempt. The income does not form
part of the total income to be included in the income tax return. A good example is occupying
own premises, and utilizing own agricultural produce.
Income exempt is income accrued or derived from a source that forms part of the tax base, but
because of some specific/particular circumstances by the operation of any regulation, law, order
or rule, such income is exempt from income tax; for example, minimum threshold for employment
income, the salary of the president of the URT, scholarship income etc.
i] Convertible income
for another product say floor tiles
A bonus of 100 bags of cement may be converted into cash by selling in cash or may be exchanged
ii] for another product
Non-convertible say floor tiles
income
Free lunch or free use of employer’s motor vehicle
ii] Non-convertible
208 Income Tax income
Free lunch or free
(b) Exempt income or use of employer’s
income exempt motor vehicle
(b) Exempt income or income exempt
income, the salary of the president of the URT, scholarship income etc.
Howeverincome, the salary
both, exempt of the and
income president
incomeof the URT, are
exempt scholarship income etc.
not taxable.
However both, exempt income and income exempt are not taxable.
Income exemption
Income
The exemption
following income has been exempt from income tax under the Income Tax Act ,Cap 332:
The following incomeincome
Presidential has been
bothexempt from income
of Tanzania tax under the Income Tax Act ,Cap 332:
and Zanzibar;
 Income earned by government or its agencies in performing government activities;
 Presidential income both of Tanzania and Zanzibar;
 Amounts derived by any person entitled to privileges under the Diplomatic and Consular
 Income earned by government or its agencies in performing government activities;
Immunities and Privileges Act to the extent provided in that Act or in regulations made under that
 Amounts derived by any person entitled to privileges under the Diplomatic and Consular
Act;
Immunities and Privileges Act to the extent provided in that Act or in regulations made under that
 Income earned by public servants in a foreign country paid by the government;
Act;
 Foreign source income earned by non resident person or income of a spouse or child of a public
 Income earned by public servants in a foreign country paid by the government;
servants working abroad where the spouse is resident in the United Republic solely by reason of
 Foreign source income earned by non resident person or income of a spouse or child of a public
accompanying the individual on the employment;
servants working abroad where the spouse is resident in the United Republic solely by reason of
 Income earned by the East Africa Development Bank; the Price Stabilization and Agricultural
Inputs Trust; the Investor Compensation Fund under the Capital Markets Regulatory Authority;
 Income earned by the East Africa Development Bank; the Price Stabilization and Agricultural
and The Bank of Tanzania;
Inputs Trust; the Investor Compensation Fund under the Capital Markets Regulatory Authority;
 Amounts derived during a year of income by a primary co-operative society Registered under the
and The Bank of Tanzania;
Cooperative Societies Act; solely engaged in activities as a primary co-operative engaged in
 Amounts derived during a year of income by a primary co-operative society Registered under the
either: agricultural activities, including activities related to marketing and distribution; construction
Cooperative Societies Act; solely engaged in activities as a primary co-operative engaged in
of houses for members of the cooperative; distribution trade for the benefit of the members of the
either: agricultural activities, including activities related to marketing and distribution; construction
cooperative; savings and credit society; and whose turnover for the year of income does not
of houses for members of the cooperative; distribution trade for the benefit of the members of the
exceedTshs50,000,000;
cooperative; savings and credit society; and whose turnover for the year of income does not
 Pensions or gratuities granted in respect of wounds or disabilities caused in war and suffered by
exceedTshs50,000,000;
the recipients of such pensions or gratuities;
 A scholarship or education grant payable in respect of tuition or fees for full-time instruction at an
educational institution;
 Amounts derived by way of alimony, maintenance or child support under a judicial order or
written agreement;
 Amounts derived by way of gift, bequest or inheritance, except amount earned by the estate of
the deceased from business and investment or employment of the deceased;
 Amounts derived in respect of an asset that is not a business asset, depreciable asset,
investment asset or trading stock;
 Amounts derived by way of foreign living allowance by any officer of the government that are
paid from public funds and in respect of performance of the office overseas;
 Income derived from investments exempted under the Export Processing Zones Act;
 Amount derived from investments exempted under any written laws for the time being in force in
Tanzania Zanzibar;
 Rental charges on aircraft lease paid to a non-resident by a person engaged in air transport
business;
 Amounts derived by a crop fund established by farmers under a registered farmers’ cooperative
society, union or association for financing crop procurement from its members;
 Income earned by Dar es salaam Stock Exchange [DSE];
 Income earned by holders of gaming licenses;
 And the fidelity fund established under the Capital Markets and Securities Act.
(c) Earned income and unearned income

Earned income is realised income e.g. salary and business profit while unearned income includes
 Amounts derived by a crop fund established by farmers under a registered farmers’ cooperative
society, union or association for financing crop procurement from its members;
 Income earned by Dar es salaam Stock Exchange [DSE];
 Income earned by holders of gaming licenses;
 Introduction
And the fidelity fund established under the Capital Markets and Securities Act. to Income Taxation: 209
(c) Earned income and unearned income

Earned income is realised income e.g. salary and business profit while unearned income includes
capital gain not realised from sales but simply an increase in value of assets. Income is earned when
you have done something substantial to be entitled to receive it as provision of services, goods or
passage of time.
2. The Legal Sources Of Income Tax Laws
A person shall not be charged tax unless there is a clear legal provision requiring the person to be
charged such tax. In other words, a tax charge must be established by law.
The sources of income tax laws are the following:
(i) Statutes
A statute is a formal written enactment (act) of a parliament of a particular state governing
various taxation for that state. It is a primary authority on matters of income tax, yet must be
constitutional. In Tanzania, tax statutes are made up of both the principal legislations and the
subsequent Finance Acts which amends the principal legislation from time to time. Usually
the Finance Acts are passed during the annual parliamentary budget sessions.
(ii) Regulations
The principal legislation allows the Minister responsible with tax administration [in this case,
the Minister of Finance] to prepare regulations where necessary as additional provisions with
respect to tax laws for the better implementation of the principles, purposes and provisions of
the principal Acts. The regulations usually carry the same authority as that of the principal
act.
(iii) Practice Notes
The Commissioner responsible with tax administration is allowed by the respective principal
Acts to prepare practice notes to achieve consistency in the administration of the principal
act and to provide guidance to persons affected by it. The practice notes usually carry the
same authority as that of the principal act.
(iv) Case Laws
These are sets of rules of law which have been established based on previous court cases.
Basically, previous courts’ decisions set precedence that may be used to judge subsequent
similar cases. Where a legal case is decided today (by the High Court or Court of Appeal), it
becomes an authority over which similar subsequent cases, presided in any other court of
law or tribunal in that particular jurisdiction, may be decided on the authority of such previous
case.
3. Basis Of Income Taxation (Chargeable Income and Total Income)
3.1 Imposition of Income Tax
S.4 of Income Tax Act Cap 332 states that income tax shall be charged and is payable for
each year of income by every person-
i] Who has total income for the year of income or is a corporation which has a perpetual
unrelieved loss determined under section 19 for the year of income and the previous two
consecutive years of income.
ii] Who has a domestic permanent establishment that has repatriated income for the year of
income; or
iii] Who receives a final withholding payment during the year of income
3.2 Chargeable income
Section 6 (1) of the Income Tax Act, Cap 332 provides that the scope of charge of income tax:
(a) in the case of a resident person, shall be the person’s income irrespective of the source
(worldwide); and
(b) In the case of a non-resident person, the person’s income that has a source in the United
Republic.
The application of the provisions is to tax in Tanzania the worldwide income of a resident person
and tax a non-resident person only the person’s income that has a source in the United
Republic. The Act provides the criteria for distinguishing various income sources that has a
source in United Republic as against foreign-sourced income.
Section 6(2) provides that the chargeable income of a resident individual who at the end of the
year of income has been resident in the United Republic for a period of two years or less in total
during the whole of the individual’s life shall be only the individual’s income that has a source in
the United Republic.
Republic.
The application of the provisions is to tax in Tanzania the worldwide income of a resident person
and tax a non-resident person only the person’s income that has a source in the United
210 Income Tax Republic. The Act provides the criteria for distinguishing various income sources that has a
source in United Republic as against foreign-sourced income.
Section 6(2) provides that the chargeable income of a resident individual who at the end of the
year of income has been resident in the United Republic for a period of two years or less in total
during the whole of the individual’s life shall be only the individual’s income that has a source in
the United Republic.
3.3 Total income

Total income of a person for a year of income is the sum of the person’s chargeable income for
the 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 total
income of each person shall be determined separately. Income tax is charged on a person’s total
income for a year of income. A person’s total income for a year of income shall be calculated by
aggregating the income, from each employment, business and investment separately calculated
in accordance with the rules provides for under the Act in respect of each of the income sources.
Definitions
"Person" means an individual or an entity;
"Individual" means a natural person;

“Entity” means a partnership, trust or corporation
“Entity”“Entity”
means ameanspartnership,
a partnership,
trust or corporation
trust or corporation
A “corporation” means any company or body corporate established, incorporated or registered under
A
any“corporation”
law Ain“corporation”
means
force in any
means
the United company
any company
Republic ororbody or
corporate
body an
elsewhere, corporate
established,
established,
incorporated
unincorporated incorporated
or or
association registered
or registered
other under
body of under
any law any
persons, ina force
law in
in force
the United
government, in
a the Republic
United
political Republic
or elsewhere,
subdivision or
of elsewhere,
an unincorporated
a government, an unincorporated
association
association
or other or
a parastatalorganisation, abody
otherof body of
public
persons,persons,
a government,
international a government,
organisation a political
and a unita trust
political
subdivisionsubdivision
of aa government,
but excludes of a government,
partnership a parastatalorganisation,
a parastatalorganisation,
a publica public
international
international
organisation
organisation
and a unitandtrust
a unit
but trust but excludes
excludes a partnership
a partnership
"Partnership" means any association of individuals or bodies corporate carrying on business jointly,
"Partnership"
"Partnership"
irrespective means any
of whether means
the association
any association
association isofrecorded
individuals
of inindividuals
or bodies
writing; or corporate
bodies corporate
carrying carrying
on business
on business
jointly, jointly,
irrespective
irrespective
of whetherof whether
the association
the association
is recordedis recorded
in writing;in writing;
Determine the residential status of an individual, a partnership, trust and corporation;

Determine
Determine
describe thesource
the residential
theofresidential
statusand
income of
status
an individual,
loss of an individual,
rules for a partnership,
income ataxation;
partnership,
trust and
trust
explain corporation;
and corporation;
relevant
describe
mattersdescribe
the source
theincome
underlying source
of incomeof income
and loss
taxation and
and rules
lossfor
explain rules
income
for income
taxation;
Quantification, taxation;
explainexplain
relevant
Characterization &relevant
mattersmatters
underlying
Allocation rulesunderlying
andincome income
taxation
the Income Taxtaxation
and
Act,explain
and
Cap explain
332Quantification,
Quantification,
[Learning Characterization
outcome Characterization
d, e, f and&g] &
Allocation
Allocation
rules and
rules
theand
Income
the Income
Tax Act, Tax
CapAct,
332Cap[Learning
332 [Learning
outcome outcome
d, e, f and
d, e,g]f and g]
4. The Residential Status Of An Individual, A Partnership, Trust And Corporation

4. The
4.1 4.Residential
Tax The Residential
residence Status Status Of An Individual,
Of An Individual, A Partnership,
A Partnership, Trust And Trust Corporation
And Corporation
4.1 Residence
Tax4.1 residence
Tax residence
has not been defined in the Income Tax Act 2004; it provides criteria for a person to
Residence
qualify toResidence
behas not been
a residenthasfor notdefined
a been in
defined
particular theperiod
Income
in the
for Tax
IncomeAct Tax
individual, 2004; Act it provides
2004; ittrust
partnership, provides
criteria for
criteria
a person
and corporation. for a toperson to
qualify toqualify
be a resident
to be
(i) Test of residence of an individual a resident
for a particular
for a particular
period forperiod
individual,
for individual,
partnership, partnership,
trust and trust
corporation.
and corporation.
(i) TestAn
(i)ofindividual
residence
Test of residence
is of an individual
resident of
in an
theindividual
United Republic for a year of income in the following cases:
a) An
when individual
An individual
she/he is
hasresident is resident
in the United
a permanent in thein
home Republic
United
the United Republic
for aRepublic
year forofaincome
yearisofpresent
and in
income
the following
ininthe
theUnited
following
cases: cases:
Republic
a) during
whena)she/hewhen
any has
part she/he
of athe
permanent
has
yearaofpermanent
home in home
income; the Unitedin theRepublic
United Republic
and is present and is inpresent
the Unitedin theRepublic
United Republic
b) during
if she/he any
during
part
has noany
ofpermanent
the
part
year
of the
ofhome,
income;
year of is income;
present in Tanzania during the year of income for a period
b) amounting
if she/he
b) ifhasshe/he
no permanent
has notopermanent
in aggregate home,
183 daysishome,
orpresent
moreis(in in
present
Tanzania in Tanzania
accordance during
with a the
during
caseyearlaw
the
of this
income
yearexcludes
of for
income
a arrival
period
for a period
amounting
and amounting
departurein aggregate
day);in aggregate
to 183 days to 183 or more
days or (inmore
accordance
(in accordance
with a case withlaw
a casethis excludes
law this excludes
arrival arrival
c) and
if thedeparture
and departure
aggregate day);
days inday);the year of income is less than 183, but he/she is present in the United
c) Republic
if thec)aggregate
ifduring
the aggregate
days
the in the
year days year
in the
of income of and
income
yearinof is
income
each less than
of theis two
less
183, thanbut183,
preceding he/she butishe/she
years present
of incomeis in
present
theperiods
for United
in the United
RepublicRepublic
averaging during
more the during
than year
122the
ofdays
income
yearinofeachand
incomein each
such and yearof
in the
each twoof preceding
of income; the simple
two preceding
years
average of years
income of for
income
(Y1 +Y2+Y3)/3 periodsfor
is periods
averaging
used; or averaging
more than
more 122 than
days 122in each
days in
sucheach year such
of income;
year of income;
simple average
simple average
(Y1 +Y2+Y3)/3
(Y1 +Y2+Y3)/3
is is
used; or used; or
d) is an employee or an official of the Government of Tanzania posted abroad during the year of
d) income.
is and)employee
is an employee
or an official
or anofofficial
the Government
of the Government of Tanzania of Tanzania
posted abroadposted during
abroadthe during
yearthe of year of
income. income.
Therefore, a Tanzanian citizen may or may not be resident in Tanzania for tax purposes. However, an
Therefore,
individualTherefore,
a Tanzanian
who at the a Tanzanian
endcitizen
of themaycitizen
yearorofmay
mayincomenot
or may be
hasresident
not
been beresident
resident
in Tanzania ininTanzania
Tanzania
for tax forpurposes.
fortwotax years
purposes.
However,
or lessHowever,
an
in an
individual
total individual
during who
the at the
whoend
whole ofatthe
the
ofindividual’s
the
endyearof the
oflife
income
year
for of has
income
purpose beenof has
resident
been resident
calculation inofTanzania in Tanzania
chargeable forincome
two yearsforistwo oryears
less in
considered or less in
total during
totalthe
nonresident. during
whole theofwhole
the individual’s
of the individual’s
life for purpose
life for purpose
of calculation
of calculation
of chargeableof chargeable
income is income
considered
is considered
nonresident.
nonresident.
Permanent home is any place any individual is free and not restricted to reside, not necessary his/her
Permanent
own housePermanent
home
may ahome
be is any place
hotel, is any
rented any place
individual
house any
etc individual
is free and is free
not andrestricted
not restricted
to reside, to not
reside,
necessary
not necessary
his/her his/her
own houseownmay house
be amayhotel,
be rented
a hotel,houserentedetc house etc
Example
d) is an employee or an official of the Government of Tanzania posted abroad during the year of
income.
Therefore, a Tanzanian citizen may or may not be resident in Tanzania for tax purposes. However, an
individual who at the end of the year of income has been resident in Tanzania for two years or less in
total during the whole of the individual’s life for purpose of calculation of chargeable income
Introduction is considered
to Income Taxation: 211
nonresident.
Permanent home is any place any individual is free and not restricted to reside, not necessary his/her
own house may be a hotel, rented house etc
Example
Mr. Limbu has a permanent home in Tanzania but was abroad for several years and is still living abroad.
Required:
Determine the residential status of the taxpayer.
Answer
Though he has a permanent home in Tanzania and is a Tanzanian citizen, he will not be considered
nonresident because he is staying abroad.
Example
In 2010, Mr. Sadiki, who has no permanent home in Tanzania came to Tanzania for holiday and stayed
for 200 days.
Required:
r
f Determine the residential status of Mr. Sadiki for the year of income 2010.
c
Answer
, Since his stay in Tanzania during the year 2010 was of over 183 days, he will be regarded resident in
Tanzania during the year of income. However, since he has been resident in Tanzania for two years or
less in total during the whole of his life for purpose of calculation of chargeable income, he is considered
non- resident.
Example
Mr. Bure has no permanent home in Tanzania. He has been frequently visiting the country for business
purposes. In 2013 he stayed for 120 days, and in 2012 and 2011 he stayed in Tanzania for 140 and 100
days respectively.
Required:
Determine the residential status of Mr. Bure.
o Answer
Since Mr. Bure was present in Tanzania for an average of less than 122 days for the year of income and
the two preceding years i.e. years 2013,2012 and 2011, average (120+140+100)/3=120 days he is
c treated as nonresident for the year 2013.
d Example
l
MrsKessy is employed by a Tanzania private entity and has been seconded in Rwanda since 2007. Mrs.
Kessydid not come to Tanzania during the year of income 2010.
d
s Required:
s
Determine the residential status of MrsKessy for the year of income 2010.
f
Answer
n
Since MrsKessy is not a government official, regardless of her citizenship she is considered a non-
n
resident in Tanzania during the year of income 2010.
d
(ii) Test of residence of a partnership
A partnership is a resident partnership for a year of income if at any time during the year of
income a partner is a resident of the United Republic.
(iii) Tests of residence of a trust
Determine the residential status of MrsKessy for the year of income 2010.
Answer
212 Income
SinceTax
MrsKessy is not a government official, regardless of her citizenship she is considered a non-
resident in Tanzania during the year of income 2010.
(ii) Test of residence of a partnership

A partnership is a resident partnership for a year of income if at any time during the year of
income a partner is a resident of the United Republic.
(iii) Tests of residence of a trust
A trust is a resident trust for a year of income if:
a) it was established in the United Republic and
b) at any time during the year of income, a trustee of the trust is a resident person; or
c) at any time during the year of income a resident person directs or may direct senior managerial
decisions of the trust, whether the direction is or may be made alone or jointly with other persons
or directly or through one or more interposed entities.
Example
Assume that Mayfair Trust is a registered trust in Tanzania. In 2011 all of Mayfair trustees were non-
residents, however the CEO of the trust is a resident individual.
Required:
Determine the residential status of the trust for the year of income 2011.
Answer
Since the trust was established in Tanzania, by registration under a Tanzania law, and directed by
resident person CEO, the trust is resident for 2011.
Example
Assume that Mayfair Trust was not registered trust in Tanzania but it operates in Tanzania. In 2010 all
the trustees, including the CEO were resident individuals.
Required:
Determine the residential status of the trust.
Answer
Since the trust was not registered in Tanzania the trust is treated as non-resident for the year 2010
though all its trustees were resident in Tanzania during the year.
(iv) Tests of residence of a corporation

A corporation is a resident corporation for a year of income if:
a) it is incorporated or formed under the laws of the United Republic; or
b) at any time during the year of income the management and control of the affairs of the
corporation are exercised in the United Republic. The control of a company is exercised at the
meeting of directors.
Significances of classifying a person as resident in the United Republic of Tanzania for income
taxes purposes
(i) Scope of income chargeability differ

By virtual of section 6(1) chargeable income of a person for the year of income from employment,
business or investment is:
(a) In the case of resident person, the persons income from employment, business, or investment
for the year of income irrespective of the source of income; and
(b) In case of non-resident person, the persons income from employment, business or investment
for the year of income, but only to the extent that the income has a source in the United
Republic.
(ii) Individual tax rates on total income differ
(a) Under paragraph 1(1) of the 1st schedule, total income of a resident individual (except
presumptive tax payers) only is taxed using progressive tax rates provided.
(b) The total income of a non-resident individual for a year of income is taxed at the rate of 20
percent.
business or investment is:
(a) In the case of resident person, the persons income from employment, business, or investment
for the year of income irrespective of the source of income; and
(b) In case of non-resident person, the persons income from employment, business or investment
for the year of income, but only to the extent that the income has a source in the United
Republic.
(ii) Individual tax rates on total income differ
(a) Under paragraph 1(1) of the 1st schedule, total income of a resident individual (except
presumptive tax payers) only is taxed using progressive tax rates provided.
(b) The total income of a non-resident individual for a year of income is taxed at the rate of 20
percent.
(iii) Withholding tax rates differ.
Under the 1st schedule paragraph 4, withholding tax rates differ, for example
Payment Rate for Resident Rate for Non
Resident
(i) Employment Regulation 15%
(i) Rental Income 10% 15%
(ii) Technical services fees 5% 15%

(iii) Insurance Premium 0% 5%
(mining)
(iii)
(iv) Insurance Premium
Service Fees 0%
5% 5%
15%
(iv) Service Fees 5% 15%
(iv) Capital gain tax rates in realisation of interest in land or building and shares differ
An individual instalment payer who derives capital gains shall pay income tax equal to
(iv) Capital gain tax rates in realisation of interest in land or building and shares differ
An individual
(a) instalment
in the case payer
of a resident who derives
individual, capital gains
ten percent of theshall
gain,pay
or income tax equal to
(b) in the case of a non-resident individual, twenty percent of the gain.
(a) in the case of a resident individual, ten percent of the gain, or
(b) in the case of a non-resident individual, twenty percent of the gain.
(v) Foreign Tax relief
Under section 77 ,a resident person (other than a partnership) may claim a foreign tax credit for a year of
(v) Foreign Tax relief
income for any foreign income tax paid by the person to the extent to which it is paid with respect to the
Under section 77 ,a resident person (other than a partnership) may claim a foreign tax credit for a year of
person's taxable foreign income for the year of income.
income for any foreign income tax paid by the person to the extent to which it is paid with respect to the
person's
Such taxable
relief cannotforeign income
be granted to for theresident
a non year of income.
person
Such relief cannot be granted to a non resident person
5. Source Of Income And Loss Rules For Income Taxation

For the purposes of income taxation, a person shall calculate the person’s income or loss from
5. Source Of Income And Loss Rules For Income Taxation
employment, business or investment that has a source in the United Republic separately from any
For the purposes of income taxation, a person shall calculate the person’s income or loss from
income or loss from employment, business or investment that has a foreign source.
employment, business or investment that has a source in the United Republic separately from any
income or
Income orloss
lossfrom employment,
which business
has source or investment
in the United thatofhas
Republic a foreign source.
Tanzania
Income
(i) or loss which
Income has source
of a person from in the United Republic
employment, business of or Tanzania
investment has a source in the United
Republic if the amounts directly included in calculating that income that have a source in the
(i) Income of a person from employment, business or investment has a source in the United
United Republic exceed the amounts directly deducted in calculating that income that have a
Republic if the amounts directly included in calculating that income that have a source in the
source in the United Republic.
United Republic exceed the amounts directly deducted in calculating that income that have a
(ii) Loss of a person from any business or investment has a source in the United Republic to the
source in the United Republic.
extent that the amounts directly deducted in calculating the income from business or investment
(ii) Loss of a person from any business or investment has a source in the United Republic to the
exceed the amounts directly included in calculating that income.
extent that the amounts directly deducted in calculating the income from business or investment
exceed
Income or the amounts
loss which directly included
has a foreign source in calculating that income.
Income
A or loss
person’s which
foreign has aofforeign
source incomesource
from an employment or of income or loss from, business or
investment shall be calculated as follows –
A person’s foreign source of income from an employment or of income or loss from, business or
investment
i) the shall be calculated
person’s worldwideas followsor–loss from that employment or business or investment; less
income
ii) any income with a source in the United Republic from that employment, business or investment;
i) the person’s worldwide income or loss from that employment or business or investment; less
or plus
iii) any loss with a source in the United Republic from that business or investment.
or plus
iii) any loss with a source in the United Republic from that business or investment.
Sources of inclusions and deductions
Inclusions with the source in URT
Amounts directly included in calculating income have a source in the United Republic where they consist
i) the person’s worldwide income or loss from that employment or business or investment; less
or plus
214 Income
iii) Tax
any loss with a source in the United Republic from that business or investment.

Inclusions with the source in URT
Amounts directly included in calculating income have a source in the United Republic where they consist
of –
(a)
i) Incomings for trading stocks (sales revenue in URT)
ii) Gains from realization of business assets or liabilities of the where the asset or
liability involved is a domestic asset or domestic liability.
iii) Gains on realization depreciable assets on pool basis, if disposed depreciable
asset is in URT
(b) In other cases, the income has a source in URT if the source of payment is in URT.
Deductions with source in URT
Amounts directly deducted in calculating income have a source in the United Republic where they consist
of –
(a)
(i) Trading stock allowances calculated in accordance with section 13(2) of the Act.
(ii) Depreciation allowance in respect of depreciable assets owned and employed by a person
wholly and exclusively in the production of the person’s income from the business.
(iii) Expenditure in respect of repair and maintenance of depreciable assets owned and
employed by a person wholly and exclusively in the production of income from business to
the extent to which
i) they relate to domestic assets; or
ii) they relates to moveable tangible assets used by a person who conducts a
business of land, sea or air transport operator or charterer to carry passengers who
embark or cargo or mail which is embarked from Tanzania.
(b) Losses from the realisation of business assets, investment assets and liabilities of a business
where the asset or liability involved is a domestic asset or domestic liability.
(c) In other cases, the deduction has a source in URT if the source of payment is in URT.
Sources of payments
The following payments have a source in the United Republic Tanzania
(a) dividends paid by a resident corporation;

(b) interest paid by a resident person or domestic permanent establishment;
(c) natural resource payments made in respect of or calculated by reference to natural resources taken
from land or the sea situated within the United Republic or its territorial waters;
(d) rent paid for the use of, right to use or forbearance from using an asset situated in the United
Republic;
(e) royalties paid for the use of, right to use or forbearance from using an asset in the United Republic;
(f) premiums for general insurance paid to and proceeds from general insurance paid by a person in
respect of the insurance of any risk in the United Republic;
(g) payments received by a person who conducts a business of land, sea or air transport operator or
charterer in respect of
i) the carriage of passengers who embark or cargo, mail or other moveable tangible
assets that are embarked in the United Republic, other than as a result of
transshipment; or
ii) rental of containers and related equipment which are supplementary or incidental
to carriage referred to in subparagraph (i);
(h) payments received by a person who conducts a business of transmitting messages by cable, radio,
optical fibre or satellite or electronic communication in respect of the transmission of messages by
apparatus established in the United Republic, whether or not such messages originate in the United
Republic;
(i) payments, including service fees, of a type not mentioned in paragraphs (g) or (h) for or attributable
to employment exercised, service rendered or a forbearance from exercising employment or
rendering service :-
i) in the United Republic, regardless of the place of payment; or
ii) whether the payer is the Government of the United Republic, irrespective of the place
apparatus established in the United Republic, whether or not such messages originate in the United
Republic;
(i) payments, including service fees, of a type not mentioned in paragraphs (g) or (h) for or attributable
to employment exercised, service rendered or a forbearance from exercising employment or
rendering service :-
i) in the United Republic, regardless of the place of payment; or
ii) whether the payer is the Government of the United Republic, irrespective of the place
of exercise, rendering or forbearance;
(j) proceeds of life insurance and retirement payments not falling within paragraph (i) paid by a resident
person or a domestic permanent establishment and any premium or retirement contribution paid to a
resident person or domestic permanent establishment to secure such a return;
(k) gifts and other ex-gratia payments to the extent received in respect of business or investment
conducted with domestic assets; and
(l) payments not mentioned in the above paragraphs made in respect of:-
i) the acquisition of a domestic asset, incurring of a domestic liability or realization of
such an asset or liability; or
ii) Activity conducted or forbearance from conducting activity in the United Republic.
6. Relevant Matters Underlying Income Taxation

6.1 Year of income
Section 20(1) of the Act provides that income tax shall be charged and is payable for each
year or income that is annual basis. It is therefore necessary to specify the year of income.
The year of income is specified under the subsection as the calendar year that is the 12
months period commencing on 1st January in any year and ending on 31st December in each
year. However, the Act permits an entity to substitute a different 12-months period as the
entity’s’ year of income. Allowing persons to close a year of income at different times may
result to some revenue loss if the persons are able to exploit the inconsistency. The Act
therefore demands that a person should be allowed to use a substitute year of income only
with the permission of the Commissioner.
6.2 Application for approval to change the year of income
Section 20(2) provides that where an entity shows that there is a compelling need requiring
changing from one accounting date to another, hence the change in the entity’s year of
income the entity may apply in writing to the Commissioner for approval to change from the
calendar year or the previous approved year. The Commissioner will communicate to the
entity the determination of the entity’s application in writing.
6.3 Conditions of approval
Section 20(3) demands the entity applying for change in the entity’s year of income to show
compelling need to change the year of income. The Commissioner will approve the change
only where is satisfied that the whole or a portion f the entity’s income cannot be correctly
reported fro any year of income under the current accounting cycle or there is substantial
business need to make the change. The Commissioner will not approve an application for
change where is of the view that the purpose or one of the purposes of the change is to
avoid or reduce tax. For example a change may be requested that may put the person in a
position to benefit from reduced tax rate or change in certain tax policy decisions.
6.4 Notice of approval of change

Section 20(3) demands that where the Commissioner has approved a change of a year of
income shall communicate the approval to the applicant by notice in writing.
6.5 Revocation of the Commissioner’s approval
Section 20(4) empowers the Commissioner to revoke an approval granted to an entity to
change the entity’s year of income. The revocation shall be by a notice in writing addressed
to the entity. Although the Act does not require the Commissioner to give reasons for the
revocation it is best practice and just to give reasons for an revocation of the approval
previously granted.
6.6 Transitional year of income
Section 20(5) stipulates that where an entity’s year of income changes, such change should
not exceed the period of 18 months. That is, the year of income should be of the length of up
to 12 months or 18 month’s. In case the transitional accounting period is less than 12
months, the income should be treated as income of the year in which the accounting period
ends. If the new accounting period is of more than 12 month, and ends in the year following
6.5 Revocation of the Commissioner’s approval
Section 20(4) empowers the Commissioner to revoke an approval granted to an entity to
change the entity’s year of income. The revocation shall be by a notice in writing addressed
to the entity. Although the Act does not require the Commissioner to give reasons for the
216 Income Tax
revocation it is best practice and just to give reasons for an revocation of the approval
previously granted.
6.6 Transitional year of income
Section 20(5) stipulates that where an entity’s year of income changes, such change should
not exceed the period of 18 months. That is, the year of income should be of the length of up
to 12 months or 18 month’s. In case the transitional accounting period is less than 12
months, the income should be treated as income of the year in which the accounting period
ends. If the new accounting period is of more than 12 month, and ends in the year following
that in which a 12 months accounting period would have ended, the income is to be
apportioned over the period, viz. for the 12 months to the old accounting date and the
balance to the new period, and profit assessed as if the accounts had been made up for 12
months to the old date and for the shorter period to the new. For example, if the usual
accounting date has been 30th September, 2016 and accounts for 18 months period are
made up to 31st March 2017, two-thirds of the income of the accounting period is to be
assessed for the year of income 2017 and one-third for the year of income 2017. Where a
new accounting period ends in the same year as that in which a 12 months’ period would
have ended, the income for the whole of the accounting period is to be assessed for that
year of income.
6.7 Year of income of a foreign permanent establishment
Section 20(6) provides that the year of income for every person’s foreign permanent
establishment shall be the same as the year of income of its owner. For example, where a
resident company with foreign permanent establishment makes accounts on 31st December,
then, the accounting date of that foreign permanent establishment shall be 31 st December so as
to coincide with the accounting date of that resident company (the owner).
6.8 Year of income of a non-resident entity
Section 20(7) provides that the year of income for every non-resident partnership, trust of
corporation shall not exceed the period of twelve months for which the entity makes up its
accounting if it is not the calendar year. Otherwise the year of income shall be the calendar year.
6.9 Initial year of income
Under the provisions of subsection 20(8) the initial year of income of a person shall be the period
of twelve months or less. However, the Commissioner may approve a period of not exceeding
eighteen month. Where the first accountings of a new business are for a period of 12 months
ending on a date other than 31t December, that is where two calendar years are covered, the
profits are, nevertheless, to be treated as income for the year of income in which the accounting
period ends. Where the first accounts are for the period of less than 12 months, the profits are to
be treated as income of the business for the year of income in which the accounting period ends.
Where they are for a period greater than twelve months, a twelve months’ proportion of the
profits shall be treated as income of the year of income in which the accounting period ended,
and the balance of the profit as that of the year of income in which the initial broken period
ended.
Example
A new business prepares its first accounts for a period of 15 months ended on 31 st January 2017, that is,
for a period of November 2015 to 31st January 2017. The business made a profit of TZS. 900,000,000
over the period.
Apportionment of income
(i) The proportion of profits for 12 months shall be treated as income for year of income in which the
accounting period ends, i.e. year 2017.
(ii) The portion of profits for 3 months (the balance) shall be treated as income for the year of
income in which the initial broken period ended, (i.e. year 2016).
The apportionment shall be as follows:
Year 2016 (3 moths) - TZS. 120,000,000
Year 2017 (12 months - TZS. 720,000,000
The profits will be assessed in the respective year of income apportioned.
6.10 Cessation
In the case of cessation, and final accounting period ends within the final year of income, or
where final accounting period exceeds 12 months, then the profit are to be assessed for the year
on the basis of twelve months proportion. Otherwise, if the final accounting period is for less that
Year 2016 (3 moths) - TZS. 120,000,000
Year 2017 (12 months - TZS. 720,000,000

The profits will be assessed in the respective year of income apportioned.
6.10 Cessation
In the case of cessation, and final accounting period ends within the final year of income, or
where final accounting period exceeds 12 months, then the profit are to be assessed for the year
on the basis of twelve months proportion. Otherwise, if the final accounting period is for less that
12 months and end in the year of income following the preceding accounting period ended, the
profits are to be treated as the income of the final year in the same way as the profits of the initial
accounting period a new business is treated as the income of the first year. Where the final
accounting period is for 12 months, the income is to be treated as that of the final year of income.
7. Basis for accounting for income tax purposes

The use of a year of income to measure, on annual basis, gains and profit from economic activities
that extend over more than one year of income needs rules to allocate income and expenses to
particular years of income. Every taxpayer reports income and expenses for tax purposes according
to a method of accounting. An accounting method is a set of rules used to determine when and how
to report income and expenses. Basically, accounting methods are divided into two categories-the
cash and accrual methods. The methods of accounting to be used should be that which clearly
shows a person’s income. That is, an accounting method, which consistently provide same
treatment of income and expenses from year to year.
7.1 Use of generally accepted accounting principles
Section 21(1) provides that, subject to the directions in this section a person shall account
the persons’ income according to generally accepted accounting principles.
7.2 Accounting by an individual
Section 21(2) provided that an individual shall account for tax purposes revenue and
expenditure based on cash basis with respect to the entire individual’s income from
employment and investment.
For purposes of accounting for business income an individual may account on accrual basis
or cash basis, whichever method reflects more clearly the individual’s income from the
business.
7.3 Accounting by entities

Section 21(3) provides that, entities shall account for income tax based on accrual methods
of accounting. All persons other than individuals shall account their income for tax purposes
on accrual basis.
7.4 Accounting by Partnerships and Trusts
Section 21(4) provides that in calculating income from a business, partnerships and trusts
shall account for income tax purposes on either cash or accrual basis according to the
method that most clearly reflects the person’s gains or profits. Exception to this is where the
Commissioner may prescribe in writing that the accounting be in either of the methods, that
is where there is specific direction as to which method should be used.
7.5 Change in the person’s basis of accounting
Section 21(5) provides that a person may change the basis of accounting for income tax
purposes by applying in writing to the Commissioner to be allowed to make the change.
Upon satisfaction, the Commissioner may by notice in writing approve the application. For
the purposes of this case, the Commissioner has to be satisfied that the change is necessary
and the method shall clearly reflect the person’s gain and profits. The satisfaction by the
Commissioner is essential in order to ensure that the accounting method being used does
not omit or take into account any item more than once.
8. Quantification, Characterization & Allocation rules and the
Income Tax Act, Cap 332
1. Quantification of benefits in kind (sec.27)
Generally the value of benefit in kind is quantified by the market value of benefit in kind is quantified
by the market value of the benefit, which means, the amount of money that knowledgeable, willing
persons in an arm’s length transaction would pay to receive the same good or service. However,
special quantification rules have been provided under section 27 of the Act to apply to the provision
of motor vehicle, subsidized loans and provision of housing. (See, employment income topic)
2. Quantification in shillings (sec.28)
All amounts used in calculating the taxpayer’s income are required to be quantified in Tanzania
shillings. The amount quantified in a different currency must be converted at the exchange rate
Generally the value of benefit in kind is quantified by the market value of benefit in kind is quantified
by the market value of the benefit, which means, the amount of money that knowledgeable, willing
persons in an arm’s length transaction would pay to receive the same good or service. However,
218 Incomespecial
Tax quantification rules have been provided under section 27 of the Act to apply to the provision
of motor vehicle, subsidized loans and provision of housing. (See, employment income topic)
2. Quantification in shillings (sec.28)
All amounts used in calculating the taxpayer’s income are required to be quantified in Tanzania
shillings. The amount quantified in a different currency must be converted at the exchange rate
quoted by the Bank of Tanzania and applying between the currency and the shilling at the time the
amount is taken into account for income tax purposes.
Where the Commissioner General permits, by notice in writing, a person may use the average
exchange rate applying during the year of income as determined by the Commissioner General
3. Compensation Received (Sec. 31)

Where a person or an associate of the person derives an amount ("the compensation amount") which
compensates for or represents recovery of -
(a) income or an amount to be included in calculating income, which the person expects or
expected to derive; or
(b) a loss or an amount to be deducted in calculating income, which the person has incurred or
which the person expects or expected to incur, the compensation amount shall be included in
calculating income
Re- Characterization and Allocation
1. Indirect payments (Sec. 29)

In case a person attained any advantage of a payment made by a payer or his associate, or any
person authorizes someone to receive the amount, Commissioner may, by written notice, treat the
person who receives the advantage or authorizes another person to receive the amount, as it
receives the amount.
2. Jointly owned investment (Sec 30)
For the purposes of calculating a person's income from an investment that is jointly owned with
another person, amounts to be included and deducted in that calculation shall be apportioned among
the joint owners in proportion to their respective interests in the investment. Where the interests of
joint owners cannot be ascertained they shall be treated as equal.
3. Transfer Pricing and Other Arrangements between Associates (Sec. 33)
In any arrangement between associated persons, operated by them according to general market
practices (at arm‟s length), Commissioner may, by a notification in writing, distribute, apportion, or
allocate the amounts to be included or deducted in the income between the persons as to reflect their
taxable income or tax liability. In this process, Commissioner can:
a) Re-characterize the source and type of any income, loss, and amount of payment; or
b) Allocate costs, including the head office expenses, incurred by one person in conducting a
business that benefits an associate or associates also in conducting their businesses,
based on the comparative turnover of the businesses.
4. Income Splitting (Sec. 34)
Section 34(1), In case any person arrange to split income with another person to reduce tax liability,
Commissioner upon notifying in writing,
i. Adjust the amount to be included or deducted in calculating the income of each
persons from splitting of the income.
ii. Re-characterise the source and type of any income, loss, amount or payment, to
prevent any reduction in tax payable as a result of the splitting of income.
5. Annuities, installment sales and finance leases(Sec. 32)
Payments under an annuity, an installment sale, or a finance lease are re-characterized as interest
and a repayment of capital under a debt claim (s 32 (1)). The idea behind this rule is that annuities,
installment sales, and finance leases are economically equivalent. Therefore, it needs to be ensured
that these substitutable forms of financing are treated similar.
All payments under an annuity, an installment sale, or a finance lease must be aggregated. The
total is then to be divided into a capital portion and an interest portion. The capital portion is
treated as a repayment of capital and the interest portion is dealt with as interest paid or to be
paid . Each of these portions is calculated as described in detail in s 32 (2). At the time of
concluding an annuity, installment sale, or finance lease the taxpayer, who receives the payment,
is required to determine the installments and segregate the installments into an interest and a
capital portion (s 32 (3)).
If the taxpayer cannot provide such a list he must treat the interest and capital portion of the
annuity, installment sale, or finance lease as a blended loan with the interest compounded six
monthly.
total is then to be divided into a capital portion and an interest portion. The capital portion is
treated as a repayment of capital and the interest portion is dealt with as interest paid or to be
paid . Each of these portions is calculated as described in detail in s 32 (2). At the time of
concluding an annuity, installment sale, or finance lease the taxpayer, who receives the payment,
Introduction
is required to determine the installments and segregate the installments into to
anIncome
interestTaxation:
and a 219
capital portion (s 32 (3)).
If the taxpayer cannot provide such a list he must treat the interest and capital portion of the
annuity, installment sale, or finance lease as a blended loan with the interest compounded six
monthly.
A blended loan means a loan under which payments by the borrower represent in part a
payment of interest and a part a repayment of capital and
(1) The interest part is calculated on capital outstanding at the time of each payment, and
(2) The rate of interest is uniform over the term of the loan.
Question 1
Selina Chichi Kristina

2010 184 188 242
days days days
2011 127 127 -
days days
2012 4 days 91 127
days days
2013 148 148 123
days days days
Required:
For each individual, explain whether she is resident/not resident in the years of income 2010, 2011 and
2013.
Question 2
Differentiate among the following terms:
a) To charge and assess;

b) Exempt income and income exempt;
c) A person and an individual;
d) Benefit in kind and in cash;
e) Entity and corporations.
Question 3
How do you determine the residential status of a Chinese company which has been operating in
Tanzania since January 2011?
Question 4
An entity commences a business on 01.07.2012 and accounts are prepared as follows: 01.04.2013 to
31.03.2014, and subsequently to 31 March.
The adjusted income of the company’s business is as follows:
Accounting period adjusted income
01.07.2012 to 31.03.2013 Tshs.150m
01.04.2013 to 31.03.2014 Tshs.240m
Required
Calculate the amounts that will be chargeable to company income tax in respect of the trade for the tax
years 2012, 2013 and 2014.
220 Income Tax
Question 5
Louise, a Danish national is a prominent baker who has a large bakery in Kigamboni – Dar es Salaam,
baking and distributing tasty traditional Danish cakes. To avoid house chores so that she can
concentrate on her recipes, she lives in a rented suite in one of the expensive beach hotels in Kigamboni.
During the year of income 2015, she was invited to make a presentation on her business model at
business summit in Stockholm – Sweden, where she was paid TZS.42,401,700 equivalent award by the
organizers, who also covered her return travel fare. She had time during the Stockholm visit to greet her
friend who lives in their house in Copenhagen – Denmark. In total, the trip took 18 days. She had other
trip within East Africa during the year, with days spent on such trips, aggregating to 165 days. The
amount she was paid in the summit was taxed in Sweden, but she wants to understand the taxability of
the amount in Tanzania.
Required:
(i) State the conditions under which a person’s income would be taxable in the United
Republic of Tanzania.
(ii) State, with reason(s) whether Louise’s income above would be taxable in Tanzania,
clearly specify further information (if any) you would need to conclude on the same.
(iii) Would the taxing of the income in Sweden put Louise in a disadvantage? Under what
circumstances?
Question 6
Study the following three given scenarios;
a. Mr. Judah maintains a permanent home in the United Republic of Tanzania (URT). He was outside
Tanzania (abroad) between 01.01.2012 and 08.12.2013 and came back to Tanzania between
08.12.2013 and 25.12.2013.
b. Ms Cathie was outside the United Republic of Tanzania but returned to Tanzania on 11 th June 2013
and again left Tanzania on 21st January 2014.
c. Mrs. Pakutokea is employed by the Tanzania Government and was posted at the Tanzania Embassy
in Tokyo Japan since 1st August 2012. She did not come to Tanzania during the year of income
2013.
Required:
For each of the scenarios above, state and explain whether the person mentioned was a resident of
United Republic of Tanzania for the year of income 2013.
Question 7
(a) Mr. Kamar is an Indian who came to Tanzania for the first time in 3rd June 2011 to work in an NGO
known as HEKI (T) Ltd. On 28th February 2012, HEKI (T) Ltd sent him to Angola and stayed there
until 2nd December 2012. On 26th January 2013, he travelled to Canada to see his family and stayed
there till 7th September 2013. On 1st May, 2014, he moved into his house in Dar es Salaam which he
had bought on 28th September 2013. Before moving into his house, he had been renting a two-
bedroom house since 1st January, 2014. On 21st December, 2014, the government of Uganda hired
him to work in the embassy of Uganda in South Africa where he has been staying to date. The
Ugandan appointment forced him to sell his residential house in Dar es Salaam on 26 th December
2014.
Required:
Use section 66 of the Income Tax Act, Cap 332 to determine the residential status of Mr. Kamar for
the years of income 2011, 2012, 2013, 2014 and 2015.
(b) Section 6 (2) of the Income Tax Act, Cap 332 provides that:
“The chargeable income of a resident individual who at the end of a year of income has been
resident in the United Republic for two years or less in total during the whole of the individual’s
life shall be determined under subsection (1) (b)”.
REQUIRED:
Ugandan appointment forced him to sell his residential house in Dar es Salaam on 26 th December
2014.
Required:
Use section 66 of the Income Tax Act, Cap 332 to determine the residential statustoofIncome
Introduction Mr. Kamar for 221
Taxation:
the years of income 2011, 2012, 2013, 2014 and 2015.
(b) Section 6 (2) of the Income Tax Act, Cap 332 provides that:
“The chargeable income of a resident individual who at the end of a year of income has been
resident in the United Republic for two years or less in total during the whole of the individual’s
life shall be determined under subsection (1) (b)”.
REQUIRED:
Discuss the implication of the above provision.
Question 8
(a) Explain “the test of residence of an individual” as enshrined under Section 66 of the Income Tax
Act, Cap. 332 (R.E. 2014).
(b) What is the significance of classifying a person as resident in the United Republic of Tanzania
(URT) for income tax purposes?
Answer to SEQ 1
YOI Celina Chichi Christie

2010 Resident (was in URT Resident (was in URT Resident (was in
more than 183 days in more than 183 days in URT more than 183
the YOI) the YOI) days in the YOI)
2011 Non resident(present Non resident(present Non resident(never
less than 183 days and less than 183 days but present in URT in
not present in 2009) not present in 2009) the YOI)
2012 Non resident(average Resident (average Non resident(not
days for 2012, 2011 and days for 2012, 2011 present in 2011)
2010 less than 122) and 2010 more than
122)
2013 Non resident(average Resident (average Non resident(not
days for 2013, 2012 and days for 2013, 2012 present in 2011)
2011 less than 122) and 2011 equal to 122)
Answer to SEQ 2
a) To assess is to determine the taxable income through computation and adjustment of various
sources of income while to charge is to apply the tax rate on the assessed value.
b) Exempt income and income exempt are both not taxable. Exempt income is income not taxed
because the source is exempt. While income exempt is income not taxed because of the
application of the law, order or rule or because of certain circumstances, it is derived from a
taxable source (e.g. president of the URT salary). Exempt income does not form part of the total
income to be included in the income tax return.
c) A person means an individual or an entity such as a company or trust whereas an individual
means a natural person.
d) Benefit in kind is income received in non-monetary terms such as free use of employer’s motor
car, accommodation. Benefit in cash on the other hand is income received or to be received in
monetary terms e.g. salary, interest, dividend etc.
e) An entity is a broader term that means a partnership, trust or corporation. A corporation means
any company or body corporate established, incorporated in the United Republic or elsewhere,
an unincorporated association or other body of persons, a government, a political subdivision of
a government, a parastatal organisation, a public international organisation and a unit trust but
excludes a partnership.
Answer to SEQ 3
In order to determine the residential status of a Chinese company which has been operating in Tanzania
since January 2011 the following factors needs to be considered:
a) Whether the Chinese company incorporated or formed under the laws of the United Republic; if
yes then it is a resident
e) An entity is a broader term that means a partnership, trust or corporation. A corporation means
any company or body corporate established, incorporated in the United Republic or elsewhere,
an unincorporated association or other body of persons, a government, a political subdivision of
a government, a parastatal organisation, a public international organisation and a unit trust but
222 Income Tax
excludes a partnership.
Answer to SEQ 3
In order to determine the residential status of a Chinese company which has been operating in Tanzania
since January 2011 the following factors needs to be considered:
a) Whether the Chinese company incorporated or formed under the laws of the United Republic; if
yes then it is a resident
b) Whether the management and control of the affairs of the corporation exercised during the year
of income were conducted in the United Republic of Tanzania. If yes, then the Chinese company
would be a resident.
Answer to SEQ 4
The basis periods for the entity are:

Y/I Basis periods
2012 01.07.2012– 31.12.2012 (6 months)
2013 01.01.2013 – 31.12.2013 (12 months)*
2014 01.04.2013 – 31.03.2014(12 months)*
(*Overlapping period: 01.04.2013 – 31.12.2013)
The adjusted income of the business should be apportioned as follows:
Y/I & Basis period Apportionment Adjusted income
2012 01.07 – 31.12.2012: TZS 10, 000m

(01.07.2012 – 31.12.2012) (6 / 9 x Sh.15, 000m.)
01.01 – 31.03.2013:
(3 / 9 x Sh.15, 000)
01.04 – 31.12.2013:
2013 9 / 12 x Sh.24, 000) TZS 23, 000m
(01.01.2013– 31.12.2013)
Adjusted income of overlapping

period (01.04.2013 – 31.12.2014)
2014 ignored in second basis period: TZS 6, 000m
(01.04.2013 – 31.03.2014) (Sh24, 000m – Sh.18, 000m)
Answer to SEQ 5
(i) Taxability in United Republic of Tanzania (URT)

2 conditions, either:
 The income has a source in the URT, or,

 The person is resident in the URT for the year of income relating to the income
(ii) Taxability of her income in Tanzania

The income is taxable in the URT because she is resident (has a permanent home and was
present in URT for part of 2015)
(i) Taxability in United Republic of Tanzania (URT)
2 conditions, either:
 The income has a source in the URT, or,

 Introduction
The person is resident in the URT for the year of income to to
relating Income Taxation: 223
the income
(ii) Taxability of her income in Tanzania

The income is taxable in the URT because she is resident (has a permanent home and was
present in URT for part of 2015)
(iii) Disadvantage??
 As a resident person in URT, Louise is eligible for section 77 foreign tax credit.
 In case the tax rate on the income in Sweden is lower than or equal to the one
applying in URT, no disadvantage
Answer to SEQ 6
(i) Mr Judah was resident of United Republic of Tanzania for the year of income 2013
Reasons:
 Has permanent home in URT
 He was present in URT during the year of income 2013
(ii) Ms Cathie was resident in Tanzania for the year of income 2013
Reasons:
 She stayed in URT for periods amounting to 205 days for the year of income 2013
which is more than 183 days
 She was present in URT during the year of income 2013

(iii) Mrs Pakutokea was resident of URT during the year of income 2013
Reasons:
 Mrs Pakutokea is employed by Tanzania Government and has been posted at
Tanzania Embassy in Tokyo Japan since 01/08/2012. Though she didn’t come to
Tanzania during the year of income 2013, she is an official of the Government of the
United Republic of Tanzania posted abroad. She is treated as resident in Tanzania
during the year of income 2013
Answer to SEQ 7
(a)
 A non-resident person for tax purposes means a person who has been physically in URT but
does not qualify to be a resident and charge the Worldwide income as per section 66 of the
ITA, 2004.
 A person who is not a resident means a person who is not a Tanzanian and is not
physically in URT for any part of the Year of Income.
(b) For 2011
He stayed for 212 days i.e.
June (28 days) + July (31 days) + August (31 days) + September(30 days) + October(31 days) +
November (30 days) + December (31 Days) therefore he is a resident of URT.
For 2012
He was physically present in URT for 87 days (i.e. January (31 days) + February (27 days) +
December (29 days) and he has no permanent home, therefore he is non-resident.
For 2013
He was physically present in URT for 140 days in 2013 + 87 days in 2012 + 212 days in 2011;
For 2012
He was physically present in URT for 87 days (i.e. January (31 days) + February (27 days) +
December (29 days) and he has no permanent home, therefore he is non-resident.
224 Income Tax
For 2013
He was physically present in URT for 140 days in 2013 + 87 days in 2012 + 212 days in 2011;
with the average of 146 days in three years therefore he is a resident.
For 2014
He was physically present in URT and he has a permanent home therefore he is a resident.
For 2015
He was not physically present in URT and he has been employed by a different government
therefore he is not a resident.
(iii) This provision implies that if a person has been a resident for only two years, or less then he has
to be treated as a non-resident and thus the person shall only be taxed for income whose source
is in URT.
Answer to SEQ 8
(a) An individual is said to be resident of United Republic of Tanzania (URT) for a year of income if
he/she:
i. has a permanent home in UR and present at any part of the Year of Income (YOI) or
ii. is present in URT during the YOI for a period(s) amounting in aggregate to at least 183 days
or
iii. is present in URT during the YOI and in each of the two preceding years of income for a
period averaging more than 122 days during each YOI
iv. is an employee or an official of the Government of URT working abroad during the YOI.
(b) The significance of classifying a person as resident in the United Republic of

Tanzania for income tax purposes as under s.6 of ITA 2004 are:
(i) Scope of chargeability (Scope of Income liable to tax)

The chargeable income of a person for a year of income shall be:
1. In the case of a resident person, the person’s income from employment, business or
investment for the year of income irrespective of the source of the income; and
2. In the case of a non-resident person, the person’s income from the employment,
business or investment for the year of income, but only to the extent that the income
has a source in the URT.
3. The income of a resident person without a permanent home in Tanzania and who at
the end of the year of income has been resident in the United Republic for two years
or less in total during the whole of the individual’s life shall be chargeable to tax only
on the income that has a source in Tanzania.
(ii) Allowances and relief in respect of capital deductions and exemptions.
(iii) Tax credit on double taxation as only provided to resident persons.

C2
Principles of Deduction: 225
SECTION C
Income Tax
STUDY GUIDE C2: PRINCIPLES OF

DEDUCTION
In calculation of chargeable income from employment, business and investment it may be allowed to
deduct certain expenditures incurred in generating such and income. In this Study Guide we learn the
principles related to deduction of expenditures in calculating chargeable income from employment
business and investment.
a) Explain the general principle of deductions.

b) Identify the specifically allowable deductions.
226 Income Tax
1.0 Explain
1.0 Explain
the general
the general
principle
principle
of deductions
of deductions
and and
identify
identify
the specifically
the specifically
allowable
allowable
deductions
deductions
[Learning
[Learning
outcome
outcome
a and a
b]and b]
1. General
1. General
Principle
Principle
Of Deductions
Of DeductionsIn Business
In Business
Income Income
Then after
Thenknowing
after knowing
elements
elements
which constitute
which constitute
businessbusiness
incomeincomethe nextthestep
nextisstep
to understand
is to understand
deductible
deductible
businessbusiness
or investment
or investment
expenses.expenses.
In fact Init fact
is very
it isimportant
very important
to understand
to understand
these these
allowable
allowable
expensesexpenses
because because
they affect
theyhow
affect
much
howismuch
left foris business/investment
left for business/investment
incomeincome
taxes. taxes.
In general all expenses
In general all expenses
incurred
incurred
‘wholly ‘wholly
and exclusively’
and exclusively’
in the production
in the production
of income
of income
are allowable
are allowable
expenses
expenses
(Section(Section
11(3)). 11(3)).
Therefore,
Therefore,
only expenditure
only expenditure
incurredincurred
for soleforpurposes
sole purposes
of producing
of producing
business/investment
business/investment
incomeincome
are allowable
are allowable
expensesexpenses
and expenditure
and expenditure
incurredincurred
not wholly
not wholly
and and
exclusively
exclusively
for business/investment
for business/investment
purposespurposes
are notare
allowable.
not allowable.
However,
However,
deduction
deduction
of capital,
of capital,
consumption
consumption
and excluded
and excluded
expenditures
expenditures
is not allowed
is not allowed
(Section(Section
11). 11).
Yet, the
Yet,
capital
the capital
expenditures
expenditures
on depreciable
on depreciable
assets assets
are deductible
are deductible
in forminofform
depreciable
of depreciable
annual annual
allowance
allowance
under the
under
third
the
schedule
third schedule
IncomeIncome
Tax ActTax
2004.
ActTherefore,
2004. Therefore,
depreciation
depreciation
chargescharges
calculated
calculated
under taxpayers’
under taxpayers’
accounting
accounting
policiespolicies
are notare
allowed
not allowed
too. too.
Definitions
Definitions
‘Consumption
‘Consumption
expenditure’ means means
expenditure’ any expenditure
any expenditure
incurredincurred
by anybyperson
any person
in the in
maintenance
the maintenance
of of
himself,himself,
his family
his or
family
establishment,
or establishment,
or for any
or for
other
anypersonal
other personal
or domestic
or domestic
purpose.
purpose.
“Expenditure
“Expenditure
of a capital
of a capital means means
nature”nature” expenditure
expenditure
that secures
that secures
a benefit
a benefit
lasting lasting
longer than
longer
twelve
than twelve
months;”
months;”
‘Excluded
‘Excluded
expenditure’ means:means:
expenditure’
a) taxa)
payable
tax payable
under this
under
Actthis
except
Act except
skills and
skills
development;
and development;
b) bribes
b) and
bribes
expenditure
and expenditure
incurredincurred
in corrupt
in corrupt
practice;
practice;
c) fines
c) and
fines
similar
and similar
penalties
penalties
payablepayable
to a government
to a government
or a political
or a political
subdivision
subdivision
of a government
of a government
of of
any country
any country
for breach
for breach
of any law
of any
or subsidiary
law or subsidiary
legislation;
legislation;
d) expenditure
d) expenditure
to the to
extent
the extent
to which to incurred
which incurred
by a person
by a person
in deriving
in deriving
exemptexempt
amountsamounts
or finalor final
withholding
withholding
payments;
payments;
e) distributions
e) distributions
by an entity
by anorentity or
Distribution
Distribution
by an entity:
by an entity:
a) means:
a) means:
i] a payment
i] a payment made by made
the by
entity
the to
entity
any toof any
its members,
of its members,
in any in
capacity
any capacity
to the to
extent
the extent
that thethat the
amountamount
of the payment
of the payment
exceeds exceeds
the amount
the amount
of any payment
of any payment
made bymade
the member
by the member
to the entity
to theinentity in
return for
return
the entity's
for the entity's
payment;payment;
or or
ii] anyii]re-investment
any re-investment
of dividends
of dividends
which enhances
which enhances
the value
theofvalue
shares
of shares
iii] anyiii]capitalisation
any capitalisation
of profits;
of profits;
b) includes a payment made by the entity to one of its members on cancellation, redemption or
surrender of a membership interest in the entity, including as a result of liquidation of the entity or as
a result of the entity purchasing a membership interest in itself;
c) excludes a payment of the type referred to in paragraph (a) (i) or (b):
i] to the extent to which the payment is directly included in calculating the member's income or in
calculating a final withholding payment, other than by reason of being a distribution; and
ii] without limiting any amount treated as a distribution by paragraph (a)(ii), that consists of the
issue of further membership interests in the entity to the entity's members in approximate
proportion to the members' existing rights to share in dividends of the entity; and
d) In the case of a controlled foreign trust or corporation, is interpreted in accordance with Section 75.
2. Specific Allowable Deductions

issue of further membership interests in the entity to the entity's members in approximate
proportion to the members' existing rights to share in dividends of the entity; and
d) In the case of a controlled foreign trust or corporation, is interpreted in accordance with Section 75.
2. Specific Allowable Deductions

2.2 Interest expense
Interests bearing external financing activities are normal in any business or investment venture.
Therefore, Interest incurred by a person during a year of income under a debt obligation shall be
considered to have been incurred wholly and exclusively in the production of income from a business or
investment if the debt obligation was incurred wholly and exclusively in the production of income from
the business or investment. Likewise, interest incurred on non-monetary debts is also deductible when
the debt obligation was incurred wholly and exclusively in the production of income from the business or
investment (Section 12(1)(b)). However, when interest incurred on foreign currency debt obligation is
deductible only when they are actually paid (39(g)).
Nevertheless, interest expenses incurred wholly and exclusive in production of business or investment
income for exempt controlled resident entity are restricted. In fact, interest expenses deducted by an
exempt-controlled resident entity must not exceed sum of interest equivalent to debt-to-equity ratio of 7 to
3 (Section 12(2). In case of changes in debt or equity amounts; the amount of the equity or debt should
be the average of balances of amount of debt or equity at the end of each period (Section 12(4)).
Definitions
‘An exempt-controlled resident entity’ for a year of income if it is resident and at any time during the year
of income 25% or more of the underlying ownership of the entity is held by entities exempt under the
Second Schedule, approved retirement funds, charitable organisations, non-resident persons or
associates of such entities or persons.
Section 12(4)
‘Debt’ means any debt obligation excluding: a non-interest bearing debt obligation, a debt obligation
owed to resident financial institution and a debt obligation owed to a non-resident bank or financial
institution on whose interest tax is withheld in the United Republic. While
‘equity’ includes: paid up share capital, paid up share premium and retained earnings on an
unconsolidated basis determined in accordance with generally accepted accounting principles.
Section 12(5)
‘Period’ means a month or part of month
Section 12(5)
‘Parastatal organisation’ means: a local authority of the United Republic, a body corporate established by
or under any Act or Ordinance of the United Republic other than the Companies Act, and any company
registered under the Companies Act where –
a) in the case of a company limited by shares, not less than 50 percent of the issued share capital of the
company is owned by the Government or an organisation which is a parastatalorganisation under this
definition; or
b) in the case of a company limited by guarantee:
i] the members of the company include the Government or an organisation which is a parastatal
organization under this definition; and
ii] such members have undertaken to contribute not less than 50 percent of the amount to be
contributed by members in the event of the company being wound up.
Section 12(5)
2.3 Trading stock allowance

Costs of goods sold are tax deductible business expenses. They are calculated by taking the opening
value of trading stock of the business for the year of income; plus expenditure incur red by the person
during the year of income that is included in the cost of trading stock of the business; less the closing
value of trading stock of the business for the year of income (Section 13(2)). The closing stock should be
valued at the lower of the cost of the trading stock of the business at the end of the year of income; or the
market value of the trading stock of the business at the end of the year of income (Section 13(4).
Section 12(5)
2.3 Trading stock allowance

Costs of goods sold are tax deductible business expenses. They are calculated by taking the opening
228 Income Tax
value of trading stock of the business for the year of income; plus expenditure incur red by the person
during the year of income that is included in the cost of trading stock of the business; less the closing
value of trading stock of the business for the year of income (Section 13(2)). The closing stock should be
valued at the lower of the cost of the trading stock of the business at the end of the year of income; or the
market value of the trading stock of the business at the end of the year of income (Section 13(4).
Definition
The opening value of trading stock of a business for a year of income is the closing value of trading stock
of the business at the end of the previous year of income.
Section 13(3)
2.4 Repair and maintenance expenditure

Revenue expenses incurred on repair and maintenance of depreciable assets owned and employed by
the person wholly and exclusively in the production of income from the business are deductible. But,
expenditures incurred to improve lives of assets or repairs and maintenance of capital nature should be
capitalised in the costs of assets rather than be deducted as revenue expenses (Section (14)(2)).
2.5 Agriculture improvement, research development and environmental expenditure

Agriculture improvement, research development and environmental expenditure are deductible expenses
when incurred for business purposes (Section 15 (1)). In addition mining business might make a
provision allowance account under environmental expenditure and apply for their deductions to the
Commissioner; if approved they become deductible expenses (Section 15(3)).
Definitions
‘Agricultural improvement expenditure’ means expenditure incurred by the owner or occupier of farm
land in conducting an agriculture, livestock farming or fish farming business where the expenditure is
incurred in clearing the land and excavating irrigation channels; or planting perennial crops or trees
bearing crops.
‘Environmental expenditure’ means expenditure incurred by the owner or occupier of farmland for
prevention of soil erosion”;
‘Research and development expenditure’ means expenditure incurred by a person in the process of
developing the person's business and improving business products or process and includes expenditure
incurred by a company for the purposes of an initial public offer and first listing on the Dar es Salaam
Stock Exchange but excludes any expenditure incurred that is otherwise included in the cost of any asset
used in the use in any such process, including an asset referred to in paragraph 1(3) of the Third
Schedule .
From definitions of agriculture improvement expenditure, the expenditure can be deducted by a person
conducting agriculture business while, environmental expenditure are deductible by both those in
agriculture for the reason explained in the definitions. Finally, the research and development expenditure
can be deducted by any type of business.
Definition
‘Agricultural business’ means the practice of rearing of crops or animals including forestry, beekeeping,
acqua-culture and faming with a view to deriving a profit but excludes extraction of natural resources o
processing of agricultural produce other than preparing such produce for the purpose of sale in its
original form.
2.6 Contribution and donations

Contribution and donations made by taxpayers are generally not incurred wholly and exclusive for
business purposes, then generally all these expenses should not be deducted. However, contribution and
donations made under Section 12 of the Education Fund Act and amount paid to local government
authority, which are statutory obligations to support community development projects, are deducted
100%. Conversely, deduction of amounted contributed to a charitable institution or social development
project should not exceed 2% of the person's income from the business calculated without such
deduction (Section 16(2).
original form.
2.6 Contribution and donations

Contribution and donations made by taxpayers are generally not incurred wholly and exclusive for
business purposes, then generally all these expenses should not be deducted. However, contribution and
donations made under Section 12 of the Education Fund Act and amount paid to local government
authority, which are statutory obligations to support community development projects, are deducted
100%. Conversely, deduction of amounted contributed to a charitable institution or social development
project should not exceed 2% of the person's income from the business calculated without such
deduction (Section 16(2).
‘Charitable organisation’ means a resident entity of a public character that satisfies the following
conditions:
(i) the entity was established and functions solely as an organisation for: the relief of poverty or
distress of the public, the advancement of education or the provision of general public health,
education, water or road construction or maintenance; and
(ii) the entity has been issued with a ruling by the Commissioner under Section 131 currently in
force stating that it is a charitable organisation or religious organisation.
Others donations and contributions can only be deducted if they are incurred wholly and exclusively for
the purposes of business. For instance, contributions to trade organisations can be deductible if the trade
association furthers the businesses of its members (Lochgelly Iron and Coal Co Ltd v Crawford [1913] 6
TC 267). Similarly, contribution to charitable organisations of clothes with businesses’ advertisements or
to support exhibition might qualify as deductible expenses (Morley v Lawford [1928] 14 TC 229). Also
costs incurred on businesses entertainment for the purposes of business might be allowable expenses
(Bentleys Stokes & Lowless v Beeson [1952] 33 TC 491).
2.7 Depreciation allowances for depreciable assets

Depreciation allowance for depreciable assets owned and employed by the person during the year of
income wholly and exclusively in the production of the person's income from the business the allowances
granted under the Third Schedule of the Income Tax Act Cap 332 is allowable expenses (Section 17);
this part is covered in the next Section. So, depreciable allowance of depreciable assets basing on
taxpayer’s accounting policies is not deductible.
2.8 Losses on realisation of business assets and liabilities

Losses from realisation of a business asset of the business that is or was employed wholly and
exclusively in the production of income from the business; a debt obligation incurred in borrowing money,
where the money is or was employed or an asset purchased with the money is or was employed wholly
and exclusively in the production of income from the business; or a liability of the business other than a
debt obligation incurred in borrowing money, where the liability was incurred wholly and exclusively in the
production of income from the business are all deductible expenses (Section 18).
2.9 Losses from a business or investment

Similarly losses incurred by businesses with exceptional of partnership or a foreign permanent
establishment are deductible expenses. These losses include any unrelieved loss of the year of income
of the person from any other business and any unrelieved loss of a previous year of income of the person
from any business (Section 19(1)).
Additionally, unrelieved losses from other foreign source losses can be deducted only in calculating the
person's foreign source income and unrelieved loses from agriculture business can only be deducted
from calculating business income from agriculture.
Definition
‘Loss’ of a year of income of a person from any business or investment is the excess of amounts
deducted in calculating the person's income from the business or investment over amounts included in
calculating such income.
‘Unrelieved loss’ means the amount of a loss that has not been deducted in calculating a person's
income.
2.10 Capital receipts

Definition
‘Loss’ of a year of income of a person from any business or investment is the excess of amounts
230 Income Tax in calculating the person's income from the business or investment over amounts included in
deducted
calculating such income.
‘Unrelieved loss’ means the amount of a loss that has not been deducted in calculating a person's
income.
2.10 Capital receipts

Proceeds from sale of depreciable assets would be treated in computation of gain from realisation of
depreciable assets as required in the schedule of the Income Tax Act ,Cap 332. Likewise, receipts from
disposal of investment income should be used in calculating investment capital gain and the investment
income not in computing business income.
2.11 Foreign currency exchange gain

Gain or loses from foreign exchanges if related to business transactions are taxable income and
deductible expenses respectively. Yet the computation of foreign exchange gains should be done when
there is actual receipt of the foreign currency. Because it is at that point the foreign currency debt is
realised (Section 40(2) (c)). Nevertheless exchange gains or losses on translation of foreign owned
operation are not allowed.
2.12 Insurance claims

When there are receipts from insurance compensation relating to depreciable assets; they should be
treated as incoming from realisation of the depreciable assets and used from computation of gain or loss
from realization of depreciable assets. Also insurance compensation relating to investment assets are
used in computing capital loss or gain from that investment assets. However, any receipt of insurance
against current assets, business losses and other accident are taxable business income.
2.13 Legal and accountancy charges

Expenses incurred in preparation of financial accounts and tax returns are generally allowable expenses.
However, legal and expenses incurred in tax appeal are not deductible (Smiths Potato Estates Ltd v
Bolland1948 30 TC 267). In that case, the judge argued that they not incurred wholly and exclusive in
production of income but in ascertaining tax liabilities therefore the expense were disallowed.
2.14 Business entertainment and gifts

Expenses and gifts incurred in entertaining employees in relationship to their employment are generally
allowed as they constitute employment income. But, those expenses incurred for non-employee persons
are disallowed expenditures if they are not wholly and exclusively incurred for businesses purposes.
2.15 Pension scheme contributions and other employee benefits

Payment made to both approved and unapproved pension schemes and other employee’ benefits are
deductible businesses expenses so long as they payments are included in calculations of employment
income (Income Tax Regulation 4). In addition, any employment benefits as training costs and
redundancy incurred by employers are deductible expenses provided they are included in employees’
income.
2.16 Legal and other expenses
Legal and other expenses in connection with normal business or investment activities and they are
incurred wholly and exclusive for business purpose are deductible expenses. However, those expenses
incurred in connection of acquisition of capital assets should be capitalised in the costs of assets and
therefore they are not deductible expenses (Section 37).
2.17 Other losses and defalcations

Only losses from business or investment activities incurred wholly and inclusive for businesses purposes
are allowable expenditures. These losses might include fire, burglary, accident and loss of profits and
when there is insurance against them insurance costs are deductible too. However, losses arising from
loss of capital assets are not straight deductible from business income. They have either to go to the
computation of gain or loss from realisation of business, depreciable or investment assets. But, insurance
expenses against depreciable assets are allowable expenses.
On the other hand, when employees defraud their employers the loss incurred is deductible expenses,
while defalcations by directors, sole traders or partners in partnership are not deductible (Curtis v J & G
Oldfield Ltd [1925] 9 TC 319). In this case, the judge argued that misappropriations of assets by persons
in control of businesses are allocations of profit of the businesses not trade activities of the businesses;
therefore these losses are not deductible.
are allowable expenditures. These losses might include fire, burglary, accident and loss of profits and
when there is insurance against them insurance costs are deductible too. However, losses arising from
loss of capital assets are not straight deductible from business income. They have either to go to the
computation of gain or loss from realisation of business, depreciable or investment assets. But,
Principles of insurance
Deduction: 231
expenses against depreciable assets are allowable expenses.
On the other hand, when employees defraud their employers the loss incurred is deductible expenses,
while defalcations by directors, sole traders or partners in partnership are not deductible (Curtis v J & G
Oldfield Ltd [1925] 9 TC 319). In this case, the judge argued that misappropriations of assets by persons
in control of businesses are allocations of profit of the businesses not trade activities of the businesses;
therefore these losses are not deductible.
2.18 Bad and doubtful debts

Businesses’ bad debts of revenue nature are deductible expenses when they become bad and actually
written off (Section 25(4); Section 39). Therefore, general provision for doubtful debts is not deductible
expenses. Yet, provision for specific doubtful debt may be allowed. Furthermore, a bad debt arising out
of business or investment activities and its associated costs is not allowable (Curtis v J & G Oldfield Ltd
[1925] 9 TC 319).
Question 1
Samaria Enterprises, super dealers of construction products, has recently constructed its office premises.
The company incurred TZS 45,000,000 for planting of grasses, fruit trees, other trees, and flowers in the
surroundings of the premises. Samaria is claiming a deduction for this expenditure on the basis that it is
an agricultural expenditure.
Required:
Comment on the Samaria claim
Question 2
KekoLtd, owns a factory which produces textile products. The chemicals released by the factory have
been claimed to be affecting the environment. Keko Ltd has thus incurred TZS 34,000,000 to clean the
environment claimed to have been affected by the chemicals. The company claims deduction of such
expenditure claiming that it is environmental expenditures.
Required:
Is Keko Limited claim right?
Question3
Explorers Ltd has won a contract to explore oil and gas along the Tanzania’s Indian Ocean shore. The
company claims, for taxation purposes, deduction of all the costs of renting exploration ship and
surveying costs which amounts to TZS 300,000,000,000 per year. Moreover the company is claiming
deduction of underwriting fees at DSE for issue of final round of its ordinary shares. On top of that the
company further claims a deduction of TZS 15,000,000 consultancy fees for formulation of office
regulations and procedures. The company’s claim for deduction is based on the fact that all these
expenditures are research and development expenditures.
Required:
Comment on the validity of the claims.
Question 4
A foreign parent company, AMADEUS LIMITED has a loan of TZS.40,000,000 to its wholly-owned
subsidiary in Tanzania, Amazon Tanzania Limited. Amadeus Limited’s equity in Amazon Tanzania
Limited is TZS.2,000,000 and interest payable on the debt for the 2019 year of assessment is
TZS.6,000,000.
Required:
Determine the interest that should be allowed for tax purposes in 2019 year of assessment for Amazon
Tanzania Limited. Explain your answer.
Question 5
Question 4
A foreign parent company, AMADEUS LIMITED has a loan of TZS.40,000,000 to its wholly-owned
subsidiary in Tanzania, Amazon Tanzania Limited. Amadeus Limited’s equity in Amazon Tanzania
232 Income Tax is TZS.2,000,000 and interest payable on the debt for the 2019 year of assessment is
Limited
TZS.6,000,000.
Required:
Determine the interest that should be allowed for tax purposes in 2019 year of assessment for Amazon
Tanzania Limited. Explain your answer.
Question 5
Company ADC Ltd was incorporated in 2008 and engaged in construction and consultancy services.
The following information were extracted for the company’s return of income for 2019 year of income:
Consultancy fee TZS 20m
Gross income (construction) TZS 300m
Expenses (allowable) TZS 150m
Donation to Education Fund (TEA) TZS 50m
Paid Sh. 10m/= to a charitable organization which is dealing with HIV affected children.
For the rehabilitation of a local dispensary TZS 50m
Donation to a charitable institution for construction of two Classrooms at cost TZS 25m
Required
Calculate the Taxable Business Income for 2019.
Question 6
In calculating income from business, the Income Tax Act, Cap 332 requires a certain treatment for
unrelieved losses.
Required:
(i) Explain the treatment of unrelieved losses for tax purposes.
(ii) Explain the rationale for the treatment of unrelieved losses you dealt with above.
(iii) State the exception to the treatment you explained in (i) above and its rationale.
Answer to SEQ 1
Persons who may claim deduction with respect to agricultural expenditure are those dealing with
agriculture, livestock farming or fish farming business. Moreover the expenditure must have been
incurred in respect of clearing land, construction of irrigation channels, planting of perennial crops or
trees bearing crops.
Samaria is a dealer of construction product and not a dealer in agriculture, livestock farming or fish
farming business. This disqualifies Samaria from claiming deductions as agricultural expenditure.
Moreover, the planting of grasses, trees bearing no crops, and flowers still do not amount to the like of
things which when planted may make an expenditure deductible as an agricultural expenditure.
Furthermore, even the planting of fruit trees around the office premises may not amount to agriculture in
its own.
Answer to SEQ 2
Environmental expenditure may exist whenever one incurs expenditure to prevent soil erosion.
Samaria is a dealer of construction product and not a dealer in agriculture, livestock farming or fish
farming business. This disqualifies Samaria from claiming deductions as agricultural expenditure.
Moreover, the planting of grasses, trees bearing no crops, and flowers still do not amount to the like of
things which when planted may make an expenditure deductible as an agricultural expenditure.
Principles
Furthermore, even the planting of fruit trees around the office premises may not amount of Deduction:
to agriculture in 233
its own.
Answer to SEQ 2
Environmental expenditure may exist whenever one incurs expenditure to prevent soil erosion.
Therefore, expenditures to clean environment after being contaminated with chemical do not amount to
environmental expenditure at all.
Answer to SEQ 3
Research and development expenditure may be categorized in the following:
 Expenditures to establish a business e.g. incorporation costs, cost to set up organization’s

systems, procedures, and regulations – including cost to issue IPO and first listing of shares and
securities at the DSE. The expenditure shall not be associated with asset acquisition used in
such process of business establishment.
 Expenditures to develop a new product or new process or improvement of the existing product or
process
Back to the expenditure incurred by Explorer:
 Ship renting expenditure is related with exploration. It is thus a research and development
expenditure.
 The only expenditure in respect of share listing at the DSE which are regarded Research and
Development expenditure are those related to the IPO or first secondary listing. Therefore,
expenditure to list the final round of secondary listing cannot be regarded research and
development expenditure.
 Expenditures to develop new or improved business regulations and procedures qualify to be
regarded as research and development expenditure.
Answer to SEQ 4
Determination of Allowable Interest – 2019 Year of Assessment

Interest allowable shall not exceed debt to equity ratio of 7:3 as provided for under thin
capitalization rules. Amadeus Limited is an exempt person with Amazon Limited being an
exempt-controlled resident entity. So with an equity of TZS.2,000,000, the interest payable on
the debt of TZS.40,000,000 has to be subject to the thin capitalization rule.
Interest charged
Equity Investment 2,000,000
Maximum Exempt Loan Allowed 7/3x 2,000,000 = 4,666,667
Interest Allowed
7 x Equity x Interest Charged = 7 x 2,000,000 x 6,000,000
3 x Total foreign loan from parent company 3 x 40,000,000
= 700,000
Answer to SEQ 5
Solution
Income
Construction 200
Consultancy 120
Total Income 320m
Less:
Operational and financial expenses (150m)
170m
Donation to Education Fund (TEA) (50m)
Balance 120m
Other donations
Interest Allowed
7 x Equity x Interest Charged = 7 x 2,000,000 x 6,000,000
3 x Total foreign loan from parent company 3 x 40,000,000
234 Income Tax
= 700,000
Answer to SEQ 5
Solution
Income
Construction 200
Consultancy 120
Total Income 320m
Less:
Operational and financial expenses (150m)
170m
Donation to Education Fund (TEA) (50m)
Balance 120m
Other donations
Other contrs. 2% of 120m – (2.4m/=) 2.4m
Taxable income 117.6m
Note:
Education Fund contribution allowed in full. Other contributions to charities ceiling is 2% of the income
before the deduction.
Answer to SEQ 6
Unrelieved loss
(i) Treatment for tax purposes

Unrelieved loss from one business can be deducted from another business, and
unrelieved loss for the same business from a previous year of income is deductible for
the year of income.
(ii) Rationale
 The rational is to allow businesses some time, especially in initial years, to recover
the losses suffered before actually levying income tax on the businesses.
 Ideally, if the objective is to tax the profit, then the unrelieved losses comes only as
a result of having the business divided into years of income for administrative
purposes.
 Allowing a deduction for unrelieved losses essentially ensures that what is eventually
taxed is purely the gains or profits from the business.
(iii) Exception
An exception to the treatment of unrelieved losses exist, for corporations, in which case
where they make losses for 3 consecutive years, if it makes a loss in the 4 th year, the
corporation will be liable to tax, which will be based on turnover.
The rationale for this is that 5 years is considered adequate for a venture to make turn
around, and since it enjoys the public services from the state, it should somehow
contribute to the same.
C3
SECTION C
Income Tax
STUDY GUIDE C3: REALIZATION OF

ASSETS AND LIABILITIES
Assets and liabilities may transfer hands from one owner to another on either business, investment or
other purposes. The gains or losses may be made. In this Study Guide we learn how to calculate gain or
loss from realization of assets and liabilities.
a) Explain the rules relating to calculation of gain/loss of assets and liabilities

b) Explain the rules relating to realisation of assets and liabilities.
c) Determine the incomings and cost of assets and liabilities.
d) Explain special rules on deemed realisation
1.0 Explain the rules relating to calculation of gain/loss of assets and liabilities and
explain the rules relating to realisation of assets and liabilities.
[Learning outcome a and b]
1. Rules Relating To Calculation Of Gain/Loss Of Assets And Liabilities

The need to calculate gains or losses on realisation of assets or liabilities for taxation purposes is
established in many provisions of the Income Tax Act, Cap 332. e.g section 8 (2) (c) requires the
inclusion of gains from the realisation of business assets or liabilities of the business in calculating a
person's gains or profits from conducting a business for a year of income. While section 18 grant the
deduction in respect of any loss of the person, from the realisation during the year of income of :-
(a) a business asset of the business that is or was employed wholly and exclusively in the
production of income from the business;
(b) a debt obligation incurred in borrowing money, where the money is or was employed or an
asset purchased with the money is or was employed wholly and exclusively in the
production of income from the business; or
(c) a liability of the business other than a debt obligation incurred in borrowing money, where
the liability was incurred wholly and exclusively in the production of income from the
business.
1.1 Calculation of gain (loss):
 a person’s gain from the realization of an asset or liability is the amount by which the sum of the
incomings from the asset or liability exceeds the cost of the asset or liability at the time of
realization
 a person’s loss from the realization of an asset or liability is the amount by which the cost of
asset or liability exceeds the sum of the incomings (amount received) for the asset or liability at
the time of realization
236 Income Tax
1.2 Net gains from the realization of investments assets

Section 36(3) provides the basis of calculating net gains from the realization of investment assets of
an investment of a person for a year of income. The net gains are the sum of all gains from the
realization of investment assets of the investment during the year reduced by:-
(a) The total of all losses from the realization of investment assets of the investment during the
year
(b) Any unrelieved net loss of any other investment of the person for the year; and
(c) Any unrelieved net loss for a previous year of income of the investment or any other
investment of the person..
Example
Mr. Mapana a resident individual owns various investment assets, including shares in companies A, B, C
and D and interest inland and buildings. During the year of income he disposes of some of his shares in
the companies as indicated below. Calculate the net gain received on realization of those shares.
Coy shares Sale Price Cost Gain/(Loss)
Coy A TZS. 17,000,000 TZS. TZS.

shares 15,800,000 1,200,000
Coy B TZS. 26,100,000 TZS. TZS.

shares 25,000,000 1,100,000
Coy C TZS. 18,000,000 TZS. TZS.

shares 18,200,000 (200,000)
Coy D TZS. 16,400,000 TZS.16,500,000 TZS.

shares (100,000)
Unrelieved net loss from realization of investment assets previous year 200,000
Calculation of net gains from the realization of investment assets of an investment of a person for a year
of income is calculated as illustrated in the following example:- (All companies are resident in the United
Republic)
Gains obtained from sale of shares in Company A TZS. 1,200,000/=
Gains obtained from sale of shares in Company B TZS. 1,100,000/=
Total TZS. 2,300,000/=
Less: Total losses from realization of investment asset
Loss obtained from sale of shares in company C 200,000
Loss obtained sale of shares in company D 100,000
300,000
Less: Unrelieved net loss from realization
of investment assets previous year 200,000
500,000/=
Gains to be included in calculating total income (S. 9(2) (b)) Shs. 1,800,000/=
Loss obtained from sale of shares in company C 200,000
Loss obtained sale of shares in company D 100,000

Realisation of assets and Liabilities: 237
300,000
Less: Unrelieved net loss from realization
of investment assets previous year 200,000
500,000/=
Gains to be included in calculating total income (S. 9(2) (b)) Shs. 1,800,000/=
The sum of losses incurred in realization of the shares in companies C and D are set off against the
gains derived from the realization of shares in companies A and B.
2. Rules Relating To Realisation Of Assets And Liabilities.

2.1 Realization of Assets
Realisation of assets is dealt with Section 39. According to this Section an asset is said to have been
realized when:
a) the person parts with ownership of the asset including when the asset is sold, exchanged,
transferred, distributed, cancelled, redeemed, destroyed, lost, expired or surrendered. This part
does not apply to assets of deceased individuals.
b) in the case of an asset of a person who ceases to exist, excluding a deceased individual,
immediately before the person ceases to exist;
c) in the case of an asset other than a Class 1, 2, 3, 5, 6 or 8 depreciable asset or trading stock,
where the sum of the incomings for the asset exceeds the cost of the asset;
d) in the case of an asset that is a debt claim owned by a financial institution, when the debt claim
becomes a bad debt as determined in accordance with the relevant standards established by the
Bank of Tanzania and the institution writes the debt off as bad;
e) in the case of an asset that is a debt claim owned by a person other than a financial institution,
the person reasonably believes the debt claim will not be satisfied, the person has taken all
reasonable steps in pursuing the debt claim and the person writes the debt off as bad;
f) in the case of an asset that is a business asset, depreciable asset, investment asset or trading
stock, immediately before the person begins to employ the asset in such a way that it ceases to
be an asset of any of those types;
g) in the case of a foreign currency debt obligation, when such debt is actually paid;
h) in the case of an asset owned by an entity whose the underlying ownership of an entity changes
by more than 50% as compared with that ownership at any time during the previous three years,
the entity would be treated as realising any assets owned by it immediately before the change.
From the definition of realisation of assets above, it can be said that an asset is realised when it is written
off from accounting records because of transaction that lead to transfer of risks and rewards associated
with the asset. Also, realisation of assets occurs when a transaction leads to reduction of value of assets
because of significant change in risks and rewards over an asset there is realisation of the assets.
However, decrease in value of assets because of depreciation or impairment loss does not result in
realisation of assets because the decrease does no result from transaction. Yet, besides realisation of
assets through transactions it is possible to realise an asset on occurrence of events like fire, thieves and
others mentioned above.
Definition
‘Underlying ownership’, in relation to an entity, means membership interests owned in the entity, directly
or indirectly through one or more interposed entities, by individuals or by entities in which no person has
a membership interest; or in relation to an asset owned by an entity, means the asset owned by the
persons having underlying ownership of the entity in proportion to that ownership of the entity.
Section 3
‘Asset’ means a tangible or intangible asset and includes currency, goodwill, know-how, property, a right
to income or future income and a part of an asset.
Definition
‘Underlying ownership’, in relation to an entity, means membership interests owned in the entity, directly
or indirectly through one or more interposed entities, by individuals or by entities in which no person has
238 Income Tax
a membership interest; or in relation to an asset owned by an entity, means the asset owned by the
persons having underlying ownership of the entity in proportion to that ownership of the entity.
Section 3
‘Asset’ means a tangible or intangible asset and includes currency, goodwill, know-how, property, a right
to income or future income and a part of an asset.
Section 3
‘Corporation’ means any company or body corporate established, incorporated or registered under any
law in force in the United Republic or elsewhere, an unincorporated association or other body of persons,
a government, a political subdivision of a government, a parastatalorganisation, a public international
organisation and a unit trust but excludes a partnership.
Section 3
‘Business asset’ means an asset to the extent to which it is employed in a business and includes a
membership interest of a partner in a partnership but excludes:
a) trading stock or a depreciable asset;

b) an interest in land held by an individual that has a market value of less than 10 million shillings at
the time it is realised and that has been used for agricultural purposes for at least two of the three
years prior to realisation;
c) the beneficial interest of a beneficiary in a resident trust; and
d) shares and securities listed on the Dar es Salaam Stock Exchange that are owned by a resident
person or by a non-resident person who either alone or with other associates controls less than
25% of the controlling shares of the issuer company.
Section 3
‘Depreciable asset’ means an asset employed wholly and exclusively in the production of income from a
business, and which is likely to lose value because of wear and tear, obsolescence or the passing of time
but excludes goodwill, an interest in land, a membership interest in an entity and trading stock.
Section 3
‘Entity’ means a partnership, trust or corporation.
Section 3
‘Foreign currency debt claim’ means a debt claim that is denominated in a currency other than Tanzanian
shillings.
Section 3
On the other hand realisations of liabilities are regulated by Section 40(2) of the Income Tax Act 2004.
Actually liabilities of a person are deemed realised when:
a) the person ceases to owe the liability including when the liability is transferred, satisfied,
cancelled, released or expired. This part does not apply to liabilities of deceased individuals
b) in the case of a liability of a person who ceases to exist, excluding a deceased individual,
immediately before the person ceases to exist;
c) in the case of a foreign currency debt obligation, when such debt is actually paid.
d) in the case of a liability of an entity whose underlying ownership of an entity changes by more
than 50% as compared with that ownership at any time during the previous three years, the entity
is treated as realizing any liabilities owed by it immediately before the change; and
e) in the case of a liability owed by a resident person, immediately before the person becomes a
non-resident person, other than liabilities owed by the person through a permanent
establishment situated in the United Republic immediately after becoming non-resident.
Determine the incomings and cost of assets and liabilities and explain special rules
on deemed realization
[Learning outcome c and d]
3. Incomings And Cost Of Assets And Liabilities

3.3 Incomings from realisation of assets and incurring liabilities
Specifically, incomings from realisation of an asset of a person means amounts derived by the person in
respect of owning the asset including amounts derived from altering or decreasing the value of the asset;
Determine the incomings and cost of assets and liabilities and explain special rules
on deemed realization
3. Incomings And Cost Of Assets And Liabilities

3.3 Incomings from realisation of assets and incurring liabilities
Specifically, incomings from realisation of an asset of a person means amounts derived by the person in
respect of owning the asset including amounts derived from altering or decreasing the value of the asset;
and amounts derived under the asset including by way of covenant to repair or otherwise; and amounts
derived or to be derived by the person in respect of realising the asset (Section 38). While the incoming
from incurring liabilities are the amount derived from incurring the liability (Section 40(1) (b)).
Definition
‘Amount derived’ means a payment received by a person or that the person is entitled to receive;-
Section 3
Example
Robots and Assembler Design makers borrowed money from a bank for the purpose of her business.
The loan amount was Tshs14,000,000 but she received Tshs10,000,000 after deduction of bank charges
and loan insurance.
Required:
Determine the incoming from incurring the business liability.
Answer
The incoming of liability is the amount received or to be received from the loan, in this case the incoming
is Tshs.10,000,000.
3.2 Costs of assets and liabilities
Costs of assets or liabilities represent its monetary values. According to Section 37 and Section 40 costs
of assets or liabilities constitute a total of:
(i) expenditure incurred by the person in acquiring the asset including, where relevant, expenditure
of construction, manufacture or production of the asset;
(ii) expenditure incurred by the person in altering, improving, maintaining and repairing the asset;
(iii) expenditure incurred by the person in realising the asset or liabilities;
(iv) incidental expenditure incurred by the person in acquiring and realising the asset or liability; and
(v) any amount to be directly included in calculating the person's income; or that is an exempt
amount or final withholding payment of the person; but excludes consumption expenditure,
excluded expenditure and expenditure to the extent to which it is directly deducted in calculating
the person's income or included in the cost of another asset or liability.
Furthermore, the cost of trading stock should not include repair, improvement or depreciation of
depreciable assets; and determined under the absorption-cost method (Section 37(1)).
Furthermore, trading stocks should be valued consistently using either the first-in-first-out method or the
average-cost method, and these method can be used valuating non-trading stock fungible assets
(Section 37(2)).
Definitions
‘Absorption-cost method’ means the generally accepted accounting principle under which the cost of
trading stock is the sum of direct asset costs, direct labour costs and factory overhead costs.
Section 37(7)
‘Depreciable asset’ means an asset employed wholly and exclusively in the production of income from
abusiness, and which is likely to lose value because of wear and tear, obsolescence or the passing of
time but excludes goodwill, an interest in land, a membership interest in an entity and trading stock.
Section 3
‘Incidental expenditure’ incurred by a person in acquiring or realising an asset or liability includes:
advertising expenditure, taxes, duties and other expenditure of transfer; and expenditure of establishing,
preserving or defending ownership of the asset or liability, and the expenditure referred to any related
remuneration for the services of an accountant, agent, auctioneer, broker, consultant, legal advisor,
surveyor or valuer. Section 37(7)
Example
The following information relates to the production of certain trading stocks. Your duty is to determine the
costs of a single stock if 100,000 of them were produced.
Raw materials Tshs6,000,000
Labor Tshs2,000,000
Depreciation costs Tshs700,000
Repairs Tshs1,000,000
preserving or defending ownership of the asset or liability, and the expenditure referred to any related
remuneration for the services of an accountant, agent, auctioneer, broker, consultant, legal advisor,
surveyor or valuer. Section 37(7)
Example
240 Income Tax
The following information relates to the production of certain trading stocks. Your duty is to determine the
costs of a single stock if 100,000 of them were produced.
Raw materials Tshs6,000,000
Labor Tshs2,000,000
Depreciation costs Tshs700,000
Repairs Tshs1,000,000
Other factory overhead Tshs2,000,000
The costs of trading stocks should not include depreciation or repair costs, so the cost of producing that
batch was Tshs10,000,000. Using average cost method the cost of a single stock would be Tshs100.
Still, the costs of inherited assets from deceased individuals are the market values of that asset at the
time of such acquisition (Section 37(4)). Likewise, a cost of non-domestic asset of a person who
becomes a resident of the United Republic for the first time is the market value of the asset immediately
before becoming a resident (37(5)).
4. Special Rules On Deemed Disposal

There are times when although no disposal has actually taken place a person is deemed to have
disposed of an asset (taxation concept only). There are special ways of determining costs and incoming
of assets resulting from deemed realisation of assets as discussed below:
1. Realisation with retention of asset
When, a person realises an asset of the business in any of the manners described in (d) to (h)
above, the realisation is name realisation with retention of assets. However, the person is treated
as having parted with ownership of the asset and deriving an amount in respect of the realisation
equal to the market value of the asset at the time of the realisation; and the person is treated as
reacquiring the asset and incurring expenditure of the same amount (Section 42).
2. Transfer of asset to spouse or former spouse

When there is transfer of assets to spouse or former spouse because of divorce settlement or
bona fide separation agreement, an individual transferring the assets is treated as deriving an
amount in respect of the realisation equal to the net cost of the asset immediately before the
realisation; and the spouse or former spouse receiving the assets is treated as incurring
expenditure of the same amount in acquiring the assets (Section 43). However, this Section
works on at the discretion of the couple and the couple should apply for this application in writing
(Section 43).
Example
During the year Mr. Kashumba , divorced his wife, by Court Order he was instructed to transfer
some of investments to his wife. He decided to transfer the following
Land costing Tshs 2,000,000 purchased on 2010, compound wall was constructed for Tshs.
200,000. The compound wall had damaged due to flood and repair cost Tshs 100,000 on 20X3.
The neighbor land owner paid Tshs 50,000 for a small piece to make boundary straight.
Net cost
In this case, cost= 2,300,000 (2,000,000+200,000+100,000) and incomings is Tshs. 50,000.
Net Cost is the actual investment of asset at any particular point of time.
i) Net Cost is
Tshs.
Cost 2,300,000
Less: Incomings (50,000)
Net Costs 2,250,000
ii) Incoming =Net cost

Therefore Incoming = Tshs 2, 250,000
Gain (loss) =2,250,000-2,250,000=0
Note
Cost 2,300,000
Less: Incomings (50,000)
Net Costs 2,250,000 Realisation of assets and Liabilities: 241
ii) Incoming =Net cost

Therefore Incoming = Tshs 2, 250,000
Gain (loss) =2,250,000-2,250,000=0
Note
The net cost of an asset is the deemed consideration on the disposal by the transferor
3. Transfer of asset to an associate or for no consideration

Except in divorce settlement, any transfer of asset to an associate or for no consideration is
treated as realisation of assets at the greater of the market value of the asset or the net cost of
the asset immediately before the realisation; and the recipient is treated as acquiring the assets
at the same value (Section 44(1)).
Nevertheless, when the transfer involves business asset, depreciable asset or trading stock, by way of
transfer of ownership of the asset to an associate of the person and
a) either the person or the associate is an entity;
b) the asset or assets are business assets, depreciable assets or trading stock of the associate
immediately after transfer by the person;
c) at the time of the transfer the person and the associate are residents; and the associate or, in the
case of an associate partnership, none of its partners is exempt from income tax;
d) there is continuity of underlying ownership in the asset of at least 50 %; and
e) both the person and the associate in writing applied to use this method.
The person making the transfer is treated as deriving an amount in respect of the realisation equal to the
net cost of the asset immediately before the realisation and the associate acquiring the assets at the
same value (Section 44(2)).
Definitions
‘Net cost of a depreciable asset’ at the time of its realisation is equal to its share of the written down
value of the pool to which it belongs at that time apportioned according to the market value of all the
assets in the pool .
Section 44(3)
‘Associate’ in relation to a person, means another person where the relationship between the two is :
a) that of an individual and a relative of the individual, unless the Commissioner is satisfied that it is
not reasonable to expect that either individual will act in accordance with the intentions of the
other;
b) that of partners in the same partnership, unless the Commissioner is satisfied that it is not
reasonable to expect that either person will act in accordance with the intentions of the other;
c) that of an entity and:
i] a person who either alone or together with an associate or associates under another
application of this definition; and whether directly or through one or more interposed entities,
controls or may benefit from 50 percent or more of the rights to income or capital or voting
power of the entity; or
ii] under another application of this definition, is an associate of a person to whom
subparagraph (i) applies; or
d) in any case not covered by paragraphs (a) to (c), such that one may reasonably be expected to
act, other than as employee, in accordance with the intentions of the other.
Section 3
4. Involuntary realisation of asset with replacement
In case of involuntary realisation of assets either by involuntary sell, exchange, transfer,
distribution, cancellation, redeem, destroy, loss, expiry or surrender and replace the asset
involuntary realised within a year; the person can be assumed deriving an amount in respect of
the realisation equal to: the net cost of the asset immediately before the realisation; plus the
amount, if any, by which amounts derived in respect of the realisation exceed expenditure
incurred in acquiring the replacement asset. Addition, the person is assumed incurring
expenditure in acquiring the replacement asset equal to the net cost of the asset immediately
before the realisation plus the amount, if any, by which expenditure incurred in acquiring the
replacement asset exceed amounts derived in respect of the realisation (Section 45). Yet, this
4. Involuntary realisation of asset with replacement
In case of involuntary realisation of assets either by involuntary sell, exchange, transfer,
distribution, cancellation, redeem, destroy, loss, expiry or surrender and replace the asset
involuntary realised within a year; the person can be assumed deriving an amount in respect of
242 Income Tax
the realisation equal to: the net cost of the asset immediately before the realisation; plus the
amount, if any, by which amounts derived in respect of the realisation exceed expenditure
incurred in acquiring the replacement asset. Addition, the person is assumed incurring
expenditure in acquiring the replacement asset equal to the net cost of the asset immediately
before the realisation plus the amount, if any, by which expenditure incurred in acquiring the
replacement asset exceed amounts derived in respect of the realisation (Section 45). Yet, this
Section applies only to taxpayers who apply to the Commissioner to use it.
5. Realisation by separation
Excluding where an asset is transferred under finance lease where the parties derive and incur
market value of assets immediately before transfer of the assets (Section 32(5)); where rights or
obligations with respect to an asset owned by one person are created in another person
including by way of lease of an asset or part thereof, permanently the person is treated as
realising part of the asset but is not treated as acquiring any new asset or liability; and when the
creation is temporary or contingent, the person is not treated as realising part of the asset or
liability but as acquiring a new asset (Section 46).
Deinition
‘Lease’ means an arrangement providing a person with a temporary right in respect of an asset of
another person, other than money, and includes a licence, profit-a-prendre, option, rental agreement,
royalty agreement and tenancy, Section 3.
3.3 Apportionment of costs and incomings of assets

Apportionment problem happens when multiple assets are transferred at the same time or in a single
deal/price.
In that case, we might be interested in knowing the costs of individual assets. According to Section 47
when multiple assets are acquired or realised the market values of assets at the time of acquisition
should be used to apportion the amount incurred or derived. While, when an asset is partly realised the
net cost of the asset immediately before the realisation should be apportioned between the parts of the
asset realised and the part retained according to their market values immediately after the realisation
(Section 47(3).
Example
Robots and Assembler Design Ltd acquired the following assets after paying a single price of
Tshs20,000,000:
Asset Market value at the time of acquisition
Car Tshs7,000,000
Tractor Tshs6,000,000
Office furniture Tshs.2,000,000
Required:
Calculate costs of each asset.
Answer
The costs of assets should be apportioned on the market value at the time of acquisition as shown below;
Asset Tshs Costs
apportioned
Tshs
Car 7,000,000 14,583,333
Tractor 600,000 1,250,000
Office 2,000,000 4,166,667
furniture
Total 9,600,000 20,000,000
3.4 Gains from the realisation of businesses assets and liabilities

Now we know what constitute costs of assets or liabilities and incoming from realisation of assets or
Tractor 600,000 1,250,000
Office 2,000,000 4,166,667
furniture
Total 9,600,000 20,000,000 Realisation of assets and Liabilities: 243
3.4 Gains from the realisation of businesses assets and liabilities

Now we know what constitute costs of assets or liabilities and incoming from realisation of assets or
incurring of liabilities. So we can determine gain from realisation of business assets or liabilities.
However, those incomings which are exempt amounts or a final withholding payment or incomings from
sales of stocks should be excluded (Section 38). The incomings from sales of trading stocks are
excluded in computation of gain from realisation of businesses assets because they are used in the
calculation of business income and they are legally not business assets.
Definition
‘Gain’ from realisation of an asset or liability is the excess of the incomings for the asset or liability over
the cost of the asset or liability at the time of realisation.
Section 36 (1)
Example
Robots and Assembler Design makers disposed a business asset for Tshs2,000,000 after incurring
selling costs of Tshs800,000 and transport expenses of 100,000.
Required:
If the cost of the asset was Tshs400,000, determine gain or loss from the realisation of the assets.
Answer
Gain or loss of realisation of assets = Incomings less cost of the assets less realisation expenses.
Therefore,
Gain = Tshs2,000,000 – Tshs800,000 – Tshs100,000 - Tshs400,000 = Tshs700,000.
Question 1
The following information is provided in connection with realization of investment assets of an investment
of Madiba Limited for the three years ended 31st December 2013.
2015 2016 2017

TZS TZS TZS
Gains from NIL 20,500,000 150,000,000
realization
Losses from 22,500,000 NIL 22,000,000
realization
Required:
i] Compute the net gains/losses from realization of investment assets of Madiba Limited for the years of
income 2011, 2012 and 2013.
ii] Briefly explain the tax treatment of the net gains/losses computed above during their respective years
of income.
Question 2
MsAmina, a resident individual, has disposed her only residential house located at Mbezi Beach at TZS.
129,000,000 on April 1, 2012. She constructed the building in 2005 through XYZ Constructions Ltd where
she was charged TZS 90,000,000. The building permits and architectural design fees cost her TZS
10,000,000. In 2010 she made major renovation of her house which involved construction of servant
quarter for TZS 12,000,000 and painting of the old building and replacement of rusted iron sheets for TZS
6,000,000. The disposal costs were 2,000,000.
Required:
i] Calculate the gain/loss on realization of the building.
ii] Determine the tax payable with respect to the gain from realization of the building for the year of
income 2012.
iii] Briefly explain the nature of the tax payable under (ii) above.
MsAmina, a resident individual, has disposed her only residential house located at Mbezi Beach at TZS.
129,000,000 on April 1, 2012. She constructed the building in 2005 through XYZ Constructions Ltd where
she was charged TZS 90,000,000. The building permits and architectural design fees cost her TZS
10,000,000. In 2010 she made major renovation of her house which involved construction of servant
244 Income Tax
quarter for TZS 12,000,000 and painting of the old building and replacement of rusted iron sheets for TZS
6,000,000. The disposal costs were 2,000,000.
Required:
i] Calculate the gain/loss on realization of the building.
ii] Determine the tax payable with respect to the gain from realization of the building for the year of
income 2012.
iii] Briefly explain the nature of the tax payable under (ii) above.
Question
Question
3 3
Mrs.
Mrs.
Salama
Salama
disposed
disposed
thethe
following
following
assets
assets
during
during
thethe
taxtax
year
year
ended
ended st December
3131 st December
2015:
2015:
1. 1. OnOn1st 1May
st May2015,
2015,
Salama
Salama sold
sold
a freehold
a freehold warehouse
warehouse forfor
TZS.500,000,000.
TZS.500,000,000.The Thewarehouse
warehouse
was
waspurchased
purchased onon
1st 1January
st January 2001
2001forfor
TZS.250,000,000
TZS.250,000,000 andandwaswasextended
extendedat at
a cost
a cost
of of
TZS.100,000,000
TZS.100,000,000 during
during2004.
2004.In In
August
August
2010,
2010,thethe
floor
floor
of of
thethe
warehouse
warehouse waswas
damaged
damaged by by
earthquake
earthquake and and
had
had
to to
bebe replaced
replaced at at
a cost
a costof of
TZS.50,000,000.
TZS.50,000,000.The The
warehouse
warehouse waswassold
sold
because
because it was
it wassurplus
surplus to to
thethe
business’s
business’s requirements
requirements duedueto to
thethe
factfact
that
that
Mrs.
Mrs.Salama
Salama
purchased
purchased a newly
a newly
built
built
warehouse
warehouse in in
2014.
2014.Both Both
warehouses
warehouses have
havealways
always
been
beenused
used
forfor
business
business purposes
purposesin ainwholesale
a wholesale business
business runrun
by by
Salama
Salama as as
a sole
a sole
trader.
trader.
1. 1.OnOn 1st 1November
st November 2015,
2015,
sheshesold
sold
anan acre
acre
of of
land landforfor
TZS.15,000,000.
TZS.15,000,000.SheShe
hadhad
originally
originally
purchased
purchased fivefive
acres
acres
of of
land
land
onon7th7July
th July
2013
2013
forfor TZS.5,000,000.
TZS.5,000,000.
TheThe
market
market
value
value
of of
thetheunsold
unsoldfour
four
acres
acres
of of
land
land
as as
at at 1 st 1November
st November 2015
2015
waswas
TZS.55,000,000.
TZS.55,000,000.The The
land
land
hashasnever
neverbeen
been
used
used
forfor
agriculture
agriculturepurposes.
purposes.
2. 2.OnOn 24September
24th th September 2015,
2015,sheshe
sold
sold700,000
700,000 TZS.100
TZS.100ordinary
ordinaryshares
sharesin in CDB
CDB Bank
BankPlcPlc
whose
whose shares
shares
trade
trade
at at
DarDar
es es
Salaam
Salaam Stock
Stock Exchange,
Exchange, forfor
TZS.700,000,000.
TZS.700,000,000.She She
hadhad
originally
originallypurchased
purchasedthethe700,000
700,000shares
sharesin inCDB
CDBBankBankPlcPlconon2 nd2 ndJune
June2005
2005forfor
TZS.35,000,000.
TZS.35,000,000. This
This
shareholding
shareholdingis more
is more
than
than
25%25%
of the
of the
CDBCDBBank
Bank
Plc’s
Plc’sissued
issued
shares.
shares.
3. 3.OnOn 24December
24th th December 2015,
2015,
sheshemade
madea gift
a giftof of
herher
entire
entireholding
holding
of of
24,000
24,000TZS.400
TZS.400 ordinary
ordinary
shares
shares in MNB
in MNBPlc.,
Plc.,
to to
herher
daughter-Amina
daughter-Amina ononherher
graduation
graduationday.
day.OnOnthat
that
date,
date,
thethe
shares
shares
were
were quoted
quoted at at
thetheDarDar
es es
Salaam
Salaam Stock
Stock Exchange
Exchange at at
TZS.750.
TZS.750.The Theshares
shareshadhad
been
been
purchased
purchased onon 2 2January
nd nd January2011
2011forfor
TZS.12,000,000.
TZS.12,000,000.Mrs. Mrs.
Salama’s
Salama’sshareholding
shareholding
was
wasless
lessthan
than
15%15%of MNB
of MNBPlc’s
Plc’s
issued
issued
share
share
capital.
capital.
Required:
Required:
Calculate
Calculatethethe
chargeable
chargeable
investment
investment
capital
capital
gain
gain
arising
arising
from
from
each of of
each Mrs.
Mrs.
Salama’s
Salama’s
asset
asset
disposals
disposals
during
during
thethe
taxtax
year
year
ended
ended 31December
31st st December
20152015
Answers
Answers
to to
Self-Assessment
Self-Assessment
Questions
Questions
Answer
Answer
to to
SEQSEQ
1 1
2011
2011 2012
2012 2013
2013
TZS
TZS TZS
TZS TZS
TZS
Gains
Gains
from
from
realization
realization - - 20,500,000
20,500,000 150,000,000
150,000,000
Losses
Losses
from
from
realization
realization 22,500,000
22,500,000 - - 22,000,000
22,000,000
Unrelieved
Unrelieved
netnet
losses
losses
from
from
previous
previous - - 22,500,000
22,500,000 2,000,000
2,000,000
year
year
NetNet
Gains
Gains
(losses)
(losses)
from
from
realization
realization (22,500,000)
(22,500,000) (2,000,000)
(2,000,000) 126,000,000
126,000,000
TheThenetnet
losses
lossesin in
2011
2011
(2012)
(2012)
cancan
bebe
carried
carried
forward
forward
to to
2012
2012
(2013)
(2013)
and
and
deducted
deducted
against
against
anyany
gains
gains
from
from
realization
realization
The
The
netnet
gains
gains
from
from
realization
realization
shall
shall
bebe
included
included
in in
calculation
calculation
of of
chargeable
chargeable
income
income
from
from
investment
investment
in in
2013
2013
Answer to SEQ 2
i] The gain/loss on realization building:
TZS TZS
Incomings 129,000,000
Less: Costs
Construction costs 90,000,000
Architectural design 10,000,000
Renovation 12,000,000
Disposal costs 2,000,000
114,000,000
Gain on realization 15,000,000
ii] Amina will have to pay 10% of the gain TZS 15mil as tax which is equal to TZS 1,500,000.
iii] This tax is called single installment tax

Answer to SEQ 3
Name of taxpayer Mrs Salama

YIO 2015
Computation of taxable investment capital gain
Item TZS
Warehouse-for business purpose -
Land (15,000,000-5,000,000*15,000,000/70,000,000) Note 13,928,571
1
CDB Bank Plc shares (70,000,000-35,000,000) 35,000,000
MNB shares-exempt by Section 3 -
Chargeable investment capital gain 48,928,571
Note 1:
Where a person who owns an asset in this case land, realizes part of it, the net cost of the asset
(in this case TZS 5,000,000) immediately before the realization shall be apportioned between the
part of the asset realized and the part retained according to their market values immediately after
the realization (in this case 15,000,000/70,000,000) section 47 (3)) of the Income Tax Act 2004).
246 Income Tax
C4
SECTION C
Income Tax
STUDY GUIDE C4: DEPRECIATION OF

DEPRECIABLE ASSETS
Depreciation expenses calculated using accounting policies and methods is not an allowable deduction
for taxation purposes. One has to calculate depreciation allowance of depreciable assets in accordance
with the Income Tax Act Cap, 332, for the allowance to be deductible. This Study Guide introduces you to
the rules of calculating depreciation allowance for depreciable assets.
a) Classify depreciable assets

b) Adding depreciable assets in the pool of depreciable assets
c) Calculate depreciation allowances
248 Income Tax
ClassifyClassify
depreciable
depreciable
assets;assets;
adding adding
depreciable
depreciable
assets assets
in the pool
in the
ofpool
depreciable
of depreciable
assets assets
and Calculate
and Calculate
depreciation
depreciation
allowances.
allowances.
[Learning
[Learning
OutcomeOutcome
a, b anda,c]b and c]
1. Depreciable
1. Depreciable
AssetsAssets
The Income
The Tax
Income
Act,Tax
CapAct,
332,Cap
provides
332, provides
that for the
thatpurposes
for the purposes
of calculating
of calculating
a person’s
a person’s
income from
income from
any business,
any business,
there shall
there
be shall
deducted
be deducted
in respect
in of
respect
depreciable
of depreciable
assets owned
assetsand
owned
employed
and employed
by the by the
person during
persontheduring
yearthe
of income
year of wholly
incomeandwholly
exclusively
and exclusively
in the production
in the production
of the person’s
of the person’s
income income
from thefrom
business,
the business,
the depreciation
the depreciation
allowances
allowances
granted under
grantedtheunder
Thirdthe
Schedule
Third Schedule
to the Act.
to the Act.
1.1 Depreciable
1.1 Depreciable
assets assets
Depreciable
Depreciable
asset means
assetan
means
assetanemployed
asset employed
wholly andwholly
exclusively
and exclusively
in the production
in the production
of income of income
from a business,
from a business,
and which
andis which
likely to
is lose
likelyvalue
to lose
because
value because
of wear and
of wear
tear,and
obsolescence
tear, obsolescence
or the or the
passing passing
of time but
of time
excludes
but excludes
goodwill,goodwill,
an interest
an in
interest
land, ainmembership
land, a membership
interest in
interest
an entity
in an
andentity and
trading stock.
trading stock.
Classification
Classification
of Depreciable
of Depreciable
Assets Assets
There areThere
8 classes
are 8 classes
of depreciable
of depreciable
assets as
assets
far asasIncome
far as Income
Tax Act Tax
CapAct
332.
Cap
These
332.are
These
as are as
follows: follows:
Class 1 Class 1
Computers
Computers
and dataandhandling
data handling
equipment
equipment
togethertogether
with peripheral
with peripheral
devices,devices,
Automobiles,
Automobiles,
buses buses
and minibuses
and minibuses
with a seating
with a capacity
seating capacity
of less than
of less
30 than
passengers,
30 passengers,
goods vehicles
goods vehicles
with a load
with a load
capacitycapacity
of less than
of less
7 tonnes;
than 7 Construction
tonnes; Construction
and earth-moving
and earth-moving
equipment
equipment
Class 2 Class 2
Buses with
Buses
a seating
with a capacity
seating capacity
of 30 or ofmore
30 orpassengers,
more passengers,
heavy general
heavy general
purpose purpose
or specialized
or specialized
trucks, trailers
trucks, and
trailers
trailer-mounted
and trailer-mounted
containers;
containers;
other self-propelling
other self-propelling
vehicles,vehicles,
RailroadRailroad
cars, cars,
locomotives
locomotives
and equipment;
and equipment;
Vessels,Vessels,
barges, barges,
tugs andtugs
similar
andwater
similar transportation
water transportation
equipment;
equipment;
Aircraft;Plant
Aircraft;Plant
and machinery
and machinery
(including(including
windmills,
windmills,
electric generators
electric generators
and distribution
and distribution
equipment)
equipment)
used in manufacturing
used in manufacturing
or mining oroperations;
mining operations;
specialized
specialized
public utility
public plant
utility
and plant
equipment;
and equipment;
and and
machinerymachinery
or other or
irrigation
other irrigation
installations
installations
and equipment.
and equipment.
Class 3
Office furniture, fixtures, all equipment except for those listed in Class 2, Any asset not included
in another Class
Class 4
Natural resource exploration and production rights, Expenditures incurred wholly and exclusively
in respect of natural resource prospecting, exploration and development
Class 5
Buildings, structures, dams, water reservoirs, fences and similar works of a permanent nature
used in agriculture, livestock farming or fishing farming;
Class 6
Buildings, structures and similar works of permanent nature other than those mentioned in Class
5
Class 7
Intangible assets other than those in Class 4
Class 8
Plant and machinery (including windmills, electric generators and distribution equipment) used in
agriculture and electronic fiscal device purchased by a non Value Added Tax registered trader,
Equipment used for prospecting and exploration of minerals or petroleum
Buildings, structures and similar works of permanent nature other than those mentioned in Class
5
Class 7 Depreciation of Depreciable Assets: 249

Intangible assets other than those in Class 4
Class 8
Plant and machinery (including windmills, electric generators and distribution equipment) used in
agriculture and electronic fiscal device purchased by a non Value Added Tax registered trader,
Equipment used for prospecting and exploration of minerals or petroleum
2. Adding Depreciable Assets In The Pools Of Depreciable Assets

2.1 Pools of Depreciable Assets
m In order to determine depreciation allowance, assets must be added to a pool of depreciable
e assets. Depreciation allowance is then determined for a pool of assets and not for an individual
e depreciable asset.
There are two types of pools of depreciable assets
(i) General Pools
This is a pool which comprises of all assets of the same class. This means all depreciable assets
e belonging to, say, class 1 are all pooled to one pool. In this case a class becomes a pool.
However, this applies for all classes except class 7 assets and moveable tangible assets used by
d a person in conducting international transportation business [land, sea, or air] –transporting
passengers, mail, livestock or other moveable tangible assets. These assets are pooled using
specific pools.
s (ii) Specific Pools

In this pooling strategy each individual asset forms a pool of its own different from assets of its
class. An asset, say copy rights, plane, bus, vessel, etc, each form its own pool. Therefore,
depreciation allowance will be calculated for eachcopy rights, plane, bus, vessel, etc. All the
s assets that do not follow general pooling strategy will fall under specific pooling.
d
2.2 Adding Depreciable Assets in the Pools of Depreciable Assets
Depreciation allowance is charged on depreciable assets which are found within the pool.
Depreciable assets outside the pool cannot be charged depreciation allowances. Not every
d depreciable asset owned by the person qualifies for addition in the pool. There are conditions to
, fulfil. These are:
; i] The depreciable asset must have been employed by the person wholly and exclusively in the
) production of business income of a person in the year of income.
d ii] The person claiming the deduction must be beneficial owner and not the legal owner of the
asset. The beneficial owner is the person who incurred the qualifying expenditure to or paid to
acquire the depreciable asset.
3. Computation Of Depreciation Allowances

There are 3 types’ depreciation allowance charges:
i] Initial Allowance
ii] Annual Allowance
iii] Terminal allowance
3.1 Initial Allowance

There are some depreciable assets which will be granted depreciation allowance immediately when
added to the pool of depreciable assets. These depreciable assets are:
i] each item of plant or machinery which
ii] qualifies to be added in the person’s Class 2, 3 or 8 pools of depreciable assets.
There are conditions however for an initial allowance to be granted to these assets. The assets above
shall be:
i] used in manufacturing processes and fixed in a factory;
ii] used for providing services to tourists and fixed in a hotel
The amount of depreciation allowance is 50% of the net cost of the asset for assets belonging to class 2
or 3;. In the year in which initial allowance is charged, the asset granted this allowance will not be
included in computation of annual allowance. In other words, the asset granted initial allowance will not
be added in the pool of depreciable assets until after the preceding year.
The initial allowance granted to a person shall be available in two portions as follows -
ii] qualifies to be added in the person’s Class 2, 3 or 8 pools of depreciable assets.
There are conditions however for an initial allowance to be granted to these assets. The assets above
shall be:
i] Tax
250 Income used in manufacturing processes and fixed in a factory;
ii] used for providing services to tourists and fixed in a hotel
The amount of depreciation allowance is 50% of the net cost of the asset for assets belonging to class 2
or 3;. In the year in which initial allowance is charged, the asset granted this allowance will not be
included in computation of annual allowance. In other words, the asset granted initial allowance will not
be added in the pool of depreciable assets until after the preceding year.
The initial allowance granted to a person shall be available in two portions as follows -
i] the first portion shall be available in the year of income in which the asset is added to the
person’s pool of depreciable assets; and
ii] the remaining portion shall be available during the year of income following that in which the first
portion is added.
3.2 Annual Depreciation Allowance

This is the annual charge of depreciation allowance from assets which are already in the pools of
depreciable assets.
Depreciation Methods
Depreciation allowance shall be calculated using reducing balance method in the case of Class 1, 2 and
3 pools, and according to straight line method in the case of Class 4, 5, 6 and 7 pools.
Depreciation Formula
The depreciation formula put forward by the Act is the following:
Annual
Annual
Depreciation
Depreciation Allowance
Allowance= A= xABx xBC/365
x C/365
Where
Where-A-A is the depreciation
is the depreciationbasis
basis
of the
of the
pool
pool
at the
at the
endend
of the
of the
year
year
of income;
of income;
B B is the depreciation
is the depreciation
rate
rate
applicable
applicable
to the
to the
pool;
pool;
andand
C C is the number
is the number
of of
days
daysin the
in the
person's
person'syear
year
of income
of incomethethe
asset
asset
was
was
employed
employed
Depreciation
DepreciationBasis
Basis– Reducing
– ReducingBalance
BalanceMethod
Method
Depreciation basis
Depreciation of of
basis Class 1, 1,
Class 2, 2,
3 or 8 pools
3 or of of
8 pools a person at at
a person thethe
end of of
end a year of of
a year income is computed
income as as
is computed
follows:
follows:
Depreciatio
Depreciatio Writte
Writte Addition
Addition Incoming
Incoming
n Basis
n Basis
at at = = n n + + s tos the
to the - - s for
s for
thethe
thethe
endend
of of Down
Down CostCost
of of assets
assets
thethe year
year Value
Value thethe
at the
at the Asset
Asset
start
start
of of
thethe
yearyear
Where
Whereby:by:
Written Down
Written DownValue at the
Value start
at the of the
start year
of the year
= Closing
= ClosingDepreciation
Depreciation Basis
Basis
forfor
lastlast
year – Last
year – LastYear
YearAnnual
AnnualDepreciation
Depreciation
Additions
Additions = Cost
= Costof assets
of assets added in the
added pool
in the during
pool thethe
during year
year
Incomings
Incomings = Proceeds
= Proceeds fromfrom
disposal
disposal
of assets
of assets from
from
thethe
pool
pool
during thethe
during year
year
Depreciation
Depreciationbasis in this
basis case
in this cancan
case only bebe
only reduced
reduced to zero butbut
to zero notnot
below
below it. Ifit.itIfturns to be
it turns negative,
to be then
negative, then
thethe
pool is considered
pool is considered as as
written-off (non-existent).
written-off (non-existent).
Moreover,
Moreover,if the depreciation
if the depreciationbasis at at
basis thethe
end
endof of
year
yearis below
is belowTZS
TZS 1,000,000,
1,000,000, thethe
depreciation of of
depreciation thethe
pool shall
pool bebe
shall equal to the
equal depreciation
to the depreciationbasis at the
basis end
at the of that
end year
of that [i.e.[i.e.
year thethefigurefigure below
belowTZS 1,000,000].
TZS 1,000,000].
Depreciation
Depreciation Basis
Basis– Straight
– Straight
Line
Line
According
Accordingto to
thethe
Act, thethe
Act, depreciation basis
depreciation of of
basis Class 4, 4,
Class 5, 5,
6 or 7 pools
6 or of of
7 pools depreciable assets
depreciable of of
assets a person
a person
at the end
at the of a
end ofyear of income
a year shall
of income be:be:
shall
Depreciati
Depreciati Depreciati
Depreciati Addition
Addition Incomin
Incomin
onon
Basis
Basis
at at = = ononbasis
basis
at at + + s tos the
to the - - gs gs
forfor
thethe
endend
of of thethe
start
start
of of CostCost
of of thethe
thethe
year
year thethe
year
year thethe assets
assets
Asset
Asset
Moreover, if the depreciation basis at the end of year is below TZS 1,000,000, the depreciation of the
pool shall be equal to the depreciation basis at the end of that year [i.e. the figure below TZS 1,000,000].
Depreciation Basis – Straight Line

Depreciation of Depreciable Assets: 251
According to the Act, the depreciation basis of Class 4, 5, 6 or 7 pools of depreciable assets of a person
at the end of a year of income shall be:
Depreciati Depreciati Addition Incomin

on Basis at = on basis at + s to the - gs for
the end of the start of Cost of the
the year the year the assets
Asset
Depreciation basis for these classes can only be reduced to zero but not below it. That means, if the
depreciation basis turns to be negative, then it shall instead be reported as zero.
Moreover, if the depreciation basis at the end of year is below TZS 1,000,000, the depreciation of the
pool shall be equal to the depreciation basis at the end of that year [i.e. the figure below TZS 1,000,000].
On top of that the annual depreciation allowance granted to a person for a year of income with respect to
a Class 4, 5, 6 or 7 pool of depreciable assets shall not exceed the Written Down Value of the pool at the
end of the year of income.
Annual Depreciation of the pool ≤ Written Down Value of the pool at the end of the year of income.
Written Down Value for a pool of assets falling under class 4, 5, 6 or 7 is computed as follows:
Ending Written Down Value = Ending Depreciation Basis – Previous Years Accumulated Depreciation
You may notice differences in the Written Down Value formula for Class 4, 5, 6, or 7 pools vs Class 1, 2,
3 or 8 pools shown above.
3.3 Terminal allowances on Pool Disposal
Where the pool of assets is disposed of and the disposal proceeds are less than the tax written down
value of the pool of assets, the disposer is entitled to claim the difference as addition allowance; or
This allowance is granted in case of pool disposed physically but there is +ve figure of Opening +
Addition- Disposal‟, this amount is granted as addition depreciation allowance based on residual
concept of transactional tax treatment. If there is -ve figure of „Opening + Addition- Disposal‟, this
amount shall be included in Profit or Gain u/s 8(2) (d).
Depreciation Rates
The depreciation rates applicable to each pool are as follows:
CLASS RATE
1 37.5%
2 25%
3 12.5%
4 20%
5 20%
6 5%
7 1 ÷ useful life
8 100%
The useful life of the asset used in class 7 shall be rounded down to the nearest half year. For example a
useful life of 5 years and 3 months shall be rounded down to 5 years, while a useful life of 7 years and 7
months shall be rounded down to 7.5 years.
Addition of Non-Commercial Vehicles

Commercial vehicle means a road vehicle designed to carry loads of more than half a tonne or more than
thirteen passengers or a vehicle used in a transportation or vehicle rental business. Where a person
acquires a non-commercial road vehicle whose value exceeds TZS 30,000,000, the amount of the
expenditure allowed to be added to the pool in respect of the vehicle shall be only TZS 30,000,000. Any
expenditure in excess of TZS 30,000,000 shall not be recognised.
Commercial vehicle means a road vehicle designed to carry loads of more than half a tonne or more than
thirteen passengers or a vehicle used in a transportation or vehicle rental business. Where a person
acquires a non-commercial road vehicle whose value exceeds TZS 30,000,000, the amount of the
expenditure allowed to be added to the pool in respect of the vehicle shall be only TZS 30,000,000. Any
252 Income Tax
expenditure in excess of TZS 30,000,000 shall not be recognised.
Question 1
Mr. Makuti conducted a guest house business for the year ended 2019 with the following assets;
(i) A guest house building which cost Tshs. 40,000,000 by year 2018
(ii) 25 beds which cost Tshs. 2,000,000.
(iii) One ton Toyota pick-up that was imported form Dubai in December year 2019 for Tshs.
9,000,000.
(iv) One desktop computer which was purchased for Tshs. 4,000,000.
(v) 15 split unit air conditioners, costing Tshs. 6,000,000
(vi) 20 years leasehold of land as from January 2019 where the guest house building was
constructed.
Required;
Compute the depreciation allowance to be granted to Mr. Makuti for year 2019. (Opening
depreciation base for class 2 was 15,000,000)
Question 2
Maliba Limited is a company involved is a company involved in the manufacturing of shoes. The
company is located in the Chirimba Industrial Area.
The following information is available in connection with the property and equipment used in Maliba
Limited’s business for the year ended 31st December, 2018. Tax written down Values (TWDV) as at 1 st
January, 2018.
Tshs.
Factory building 850,060,000
Motor vehicles (saloon) 28,080,000
30 seats bus 6,750,250
Computers 2,500,000
Motor Lorries (for heavy work) 98,146,500
Accumulated depreciation for factory building 94,451,111
The following transactions took place during the year ended 31 st December, 2018. Additions to property
and equipment at cost:
Tshs.
April Machine (new) 86,000,500
July Lorry (for light work) 45,265,000
August Factory extension 12,465,000
September, Computers (two desktops) 2,465,000
Included in the cost of the factory extension is the cost of an office amounting to Tshs. 5,620,500.
Disposals
April - Motor vehicle (sale proceeds) Tshs. 6,350,000.The vehicle had been purchased in
January, 2017 for Tshs. 2,791,666.
Required:
(a) Prepare the capital allowances schedule for Maliba Limited for the year ended 31 st December,
2018 and
(b) Compute the total allowances available to the company for the year.
Note: You should pay particular attention to the presentation of the schedule
Question 3
ABC Co. Ltd. Commenced a business of assembling computer hardware on 1 st May 2018. The company
acquired the following assets from XYZ which was winding up its business in the URT on 30 th April 2018:
(i) A house which was used by the XYZ’s director for Tshs. 15,000,000. This was converted by ABC
Co. Ltd. into a factory building after incurring additional alterations cost of Tshs. 4,500,000.
(ii) Factory building was acquired for Tshs. 24,000,000. One fifth of this building houses the head office.
The office was air conditioned with air conditioners worth Tshs. 2,000,000.
(iii) Factory plant and machinery worth Tshs. 180,000,000. The tax written down value (TWDV) of the
machinery was Tshs. 60,000,000 in the vendor’s books.
(iv) Two five-ton Lorries worth Tshs. 40,000,000 in total. Their total TWDV was Tshs. 32,000,000 and
their total book value (BV) was Tshs. 28,000,000.
(v) A saloon car costing Tshs 33,000,000. This car had a nil BV and TWDV in the books of the vending
company. ABC Co. Ltd. used the car purely for business purposes.
(vi) Office furniture was purchased for Tshs. 4,200,000. This asset had a TWDV of Tshs. 1,800,000/=
and accumulated depreciation of Tshs. 400,000.
(vii) Office stationery and some operational guides were also purchased for Tshs. 1,900,000/=
After the commencement of the business, the following transactions took place:
i) One of the Lorries was qutted by fire Tshs. 8,000,000 as insurance compensation was received
from National Insurance Corporation for the loss.
ii) On 1st November 2018 an eight-ton trailer was purchased for Tshs. 38,000,000.
iii) BBA sold to ABC Co. Ltd. a godown building constructed for Tshs. 15,000,000 at Tshs.
175,000,000. It was used for storage of ABC Co. Ltd. finished products from 1 st January 2019.
iv) The remaining lorry was exchanged for a new one on 1 st March 2019. ABC Ltd. had to pay an
additional Tshs. 10,000,000 for the new lorry, the total cost of which was Tshs. 24,000,000.
Required: Compute depreciation allowances to be granted to ABC Co. Ltd. for the year of
income 2019 under the Income Tax Act, Cap 332.
Question 4
a. Define the term ‘depreciable assets’ as per the Income Tax Act, Cap 332.
b. Clearly provide at least five (5) conditions to be fulfilled by a person before being granted
depreciation allowance as per the Income Tax Act, Cap 332.
c. OKWI Co. Ltd was incorporated in the United Republic of Tanzania in May 2015. It started
business in June 2015, the accounting period of the company ends on 31 st December.
The company’s activities include; tour operator, travel agent and hotelier. In order to expand its
business, the company entered into an agreement with Entebe Air to lease one of its aircrafts.
The lease period was 96 months commencing on 1st July 2015.
The lease value was TZS.4.8 billion where as the lease agreement conditions to be borne by the
lessee included repair and maintenance, and monthly rental charge of TZS.46 million. The
lessee was not allowed to re-release the aircraft, and the lease agreement was renewable.
254 Income Tax
Other information from OKWI Co. Ltd include expenditure incurred during the year as
maintenance cost of TZS.10,850,000.
Required:
Calculate depreciation allowance for the year 2015 as per the provisions of the Income Tax Act,
Cap 332.
Answer to Self-Examination Questions
Answer to SEQ 1
Depreciation schedule
Class 1 Class 2 Class 3 Class 6 Total depreciation

allowances
Rate 37.50% 25% 12.50% 5%
TWDV at start - 15,000 - -
,000
G. House 40,000,
000
25 Beds 2,000,000
Pick up 9,000,000
Computer 4,000,000
15 air Conditions 6,000,000
Depreciation base 13,000,000 15,000,000 8,000,000 40,000,000
D. Allowance 4,875,000 3,750,000 1,000,000 2,000,000 11,625,000
TWDV at end 8,125,000 11,250,000 7,000,000 38,000,000
 Item (vi) is not depreciable asset.

 Class 6 workings A x B x C/365 Days = 40,000,000 x 5% 365/365 = 2,000,000.
Answer to SEQ 2
Depreciation schedule
Classes
Total depreciation
allowances
I II VI
TWDV at start
Factory building 850,060,000
Motor vehicle (Saloon) 28,080,000
30 seats Bus 6,750,250
Computers 2,500,000 CL
Motor lorries 98,146,500
TWDV 1/1/2007 30,580,000 104,896,750 850,060,000
RA
Additions
Ho
Lorry 45,265,000
Computers 2,465,000
FactoryLorry
extension 45,265,000 12,465,000
Computers 33,045,000
2,465,000 150,161,750 862,525,000
Realisation
Factory extension 12,465,000
Motor vehicles (6,350,000)
33,045,000 150,161,750 862,525,000
Depreciation basis
Realisation 26,695,000 150,161,750 862,525,000
Rate Motor vehicles 37.5% (6,350,000) 25.0% 5.0%
AnnualDepreciation
Depreciation
basis (10,010,625)
26,695,000 (37,540,438)
150,161,750 (47,486,808)
862,525,000
allowance
Rate 37.5% 25.0% 5.0% 95,037,870
Annual Depreciation (10,010,625) (37,540,438) (47,486,808)
TWDV allowance 16,684,375 112,621,313 815,038,192 95,037,870
31/12/2007
TWDV 16,684,375 112,621,313 815,038,192
31/12/2007
1st portion of initial
allowances 1/2*43,000,250 21,500,125
1st portion of initial
allowances 1/2*43,000,250 21,500,125
116,537,995
116,537,995
Note 1:
Machines are used in manufacturing. They enjoy initial allowance in first year put into use and 50% of
Note 1:
cost is added in the pool under class 2 after 12 months. The 1 st portion of the initial allowance is claimed
Machines are used in manufacturing. They enjoy initial allowance in first year put into use and 50% of
in the first year put into use , the 2nd portion shall be claimed 12 months after the machine is pooled.
cost is added in the pool under class 2 after 12 months. The 1 st portion of the initial allowance is claimed
in the first year put into use , the 2nd portion shall be claimed 12 months after the machine is pooled.
Note 2:
Depreciation
Note 2:for class 6.
On 1/1/2017
DepreciationWDVfor for building
class 6. 850,060,000
Add: Acc Depr.
On 1/1/2017 WDV for building 94,451,111
850,060,000
Depreciation Basis
Add: Acc Depr. 944,511,111
94,451,111
Depreciation Basis 944,511,111
Depreciation allowance = 944,511,111 x 5% x 365/365 = 47,225,555
Depreciation allowance = 944,511,1119x 5% x 365/365 = 47,225,555
Depreciation for addition = 12,465,000 x 5% x 153/365 9 = 261,252.7
Depreciationallowance
Total depreciation for addition = 12,465,000 x 5% x 153/365 = 261,252.7
47,486,807.70
Total depreciation allowance 47,486,807.70
Answer to SEQ 3
Answerofto
Computation SEQ 3
Computation of Depreciation Allowance
CLASS I II III VI Total
CLASS I II III VI Total
depreciation
depreciation
allowances
allowances
RATE-A 37.5% 25% 12.5% 5%
RATE-A 37.5% 25% 12.5% 5%
Tshs’000’
Tshs’000’
Tshs’000’
Tshs’000’
Tshs’000’
Tshs’000’
Tshs’000’
Tshs’000’
Tshs’000’
Tshs’000’
House House 19,500
19,500
256 Income Tax
Factory building 24,000

Air conditioners 2,000
2 lorries five tons 40,000
Saloon Car( at restricted cost) 30,000
Office furniture 4,200
Office stationary (revenue
expenses)
Eight-ton trailer 38,000
Exchanged lorry 24,000
Godown 175,000
Total 94,000 38,000 6,200 218,500
Less: Incomings
One lorry caught by fire (8,000)
Exchanged lorry (14,000)
Depreciation base 72,000 38,000 6,200 218,500
Annual depreciation allowance 27,000 9,500 775 10,925

Initial Allowance-Plant and 45,000
Machinery (1/2 ×50% of
180,00,000
TOTAL ALLOWANCES 27,000 54,500 775 10,925 93,200
TWDV 31st December 2019 35,625 28,500* 5,425 207,575
*(38,000-9,500)
Answer to SEQ 4
(a) As per S.3 of the ITA 2004, Depreciable assets means an asset employed wholly and
exclusively in the production of income from a business, and which is likely to loose value
because of wear and tear, obsolescence or the passing of time but excludes goodwill, an
interest in land, a membership interest in an entity and trading stock. Examples of depreciable
assets employed in the business may include office furniture, office computer, office building,
fixtures and fittings installed in the office etc.
(b) As per section 17 of the Income Tax Act 2004 as conditions to be fulfilled by a person before
being granted depreciation allowance are:
 The items must be depreciable assets
 Must be owned by the person generating his income
 Must be wholly and exclusively employed in the production of the person’s income from the
business.
 Must be employed during the year of income in which it relates
 It must be a domestic assets i.e. situated in United Republic of Tanzania.
(c) Name of the taxpayer: OKWI Co. Ltd.

Residential status: Resident Corporation
Year of income: 2015
Computation of Depreciation allowance to be granted for the year 2015 as per the third
schedule of the ITA 2004;
Depreciable item
Air craft lease (Class vii) 4,800,000,000
Duration of the lease 96 months
Usage during the year 2015 184 days
Formula = AxBxC/365
Where
(c) Name of the taxpayer: OKWI Co. Ltd.
Residential status: Resident Corporation
Computation of Depreciation allowance to be granted for the year 2015 as per the third
schedule of the ITA 2004; Depreciation of Depreciable Assets: 257
Depreciable item
Air craft lease (Class vii) 4,800,000,000
Duration of the lease 96 months
Usage during the year 2015 184 days
Formula = AxBxC/365
Where
A = is the depreciation basis of the pool at the end of the year of income
= 4,800,000,000
B = is the depreciation rate applicable to the pool (i.e 1/n = 1/8)
C = the number of days in the person’s year of income = 184 days

Therefore,
Depreciation allowance = 4,800,000,000 x 1/8 x 184/365.
Depreciation allowance = Tshs.302,465,753.42.
258 Income Tax
D1
Employment Income: 259
SECTION D
SECTION D: COMPUTATION
Computation of Taxable
OF TAXABLE INCOME
Income
STUDY GUIDE D1: EMPLOYMENT

INCOME
Total Income includes income from employment, businesses and investment. Employment income
considers all income from an employment. Specifically, this Study Guide elucidates items which are
included in computation of taxable income from employment and those items which are excluded when
computing an individual’s employment income. Further, it deals with valuation of employment benefits in
kind.
This Study Guide will enable you to establish the correct taxable employment income. Knowledge of
determining employment income is essential in understanding how employees are taxed. It is also
important to know this computation to avoid breaking tax laws either by failing to collect employment
taxes when they are supposed to be collected or burdening employees with incorrect employment taxes.
Sections from Income Tax Act ,Cap 332 are being referred to throughout this Study Guide.
;ĂͿ Identify items included in calculation of chargeable income from employment.

;ďͿ Identify items excluded in calculation of chargeable income from employment.
;ĐͿ Identify the allowable deductions.
;ĚͿ Establish income from employment.
260 Computation of Taxable Income
Identify items included in calculation of chargeable income from

Identify and
employment items included
identify in calculation
items excluded inof chargeable
calculation ofincome from
chargeable
employment
income and identify items excluded in calculation of chargeable
from employment.
income
[Learning from employment.
outcome a and b]
1. Items Included In Calculation Of Chargeable Income From Employment

1. Items Included In Calculation Of Chargeable Income From Employment
1.1 Definitions
Employment
1.1 Definitionsincludes in particular:
 a position of an individual
Employment includesininthe employment of another person;
particular:
 a position
 a position of an individual in theof
of an individual as manager an entity other
employment than asperson;
of another partner of a partnership;
 a position of an individual entitling the individual to a periodic
 a position of an individual as manager of an entity other than remuneration in arespect
as partner of of
partnership;
services
 a performed;
position of or
an individual entitling the individual to a periodic remuneration in respect of
 a publicservices
office held by an individual,
performed; or and includes past, present and prospective employment
Section 3  a public office held by an individual, and includes past, present and prospective employment
Section 3
‘Employee’ means an individual who is the subject of an employment conducted by an employer;
Section 3
‘Employee’ means an individual who is the subject of an employment conducted by an employer;
‘Employer’ means
Section 3 a person who conducts, has conducted or has the prospect of conducting the
employment of an individual.
‘Employer’ means a person who conducts, has conducted or has the prospect of conducting the
Sectionemployment
3 of an individual.
Section 3
Normally, employment is demonstrated by presence of contract of service or employment. The
contract of service
Normally, exists when
employment is an employer dictates
demonstrated what an of
by presence employee
contractshould do and or
of service how, in return The
employment.
for period payments.
contract of service exists when an employer dictates what an employee should do and how, in return
for period payments.
In a case of Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance
[1968] 2 InQB 497 itofwas
a case decided
Ready MixedthatConcrete
contract of service
(South might
East) Ltdexist when: of Pensions and National Insurance
v Minister
(i) an [1968]
employee 2 QB 497 it was decided that contract of service might exist when: he will provide his own
agrees that, in consideration of a wage or other remuneration,
work and skill
(i) an employee in the performance
agrees that, inof consideration
some service for of ahis master.
wage or other remuneration, he will provide his own
(ii) He agrees, expressly or impliedly, that in the performance
work and skill in the performance of some service for his of that service he will be subject to the
master.
other's control
(ii) He in a sufficient
agrees, expresslydegree to make
or impliedly, that
that in other master.
the performance of that service he will be subject to the
(iii) The otherother's control in a sufficient degree to make thatits
provisions of the contract are consistent with being
other a contract of service.
master.
Control(iii)
wasThe
associated with power
other provisions of the
of the employer
contract to decide with
are consistent thingsitsto be done,
being the way
a contract in which it shall
of service.
be done, the means
Control to be employed
was associated in doing
with power it, the
of the time when
employer and thethings
to decide placetowhere it shall
be done, thebe done.
way in which it shall
However, in the same case it was suggested that contract for service (sole
be done, the means to be employed in doing it, the time when and the place where it shall be done. trading or businesses)
occurs However,
when a contractor
in the samehires casehis ownsuggested
it was employees, that provides
contract and maintains
for service (solehistrading
own tools or
or businesses)
equipment;
occurs thewhen
contractor is paid hires
a contractor by reference
his owntoemployees,
the volume provides
of work done; has invested
and maintains in thetools or
his own
enterprise and bore the financial risk; have the opportunities of profit
equipment; the contractor is paid by reference to the volume of work done; has invested or the risk of loss; and the in the
relationship is not permanent.
enterprise and bore the financial risk; have the opportunities of profit or the risk of loss; and the
relationship is not permanent.
Likewise, in McManus v Griffiths (1997) 70 TC 218 case the judge suggested in deciding whether a
person Likewise,
was employed (contract
in McManus of service
v Griffiths (1997)or
70self-employed
TC 218 case the- contract for service)
judge suggested we should
in deciding whether a
consider the substance
person of the (contract
was employed contractualofarrangements rather than their
service or self-employed form or the
- contract forparties'
service)labels
we should
(incorporated companies).
In F S Consulting Ltd v McCaul (2002) case it was decided that the owner of F S Consulting Ltd, Mr
Frank Simpson earned income under contract of service not contract for service. Mr Simpson was a
computer consultant and the sole director and shareholder of F S Consulting Ltd. During the relevant
time of the contract Mr Simpson supplied his services to the F S Consulting Ltd who supplied them to an
agency called Topper Recruitment Limited (Topper) who supplied them to Better Investments Plc
(Better). It was disputed that Mr Simpson was an employee of Better Investment Plc. The judge
asserted that:
 Mr Simpson did agree, in consideration of remuneration, to provide his own work and skill to Better
and it was also part of the arrangements that the standard working week was 37.5 hours. Any
absence of Mr Simpson had to be agreed and approved in advance by Better (although in fact there
were no difficulties)
Frank Simpson earned income under contract of service not contract for service. Mr Simpson was a
computer consultant and the sole director and shareholder of F S Consulting Ltd. During the relevant
time of the contract Mr Simpson supplied his services to the F S Consulting Ltd who supplied them to an
agency called Topper Recruitment Limited (Topper) who supplied them to Better Investments Plc
(Better). It was disputed that Mr Simpson was an employee of Better Investment Employment
Plc. The Income:
judge 261
asserted that:
 Mr Simpson did agree, in consideration of remuneration, to provide his own work and skill to Better
and it was also part of the arrangements that the standard working week was 37.5 hours. Any
absence of Mr Simpson had to be agreed and approved in advance by Better (although in fact there
were no difficulties)
 Mr Simpson was a man of skill and experience and so it would not be expected that Better would tell
him how to do his work; however, Mr Simpson was part of a team made up mainly of employees of
Better and of which the project manager was an employee of Better. The project manager controlled
what was to be done and when it was to be done although he left it to Mr Simpson to decide how it
should be done. Also, the contract between the appellant and Topper provided that Mr Simpson had
to take all necessary instructions from Better and comply with Better's rules, regulations and
procedures
 In the performance of his work Mr Simpson was also subject to Better's control to the extent that the
contract between the Appellant and Topper provided that it could be terminated immediately if Better
terminated its agreement with Topper because of the incompetence, unsuitability or unprofessional
conduct of Mr Simpson
 Mr Simpson did not hire his own employees; the members of his team were mainly permanent
employees of Better and one other consultant who had entered into his own contract with Better
 Mr Simpson did not provide and maintain his own tools and equipment; he used the mainframe
computer and other equipment provided by Better
 Mr Simpson was not paid by reference to the volume of work done but by reference to the number of
hours he worked
 Mr Simpson did not invest in any enterprise and he did not bear any financial risk; he had no
opportunity of profit and no risk of loss. All his invoices were paid
 The relationship between Mr Simpson and Better had some element of permanency as it lasted for
two and a half years from December 1998 to June 2001
 While working for Better Mr Simpson only provided work for Better and for no other client. Before
working for Better he worked for two other clients and since leaving Better he has worked for one
other client but has never worked for more than one client at a time
 Mr Simpson was integrated into the structure of Better to the extent that he worked closely with its
employees; also the project manager was an employee.
Therefore, Mr Simpson was an employee of Better.
In calculating an individual’s gains or profits from an employment for a year of income the following
payments made to or on behalf of the individual by the employer or an associate of the employer during
that year of income shall be included:
1.2 Secondary employment.

There are employees who have more than one employment e.g. persons with several directorships
or persons with part-time employments. The employee having more than one employment shall
select (at the employee’s choice) one of those employments to be the employee’s primary
employment and the remaining employment shall be secondary employment. Secondary employers
should apply similar process as primary employer in determining monthly pay and deduction of tax.
However, secondary employers do not use progressive rates and the income tax tables to calculate
the amount of tax to be withheld from monthly pay. Secondary employers must withhold tax at the
highest individual rate (currently 30%) from the full amount of monthly pay
1.3 Employment income items

Income in connection with employment income (contract of service) means:
(i) Wages, salary, payment in lieu of leave, fees, commissions, bonuses, gratuity or any subsistence,
travelling, entertainment or other allowance received in respect of the employment or services
rendered;
(ii) Reimbursement by an employer of personal expenditure by the employee or an associate of an
employee;
(iii) Payments for the employee’s agreement to any conditions of the employment;
(iv) Retirement contributions and retirement payments paid by an employer on behalf of employees
(v) Payment for redundancy or loss or termination of employment relating to the year of payment;
(vi) Other payments made in respect of the employment including benefits in kind (Section 7(2)).
Example
Robots and Assembler Design makers employed Ms. Rachel Makona as the Company Accountant with
effect from 1 January 2017. By the time the company submitted a statement of employment income for
year 2018, the following information was revealed to her as her monthly emoluments:
employee;
(iii) Payments for the employee’s agreement to any conditions of the employment;
(iv) Retirement contributions and retirement payments paid by an employer on behalf of employees
(v) Payment for redundancy or loss or termination of employment relating to the year of payment;
(vi) Other payments made in respect of the employment including benefits in kind (Section 7(2)).
Example
Robots and Assembler Design makers employed Ms. Rachel Makona as the Company Accountant with
effect from 1 January 2017. By the time the company submitted a statement of employment income for
year 2018, the following information was revealed to her as her monthly emoluments:
TZS
Basic monthly salary 600,000
Transport allowance monthly 250,000
Lunch allowance monthly 150,000
Medical allowance monthly 100,000
The employer housed her for free. The market value of rental at that area was TZS 400,000 per month
and the expenditure claimed by the company for that premises was TZS 150,000. The contribution
made monthly by the employee was TZS 50,000 as rent. Beside the emoluments stated above, the
employee had the following benefits:
(i) Self-driven car for private use, which is 3000 cc, brand new. The company claims expenditure of car
maintenance.
(ii) Loan advances of Tshs3,000,000 payable in 15 monthly instalments and free of interest. Statutory
rate was 10% per annum.
(iii) Other benefits included electricity TZS 30,000 and water TZS 25,000 per month.
The employer was contributing 15% of basic salary to the approved retirement fund, while the employee
contributed 5%.
Though her employment services were terminated on 31 December 2018, the company paid her
Tshs30,000,000 as termination benefits (compensation for lost employment).
Other income she received in 2018 was TZS 300,000 interest from CRDB Bank (a resident person),
TZS1,500,000 – lease amount from Milk Shake Company for the building she leased to the company
since 2008.
Required:
Required:
Identify items included in chargeable employment income for the year 2018.
Identify items included in chargeable employment income for the year 2018.
Answer
Answer
With exception of interest from CRDB Bank and rent from Milk shake company all other is employment
With exception of interest from CRDB Bank and rent from Milk shake company all other is employment
income.
income.
1.4 Taxation of benefits in kind as employment income
1.4 Quantification
Taxation of benefits in kind benefits
of employment as employment income
in kind are dealt with in Section 27 of the Income Tax Act 2004.
Quantification
Generally, benefits in kind are valued on marketdealt
of employment benefits in kind are valueswith
of in
theSection
benefits,27butof with
the Income
exception TaxofAct
car 2004.
benefits,
Generally, benefits in kind are valued on market values of the benefits, but with exception
beneficial loans and house benefits. These three benefits have specific approaches concerning their of car benefits,
beneficial loans
valuations. and house
Therefore, thisbenefits. These
Study Guide three these
explains benefits have specific
approaches approaches concerning their
in detail.
valuations. Therefore, this
1. Private uses of motor car Study Guide explains these approaches in detail.
1. Private
Whenuses of motor car
an employee uses an employer’s car for official purposes, it results in no taxable income.
When an employee uses
However, there is taxable anbenefit
employer’s
when car
the for official uses
employee purposes,
the carit for
results in purposes,
private no taxableprovided
income. the
However, there is taxable benefit when the employee uses the car for private
employer claims maintenance and ownership allowances of the car when computing his/her taxablepurposes, provided the
employer claims maintenance and ownership allowances of the car when computing
income (Section 7(3) (e)). In that case, the car benefit is the value given as per the table below. his/her taxable
income
As you(Section
can see, 7(3)the(e)). In that
value case,
of car the depends
benefit car benefitonisengine
the valuesizegiven
of carsasand
per age
the table
of thebelow.
car; the age is
As counted
you can see,
from the
the value of car benefit
first registration depends
of the on engine
car in the United size of cars
Republic and age of the car; the age is
of Tanzania.
counted from the first registration of the car in the United Republic of Tanzania.
Quantity of payment per annum

Quantity of payment per annum
Vehicle less than 5 Vehicle more than 5
Engine Size of Vehicle Vehicle less
years old than 5 Vehicle
years more
old than 5
Engine Size of Vehicle years old years old
Not exceeding 1000cc Tshs250,000 Tshs125,000
Not exceeding 1000cc Tshs250,000 Tshs125,000
Above 1000cc but not exceeding Tshs500,000 Tshs250,000
Above 1000cc
2000cc but not exceeding Tshs500,000 Tshs250,000
2000cc
Above 2000cc but not exceeding Tshs1,000,000 Tshs500,000
Above 2000cc
3000cc but not exceeding Tshs1,000,000 Tshs500,000
3000cc
Above 3000cc Tshs1,5000,000 Tshs750,000
Required:
Required:
Establish the taxable car benefit in kind of Ms. Rachel Makona for the year 2018.
Above 1000cc but not exceeding Tshs500,000 Tshs250,000
2000cc
Above 2000cc but not exceeding Tshs1,000,000 Tshs500,000
3000cc
Required:
Answer
From the information available in the question, the car is brand new and operates at 3,000 cc. Therefore,
from the table above, the annual car benefit is calculated as Tshs1,000,000.
2. Loan benefit
When an employer provides staff loans at lower interest rates compared to statutory rates or interest
free loans; recipient employees enjoy taxable income. The taxable income is the whole of the forgone
interest in the case of interest free loans and when the lower interest rate is offered the benefit would
be calculated based on the relinquished part of interest rate.
However, no taxable benefit is derived when the loan made by an employer to an employee is for less
than 12 months and the aggregate amount of the loan and any similar loans outstanding at any time
during the previous 12 months do not exceed 3 times the month’s basic salary (Section 27(1) (b)).
‘Statutory rate’ in relation to a calendar year means the prevailing discount rate determined by the Bank
of Tanzania;
Section 3
In short taxation of beneficial interest one needs to know the following important aspects
 Check whether the loan made by an employer to an employee is for less than 12 months and
the aggregate amount of the loan and any similar loans outstanding at any time during the
previous 12 months do not exceed 3 times the month’s basic salary. If yes, no taxable benefit
arises from the loans given. Otherwise, go to the next steps.
 The loans are given to employees because they are just employees, otherwise loans provided in
normal course of business at market terms are not employee beneficial loans.
 The benefit bases on the forgone interest rate which can be statutory rate when the loans
concerned are interest free, otherwise the benefit is statutory rate less interest paid by
employees.
 Interest = Outstanding amount x (statutory rate – interest rate paid) x time/12
Refer to the information of Test Yourself 1 of Robots and Assembler Design makers.
Required:
Calculate the loan benefit of Ms. Rachel Makona for the year 2018.
Solution
The loan made by the employer to the employee is for more than 12 months (in this case 15 months
term) also the aggregate amount of the loan and any similar loans outstanding at any time during the
previous 12 months exceed 3 times the month’s basic salary (Tshs3,000,000 is greater than 3 times
basic salary i.e. Tshs600,000). So the beneficial loan is taxable.
As the loan balance did not change, the formula of simple interest can be used to determine the forgone
interest.
So Interest = Principle x time/12 x saved interest rate = Tshs3,000,000 x 12/12 x 10%= Tshs300,000
3. Residential premises benefit
There is taxable employment benefit when an employee lives in a subsidized house and the employee
claims maintenance and ownership allowances in his/ her tax returns (Section 27(1)(c)). This valuation of
taxable house benefit in kind includes any furniture or other contents provided by an employer for
residential occupation by an employee during a year of income. Actually, the taxable benefit is the lower
of (i) and (ii) – given below after being reduced by any rent paid for the occupation by the employee.
;ĂͿ the market value rental of the part of the premises occupied by the employee for the period occupied
during the year of income; and
;ďͿ the greater of:
(i) 15% of the employee's total income for the year of income, calculated without accounting for the
provision of the premises and, where the premises are occupied for only part of the year of income,
apportioned as appropriate;
(ii) and expenditure claimed as a deduction by the employer in respect of the premises for the period of
occupation by the employee during the year of income;
The total income of a person is the sum of the person's chargeable income for the year of income from
each employment, business and investment less any reduction allowed for the year of income under
Section 61 relating to retirement contributions to approved retirement funds
(i) 15% of the employee's total income for the year of income, calculated without accounting for the
provision of the premises and, where the premises are occupied for only part of the year of income,
apportioned as appropriate;
(ii) and expenditure
264 Computation claimed as a deduction by the employer in respect of the premises for the period of
of Taxable Income
occupation by the employee during the year of income;
The total income of a person is the sum of the person's chargeable income for the year of income from
each employment, business and investment less any reduction allowed for the year of income under
Section 61 relating to retirement contributions to approved retirement funds
Section 5 (1)
Example
Hewit Ltd employed Ms Tracy Jones as the Company Accountant with effect from 1 January 2019. By
the time the company submitted a statement of employment income for year 2010, the following
information was revealed to her as her monthly emoluments:
Basic monthly salary Tshs 600,000
Transport allowance monthly Tshs 250,000
Lunch allowance monthly Tshs150,000
Medical allowance monthly Tshs100,000
The employer housed her freely. The market value of rental at that area was Tshs400,000 per month
and the expenditure claimed by the company for that premise was Tshs150,000. The contribution made
monthly by the employee was Tshs50,000 as rent. Beside the emoluments stated above, the employee
had the following benefits.
(i) Self-driven car for private use, which is 3000 cc, brand new. The company claims expenditure of car
maintenance.
(ii) Loan advances of Tshs3,000,000 payable after 15 monthly and free of interest. Statutory rate was
10% per annum.
(iii) Business income of Tshs1,000,000 and investment income of Tshs500,000
(iv) Other benefits included electricity Tshs30,000 and water Tshs25,000 per month.
Workings
Establishment of total income before house benefit in kind
Items Tshs Tshs
Basic salary 600,000 x12 7,200,000
Transport allowance 250,000 x12 3,000,000
Lunch allowance 150,000 x 12 1,800,000
Medical allowance 100,000 x 12 1,200,000
Car benefit as above 1,000,000 1,000,000
Loan benefit as above 300,000 300,000
Electricity 30,000 x12 360,000
Water 25,000 x12 300,000
Employment income 12,760,000
Add: Business income 1,000,000
Add: Investment income 500,000
Total income
;ĂͿ the annual market value Tshs4,800,000 14,260,000
;ďͿ the greater of:
House benefit is the lower of:
(i) 15% of Tshs14, 260,000 =
Tshs2,139,000
(ii) Employer’s claim
Tshs1,800,000.
This is reduced by monthly contribution made during the year of Tshs600,000 (Tshs50,000 x12). So the
house benefit without deduction of monthly contribution was Tshs2,139,000. It is the lower of
Tshs4,800,000 and Tshs2,139,000. The ultimate house benefit was Tshs1,539,000.
1.5 Redundancy, or loss or termination benefit paid in arrears

In accordance with Section 7(4), while calculating an individual’s gains or profit from payment for
redundancy or loss or termination of employment, any payment received in respect of a year of income
which expired earlier than five years prior to the year of income in which it was received, or which the
employment or services ceased, if earlier such payment shall, for the purposes of calculation of the tax
payable thereon, should be allocated in following manner:
 the payments should be allocated equally between the years of income in which it is received
or,
 if the employment or services ceased in an earlier year between such earlier year of income and
the five years immediately preceding such earlier year of income.
1.5 Redundancy, or loss or termination benefit paid in arrears
In accordance with Section 7(4), while calculating an individual’s gains or profit from payment for
redundancy or loss or termination of employment, any payment received in respect of a year of income
which expired earlier than five years prior to the year of income in which it was received, or which the
employment or services ceased, if earlier such payment shall, for the purposes of calculation of the tax
payable thereon, should be allocated in following manner:
 the payments should be allocated equally between the years of income in which it is received
or,
 if the employment or services ceased in an earlier year between such earlier year of income and
the five years immediately preceding such earlier year of income.
Actually, each such portion, allocated to any such year of income, is deemed to be income of that year of
income in addition to any other income in that period (Section 7(4)).
In short the allocation process of redundancy, or loss or termination benefit paid in arrears can be
summarized into four major steps:
1. Decide the earlier period between the year of receipt, or which the employment (services) ceased.
2. Total redundancy, or loss or termination benefits relating to periods earlier than five years prior to
the earlier of the year of receipt, or which the employment/ services ceased.
3. Divide the total above by 6, allocate the amount to 5 years immediately preceding such earlier year of
income in step a above and in that earlier period.
Example
Mr. Jaffer was employed by Kahama Mining Corporation Ltd since 2000. His monthly salary was
Tshs960,000 per month with effect from 1st. Mr. Jaffer was also provided with free residential house
accommodation by the employer and the resulting benefit was correctly determined to be Tshs200,000
per month; and employer claimed ownership allowances.
However, he was terminated on 31 December 2010 and paid a lump sum compensation of
Tshs18,560,000 on termination of his contract of employment on September 2013. The amount was
earned equally throughout ten years of employment.
Required:
You are required to establish his taxable income and state which year it will be taxable
Solution
;ĂͿ The earlier period between the year of receipt i.e. 2013, or which the employment or services
ceased i.e. 2010, is 2010.
;ďͿ Total redundancy, or loss or termination benefits relating to periods earlier than five years prior to
2010, i.e.
before 2005 i.e. 2000-2004 is equal to Tshs1,856,000 x 5 = Tshs9,280,000.
;ĐͿ Divide the total above by 6, then allocate the amount to 5 years immediately preceding 2010 in step
‘a’ above and in 2010. That is, allocate Tshs1,546,667 to 2010, 2011, 2012, 2013, 2014, and 2015.
The amount allocated will be taxed in the period allocated.
;ĚͿ Finally, the remaining balance (from 2005 to 2010) of termination benefit will be taxed on cash basis
on the date of receipt i.e. September 2013.
1.6 Taxation of employment termination benefits
Likewise taxation of employment termination benefits has three special treatments.
Fixed employment contract
First, when a fixed employment contract is terminated before its expiration and the affected employee
gets termination benefits; taxable termination benefits should not exceed the amount which
would have been received in respect of the unexpired period (Section 7(5) (a)). Also this amount is
assumed to have accrued evenly in such unexpired period.
Employment contract (which provides for compensation on termination) having

unspecified term
Second, when an employment contract which has unspecified term and provides for compensation on
its termination, the compensation thereon is deemed to have accrued in the period immediately
following such termination at a rate equal to the rate per annum of the gains or profits from such
contract received immediately prior to such termination (section 7(5)(b)).
Employment contract (which does not provide for compensation on termination) for an
unspecified term
Finally, when an employment contract is for an unspecified term and does not provide for
Second, when an employment contract which has unspecified term and provides for compensation on
its termination, the compensation thereon is deemed to have accrued in the period immediately
following of
266 Computation such termination
Taxable Income at a rate equal to the rate per annum of the gains or profits from such
contract received immediately prior to such termination (section 7(5)(b)).
Employment contract (which does not provide for compensation on termination) for an
unspecified term
Finally, when an employment contract is for an unspecified term and does not provide for
compensation on its termination thereof, any compensation paid on the termination thereof is deemed
to have accrued in the period immediately following such termination at a rate equal to the rate per
annum of the gains or profits from such contract received immediately prior to such termination, but the
amount so included in gains or profits must not exceed the amount of three years’ remuneration at
such rate (section 7(5)(c)).
Example
Mr. Jaffer was employed by Kahama Mining Corporation Ltd since 2010. His monthly salary was
Tshs 960,000
per month gross with effect from 1st. Mr. Jaffer was also provided with free residential house
accommodation by the employer and the resulting benefit from the house benefits was correctly
determined to be Tshs 200,000 per month and employer claimed ownership allowances. However, he
was terminated on 31 December 2015 and paid a lump sum compensation of Tshs 18,560,000 on
termination of his contract of employment.
You are required to establish his taxable termination benefit and stated when i.e. year it will be taxable
if:
(a) The contract of employment was for ten years.
(b) The contract of employment was for unspecified term and provides for termination
benefits
(c) The contract of employment was for unspecified term and does not provide for
termination benefits.
Answer:
(i) Fixed employment contract

When the contract is for specified term the taxable benefits of termination benefits should
not exceed the amount that could have been received in absence of termination of the
contract in an unexpired period. In this case the amount is (Tshs 960,000 + Tshs 200,000) x 5
years. X12 months= Tshs 69,600,000.
So as the amount received is lower than Tshs 69,600,000 the whole amount will be taxable
termination benefits. However, it should be allocated equally in the five remaining years from
2016 to 2020. So each year gets Tshs 3,712,000 from Tshs 18,560,000/5.
(ii) Employment contract (which provides for compensation on termination) having

unspecified term
In case of unspecific employment contract but provides for termination compensation benefit, the
taxable benefit should not exceed annual employment income immediately before termination.
st
As the termination happened on 31 December 2015, the annual employment income should
base on this year. So the taxable amount should not exceed Tshs 13,920,000
((960,000+200,000) x 12). Consequently, the taxable termination benefits were Tshs
13,920,000 and deemed to have accrued in the next year 2016.
(iii) Employment contract (which does not provide for compensation on termination) for an
unspecified term
Finally, when the contract is for unspecified term and does not provide for termination
benefits, in case termination benefits is received, the maximum taxable amount should
be 3 times the annual employment income immediately before the .termination. In this
case it should not exceed Tshs 13,920,000 x 3 = Tshs 41,760,000. So as this amount is
higher than Tshs 18,560,000, the amount received should be taxed in 2016.
2. Items Excluded In Calculation Of Chargeable Income From Employment

According to Section 7(3) of the Income Tax Act 2004, the following income earned by employees
benefits, in case termination benefits is received, the maximum taxable amount should
be 3 times the annual employment income immediately before the .termination. In this
case it should not exceed Tshs 13,920,000 x 3 = Tshs 41,760,000. So as this amount is
higher than Tshs 18,560,000, the amount received should be taxed in 2016.
2. Items Excluded In Calculation Of Chargeable Income From Employment

According to Section 7(3) of the Income Tax Act 2004, the following income earned by employees
from their employments is not taxable:
(a) exempt amounts and final withholding payments; on-premises cafeteria services that
are available on a non-discriminatory basis;
(b) medical services, payment for medical services, and payments for insurance for medical services to
the extent that the services or payments are;
(i) available with respect to medical treatment of the individual, spouse of the individual and up to four
of their children; and
(ii) made available by the employer (and any associate of the employer conducting a similar or related
business) on a non-discriminatory basis;
(c) any subsistence, travelling, entertainment or other allowance that represents solely the
reimbursement to the recipient of any amount expended by him wholly and exclusively in the
production of his income from his employment or services rendered;
(d) benefits derived from the use of motor vehicle where the employer does not claim any deduction or
relief in relation to the ownership, maintenance or operation of the vehicle;
(e) benefit derived from the use of residential premises by an employee of the Government or any
institution whose budget is fully or substantially out of Government budget subvention;
(f) payment providing passage of the individual, spouse of the individual and up to four of their children
to or from a place of employment which correspond to the actual travelling cost where the individual
is domiciled more than 20 miles from the place of employment and is recruited or engaged for
employment solely in the service of the employer at the place of employment;
(g) retirement contributions and retirement payments exempted under the Public Service Retirement
Benefits Act;
(h) payment that it is unreasonable or administratively impracticable for the employer to account for or to
allocate to their recipients and;
(i) allowance payable to an employee who offers intramural private services to patients in a public
hospital;
(j) housing allowance, transport allowance, responsibility allowance, extra duty allowance, overtime
allowance, hardship allowance and honoraria payable to an employee or the Government or its
institution whose budget is fully or substantially paid out of Government budget subvention.
In addition, board members sitting allowance is exempted because it is deemed as reimbursement of
members’ time (Income Tax Act 2004, Practice Note No. 11/2004) as well as gifts, tips, prizes,
incentives and voluntary payments made to an employee with no reference to the employment as
acknowledging faithfulness, and consistency and readiness of the employee (Income Tax Act 2004,
Practice Note No. 11/2004; Ball v Johnson 1971; Cooper v Blakiston HL 1908, Calvet v Wainwright
(1947).
Exempt income
Exempt income items are normally given in the schedules reproduced below to assist you in
understanding exempt employment income, please take time to familiarize yourself with this schedule,
particularly paying attention to employment income.
Second schedule and section 52 and 86

The following amounts are exempt from income tax:
;ĂͿ amounts derived by the President of the United Republic or the President of the Revolutionary
Government of Zanzibar from salary, duty allowance and entertainment allowance paid or
payable to the President from public funds in respect of or by virtue of the office as President;
;ďͿ amounts derived by the Government (including Executive Agency established under the
Executive Agencies Act, 1997) or any local authority of the United Republic or by the
Revolutionary Government of Zanzibar or any local authority of Zanzibar except amounts
derived from business activities that are unrelated to the functions of government;
;ĐͿ amounts derived by any person entitled to privileges under the Diplomatic and Consular
Immunities and Privileges Act to the extent provided in that Act or in regulations made under
that Act;
;ĚͿ amounts derived by an individual from employment in the public service of the government of
a foreign country provided:
(i) the individual is a resident person solely by reason of performing the employment or
is a non-resident person; and
Executive Agencies Act, 1997) or any local authority of the United Republic or by the
Revolutionary Government of Zanzibar or any local authority of Zanzibar except amounts
derived from business activities that are unrelated to the functions of government;
;ĐͿ amounts derived by any person entitled to privileges under the Diplomatic and Consular
Immunities and Privileges Act to the extent provided in that Act or in regulations made under
that Act;
;ĚͿ amounts derived by an individual from employment in the public service of the government of
a foreign country provided:
(i) the individual is a resident person solely by reason of performing the employment or
is a non-resident person; and
(ii) the amounts are payable from the public funds of the country;
;ĞͿ foreign source amounts delivered by:
(i) an individual who is not a citizen of the United Republic and who is referred to in
paragraph (d); or a spouse or child of an individual referred to in subparagraph
(ii) where the spouse is resident in the United Republic solely by reason of
;ĨͿ Amounts derived by:
(i) the East Africa Development Bank;
(ii) the Price Stabilization and Agricultural Inputs Trust;
(iii) the Investor Compensation Fund under the Capital Markets Regulatory Authority; and
(iv) The Bank of Tanzania.
(v) Dar es salaam Stock of Exchange
(vi) African Development Bank from the sale of bonds and securities in the capital
;ŐͿ amounts derived during a year of income by a primary cooperative society:

(i) registered under the Co-operative Societies Act;
(ii) solely engaged in activities as a primary cooperative in one of the following fields:
(aa) agricultural activities, including activities related to marketing and distribution;
(bb) construction of houses for members of the cooperative;
(cc) distribution trade for the benefit of the members of the cooperative;
(dd) savings and credit society; and
(iii) whose turnover for the year of income does not exceed Tshs.50,000,000;
;ŚͿ pensions or gratuities granted in respect of wounds or disabilities caused in war and
suffered by the recipients of such pensions or gratuities;
;ŝͿ a scholarship or education grant payable in respect of tuition or fees for full-time
instruction at an educational institution;
;ũͿ amounts derived by way of alimony, maintenance or child support under a judicial
order or written agreement;
;ŬͿ amounts derived by way of gift, bequest or inheritance, except as required to be included
in calculating income under Sections 7(2), 8(2) or 9(2)
;ůͿ amounts derived by way of foreign living allowance by any officer of the Government that
are paid from public funds and in respect of performance of the office overseas;
;ŵͿ Income derived from gaming by a gaming lincensee who has paid gaming tax under Gaming
Act;
;ŶͿ income derived from investment or business conducted within the Export Processing Zone,
and Special Economic Zone during initial period of ten years;
;ŽͿ income derived from investments exempted under any written laws for the time being in force
in Tanzania Zanzibar;
;ƉͿ rental charges on aircraft lease paid to a non-resident by a person engaged in air transport
business; amounts derived by a crop fund established by farmers under a registered
farmers cooperative society, union or association for financing crop procurement from its
members;
;ƋͿ the fidelity fund established under the Capital Markets and Securities Act
;ƌͿ Amounts derived from gains on realization of asset by a unit holder on redemption of a unit by
a unit trust.
farmers cooperative society, union or association for financing crop procurement from its
members;
;ƋͿ the fidelity fund established under the Capital Markets and Securities Act
;ƌͿ Amounts derived from gains on realization of asset by a unit holder on redemption of a unit by
a unit trust.
;ƐͿ payment of withholding' tax on dividend arising from investment in the Export Processing
Zone and Special Economic Zone during initial period often years; and
;ƚͿ payments of withholding tax on rent payable by an investor licensed under the Export
Processing Zone and Special Economic Zone during initial period of ten years, provided that
the rent is payable to an investor licensed under the Economic Processing Zones or the
Special Economic Zones."
;ƵͿ Distributions of a resident trust or unit trust shall be exempt in the hands of the trust's
beneficiaries (Section 52)Rent which does not exceed Tshs500,000, received by a resident
individual (the "landlord") in respect of residential premises situated in the United Republic
that are leased by another individual as the residence of that other individual and the rent is
not received by the landlord in conducting a business (Section 86(4)).
;
Final withholding payments
These are payments which are taxed only at the source by withholding the tax by the payers of the
payments.
So these payments are normally excluded in computation of income from employment,
investment or businesses. The following payments are final withholding payments as per section 86.-
(1):
 Dividends paid by a resident corporation or non-resident corporation to a resident individual

resulting from investment activities.
 Interest paid by financial institution to a resident individual where the interest is paid with
respect to a deposit held with the institution, other than interest received by the individual in
conducting a business; or foreign source interest paid to non-resident individual.
 Rent paid to a resident individual under a lease of land or a building and associated fittings
and fixtures, other than rent received by an individual in conducting a business; or foreign source
rent paid to non- resident individual.
 Service fees paid to a resident person who is conducting a mining business in respect of
management or technical services provided wholly and exclusively for the business by another
resident persons and money transfer commission to a resident money transfer agent.
 Payments made to non-resident persons other than through a domestic permanent

establishment of the person) that are subject to withholding taxes.
 Interest paid to a unit trust.
 Dividends distributed by a resident corporation not in a virtue of its ownership of redeemable
shares (section 54(1)).
Identify the allowable deductions and establish income from employment.
3. Allowable Deductions
Apart from some exemptions, the Act has provided two deductions when computing income from
employment. These are:-
(i) Donation to education fund
Voluntary contribution of any amount to education establishment made under Section 12 of the
Education Fund Act by an employee is deductible expenses in determining his or her taxable
employment income (Section 16(3)).
(ii) Retirement contributions to approved retirement fund
In addition, employees can deduct pension contributions made by themselves or their employers
3. Allowable Deductions
Apart from some exemptions, the Act has provided two deductions when computing income from
employment. These are:-
(i) Donation to education fund
Voluntary contribution of any amount to education establishment made under Section 12 of the
Education Fund Act by an employee is deductible expenses in determining his or her taxable
employment income (Section 16(3)).
(ii) Retirement contributions to approved retirement fund
In addition, employees can deduct pension contributions made by themselves or their employers
on employees’ behalf (or for the employees’ spouses) to approved pensions. Actually the law
allows deduction of pension contribution made by the individual; or an employer of the
individual to approved pension funds where the contribution is included in calculating the
individual's income from the employment (Section 61(1)). However, the reduction claimed by an
individual for any year of income should be the lower of the actual contribution or the
statutory amount required (Section 61(2)).
The statutory amount is TZS 2,400,000 if Actual Contributions do not exceed TZS 2,400,000 or
where actual contribution paid to the retirement fund exceeds TZS 2,400,000, the statutory
amount will be the maximum obligatory contribution required by the fund (which is 20% of
remunerations).
Definitions
 ‘Retirement contribution’ means a payment made to a retirement fund for the provision or
future provision of retirement payments.
Section 3
 ‘Retirement fund’ means any entity established and maintained solely for the purposes of
accepting and investing retirement contributions in order to provide retirement payments to
individuals who are beneficiaries of the entity.
Section 3
 ‘Statutory contribution’ is when the total contribution to an approved retirement fund
required by statute in relation to an employee is in excess of Tshs2,400,000 per year, the
amount of that obligation or in any other case, Tshs2, 400,000.
Income Tax Regulation 10
 ‘Approved retirement fund’ means a resident retirement fund having a ruling under Section
131.
Section 3
4. Chargeable Income From Employment

‘Chargeable business income’ of resident person, includes all his or her income for the year of
income irrespective of the source of the income, while chargeable income of non-resident
persons income only to the extent that the income has a source in the United Republic. Payments
attributable to employment exercised or a forbearance from exercising employment have a
source in the United Republic where –
i) The employment or the forbearance is exercised in the United Republic, regardless of the place
of payment. Exercising in this sense means the actual carrying out of the employment activities
which may include physical presence of the employee at the place of employment.
ii) The payer for the exercising of the employment or the forbearance is the Government of the
United Republic, including the Revolutionary Government of Zanzibar (SMZ) or any Tanzania
local authority.
The employment income is generally computed on cash basis unless specifically required by tax laws.
The statement below can help us when computing taxable employment income.
Computation of chargeable employment income

Items Tshs
Salary Bonus Transport Meals XX
House benefit XX XX XX XX XX
Loans
Less: (XX) (XX) XXX
Contribution to education fund Contribution to approved fund Taxable employment income
Question 1
Ms Glory was employed for the first time by Fruto International Ltd, a private resident company since 1 st
January 2018. As a company’s Marketing Manager, Ms Glory was given a range of responsibilities.
She has been resident of the United Republic of Tanzania solely in the years 2017 and 2018. Her duties
are well balanced by a good package of remuneration which is made up of the following;
(i) Basic salary of Tshs. 800,000 per month and medical service insurance of Tshs. 30,000 per
month and medical service insurance of Tshs. 30,000 per month as per the company’s policy to
its employees.
(ii) Mobility allowances for use when on duty trips within her duty stations of Tshs. 100,000 per
month coupled with life insurance of Tshs. 50,000 each month paid directly by the company to
the Insurance Company. It is estimated that Ms Glory is spending only 50% of the mobility
allowance for the performance of her official duties.
(iii) It is the policy of the company to pay all of its employees lunch allowances of Tshs. 2,000 each
per day for 22 days each month.
(iv) Traveling allowances for home-office-home trips of Tshs. 100,000 per month.
(v) The company pays school fees and uniforms for its employees as its contribution as per the
National Education Policy. Ms Glory received Tshs. 500,000 which the employer ensured that
the sum is spent according to agreed terms.
(vi) A fully furnished residential quarter where the value of furniture itself amount to Tshs. 2,000,000.
The company normally recognizes Tshs. 120,000 per month as expense for the provision of the
house while the market rent of a house of the same status is Tshs. 150,000 per month. The cost
of the house to the company was Tshs. 10 million.
(vii) During 2018, Ms Glory traveled to her home country, Uganda, for an annual leave where she
provided consultancy for one month for the following remuneration: Consultancy fees amounting
to Tshs. 40,000 per day for 20 days; Upkeep allowance of Tshs. 200,000 for the period of
consultancy and free accommodation with market value of Tshs. 150,000.
(viii) During her trip to Uganda, the company paid Tshs. 450,000 for her return air ticket, since the
location of the company is Dar es Salaam.
(ix) Ms. Glory acquired a car at a cost of Tshs. 6,000,000 which was fully used in the employment
duties.
(x) Ms. Glory also received interest from her Banker on fixed deposit account, Tshs. 200,000.
(xi) Retirement contributions are made to the Social Security Fund where the employer contributes
10% and the employee 10% of the gross monthly salary.
Required:
On the basis of the above information, compute Ms Glory’s taxable income for the year of income 2018
(assume today is 31st December 2018).
Question 2
Mr. Hamnazo is a resident employee of Tatua Company Ltd from 1 January 2019. The following
information relates to his affairs:
(i) His monthly receipts include basic salary, transport, lunch and medical allowances to the
Required:
On the basis of the above information, compute Ms Glory’s taxable income for the year of income 2018
(assume today is 31st December 2018).
Question 2
Mr. Hamnazo is a resident employee of Tatua Company Ltd from 1 January 2019. The following
information relates to his affairs:
(i) His monthly receipts include basic salary, transport, lunch and medical allowances to the
tune of TAS 500,000, TAS 425,000, TAS 175,000 and TAS 50,000 respectively.
(ii) Transport allowance of TAS 425,000 for nine people totaled TAS 3,825,000; and has been
given to Mr Hamnazo including each child and his spouse because he lives more than 45
km from the place of employment.
(iii) Self driven car of above 3000 cc was given to him for private use. Expenditure on the car is
claimed against taxable income of Tatua Company Ltd.
(iv) Mr. Hamnazo was given an interest free loan of TAS 4,000,000 payable in two calendar years
on monthly instalments (assume statutory interest rate of 15% per year).
(v) Other per month benefits enjoyed by Mr. Hamnazo includes electricity and water amounting to
TAS 300,000 and TAS 240,000 respectively.
Required:
Establish the monthly taxable income for Mr. Hamnazo for the first month
of 2019.
Question 3
Mr. Jaffer had secured a five years employment contract with Kahama Mining Corporation Ltd. His
monthly salary was Tshs960,000 per month gross with effect from 1st January, 2016. Mr. Jaffer was
also provided with free residential house accommodation by the employer who did not claim
ownership allowance. After serving the employer for 2½ years his contract was terminated (by the
employer) on 30th June, 2018 because he was suspected of being involved in illegal gold
smuggling. He was paid a lump sum compensation of Tshs18,560,000 on termination of his
contract of employment. His contract provided for payment of compensation on termination of
employment.
Required:
Establish the taxable income of Mr. Jaffer for the year of income 2018.
Question 4
Peter is employed by The Consultancy Ltd as a fashion designer. The following information is available
for the tax year 2019.
(1) During the tax year 2019 Peter was paid a gross annual salary of Tshs. 12,000,000 by The
Consultancy Ltd.
(2) In addition to his salary, Peter received two bonus payments from The Consultancy Ltd during
the tax year 2019. The first bonus of Tshs. 444,300 was paid on 30 April, 2019 and was in
respect of the year ended 31 December, 2008. Peter became entitled to this first bonus on 10
April, 2019. The second bonus of Tshs 333,600 was paid on 31 March 2019 and was in respect
of the year ended 31 December, 2019. Peter became entitled to this second bonus on 25 March,
2019.
(3) Throughout the tax year 2019 The Consultancy Ltd provided Peter with a diesel powered motor
car which has a list price of Tshs 22,500,000/=. The motor car cost The Consultancy Ltd Tshs
21,200,000, and it has 1500cc and was first registered in Tanzania on 2 March, 2017. The
Consultancy also provided Peter with fuel for private journeys and does not claim capital
allowance for this vehicle.
(4) The Consultancy Ltd has provided Peter with living accommodation since 1 January, 2017. The
company had purchased the property in 2016 for Tshs 16,000,000, and it was valued at Tshs
18,000,000 on 1 January, 2018. Improvements costing Tshs 2,013,000 were made to the
property during June 2019. The annual value of the rental in that area is Tshs 3,600,000, and the
company claim Tshs 1,000,000 as capital and maintenance toward the house.
(5) Throughout the tax year 2019 The Consultancy Ltd provided Peter with two mobile telephones.
The telephones had each cost Tshs 250,000 when purchased by the company in January 2019
and 20% of telephone uses were private. It is the company’s policy to provide mobile telephones
to all employees.
(6) On 5 January 2019 The Consultancy Ltd paid medical insurance of Tshs 510,000 for the benefit
of Peter and all employees of the company were covered by the same programme.
(7) During February 2019 Peter spent five nights overseas on company business. The Consultancy
Ltd paid Peter a daily allowance/per diem of Tshs 100,000 to cover the cost of personal
property during June 2019. The annual value of the rental in that area is Tshs 3,600,000, and the
company claim Tshs 1,000,000 as capital and maintenance toward the house.
(5) Throughout the tax year 2019 The Consultancy Ltd provided Peter with two mobile telephones.
The telephones had each cost Tshs 250,000 when purchased by the company in January 2019
and 20% of telephone uses were private. It is the company’s policy to provide mobile telephones
to all employees.
(6) On 5 January 2019 The Consultancy Ltd paid medical insurance of Tshs 510,000 for the benefit
of Peter and all employees of the company were covered by the same programme.
(7) During February 2019 Peter spent five nights overseas on company business. The Consultancy
Ltd paid Peter a daily allowance/per diem of Tshs 100,000 to cover the cost of personal
expenses such as telephone calls to his family.
(8) The company contributes 15% of basic salary to PPF on behalf of Peter and does not include in
taxable employment income.
(9) Peter received a loan of Tshs 1,000,000 during the year 2019 and is payable over three years.
The company charges 2% pa on gross loan while the current statutory rate was 17% pa.
Required:
Calculate the Employment income of Peter for the year 2019.
Question 5
Mr. Torres is a Marketing Manager of Food Processors Company Ltd in Tanga Municipal town since July
2019 .
(i) His monthly salary was Tshs.600,000 with effect from 1/7/2019.
(ii) He received a bonus of Tshs.650,000 in September 2019.
(iii) He received Tshs.250,000 entertainment allowance for the year. Of this amount, he spent
Tshs.170,000 entertaining potential customers.
(iv) He was provided with fully furnished residential quarters at a nominal rent of Tshs.20,000 per
month payable to the employer The cost of furniture to the employer was Tshs.350,000.The
market rental value is Tshs 100,000 p.m
(v) He was also provided with subsidized lunches on all working days at leading hotel in the
town. He personally paid Tshs.5,000 only for each executive lunch of Tshs.20,000/=. During
the year of income 2019, he took a total of 100 of such lunches. This benefit is available to
all employees.
(vi) The company provided him with a gardener in order to keep the extensive lawns of his house
in a first class condition and a night security guard. They were both paid directly by the
company Tshs. 50,000 each per month.
(vii) The company settled Mr. Torres’s domestic electricity and water bills of Tshs. 20,000 and
Tshs.10, 000 respectively per month directly. The bills were in the name of the company.
(viii) The company issued shares to all interested employees at an issue price of Tshs.600/= per
share its market sells at Tshs.750 per share. Mr. Torres purchased 1,000 shares.
(ix) Taking into account the number of official trips made by Mr. Torres, the employer insured his
life and paid an annual premium of Tshs.38,000
(x) Mr. Torres purchased a saloon car on 5/10/2019 at Tshs.4,500,000. The employer incurred
Tshs. 1,800,000 running expenses. Mr. Torres uses the car to the proportion of two-thirds
performance of duties and one-third private.
(xi) Mr. Torres makes retirement contributions to NSSF, 10% of the basic salary by the employer
and 10 % his contribution.
(xii) Since he is provided with a residential house by his employer, he offered his own house for
rent to NSA Ltd , a company registered in Tanzania, where he receives Tshs. 80,000 a
month from July 2019.
(xiii) The employer has employees’ non-interest loan scheme. Mr Torres borrowed Tshs. 4 million
to finance finishing of his house in August 2019 repayable in twenty monthly installments
from 30th September 2019
Required On the basis of the above information, compute Mr. Torres’s taxable income
assuming he worked for the end of the year of income 2019 and the Bank of Tanzania
discount rate at 1st January 2019 was 15 percent.
Question 6
Mrs. Kinabo is a resident employee of NAFAKA Ltd, a resident corporation since 1 st January 2012
working at a position of senior accountant. The information relating to her employment remuneration and
other benefits during the year of income 2014 is as follows:
(i) Gross annual salary TZS.11,826,617. During the year, she contributed 5 per cent of this
salary to an approved pension fund. The employer contributed 15 per cent of the gross
salary to the same fund.
to finance finishing of his house in August 2019 repayable in twenty monthly installments
from 30th September 2019
Required On the basis of the above information, compute Mr. Torres’s taxable income
assuming he worked for the end of the year of income 2019 and the Bank of Tanzania
274 Computation ofdiscount rate at 1st January 2019 was 15 percent.
Taxable Income
Question 6
Mrs. Kinabo is a resident employee of NAFAKA Ltd, a resident corporation since 1 st January 2012
working at a position of senior accountant. The information relating to her employment remuneration and
other benefits during the year of income 2014 is as follows:
(i) Gross annual salary TZS.11,826,617. During the year, she contributed 5 per cent of this
salary to an approved pension fund. The employer contributed 15 per cent of the gross
salary to the same fund.
(ii) During February, she was provided with a brand new car, whose engine capacity was
3000cc. The car was used for both, private and employment purposes and the private
use was estimated at 25 per cent of the total mileage. Annual claimable deduction in
relation to maintenance and operation of the car was TZS.5,675,800. The employer
claimed this deduction during the year 2014.
(iii) During April, she was provided with fully furnished four rooms house. These rooms were
self-contained. One room was solely used as a library established by the employer for
the purpose of updating her profession. Another room was used for official purpose
while at home. Rent payable for similar house to this in the nearby area is TZS.200,000
per month. She was required to contribute a nominal rent of TZS.20,000 per month to
the employer. Claimable annual deduction during the year in relation to the maintenance
of this house was TZS.3,600,000. The company’s entitlement to this claim for the year
2014 was, however, not allowed by the Commissioner.
(iv) Employees of NAFAKA Ltd are entitled to interest free loans of TZS.15,000,000 since
2012. Mrs. Kinabo secured the loan on 1st January 2014 and agreed to discharge the
liability in 60 monthly installments based on average methods with effect from February
2014. By the time this loan was advanced, her basic salary was fixed at TZS.500,000
per month and the annual statutory borrowing/lending rate announced by the Bank of
Tanzania was 12 per cent.
(v) The employer paid on her behalf, the remunerations for the warden and security services
offered to the house. In aggregate, this amounted to TZS.200,000 per month. Also on
31st December 2014 employer settled the utility bill of TZS.1,600,000 for the house. This
was an outstanding bill for the whole year 2014.
(vi) During July 2014, the company also paid TZS.1,000,000 for her scholarship’s fees. This
was paid to the Open University of Tanganyika where she enrolled for Mastes degree on
a part time basis.
(vii) She was receiving monthly alimony allowance from her ex-husband worth TZS.100,000
to support the children. The alimony allowance received by Mrs. Kinabo was not under
any judicial order nor written agreement, rather it was an informal agreement between
the two ex-spouses.
Required:
Determine the taxable income from employment for Mrs. Kinabo during the year 2014. Show all
your workings clearly.
Question 7
Mr. James Musa was appointed Liaison Officer of the University of Dar es Salaam on a salary of
TZS.10,800,000 per annum with effect from 1st July, 2016 and posted to Mkwawa University College of
Education. He was paid a transfer grant of TZS.1,250,000 on 1st July 2016
His other entitlements included the following:

Required:
Determine the taxable income from employment for Mrs. Kinabo during the year 2014. Show all
your workings clearly.
Question 7
Mr. James Musa was appointed Liaison Officer of the University of Dar es Salaam on a salary of
TZS.10,800,000 per annum with effect from 1st July, 2016 and posted to Mkwawa University College of
Education. He was paid a transfer grant of TZS.1,250,000 on 1st July 2016
His other entitlements included the following:
(i) Responsibility allowance TZS.250,000 per month
(ii) Transport allowance TZS.350,000 per month
(iii) Inconvenience allowance TZS.250,000 per month
He contributed 5% of his salary to an approved Social Security Scheme.
The University of Dar es Salaam provided him with free accommodation, a car and a driver as detailed
below:
(i) The university record TZS.200,000 each month as expenses relating to provision of residential
house to Mr. Musa while the market rental charge stood at TZS.300,000 per month throughout
the year. The University incurred TZS.45,000,000 to construct each on these houses though
their current market value is TZS.30,000,000 each.
(ii) In addition to housing benefit, he was also provided with brand new TOYOTA RAV4 worth
TZS.50 million. The car had 3000cc and was used for both official and private trips though it
was estimated that during the year official trips was three quarters of the whole trips. The
University claims for both car maintenance expenditure and Musa’s driver salary where during
the year it paid TZS.1,080,000 as salary to the Musa’s driver.
The University contributed also TZS.2,550,000 per annum towards his children’s education at the
University of Dar es Salaam Engineering College.
While at University of Dar es Salaam, Mr. Musa took a life assurance policy with the University of Dar es
Salaam Insurance (T) Ltd. He paid a monthly premium of TZS.1,000,000 for a capital sum of
TZS.6,000,000.
Mr. Musa’s aged mother, wife and two children live at his residence at Maswa in Simiyu Region. He is
solely responsible for them. The guest house, a two bedroom self contained residential facility at his
residence, has been rented to Mr. & Mrs. Bagosha at TZS.250,000 per month for the year of
assessment.
Required:
Compute Mr. Musa’s chargeable total income, if any, for the year of assessment 2016. State any
basic tax principles underlying your computation.
Question 8
(a) Mr. Timoth is on a five years teaching contract at a salary of TZS.554,000 per month with effect from
1st January 2012. After serving for two years his contract was terminated, and a lump sum
compensation of TZS.9,930,000 was paid to him.
Required:
Determine the amount of compensation for tax purpose, and state the years in which they are
taxable.
(b) Ms YUNIS is employed by International School of Mwanza from 1st August 2008
Question 8
(a) Mr. Timoth is on a five years teaching contract at a salary of TZS.554,000 per month with effect from
1 January 2012. After serving for two years his contract was terminated, and a lump sum
st
compensation of TZS.9,930,000 was paid to him.

Required:
Determine the amount of compensation for tax purpose, and state the years in which they are
taxable.
(b) Ms YUNIS is employed by International School of Mwanza from 1st August 2008
The following items, conditions and particulars relate to her employment during the year of
income 2015:
(i) Her salary per month is TZS.1,300,000

(ii) She is entitled gratuity equivalent to 25% of his basic salary for each successful
completed year of service.
(iii) The School provided her with the following benefits:
- Free use of school’s motor vehicle, bought six year ago (Toyota Corolla, 1000cc).
The Commissioner for Income Tax accepted three quarter of the use as representing
free use of the car.
- One night security guard who is on the school’s payroll at monthly wage of
TZS.250,000.
- Electricity, gas, telephone and water bills amounting to TZS.300,000 per annum. All
these benefits were paid directly to the utility companies since they were addressed
to the name of employer.
- A residential house for the whole year for which she paid a token rent amounting to
TZS.10,000 per month. It is estimated that the market rental value of this house is
TZS.160,000 per month.
(iv) Other sums met by the employer during the year included:
- TZS.50,000 per month as entertainment allowance. However, she was not required
to account for the amount.
- Monthly duty allowance TZS.120,000.
- She was given TZS.30,000 per month to meet her travelling expenses. She was
spending about 25% of such for performing her official duties.
- Free medical services under the arrangement that required the employer to pay
medical bills for Ms AKISA, her husband and up to four children. For the year of
income 2015, this bill amounted to TZS.300,000.
- TZS.130,000 per month to an insurance company for policy covering her life.
(v) She had two children who are enrolled at the same school. During the year, the school
subsidized the school fees and board expenses of the two children amounting to
TZS.2,000,000 in total.
(vi) After successful of year 2015, her contract was not renewed due to employer’s financial
crisis. To this effect, she was paid a lump sum of TZS.2,000,000 as compensation.
Required:
Calculate the total taxable income for Ms. YUNIS for the year of income 2015 and tax liability if her tax
bracket is 25%
Question 9
a) Explain the meaning of ‘an employment’.

b) Mr. Kizu has just been appointed as a financial consultant of MTANASHATI Ltd for a
contract of one year and he will be stationed at MTANASHATI Ltd’s premises for the
whole period of the contract. His terms of the contract include a weekly remuneration
based on hours that Mr. Kizu will be working at MTANASHATI Ltd.
Required
Distinguish between ‘a contract of service’ and ‘a contract for service’ using the information
above.
c) Rabia & Assey Ltd employed Ms. Malaika Mukoba as the company human resource
officer with effect from 1st September 2010. By the time the company submitted a
statement of employment income for year 2010, the following information was revealed to
her as her annual emoluments:
i. Basic annual salary TZS.6,000,000

ii. Transport allowance TZS.2,500,000
iii. Lunch allowance TZS.1,500,000
iv. Medical allowance TZS.1,000,000
The employer housed her for free. The annual market rental value of that area was
TZS.4,000,000 and the expenditure claimed by the company per annum for that premise was
TZS.1,500,000. The contribution made by the employee was TZS.500,000 as rent. Besides the
emoluments stated above, the employee had the following benefits:
 A self-driven car for private use, which is 3000 cc, brand new. The company claims
expenditure of car maintenance.
 Other benefits included electricity TZS.30,000 and water TZS.25,000 per month in her office.
Though her employment services were terminated on 31st December 2010, the company paid
her TZS.30,000,000 as termination benefits (compensation for lost employment). Other income
she received in 2010 was TZS.300,000 interest from MBY Bank, TZS.1,500,000 – lease amount
from MSK Company for the building she leased to the company since 2009.
Required
Calculate the total income for Ms. Malaika Mukoba for the year of income 2010.
Question 10
Mr. Li Ching Chinese expert was employed by the Nuwe Mining Corporation (NMC) a private resident
company on expatriate terms, to construct the Rungwe Coal Mine complex in Mbeya.
He came to the United Republic of Tanzania on 1st February 2013 and started to work with the company
on the following day.
(i) He was being paid duty allowance of Tshs Tshs.300,000 per month and a salary of Tshs.
600,000 per month.
(ii) For one month he was in China, he was working with the Government of China which had paid
him equivalent to Tshs. 500,000 per month.
(iii) The firm provided him a car (3000cc, of 2011) from the day he arrived in the United Republic.
This was wholly used for employment.
(iv) For the first two months of his stay in the United Republic, he was accommodated in a hotel.
The firm paid a total of Tshs. 1,500,000 for full board.
After then, he was provided with a fully furnished house. The firm had installed the furniture in
the house which belonged to the NPC l im it ed wh ic h c os t T shs.6,000,000. NMC was paying
a monthly rent of Tshs. 800,000 per month for the house to NPC and was deducting a token rent
of only Tshs. 50,000 per month from Mr. Li Ching’s salary. Half of the house was used as an
office, and the company was entitled to claim repair and maintenance expenditure.
(v) According to the contract of employment, he had a right of going on leave once annually.
However, due to his important role in the project, the firm decided to pay him on 30.5.2013, Tshs.
1,000,000 in consideration of him foregoing his 2013 annual leave.
After then, he was provided with a fully furnished house. The firm had installed the furniture in
the house which belonged to the NPC l im it ed wh ic h c os t T shs.6,000,000. NMC was paying
a monthly rent of Tshs. 800,000 per month for the house to NPC and was deducting a token rent
of of
278 Computation only Tshs.Income
Taxable 50,000 per month from Mr. Li Ching’s salary. Half of the house was used as an
office, and the company was entitled to claim repair and maintenance expenditure.
(v) According to the contract of employment, he had a right of going on leave once annually.
However, due to his important role in the project, the firm decided to pay him on 30.5.2013, Tshs.
1,000,000 in consideration of him foregoing his 2013 annual leave.
(vi) On several occasions he had, on behalf of the company, to tender some consultancy services to
the State Mining Corporation. As thus the employer company paid him a token sum of Tshs.
500,000 as appreciation for the services as he gave the firm a considerable amount of revenue,
in the form of consultancy fees from the State Mining Corporation.
(vii) Water bills for the year totaled Tshs. 80,000 and were fully met by the employer. The bills stood
in the name of the employer. Electricity bills (which stood in the name of the employee) totaling
Tshs. 50,000 were also met by the company.
(viii) A night watchman earning Tshs. 80,000 was employed by the company for the house. However,
he was only responsible for part of the house used for employment purpose. This watchman
was also provided with a house by the company.
(ix) When he came to the United Republic, he came with a number of equipment to be used in his
work. He had purchased them in China and the company reimbursed him a total of Tshs.
900,000 for such equipment.
(x) The company paid the following annual membership fees for him:
- Tshs. 60,000 as membership fee to the Lion Hotel swimming pool
- Tshs. 100,000 as membership fee to Mining Experts Club
- Tshs. 10,000 to Officers mess
- Tshs. 200,000 to the Safari Club
Though he was working in Mbeya, he used to come to DSM during the week-ends. The firm was
also paying for his trip to and from Mbeya in which Tshs. 2,300,000 was used for those trips.
(xi) On the basis of his contract, the company provided him with free lunch which was worth Tshs.
10,000 each and two crates of beer for each month. He had taken only 30 lunches for 2013. A
crate of beer was purchased at Tshs. 25,000.
(xii) On one of the trips to DSM he toured Chui Textile Mill, where he was given complimentary of 6
pieces of ‘kitenge’ dressing materials each worth Tshs. 5,000.
(xiii) At the end of each year he was paid a gratuity of Tshs. 1,500,000.
Required:
From the above information, compute Mr. Li Ching taxable income for 2013 year of income.
Answer to SEQ 1
Employment income:
Residence: Resident Individual (for two years)
Basic salary (800,000 x 12) 9,600,000
Medical service insurance NIL
Mobility allowance (100,000 x 50% x 12) 600,000
Life insurance (50,000 x 12) 600,000
Lunch allowance (2,000 x 22 days x 12) 528,000
Traveling allowance (100,000 x 12) 1,200,000
School fees and uniforms 500,000

(xiii) At the end of each year he was paid a gratuity of Tshs. 1,500,000.
Required:
From the above information, compute Mr. Li Ching taxable income for 2013 year of income.
Answer to SEQ 1
Employment income:
Residence: Resident Individual (for two years)
Basic salary (800,000 x 12) 9,600,000
Medical service insurance NIL
Mobility allowance (100,000 x 50% x 12) 600,000
Life insurance (50,000 x 12) 600,000
Lunch allowance (2,000 x 22 days x 12) 528,000
Traveling allowance (100,000 x 12) 1,200,000
School fees and uniforms 500,000
Consultancy fee (Uganda) (W3) 13,028,000
Upkeep allowance (Uganda) (W3) NIL
Free accommodation (Uganda) (W3) NIL
Trip to Uganda (more than 20 miles) NIL
Interest from NBC (non-final withholding) 200,000
Retirement contributions (W1) – Add employer’s 1,302,800*

contribution
Retirement contributions (W1) – Less allowed amount (2,605,600)*

(employer and employee)
11,925,200
Housing benefit (W2) 1,800,000
Taxable amount for the year of income 2005 10,125,200
Workings:
1. Computation of taxable retirement contributions Shs.
Total gross cash remuneration 13,028,000
Employer’s contribution 10% 1,302,800
Employee’s contribution 10% 1,302,800
Total contribution 2,605,600
2. Computation of housing benefit Shs.
(i) Market rent shs. 150,000 x 12 = Tshs. 1,800,000

Housing benefit (W2) 1,800,000
Taxable amount for the year of income 2005 10,125,200

Workings:
1. Computation of taxable retirement contributions Shs.
Total gross cash remuneration 13,028,000
Employer’s contribution 10% 1,302,800
Employee’s contribution 10% 1,302,800
Total contribution 2,605,600
2. Computation of housing benefit Shs.
(i) Market rent shs. 150,000 x 12 = Tshs. 1,800,000
(ii) 15% x 11,925,200 (total income before housing) 1,788,780
(iii) Deduction by employer Tshs 1,440,000

120,000x12
(iv) Compare (ii) and (iii) above, take the greater, i.e. 1,819,620
(v) Compare (i) and (iv) above, then take the lesser, i.e.
Which forms the value of 1,800,000

housing benefit.
3. An individual who has become resident for two years or less for the whole of the life
of this individual, her/his taxable income is only that with a source in the United
Republic of Tanzania (Section 6 (2).
Answer to SEQ 2
I Tshs
Salary t 500,000
Transport e 425,000
Lunch m 175,000
s
Medical 50,000
Transport for nine 425,000
people
Car benefit 83,333.3
Loan (PRT) for 50,000.0
January
Electricity 300,000
Water 240,000
Total monthly income 2,248,333
Note:
2.1 The transport allowance of Tshs425,000 amounted to commuting costs which are not wholly and
exclusively earned for generating employment income. The law exempt payment providing
passage of the individual, spouse of the individual and up to four of their children to or from a place
of employment which correspond to the actual travelling cost where the individual is domiciled
more than 20 miles from the place of employment and is recruited or engaged for employment
solely in the service of the employer at the place of employment.
2.2 The loan benefit has been calculated based on the original value i.e. TSH 4,000,000 because in
January no repayment is done until 31 January.
2.3 The self-driven car is assumed to be new.

2.1 The transport allowance of Tshs425,000 amounted to commuting costs which are not wholly and
exclusively earned for generating employment income. The law exempt payment providing
passage of the individual, spouse of the individual and up to four of their children to or from a place
of employment which correspond to the actual travelling cost where the individual is domiciled
more than 20 miles from the place of employment and is recruited or engaged for employment
solely in the service of the employer at the place of employment.
2.2 The loan benefit has been calculated based on the original value i.e. TSH 4,000,000 because in
January no repayment is done until 31 January.
2.3 The self-driven car is assumed to be new.
Answer to SEQ 3
Since the contract term was 5 years and Mr Jaffer was employed for only 2 1/2 , the unexpired
contract period was 2 ½ , which equals to 30 months. So Tshs960,000 x30= Tshs28,800,000 could
had been earned from the contract if the contract was not terminated.
Since the amount received i.e. Tshs18,560,000 is lesser than that could have been received i.e.
Tshs28,800,000; the whole amount received should be apportioned evenly over the unexpired period
of 30 months.
Therefore, every month will be allocated Tshs618,667, and Tshs3,712,000 (Tshs618,667 x 6 months)
would be taxable for the year ending 31 December 2012,
Hence, the taxable income for the year is Tshs11,520,000 plus Tshs3,712, 000= Tshs15,232,000
Answer to SEQ 4
Computation: Employment Income
Annual Salary 12,000,000
Bonus (444,300 + 333,600) 777,900
Car Benefit (No expenditure claimed) Nil
Mobile phones (20% x 250,000 x 2) 100,000
Health club membership fee (Non-discriminatory) Nil
Allowance for personal expenses on business trip Nil
PPF Contribution (Not included in income) Nil
Loan Interest Benefit (LIB) – Note 1 150,000
Total Income before Housing Benefit 13,027,900
Housing Benefit (HB) – Note 2 1,954,185
Taxable Employment Income 14,982,085
Notes
1. Since the loan given to Peter doesn’t satisfy the condition(s), then the LIB thereon is taxable and it is
computed as follows. LIB = (17% - 2%) x 1,000,000 = 150,000
2. If an employer provides residential housing to the employee, and the employer claims deduction in
relation to capital and maintenance of the house, then the House Benefit is taxable and is calculated
as: The lesser of:
(i) Annual market rental value of the house and
(ii) The greater of:
(a) 15% of employee’s total income for the year of income excluding House Benefit
(b) Expenditure claimed as deduction by the employer.
Reduced by the employee’s rental contribution. So, for the case of Peter Loan Benefit is the lesser of:
(i) 3,600,000; and
(ii) the greater of:
(a) 15% x 13,027,900 = 1,954,185
relation to capital and maintenance of the house, then the House Benefit is taxable and is calculated
as: The lesser of:
(i) Annual market rental value of the house and
(ii) The greater of:
(a) 15% of of
282 Computation employee’s total income for the year of income excluding House Benefit
Taxable Income
(b) Expenditure claimed as deduction by the employer.
Reduced by the employee’s rental contribution. So, for the case of Peter Loan Benefit is the lesser of:
(i) 3,600,000; and
(ii) the greater of:
(a) 15% x 13,027,900 = 1,954,185
(b) 1,000,000
Here the greater of 1,954,185 and 1,000,000 is 1,954,185; and the lesser of 3,600,000 and 1,954,185 is
1,954, 185. Hence the Housing Benefit is 1,954,185. Note that, we only consider the chargeable income
in computing total income for the purpose of calculating 15% of total income. This is the ruling of section
5(1) which specifies that total income is the sum of chargeable income. In this case if an amount such as
the transport allowance to father, mother and 4 children staying more than 20 miles from the employment
base is not chargeable income and hence excluded.
Answer to SEQ 5
Computation of Chargeable income of Mr. Torres
Basic salary Tshs 600,000 x 6months 3,600,000
Bonus 650,000
Entertainment allowance (Tshs250,000-

TTshs170,000) 80,000
Lunch (Tshs20,000-TTshs5,000) x 100 1,500,000
Gardener and Guard TTshs 50,000 x 2 x 6 600,000
Water & electricity bills (20,000 + 10,000) x 6 180,000
Shares (750-600) x 1000 shares 150,000
Life insurance 38,000
Car expenses (1/3 x 1,800,000) 600,000
NSSF contribution (Employer)s.7(2)(d) 10% x

3,600,000 360,000
Rent (Final withholding s. 86(1)(c) Nil
Loan benefit (note 3) 250,000
Sub Total 8,008,000
NSSF contribution (Employer) 10% x 3,600,000 360,000
NSSF contribution (Employee) 10% x 3,600,000 360,000 (720,000)
Total income before housing benefit 7,288,000
Housing benefit (note 2) 426,600
TOTAL taxable income 6,861,400

Note 1: Computation of housing benefit and its content.
Market value of the part of premises occupied –(100,000 x6) =600,000
Note 1: Computation of housing benefit and its content.
Market value of the part of premises occupied –(100,000 x6) =600,000
15% x Tshs. 7,288,000x 6/12 = TTshs 546,600
15% x Tshs. 7,288,000x 6/12 = TTshs 546,600

Less rent 20,000 x 6 = 120,000
426,600
Less rent 20,000 x 6 = 120,000
Expenditure claimed by the employer for the period in respect of the provision of the premises.-not
426,600
provided.
Expenditure claimed by the employer for the period in respect of the provision of the premises.-not
Therefore the value of premises is Tshs. 426,600
provided.
Therefore the value of premises is Tshs. 426,600
Note 3: Computation of Loan Benefit

Period for the loan = 20 months i.e more than a year
Note 3: Computation of Loan Benefit
Three-month basic salary TTshs. 600,000 x 3 = TTshs. 1,800,000
Period for the loan = 20 months i.e more than a year
Amount of loan Tshs 4,000,000
Three-month basic salary TTshs. 600,000 x 3 = TTshs. 1,800,000
Since the loan is greater than the three-month basic salary and is repayable in more than a year, the
Amount of loan Tshs 4,000,000
benefit from loan for the year of income 2019 will be:
Since the loan is greater than the three-month basic salary and is repayable in more than a year, the
TTshs. 4,000,000 x 15% x 5/12 (i.e from Aug. to December 2019) = TTshs.250,000
benefit from loan for the year of income 2019 will be:
TTshs. 4,000,000 x 15% x 5/12 (i.e from Aug. to December 2019) = TTshs.250,000
Answer to SEQ 6
Determination of employment income
Answer to SEQ 6
TZS
Determination of employment income
Salary 11,826,617
TZS
Employer’s contribution to pension fund (15% x 11,826,617 1,773,993
Salary 11,826,617
Other benefits
Employer’s contribution to pension fund (15% x 11,826,617 1,773,993
Car benefit (note 1) 250,000
Other benefits
Loan benefit (note 2) 1,575,000
Car benefit (note 1) 250,000
Warden and security remuneration 200,000 x 9 months x ½ (private 900,000
Loan benefit (note 2) 1,575,000
portion)
Warden and security remuneration 200,000 x 9 months x ½ (private 900,000
Utility 1,600,000 x 9/12 x ½ (reduced to period/portion she occupied the 600,000
portion)
house)
Utility 1,600,000 x 9/12 x ½ (reduced to period/portion she occupied the 600,000
Tuition fee (taxable as it is for part-time studies) 1,000,000
house)
Alimony (taxable if not under judicial order/written agreement (100,000x 1,200,000
Tuition fee (taxable as it is for part-time studies) 1,000,000
12)
Alimony (taxable if not under judicial order/written agreement (100,000x 1,200,000
19,125,610
12)
Less: Employee’s contribution to pension fund (5% x 11,826,617 (591,331)
Employer’s contribution (deductible) (1,773,993)
Total income from employment income without housing benefit 16,760,286
Add: Housing benefit (note 3) nil
Taxable income from employment 16,760,286
Notes:
Note 1: Car benefit
Total income from employment income without housing benefit 16,760,286
Add: Housing benefit (note 3) nil
Taxable income from employment 16,760,286
Notes:
Note 1: Car benefit
Private element qualifies for car benefit provided that employer is entitled to claim maintenance
expenditure. It is taxable under the 5th schedule. Brand new car is a car as aged less than 5
years. Taxable benefits is kind for a car of this age and engine capacity 3000cc is 1,000,000.
Therefore, car benefit = 1,000,000 x 25 per cent = 250,000
Note 2: Loan benefit
1/1/2014 Loan given 15,000,000

31/12/2014 (15,000,000 – 15,000,000/4) 11,250,000
26,250,000
Average loan balance 26,250,000/2 13,125,000
Taxable loan benefit year 2014 = 13,125,000 x (12% - 0% x 12/12) 1,575,000
Note 3
Housing benefit is excluded from taxable employment income if employer is not entitled to claim
deduction or relief in relation to ownership or maintenance of the house
Answer to SEQ 7
Computation of Mr. Mussa’s chargeable Income
TAXPAYER: JAMES MUSSA
SOURCE OF INCOME EMPLOYMENT
YEAR OF INCOME: 2016
PARTICULARS AMOUNT
(TZS)
Basic salary (for 6 months) 5,400,000
Transfer grant (relocation allowance) NIL
Responsibility allowance NIL
Transport allowance NIL
Inconvenience allowance NIL
Housing benefits NIL
Car benefits NIL
Salary paid to his driver by the employer NIL
Contribution toward children’s education NIL
Life insurance contribution NIL
Employment income before statutory 5,400,000

contribution
Statutory contribution – employee’s contribution (270,000)
Chargeable employment Income 5,130,00
===========
Contribution toward children’s education NIL
Life insurance contribution NIL
Employment income before statutory 5,400,000 Employment Income: 285

contribution
Statutory contribution – employee’s contribution (270,000)
Chargeable employment Income 5,130,00
===========
Answer to SEQ 8
(a) Contract is to specified term and provides for compensation s.7(5) (a)
 Assessable or taxable amount: SHALL NOT EXCEED:

 Amount to be received in the unexpired period assuming that the contract was not
terminated
 Such amount accrues evenly
 Taxable in the year (s) immediately following termination
 Compare amount from unexpired period against amount provided for compensation.
Therefore
 Term of contract 5 years (1.1.2012 – 2016)

 Termination (after 2 years) = 31.12.2016
 Unexpired period (from 1.1.2014 – 31.12.2016) = 3 years = 36 months
 Salary from unexpired period:
 Monthly salary 554,000
 3 years (unexpired) x 540,000 x 36 months = 19,944,000/=
Note: This should be the maximum amount to be taxed in him from compensation.
Amount which would have been received in the unexpired period = 19,944,000
 Compare this figure against amount provided for compensation

= 19,944,000 Vs 9,930,000
 Take the lesser i.e. 9,930,000 = amount for compensation

 Assessment: Note: is deemed to have accrued evenly in the expired period of the
contract i.e. from 2004 – 2006 (using the same annual rate).
Therefore, annual compensation = 9,930,000/3 years = 3,310,000
YOI 2013 NIL (year of termination)
YOI 2014 3,310,000
YOI 2015 3,310,000
YOI 2016 3,310,000
(b) Determination of Total taxable income of Ms YUNIS for the year of income 2015
1. Salary – 12 months 12 x 1,300,000 15,600,000
2. Gratuity 25% x 3,900,000

1,300,000 x 12
3. Motor vehicle benefit 125,000 x ¾ 93,750
4. Security Guard 250,000 x 12 3,000,000
5. Utility bills (electricity, water and 300,000

gas)
6. Entertainment allowance 50,000 x 12 600,000
7. Duty allowance 120,000 x 12 1,440,000
8. Travelling expenses 30,000 x 12 360,000
9. Medical allowances NIL
10. Insurance policy-life 130,000 x 12 1,560,000
11. School fees subsidy 2,000,000
12. Compensation for termination of 2,000,000

contract
13. Sub-total before – HB 30,853,750
14. Housing Benefit 1,800,000
15. Total taxable income 32,653,750
16. Tax liability 25% there-off 8,163,437.50
NOTE 1: Housing benefit: The lower between
(i) Market rental ……….. 160,000 x 12 = 1,920,000

and
(ii) The greater of

15% x 30,853,750 = 4,628,062.50
And amount claimed = 0
Take the greater i.e. 4,628,062.50
The lesser between 1,920,000 and 4,628,062.50 is = 1,920,000
Reduced by the amount of rent paid by employee = 1,920,000 – 120,000

(10,000 x 12)
Answer to SEQ 9
(a)
 Employment includes in particular:
 A position of an individual in the employment of another person;
 A position of an individual as manager of an entity other than as partner of a partnership;
 A position of an individual entitling the individual to a periodic remuneration in respect of
services performed; or
 A public office held by an individual, and includes past, present and prospective
employment.
 Any explanation on contract of service.
(b)
 Employment is determined by the presence of contract of service or

employment. The contract of service exists when an employer dictates what
an employee should do and how, in return for periodic payments.
 The contract of service might exist when:

 An employee agrees that, in consideration of a wage or other remuneration, he will
provide his own work and skill in the performance of some service for his master.
 An employee agrees, expressly or impliedly, that in the performance of that service he
will be subject to the other’s control in a sufficient degree to make that other master.
 The other provisions of the contract are consistent with its being a contract of service
 On the other hand, a contract for service occurs when a contractee hires his own employees,
provides and maintains his own tools or equipment; the contractor is paid by reference to the
volume of work done; has invested in the enterprise and bear the financial risk; has the
opportunities of profit or the risk of loss; and the relationship is not permanent.
 Therefore Mr. Kizu is an employee of MTANASHATI Ltd. i.e. contract of service exist.
Basic salary (6,000,000 x 4/12) 2,000,000
Transport Allowance (2,500,000 x 4/12 833,333.33
Lunch allowance (1,500,000 x 4/12 500,000.00
Medical allowance (1,000,000 x 4/12 333,333.33
Car benefit (1,000,000 x 4/12 333.333.33
Total income before House benefit 4,000,000.00
House benefit:
A: 4,000,000 x 4/12 1,333,333.33
B: The greater of the following

 15% x 4,000,000 = 600,000
 1,500,000 x 4/12 = 500,000
The greater is 600,000 compare with 1,333,333.33

take the
lesser i.e. 600,000
600,000 – 500,000 100,000
Total Taxable Income 4,100,000
=======
Answer to SEQ 10
Mr. Li Ching
Duty allowance (300,000 x 11) 3,300,000
Salary (600,000 x 11) 6,600,000
Salary China (not employed in Tanzania) NIL
Car benefit (fully for employment NIL
Hotel expenses 1,500,000
Furniture 6,000,000 x ½ x 9/12 NIL
Leave pay (payment in lieu of leave) 1,000,000
Consultancy fees 500,000
Water bills 80,000 x ½ x 9/12 30,000
Electricity 50,000 x ½ x 9/12 18,750
Watchman salary (employment purpose) NIL
Equipment (for employment purpose) NIL
Membership fees - swimming pool) not for 60,000
- Oysterbay ) employment 40,000

- Safari ) purpose
200,000
Trips to/from DSM 2,300,000
Lunch 10,000 X 30 300,000
Bear 2 crates = 2 x 25,000 x 11 550,000
Present – Kitenge Chui NIL
Gratuity 1,500,000
17,898,750
Add: Housing benefit (Note 1) 3,150,000
Total employment Income 21,048,750
========
NOTE 1:
A: Market Rent value …. 800,000 x 9 x ½ 3,600,000.00
B: (i) 15% of 17,898,750 x ½ 1,342,406.25
(ii) Expenditure Claimed by Employer 3,600,000.00
The greater between (i) and (ii) 3,600,000.00
Housing benefit = lesser of A & B 3,600,000.00
Less: Rent paid by Ching (50,000 x 9) 450,000.00
Net Housing benefit 3,150,000.00

D2
SECTION D
Income
STUDY GUIDE D2:

COMPUTATION OF INDIVIDUALS
BUSINESS INCOME
To calculate total income of a person, one needs to calculate the sum of chargeable income from
conduct of employment, business and investment. In this Study Guide you are introduced to computation
of chargeable income from business of an individual.
a) Explain the meaning of business

b) Identify items of income included in calculating chargeable income from business
c) Identify items of income excluded in calculating chargeable income from business
d) Calculate chargeable income from business
e) Explain presumptive income taxation and its application in Tanzania
Explain Explain the meaning

the meaning of business
of business and identify
and identify items ofitems of income
income included
included in calculating
in calculating
chargeable income from
chargeable income from business. business.
[Learning
[Learning OutcomeOutcome a, and b]
a, and b]
1. 1. Meaning
Meaning Of Business
Of Business
Normally,
Normally, businessbusiness is demonstrated
is demonstrated by presenceby presence of contract
of contract for as
for service service as discussed
discussed before. Shortly,
before. Shortly,
that contract for service (sole trading or businesses) occurs when a contractor hires hishires
that contract for service (sole trading or businesses) occurs when a contractor ownhis own
employees,
employees, providesprovides and maintains
and maintains his own his own
tools or tools or equipment;
equipment; the contractor
the contractor paid by paid by reference
reference to to
the volume of work done; have invested in the enterprise and bore
the volume of work done; have invested in the enterprise and bore the financial risk; have the the financial risk; have the
opportunities
opportunities of profitoforprofit or the
the risk risk ofand
of loss; loss;
theand the relationship
relationship is not permanent
is not permanent (Ready (Ready
Mixed Mixed
ConcreteConcrete (South
(South East) LtdEast) Ltd v Minister
v Minister of Pensions of Pensions and National
and National Insurance Insurance
[1968] 2[1968] 2 QB 497).
QB 497).
Likewise, in McManus v Griffiths (1997) 70 TC 218 case the judge suggested in decidingdeciding
Likewise, in McManus v Griffiths (1997) 70 TC 218 case the judge suggested in whether whether
a a
person was employed (contract of service or self-employed (contract for service)
person was employed (contract of service or self-employed (contract for service) we should consider we should consider
the substance
the substance of the of the contractual
contractual arrangements
arrangements rathertheir
rather than thanformtheirorform
the or the parties'
parties' labels labels
(incorporated
(incorporated companies).
companies).
Definitions
Definitions
(i) (i)
Business Business
‘Business’ includesincludes
‘Business’ a trade,aconcern
trade, concern in theofnature
in the nature trade, manufacture,
trade,ofmanufacture, profession,
profession, vocation vocation
or or
isolated arrangement with a business character; and a past, present or
isolated arrangement with a business character; and a past, present or prospective business, but prospective business, but
excludesexcludes
employmentemployment
and any and anythat,
activity activity that,regard
having havingtoregard to itsand
its nature nature
the and the principal
principal occupation
occupation of of
its owners or underlying owners, is not carried on with a view
its owners or underlying owners, is not carried on with a view to deriving profits.to deriving profits.
(ii) (ii)
ManufactureManufacture
The Act ThedoesActnotdoes notthe
define define
termthe term manufacturing.
manufacturing. Therefore,Therefore, we can
we can only only
base onbase
case on case
laws. laws.
One One of the
of the
best case laws which attempted defining this term is the case between Teejan Beverages Ltd vs State OfState Of
best case laws which attempted defining this term is the case between Teejan Beverages Ltd vs
Kerala andKerala
Orsand Ors No.
S.R.O. S.R.O.
1729 No.
of 1729
1993.ofTeejan
1993. Beverages
Teejan Beverages Ltd vs
Ltd vs State OfState Ofand
Kerala Kerala
Orsand Ors No.
S.R.O. S.R.O. No.
1729
1729 of 1993. of 1993.
In this
In this case, thecase, the appellant
appellant waswith
was issued issued with Government
Government letter exempting
letter exempting her fromher fromsales
paying paying
taxsales tax on the
on the
ground
ground that shethat
wasshe was involved
involved in manufacturing
in manufacturing or purification
or purification of bottledof water
bottledbecause
water because manufacturing
manufacturing of of
any goods was exempted from
any goods was exempted from the taxes. the taxes.
However, However,
the letterthe letter
was laterwas later revoked
revoked by the government
by the government on the
on the basis basis
that that purification
purification of waterofdoes
water
notdoes not
satisfy the meaning of manufacturing given in the sale taxes. Hence, the
satisfy the meaning of manufacturing given in the sale taxes. Hence, the person appealed. person appealed.
The
The court court definition
definition of manufacturing
of manufacturing does notdoes not packing
include include packing ofpolishing,
of goods, goods, polishing, and cleaning,
and cleaning, grading,grading,
drying, blending or mixing different varieties of the same goods by mixing with chemicals or gas, or gas,
drying, blending or mixing different varieties of the same goods by mixing with chemicals
fumigation
fumigation or any or anyprocess
other other process
applied applied for preserving
for preserving the in
the goods goods
goodincondition
good condition or for easy
or for easy
transportation”.
transportation”.
Hence, manufacturing
Hence, manufacturing occurs
occurs only whenonly when
raw raw materials
materials are usedare used (converted)
(converted) in producing
in producing another another
product product
which is which is commercially
commercially distinct
distinct from thefrom the raw materials.
raw materials.
Manufacturing’
Manufacturing’ refers torefers to production
production of goodsofcommercially
goods commercially
differentdifferent
from thefrom
raw the raw material
material used. Teejan
used. Teejan
Beverages Ltd vs State Of Kerala and Ors S.R.O [1993]
Beverages Ltd vs State Of Kerala and Ors S.R.O [1993] TC.1729 TC.1729
(iii) (iii)
Trade Trade
Similarly, no definition of trade is given in the Act. However, cases laws have provided indicators “
badges of trade” which can be used to tell whether a trade is being contacted.
These indicators include:
a) Methods of acquisition; assets acquired through inheritance or gifts might indicate no trade
motive than those acquired through purchases (Taylor v Good [1974] 49TC277).
b) Second, length of the period of ownership; purchasing and selling an asset in hast might indicate
trading while holding the assets for long period may indicate investment (Marson v Morton and
Others [1986] 59TC381).
c) Third, frequency or number of similar transactions by the same person; too many similar
transactions might imply trade (CIR v Livingston and Others [1926] 11TC538).
d) Fourth, doing supplementary work on or in connection with the asset realised to increase
Similarly, no definition of trade is given in the Act. However, cases laws have provided indicators “
badges of trade” which can be used to tell whether a trade is being contacted.
These indicators include:

Computation of Individuals Business Income: 293
a) Methods of acquisition; assets acquired through inheritance or gifts might indicate no trade
motive than those acquired through purchases (Taylor v Good [1974] 49TC277).
b) Second, length of the period of ownership; purchasing and selling an asset in hast might indicate
trading while holding the assets for long period may indicate investment (Marson v Morton and
Others [1986] 59TC381).
c) Third, frequency or number of similar transactions by the same person; too many similar
transactions might imply trade (CIR v Livingston and Others [1926] 11TC538).
d) Fourth, doing supplementary work on or in connection with the asset realised to increase
saleable condition might indicate trading (CIR v Livingston and Others [1926] 11TC538.
e) Fifth, circumstances that were responsible for the realisation; forced realisation for example in
emergency might indicate absence of trade (CIR v Livingston and Others 11TC538).
f) Sixth profit motive; reason for transaction involved being gain profit from it rather than holding it
as an investment (Salt v Chamberlain [1979] 53TC143).
g) Also nature of assets involved; if the nature of the assets involved is not always involved in trade,
it might not indicate trade. This assets include purchase of shares might highly indicate
investment than trading and purchasing of classic cars may be for person consumption than
trading while purchase of chemical for example might definitely indicate trade (CIR v Fraser
[1942] 24TC498).
h) Finally, existence of similar trade transaction, the close the proximity of the transaction
undertaken to the existence trade transactions the more it can be taken to be a trade transaction
(Harvey v Caulcott [1952] 33TC159).
Definition
‘Trade’ is an act of providing goods or services to others in exchange for a reward.
Cambridge dictionary
However, in many cases presences of these badges of trade do not indicate presence or absence of
trade.
Therefore, all facts surrounding the transaction should be considered. For instance, the definition of
business above includes even “isolated arrangement with a business character” which might means
trading.
For instance, in a case of CIR v Fraser [1942] 24TC498; Fraser bought a large consignment of whisky
and sold it at profit, using the above indicators the transaction could be none trade transaction. However,
the court decided that “The purchaser of a large quantity of a commodity like whisky, greatly in excess of
what could be used by himself, his family and friends, a commodity which yields no pride of possession,
which cannot be turned to account except by a process of realisation, I can scarcely consider to be other
than an adventurer in a transaction in the nature of a trade. Most important of all, the actual dealings of
the respondent with the whisky were exactly of the kind that take place in ordinary trade.”
(iv) Profession
‘Profession’ any type of work that needs special training or a particular skill, often one that is
respected because it involves a high level of education. Cambridge dictionary
(v) Vocation
‘Vocation’ is a type of work that you feel you are suited to doing and to which you should give all
your time and energy, or the feeling that a type of work suits you in this way and indicates a
calling.
Vocations include religion or high-minded service to others, a bookmaker and a jockey, authors,
dramatists and professional singers. Graham v Green [1925] 9TC309
2. Items Of Income Included In Calculating Chargeable Income From Business

Business income items which are chargeable
Income in connection with businesses income (contract for service) means:
a) service fees;
b) incomings for trading stock;
c) gains from the realisation of business assets or liabilities of the business
d) Gains from realisation of the person's depreciable assets of the business;
your time and energy, or the feeling that a type of work suits you in this way and indicates a
calling.
Vocations include religion or high-minded service to others, a bookmaker and a jockey, authors,
dramatists and professional singers. Graham v Green [1925] 9TC309
2. Items Of Income Included In Calculating Chargeable Income From Business

Business income items which are chargeable
Income in connection with businesses income (contract for service) means:
a) service fees;
b) incomings for trading stock;
c) gains from the realisation of business assets or liabilities of the business
d) Gains from realisation of the person's depreciable assets of the business;
e) amounts derived as consideration for accepting a restriction on the capacity to conduct the
business;
f) gifts and other ex gratia payments received by the person in respect of the business;
g) amounts derived that are effectively connected with the business and that would otherwise be
included in calculating the person's income from an investment; and
h) Other amounts including reverse of amounts as bad debts, bad debts writing off, discount
allowed, fluctuations in foreign exchanges and seizures of untaken deposits and advances
(Section 8(2)).
Identify items of income excluded in calculating chargeable income from business; calculate
chargeable income from business; explain presumptive income taxation and its application
in Tanzania [Learning outcome c, d and e]
3. Items Of Income Excluded In Calculating Chargeable Income From Business

Excluded business income
According to Section 8(3) of the Income Tax Act 2004, exempt business income, final withholding
payments and non-business income should be excluded in computing business income. Both exempt
income and final withholding income items were covered in the employment income Section. So in
this Section they are not discussed. Please take time to peruse them. In addition receipt from
realisation of capital assets should be excluded as well because they are used in computing gain
from realisation of assets.
4. Calculation Of Chargeable Income From Business

By now we have learnt that not all income from business are taxable, some are final withholding
payments, some are exempt income and some simply not related to business. Also we saw how to
identify allowable deductions and non-deductible expenses when computing business income. This
Section deals with how to establish chargeable income from business. The business income of sole
trade is can be computed on cash or accrual basis unless specifically required by tax laws, while
corporations compute their business income on accrual basis.
Definition
‘Chargeable business income’ of resident person, includes all his or her income for the year of
income irrespective of the source of the income, while chargeable income of non-resident persons
income only to the extent that the income has a source in the United Republic. Finally, chargeable
income of a resident corporation which has perpetual unrelieved loses for the last consecutive two
years is the turnover of such corporation for a year of income, expect those in agriculture, health or
education businesses.
However, all business persons prepare their accounting records using General Accepted Accounting
Practices (GAAPs). So for tax purposes, we do not establish new financial statements. But we adjust
profit or losses shown by the accounting statements by adding items which are not taken into accounting
by GAAPs and deducting items which are not allowed by tax laws but included by the GAAPs. The
statement below can help us when computing taxable employment income.
Computation of Chargeable Business Income
Items TZS
Profit or loss as per account XX

Add: None allowable expenses
However, all business persons prepare their accounting records using General Accepted Accounting
Practices (GAAPs). So for tax purposes, we do not establish new financial statements. But we adjust
profit or losses shown by the accounting statements by adding items which are not taken into accounting
by GAAPs and deducting items which are not allowed by tax Computation of Individuals
laws but included Business
by the GAAPs. Income:
The 295
statement below can help us when computing taxable employment income.
Computation of Chargeable Business Income
Items TZS
Profit or loss as per account XX

Add: None allowable expenses
 Consumption expenditure xx
 Excluded expenditure xx
 Capital expenditure xx xx
Add: Business income not included

 Compensation xx
 Loss on realization of business xx xx
assets/liabilities
Less: Non-taxable business income

 Final withholding payments xx
 Gain on disposal of fixed assets xx (XX)
Less: Business expenses not deducted

 Capital allowances xx (XX)
Taxable business income XX
5. Presumptive Income Taxation And Its Application In Tanzania

Small traders, who operate mostly without keeping proper business records, are charged income
tax by presumptive tax system based on the annual turnover of their business. Presumptive tax
system involves the use of indirect means to ascertain tax liability, which differ from the usual rules
based on the taxpayer's accounts.
In Tanzania individuals are taxed based on their annual turnover. The taxpayers under this system are
not obligated to prepare and submit audited accounts to the TRA. However, they may opt not to adopt
the system and prepare audited accounts and pay tax based on profits.
Presumptive methods of taxation are thought to be effective in reducing tax avoidance as well as
equalizing the distribution of the tax burden.
The term "presumptive" is used to indicate that there is a legal presumption that the taxpayer's
income is no less than the amount resulting from application of the indirect method. As discussed
below, this presumption may or may not be rebuttable.
The concept covers a wide variety of alternative means of determining the tax base, ranging from
methods of reconstructing income based on administrative practice, which can be rebutted by the
taxpayer, to true minimum taxes with tax bases specified in legislation. Taube and Tadesse (1996).
Conditions which qualify for presumptive tax system
1. The taxpayer must be a resident individual
2. The annual turnover of the business does not exceed the threshold of Tshs20 million.
3. The individual's income for a year of income consists exclusively of income from a business having a
source in the United Republic. If income is derived from other sources such as employment and/or
investment the presumptive scheme cannot be used.
4. The individual does not elect to disapply this provision for the year of income.
2.3 Rates of tax under presumptive taxation
Under this system, tax payable is established depending on the level of record keeping of the taxpayer.
Failure to keep complete records necessitates establishment of tax payable by estimation settled
3. The3. individual's
The individual's
incomeincome
for a year
for aofyear
income
of income
consists
consists
exclusively
exclusively
of income
of income
from a from
business
a business
havinghaving
a a
sourcesource
in the United
in the United
Republic.
Republic.
If income
If income
is derived
is derived
from other
fromsources
other sources
such assuch
employment
as employment
and/or and/or
investment
investment
the presumptive
the presumptive
scheme scheme
cannotcannot
be used.be used.
296 Computation
4. The of Taxable
4. individual
The Income
individual
does not
does
elect
nottoelect
disapply
to disapply
this provision
this provision
for the for
year
theofyear
income.
of income.
2.3 Rates
2.3 of
Rates
tax under
of tax presumptive
under presumptive
taxation
taxation
Under Under
this system, tax payable
this system, is established
tax payable depending
is established on the on
depending level
theoflevel
record keeping
of record of the taxpayer.
keeping of the taxpayer.
FailureFailure
to keeptocomplete recordsrecords
keep complete necessitates establishment
necessitates of tax payable
establishment by estimation
of tax payable settledsettled
by estimation
between the TRA
between theofficers and taxpayers.
TRA officers The turnover
and taxpayers. bands bands
The turnover and their
andtax rates
their taxare as are
rates stipulated below:below:
as stipulated
AnnualAnnual
turnover
turnover Tax payable
Tax payable
when when Tax payable
Tax payable
when when
records
records
are incomplete
are incomplete records
records
are complete
are complete
WhereWhere
turnovers
turnovers
does not
does not NIL NIL NIL NIL
exceedexceed
Tshs. 4,000,000
Tshs. 4,000,000
WhereWhere
turnover
turnover
exceeds
exceeds Tshs. Tshs.
150,000
150,000 3% of the
3% turnover
of the turnover
in in
Tshs.4,000,000
Tshs.4,000,000
but does
but does excessexcess
of Tshs.of 4,000,000
Tshs. 4,000,000
not exceed
not exceed
Tshs.7,500,000
Tshs.7,500,000
WhereWhere
turnover
turnover
exceeds
exceeds Tshs. Tshs.
318,000
318,000 Tshs. 135,000+3.8%
Tshs. 135,000+3.8%
of of
TSHS.TSHS.
7,500,000
7,500,000
but does
but does the turnover
the turnover
in excess
in excess
of of
not exceeds
not exceeds
Tshs. Tshs. Tshs. 7,500,000
Tshs. 7,500,000
11,500,000
11,500,000
Where turnovers exceeds Tshs. 546,000 Tshs. 285,000+4.5% of

Tshs. 11,500,000 but does the turnover in excess of
not exceed Tshs. Tshs.11,500,000
16,000,000
Where turnover exceeds Tshs. 862,500 Tshs. 487,000+5.3% of

Tshs. 16,000,000 but does the turnover in excess of
not exceed Tshs. Tshs. 16,000,000
20,000,000
Question 1
Mr. Mwamba Kimweri is a Tanzanian self-employed, managing a health shop. His profit or loss account
for the year ended 31st March 2019 is as follows:
TZS TZS
‘000’ ‘000’
Sales (note 2) 338,050
Opening stocks 20,000
Purchases 110,500
130,500
Closing stock (note 3) (27,500) (103,000)
Gross profit 235,050
Loss on sale of fixed assets 5,000

Loss on sales of land 10,000
Depreciation of equipment 8,900
Wages and salaries (note 4) 61,575
Light and heat (note 1) 3,650
Telephone (note 5) 5,700
Repairs and renewals (note 6) 20,360
Bad debts expenses (note 7) 4,780
not exceed Tshs. Tshs. 16,000,000
20,000,000
Question 1
Mr. Mwamba Kimweri is a Tanzanian self-employed, managing a health shop. His profit or loss account
for the year ended 31st March 2019 is as follows:
TZS TZS
‘000’ ‘000’
Sales (note 2) 338,050
Opening stocks 20,000
Purchases 110,500
130,500
Closing stock (note 3) (27,500) (103,000)
Loss on sale of fixed assets 5,000

Loss on sales of land 10,000
Depreciation of equipment 8,900
Wages and salaries (note 4) 61,575
Light and heat (note 1) 3,650
Telephone (note 5) 5,700
Repairs and renewals (note 6) 20,360
Bad debts expenses (note 7) 4,780
Professional fees (note 8) 11,400
Relocation expenses (note 9) 3,250
Other expenses (note 11) 4,400
Motor vehicle expenses (note 10) 1,690
(140,705)
Net Profit 94,345
=======
Notes to accounts
Note 1 – Private Accommodation
Mr. Kimweri and his family live in an apartment situated above the business premises. It is his policy to
treat two-fifth (2/5) of the expenditure on the premises occupied as private expenditure unless it can be
specifically allocated.
Note 2
Mr. Kimweri took product from the store at a sale price of TZS.1,000,000. This drawing was recorded in
sales figure at the cost price of TZS.700,000.
Note 3
Closing stock included a contingency reserve of TZS.9,000,000 for loss of stock by fire.
Note 4 – Wages and Salaries
Self – Drawings 18,000,000

Mrs. Kimweri – Secretarial services 7,500,000
Other staff 28,000,000
Mr. Kimweri’s daughter – casual work 8,075,000
61,575,000
========
Note 5 - Telephone
One-third (1/3) of the amount charged as telephone cost was for private use
Note 6 – Repairs and Renewals

Decorating the apartment 950,000
Purchased a price of small equipment to be used in a shop 3,350,000
sales figure at the cost price of TZS.700,000.
Note 3
Closing stock included a contingency reserve of TZS.9,000,000 for loss of stock by fire.
Note 4 – Wages and Salaries
Self – Drawings 18,000,000

Mrs. Kimweri – Secretarial services 7,500,000
Other staff 28,000,000
Mr. Kimweri’s daughter – casual work 8,075,000
61,575,000
========
Note 5 - Telephone
One-third (1/3) of the amount charged as telephone cost was for private use
Note 6 – Repairs and Renewals

Decorating the apartment 950,000
Purchased a price of small equipment to be used in a shop 3,350,000
Major restoration of the building 15,000,000
General maintenance 1,060,000
20,360,000
========
Note 7 – Bad debts
Trade debts written off 1,000,000
Increase in general provision 3,780,000
4,780,000
========
Note 8 – Professional fees
Accountancy 1,500,000
Legal fee in connection with purchase of a used fixed assets 3,800,000
Computer services 2,500,000
Legal fee incurred in defending Mr. Kimweri from speeding offence 1,700,000
Trade subscriptions 800,000
Subscription to sundry Lane Golf Club 1,100,000
11,400,000
========
Note 9 – Relocation expenses
This expenditure was incurred in transferring the business to new larger premises.
Note 10 – Motor vehicle Expenses

One forth (1/4) of motor car running expenses was for Mr. Kimweri private mileage. Included in charge
is TZS.150,000 for speeding fine incurred by Mr. Kimweri whilst delivering goods to a customer.
Note 11 – Other expenses

Training course for Mr. Kimweri to enhance managerial skills 1,900,000
Fine for a traffic offence 450,000
Misappropriation of company funds by an employee 550,000
Donation to a political party 1,500,000
4,400,000
=======
Note 12
Depreciation allowance for depreciable assets as estimated by Mr. Kimweri’s tax consultant amounted to
TZS.33,250,000.
Note 13 – Other information

Mr. Kimweri had a tax loss brought forward of TZS.4,000,000 as at the previous financial year. He has 4
children under the age of 15 and savings account balance of TZS.7,800,000.
Required:
Calculate Mr. Kimweri’s adjusted profit, after capital allowances, for the year ended 31 st March 2019.
Question 2
Uwimana is a business lady in Dar es Salaam city. During the year ended 31/12/2017, her accountant
submitted the following information for income tax purpose:
Mr. Kimweri had a tax loss brought forward of TZS.4,000,000 as at the previous financial year. He has 4
children under the age of 15 and savings account balance of TZS.7,800,000.
Required: Computation of Individuals Business Income: 299

Calculate Mr. Kimweri’s adjusted profit, after capital allowances, for the year ended 31 st March 2019.
Question 2
Uwimana is a business lady in Dar es Salaam city. During the year ended 31/12/2017, her accountant
submitted the following information for income tax purpose:
TZS.“000” TZS.“000”
Revenues 250,000
Cost of sales
(120,000)
Less: expenses
Salaries 35,000
Rent 10,000
Bad debt 2,000
Electricity 18,000
Advertising 6,000
Insurance 5,000
VAT 20,000
Telephone 6,000 (102,000)
Profit before Tax 28,000
=======
Additional information:
(i) Rent was paid on 1/1/2017
(ii) Of the bad debt expense, TZS.1,000,000 relates to a debtor who was declared bankrupt
(iii) Salaries of TZS.5,000,000 remained outstanding
(iv) A quarter of the insurance expenses has expired
(v) Telephone expenses relate to the airtime loaded on Uwimana’s mobile which she uses
for both private and business purposes.
Required:
Compute the taxable income and the tax liability of Uwimana.
Answer to SEQ 1
TAXPAYER: MR. KIMWERI

STATEMENT OF CALCULATING TAXABLE
INCOME
DETAILS TZS‘000’ TZS‘000’
Net profit as per accountants 94,435
Add: Items debited in P & L account not
allowed
Loss from sale of land 5,000
Depreciation of Equipment 8,900
Light and Heat (two fifth) 2/5 x 3,650) 1,460
Self drawing 18,000
Telephone (one-third for private for Private 1,900
use) (1/3 x 5,700)
Purchased a piece of small equipment to be 3,350
used in a shop
Major restoration of the building 15,000
Increase in general provision 3,780
for both private and business purposes.
Required:
300 Computation of Taxable

Compute the Income
taxable income and the tax liability of Uwimana.
Answer to SEQ 1
TAXPAYER: MR. KIMWERI

STATEMENT OF CALCULATING TAXABLE
INCOME
DETAILS TZS‘000’ TZS‘000’
Net profit as per accountants 94,435
Add: Items debited in P & L account not
allowed
Depreciation of Equipment 8,900
Light and Heat (two fifth) 2/5 x 3,650) 1,460
Self drawing 18,000
Telephone (one-third for private for Private 1,900
use) (1/3 x 5,700)
Purchased a piece of small equipment to be 3,350
used in a shop
Major restoration of the building 15,000
Increase in general provision 3,780
Legal fee in connection with purchase of a 3,800
used fixed assets
Legal fee incurred in defending Mr. Kimweri 1,700
from speeding offence
Subscription to Sundry Lane Golf Club 1,100
Speeding fine 150
Motor vehicle running expense (1,690 – 150) x 385
¼ (one forth for Private)
Fine for a traffic offence 450
Donations to the Democratic Labour Party 1,500 76,475
170,820
Add: Goods taken for Private use (1,000 – 300
700)
Deduct: 171,120
Contingent Reserve 9,000
Tax losses brought forward 4,000 (46,250)
Depreciation allowance 33,250
Adjusted business income 124,870
Answer to SEQ 2
STATEMENT OF COMPUTING TAXABLE INCOME AND TAX LIABILITY

TAX PAYER: UWIMAMA
SOURCE OF INCOME: BUSINESS
AMOUNT AMOUNT
(TZS’000’) (TZS’000’)
DETAILS
Profit before tax 28,000
Add back: Disallowed expenses
VAT 20,000
Telephone 6,000
Tax losses brought forward 4,000 (46,250)
Depreciation allowance 33,250
Adjusted business income 124,870
Answer to SEQ 2
STATEMENT OF COMPUTING TAXABLE INCOME AND TAX LIABILITY

TAX PAYER: UWIMAMA
SOURCE OF INCOME: BUSINESS
AMOUNT AMOUNT
(TZS’000’) (TZS’000’)
DETAILS
Profit before tax 28,000
Add back: Disallowed expenses
VAT 20,000
Telephone 6,000
Bad debts (Not proven to be 1,000
bad)
Insurance (Unexpired) 3,750 30,750
Taxable business income 58,750
Tax Liability = A + Tax rate* [B-C]

= 1,177,200 +30% [58,750,000- 8,640,000]
= TZS 16,210,200√
D3
SECTION D
Income
STUDY GUIDE D3:

INDIVIDUAL INVESTMENT
INCOME
Investment income comes from holding an asset for a certain period in anticipation of getting
periodic income /and or getting capital gain from its realisations. It is very closely related to
business activities, but it differs in two aspects: it is just a minor undertaking of a person and there is
no close link to business activities. This Study Guide is specifically aimed at elucidating items which
are included in computation of investment income and those items which are excluded when
computing investment income. In doing so, it covers sections in the Income Tax Act to enable you to
establish correct taxable investment income. Sections from Income Tax Act Cap 332 are being
referred to throughout this Study Guide. Knowledge of determining investment income is essential in
understanding how investors are taxed.
a) Explain the meaning of Investment

b) Differentiate between Investment income and Business Income
c) Describe inclusions /component of investment income
d) Describe exclusions /income not Included in Investment income
e) Explain allowable and non-allowable deductions of investment income
f) Establish chargeable Investment Income
ExplainExplain
the meaning of Investment;
the meaning differentiate
of Investment; between
differentiate Investment
between incomeincome
Investment and and
Business IncomeIncome
Business and describe inclusions
and describe /component
inclusions of investment
/component incomeincome
of investment
[Learning outcome
[Learning a, b, and
outcome a, c]
b, and c]
1. Meaning Of Investment
1. Meaning And ItsAnd
Of Investment Differences From Business
Its Differences From Business
1.1 Investment
1.1 Investment
Section Section
3 of the 3Act
of provides definitions
the Act provides of the term
definitions investment
of the as the owning
term investment as the of one or
owning of more
one or more
assets ofassets
a similar nature or that are used in an integrated fashion, on similar terms and subject
of a similar nature or that are used in an integrated fashion, on similar terms and subject
to similartoconditions, includingincluding
similar conditions, as to location
as to location
Investment can be can be

Investment
(i) past,(i) past,
(ii) present and
(ii) present and
(iii) prospective investment,
(iii) prospective investment,
But investment does notdoes

But investment include
not include
(i) Business,
(i) Business,
(ii) Employment and
(ii) Employment and
(iii) The (iii)
owningThe of assets,
owning of other than
assets, investment
other assets, for
than investment personal
assets, use by the
for personal useowner
by the owner
This definition covers any
This definition assets
covers any unless
assets they arethey
unless heldare
primarily for personal
held primarily use by the
for personal useperson
by the person
who owns them and are not used in the production of profits. The definition
who owns them and are not used in the production of profits. The definition of investment of investment
excludesexcludes
employment or business.
employment If the issue
or business. arises
If the issueasarises
to whether certain activities
as to whether of a person
certain activities of a person
constitute one or more
constitute investments,
one or there arethere
more investments, two tests to check
are two tests toit.check
The first is whether
it. The the assets
first is whether the assets
held areheld
of a are
similar
of anature. For example:
similar nature. A block of
For example: shares
A block ofmay
sharesconstitute a single ainvestment.
may constitute single investment.
The second
The test
secondis whether the assets
test is whether theare usedare
assets in used
an integrated fashion, fashion,
in an integrated on similar
on terms,
similarand
terms, and
subject subject
to similar conditions, including as to location. For example: A house that
to similar conditions, including as to location. For example: A house that is heldis held
passivelypassively
and rented
andout with out
rented associated furniturefurniture
with associated will constitute a single ainvestment
will constitute single investment
Any liabilities incurredincurred

Any liabilities with respect
with to the asset
respect or asset
to the assetsorheld areheld
assets also are
partalso
of the investment.
part of the investment.
1.2 Investment
1.2 vs business
Investment vs business
It is important to differentiate
It is important when someone
to differentiate when someoneis doingisbusiness or investment
doing business becausebecause
or investment of of
difference in tax rates.
difference in tax Unlike
rates. aUnlike
business person person
a business who expects benefiting
who expects from regular
benefiting from orregular or
many frequent transactions,
many frequent someone
transactions, making making
someone an investment normallynormally
an investment takes a takes
long term
a longview
term view
of his/herofactivities. For example,
his/her activities. shareholders
For example, of a corporate
shareholders might hold
of a corporate mightshares
holdfor expectation
shares for expectation
of getting periodic periodic
of getting dividends and long
dividends andtermlongcapital
term gains
capital after
gainsdisposing of the shares.
after disposing of the shares.
However, share brokers in most cases buy shares in order to profit from
However, share brokers in most cases buy shares in order to profit from short term short term rises or rises or
falls in share
falls inprices.
share So if theSoshare
prices. if thebrokers get dividends
share brokers or capital
get dividends or gain from
capital gainrealisation of
from realisation of
shares, these
shares, incomes are moreare
these incomes likely to likely
more be business incomesincomes
to be business than investment income. income.
than investment
Furthermore, another another
Furthermore, important distinction
important betweenbetween
distinction businessbusiness
and investment activitiesactivities
and investment is that is that
businessbusiness
activitiesactivities
are normally the major
are normally the occupations of a person
major occupations while investment
of a person while investment
activitiesactivities
are subsidiary ones. Take
are subsidiary ones. an example
Take of interest
an example income; income;
of interest the interest income income
the interest
receivedreceived
by an individual from a saving or fixed deposit account might be investment
by an individual from a saving or fixed deposit account might be investment income, income,
while, the interest income received by financial institutions or money lenders is definitely
business income. Likewise, rent income received by property management company is
business income, the same income received by a trading company owning a few properties may
be investment income.
Finally, it is important to look at the substance of the income, not the form of it. For
instance, interest received from the business accounts is business income not investment
income. Also income from short term investments using business funds are business income
not investment income as income from letting extra business space.
2. Component of Investment Income

According to section 9 (1) of the Income Tax Act Cap 332, the following items are investment income.
be investment income.
Finally, it is important to look at the substance of the income, not the form of it. For
instance, interest received from the business accounts is business income not investment
income. Also income from short term investments using business funds are business income
Individual Investment Income: 305
not investment income as income from letting extra business space.
2. Component of Investment Income

According to section 9 (1) of the Income Tax Act Cap 332, the following items are investment income.
(a) Dividend,
(b) Distribution of a trust,
(c) Gains of an insured from life insurance,
(d) Gains from an interest in an unapproved retirement fund,
(e) Interest,
(f) Natural resource payment,
(g) Rent
(h) Royalty;
(i) Net gains from the realisation of investment assets of the investment
(j) Amounts derived as consideration for accepting a restriction on the capacity to conduct
the investment.
Definitions
‘Royalty’ means any payment made by the lessee under a lease of an intangible asset and includes
payments for:
(a) the use of, or the right to use, a copyright, patent, design, model, plan, secret formula or
process or trademark;
(b) the supply of know-how including information concerning industrial, commercial or scientific
equipment or
experience;
(c) the use of, or right to use, a cinematography film, videotape, sound recording or any other like
medium;
(d) the use of, or right to use, industrial, commercial or scientific equipment;
(e) the supply of assistance ancillary to a matter referred to in paragraphs (a) to (d); or
(f) a total or partial forbearance with respect to a matter referred to in paragraphs (a) to (e), but
excludes a natural resource payment. Section 3
‘Natural resource’ means minerals, petroleum, water or any other non-living or living resource that
may be taken from land or the sea. Section 3
‘Natural resource payment’ means any payment, including a premium or like amount, for the right to
take natural resources from land or the sea or calculated in whole or part by reference to the quantity
or value of natural resources taken from land or the sea. Section 3
’Interest’ means a payment for the use of money and includes a payment made or accrued under
a debt obligation that is not a repayment of capital, any gain realised by way of a discount, premium,
swap payment or similar payment.
‘Gains of an insured from life insurance .Section 60(3) provides the meaning of the term “gains of an
insured from life insurance” as the extent to which proceeds from life insurance paid by an insurer exceed
premiums paid to the insurers with respect to the insurance
‘Gains from an interest in an unapproved retirement fund’

Gains from an in interest in an unapproved retirement fund” is defined in section 63 to mean the extent to
which retirement payments made by an unapproved retirement fund in respect of an interest in the fund
exceed retirement contributions made to the fund in respect of the interest.
Net gain from realisation of investment assets

The net gain from realisation of investment assets is calculated as follows:
(a) Total of all gains from the realisation of investment assets during the year
(b) Less
(i) Total of all losses from the realisation of investment assets of the
investment during the year;
(ii) Any unrelieved net loss of any other investment of the person for the
year.
(iii) Any unrelieved net loss of an investment for a previous year of income (Section 36(3)).
Definitions
The net gain from realisation of investment assets is calculated as follows:
(a) Total of all gains from the realisation of investment assets during the year
(b) Less
306 Computation
(i)
of Taxable Income
Total of all losses from the realisation of investment assets of the
investment during the year;
(ii) Any unrelieved net loss of any other investment of the person for the
year.
(iii) Any unrelieved net loss of an investment for a previous year of income (Section 36(3)).
Definitions
‘Investment asset’ means shares and securities in a corporation, a beneficial interest in a non-
resident trust and an interest in land and buildings but does not include:
(a) business assets, depreciable assets and trading stock;

(b) a private residence of an individual that has been owned continuously for three years or more
and lived in by the individual continuously or intermittently for a total of three years or more,
other than a private residence that is realised for a gain in excess of 15,000,000 shillings;
(c) an interest in land held by an individual that has a market value of less than 10,000,000
shillings at the time it is realised and that has been used for agricultural purposes for at least
two of the three years prior to realisation; and
(d) shares or securities listed on the Dar es Salaam Stock Exchange that are owned by a resident
person or a non-resident person who either alone or with other associate controls less than
25% of the controlling shares of the issuer company.
‘Unrelieved net loss’ of an investment for a year of income is the excess of losses over gains
from the realisation of investment assets of the investment during the year of income.
3. Income Not Included In Investment Income

Section 9(3) provides that the following amounts are to be excluded in calculating gains or profits
from conducting an investment:-
(i) Exempt amounts
(ii) Final withholding payments; and
(iii) Amount that are in calculating the person’s income from any employment or business.
Describe
Describe
exclusions
exclusions
/income/income
not Included
not Included
in Investment
in Investment
income;income;
explainexplain
allowable
allowable
and non-allowable
and non-allowable
deductions
deductions
of investment
of investment
income,income,
and establish
and establish
chargeable
chargeable
Investment
Investment
Income.Income. [Learning
[Learning
outcomeoutcome
d, e, and
d, f]
e, and f]
4. Allowable
4. Allowable
And Non
And
Allowable
Non Allowable
Deductions
Deductions
Of Investment
Of Investment
IncomeIncome
4.1 4.1
Allowable
Allowable
deductionsdeductions
As it was
As for
it was
business
for business
income, income,
taxable taxable
investment investment
income income
is established
is established
after deducting
after deducting
allowable
allowable
deductions.
deductions.
Almost all
Almost
the criteria
all the for
criteria
allowing
for allowing
or not allowing
or not allowing
expenses expenses
we saw wein saw in
businessbusiness
income apply
income here
apply
as here
well. as
In short,
well. Inonly
short,
expenses
only expenses ‘wholly and
incurredincurred ‘wholly
exclusively’
and exclusively’
in in
the production
the production
of business
of business
income income
are allowable
are allowable
expenses expenses
(Section(Section
11(3)). Therefore,
11(3)). Therefore,
only only
expenditure
expenditure
incurredincurred
for sole for
purposes
sole purposes
of producing
of producing
investmentinvestment
income income
are allowable
are allowable
expensesexpenses
and expenditure
and expenditure
incurredincurred
not wholly
notandwholly
exclusively
and exclusively
for business
for business
purposes purposes
is not allowable.
is not allowable.
4.2 4.2
Non-allowable
Non-allowable
deductions
deductions
Likewise,
Likewise,
deduction
deduction
of capital,
of capital,
consumption
consumption
and excluded
and excluded
expenditures
expenditures
are notareallowed
not allowed
(Section(Section
11). Also,
11).unlike
Also, business
unlike business
persons persons
who arewho allowed
are allowed
to deductto depreciation
deduct depreciation
annual annual
allowance
allowance
under theunder
thirdtheschedule
third schedule
of Income
of Income
Tax ActTax CapAct332,
Capinvestors
332, investors
cannot cannot
claim claim
depreciation
depreciation
chargescharges
on their on
investment
their investment
assets. Therefore,
assets. Therefore,
depreciation
depreciation
chargescharges
of investment
of investment
assets calculated
assets calculated
under taxpayers’
under taxpayers’
accounting
accounting
policies policies
are not allowed
are not allowed
too. too.
5. Chargeable
5. Chargeable
InvestmentInvestment
IncomeIncome
By now Bywe now
havewe learnt
havethat
learnt
not that
all income
not all income
from investment
from investment
are taxable,
are taxable,
some are some
finalare
withholding
final withholding
payments,
payments,
some are some
exempt
are exempt
income income
and some andare
some
simply
arenot
simply
related
not to
related
investment.
to investment.
Also weAlsosaw we saw
how to how
identify
to identify
allowable allowable
deductions deductions
and non-deductible
and non-deductible
expenses expenses
when computing
when computing
investmentinvestment
income. income.
This section
This section
deals withdealshowwithto how
establish
to establish
chargeable
chargeable
income income
from investment
from investment
activities.
activities.
The The
investment
investment
income income
of a sole of trader
a solecan
trader
be computed
can be computed
on cashon or cash
accrual
or accrual
basis unless
basis specifically
unless specifically
requiredrequired
by tax laws,
by taxwhile
laws,corporations
while corporations
computecompute
their investment
their investment
income on income
accrual
on basis.
accrual basis.
5. Chargeable Investment Income
By now we have learnt that not all income from investment are taxable, some are final withholding
payments, some are exempt income and some are simply not related Individual
to investment. Also we
Investment saw 307
Income:
how to identify allowable deductions and non-deductible expenses when computing investment
income.
This section deals with how to establish chargeable income from investment activities. The
investment income of a sole trader can be computed on cash or accrual basis unless specifically
required by tax laws, while corporations compute their investment income on accrual basis.
‘Chargeable investment income’ of resident person, includes all his or her income for the year of
income irrespective of the source of the income, while chargeable income of non-resident persons
income only to the extent that the income has a source in the United Republic.
Question 1
Mr. Mkongo is a resident individual with the following sources of income during the year of ncome ended
December 31, 2017:
1. Sold shares of Atmos Supplies Ltd, a resident company listed in the Dar es Stock
Exchange, whereby he owns 17% of controlling shares. These shares were bought at
TZS.5,200,000 and sold for TZS.10,400,000.
2. Received TZS.28,000,000 from Mashaka Assurance Ltd a resident company, as
proceeds from his life insurance that has matured in 2017 after 10 years of contributions.
Mkongo has been contributing of TZS.100,000 monthly.
3. Received bank interest of TZS.5,000,000 in relation to a fixed deposit with Mwananchi
Bank Ltd.
4. Mkongo is a member of ZSSF, a Zambian retirement fund, where he has been making
monthly retirement contributions of equivalent to TZS.120,000 for 5 years until last year
when he retired. This year he received a lumpsum retirement payment of equivalent to
TZS.30,000,000.
5. Received TZS.200,000,000 for sale of a land situated at Kariakoo, Dar es Salaam. This
land was acquired in 1986 for TZS.8,000,000. Legal fees for the sale amounted to
TZS.12,000,000.
6. Received dividend of TZS.400,000 from Musiba Ltd. This was a resident corporation
where he own 29% of the shares.
7. He was paid TZS.280,000 by Fjardings Trust, a Swedish registered trust as a
compensation for cancellation of his membership due to old age. Mkongo has made
cumulative contributions of TZS.200,000,000 for the whole period of membership.
8. Sold a residential house of which he had been occupying occasionally for more than
three years for TZS.700,000,000. The house was bought for TZS.400,000,000.
9. Dividends amounting to TZS.12,400,000 were received from Gatan Ltd, a non-resident
corporation, which is listed in DSE. 24% of Gatan Ltd shares are owned by Kamaka Ltd,
g a resident company.
Required:
Determine investment chargeable income of Mr. Mkongo for the year of income 2017 use all 1 to 9 notes
y mentioned above; (where the amount is not taxable write nil).
w
D4
SECTION D
Income
STUDY GUIDE D4: PROCEDURES

FOR PAYMENT OF TAX
While complying with the Income Tax Act, Cap 332 following the due dates is very important as any delay
in filing returns and paying tax can lead to heavy penalties. This Study Guide discusses in detail the
methods of tax payments, contents and due dates for submission of provision and final returns, types of
assessments as well as documents required to be maintained by the taxpayers consequences of not
complying with the Income Tax Act, Cap 332.
As a tax consultant, you will need this information to advise clients on how to minimize penalties. A
thorough understanding of this topic is important for your examination, as well as in your professional life.
ĂͿ Describe tax payment procedures by withholding system.

ďͿ Describe tax payment procedures by installment.
ĐͿ Describe tax payment procedures by return.
ĚͿ Explain concept tax assessments and notice of assessment
ĞͿ Identify documents required to be maintained by Taxpayers.
ĨͿ Describe the “EFD” system, its benefits and the possible revenue risks involved
Describe tax payment procedures by withholding system; describe tax payment procedures
by installment and describe tax payment procedures by return.
Describe tax payment procedures by withholding system; describe tax payment procedures
by installment and describe tax payment procedures
[Learning by return.
outcome a, b, and c]
[Learning outcome a, b, and c]
ϭ͘ Tax Payment Procedures By Withholding System

In order to ease tax collection and hence reduce both tax administration cost as well as compliance
ϭ͘ Tax Payment Procedures By Withholding System
costs of tax payers, many tax systems including Tanzania have adopted a system of tax deduction at
In order
source. This to ease
system tax collection
is known and hence
as withholding reduce both
tax system. tax
In this administration
system the amountcostofas
taxwell as compliance
is retained/
costs of tax payers, many tax systems including Tanzania have adopted
withheld by one person when making payments to another person in respect of goods supplied a system of taxordeduction at
source. This system is known as withholding tax system. In this system
services rendered by the payee. For instance, instead of collecting taxes from hundreds of the amount of tax is retained/
withheld
employees, by authority
the tax one person when making
demands paymentpayments to another
of tax from a singleperson
employerin respect of goods supplied or
who is withholding
services rendered by the payee.
PAYE before paying employees’ salaries. For instance, instead of collecting taxes from hundreds of
employees, the tax authority demands payment of tax from a single employer who is withholding
PAYE before paying employees’ salaries.
1.1 Payments that are subject to withholding taxes

The following payments are subject to withholding taxes:
 Payment1.1 Payments
that is tothat
be are subject
included in to withholding
calculating the taxes
chargeable income of an employee from the
The following payments
employment of a resident employer are subject to withholding taxes:
 Payment Payment that is to
of investment be included
return includingindividend,
calculating the chargeable
interest, income of
natural resource an employee
payment, rent orfrom the
royalty. employment of a resident employer
 However Payment of investment
the withholding tax does return
not apply including dividend,are
when payments interest,
made by natural resource
individuals unlesspayment,
made rent or
royalty.
for conducting a business
 Payment However the to
in respect withholding
service fee taxand
doescontract
not apply when payments are made by individuals unless made
payments for conducting a business
 Payment Payment in respect
for technical to serviceservices
or management fee andmade contract
by resident person to another resident person
payments
in mining business and payment made by resident person for a service fee or an insurance premium
Payment
with a source in for technical
United or management
Republic services
to a non-resident made by
person. residentindividuals
However, person to another
who areresident
not in person
in mining business and payment made by resident person for
business cannot withhold taxes, and exempt amount is not subject to withholding payment. a service fee or an insurance premium
 Paymentwith made a source in Unitedand
by government Republic to a non-resident
its institutions in respect to person.
supplyHowever,
of goods and individuals who are not in
services business cannot withhold taxes, and exempt amount is not subject to withholding payment.
 Payment made by government and its institutions
 Payment in respect of money transfer commission paid or payable to money in respect to supply of goods and
transfer services
agents
 Payment in respect of money transfer commission paid or payable to money
transfer agents
Classification of withholding payments
Classification
There two of withholding
types of withholding payments
payments
(i) There
Final two types of withholding
Withholding payments payments
(ii) Non-final withholding payments.
(i) Final Withholding payments
(ii) Non-final withholding payments.
Non final withholding tax is taxed at the source and in the hands of the tax payer. It does not relieve
a personNon
fromfinal
further tax. Therefore,
withholding tax is the income
taxed at theissource
also included in the
and in the computation
hands of the taxofpayer.
taxable income
It does not relieve
and tax liability but the tax paid is deducted in the computation of tax payable.
Final withholding payments are those which are taxed only at the source and their tax liability
under income tax is satisfied. This kind of withholding tax is treated as discharging the recipient's tax
liability, and no tax return or additional tax is required on taxed income. The classification of final
or non-final withholding payments depend on whether the parties involved are resident or non-
resident, persons or natural person i.e. individual doing business or investment, foreign or domestic.
The following are final withholding payments:
(a) Dividends paid by:
(i) a resident corporation;

under income tax is satisfied. This kind of withholding tax is treated as discharging the recipient's tax
liability, and no tax return or additional tax is required on taxed income. The classification of final
or non-final withholding payments depend on whether the parties involved are resident or non-
resident, persons or natural person i.e. individual doing business or investment, foreign or domestic.
Procedures for Payment of Tax: 311
The following are final withholding payments:
(a) Dividends paid by:
(i) a resident corporation;

(ii) non-resident corporation to a resident individual, other than a dividend received by an
individual in conducting a business;
(b) Interest paid by financial institution to a resident individual where the interest is paid with
respect to a deposit held with the institution, other than interest received by the individual in
conducting a business; or foreign source interest paid to a resident individual;
(c) Rent paid to a resident individual under a lease of land or a building and associated fittings
and fixtures, other than rent received by an individual in conducting a business; or foreign source
rent paid to a non- resident individual;
(d) Interest paid to a unit trust.
(e) Management or technical service fees paid by a resident person to another resident or service
fee or an insurance premium with a source in Tanzania paid by resident person to a non-resident
person rather than through domestic permanent establishment in conducting mining business.
(f) Interest paid to a unit trust.
(g) Capital gains from realisation of interest in land or building (or both) when received:
 By resident individuals whose income consists exclusively of either or both of

income from any employment or capital gains from realisation interest in land and building in
Tanzania and
 By non-resident persons without domestic permanent establishments whose their
income consists exclusively of either or both of income from capital gains from realisation
interest in land and building in Tanzania are not required to file tax returns, consequently the
gains are final withholding payments
1.2 Filing requirements by withholding agents

Withholding agents are required to pay income taxes withheld to TRA within 7 days after the end of
each calendar month. In addition, the withholding agents are required to file (to the Commissioner)
statements accounting for the amount withheld within 30 days after the end of each 6 month
calendar period (Section
84(1)). The statements should show: payments made by the agent during the period that are subject to
withholding, the name and address of the withholdee, income tax withheld from each payment; and
any other information that the Commissioner may prescribe (Section 84(2)).
Furthermore, a withholding agent is required to prepare and serve separately for each period a
withholding certificate to the withholdee. The certificate shall cover a calendar month and is served
within 30 days after the end of the month. The statement should include, the name and address of the
withholdee; income tax withheld from each payment; and any other information that the Commissioner
may prescribe.
In the case of employment income, a withholding certificate covers the part of the calendar year
during which the employee is employed; and served by 30th January after the end of the year
(assuming calendar year) or, where the employee has ceased employment with the withholding agent
during the year, no more than 30 days from the date on which the employment ceased.
Example
Robots and Assembler Design Makers Ltd withheld taxes on employees’ salaries, amounting to
Tshs10,000,000 on 3 January 2018, and on dividends amounting to Tshs8,000,000 which were paid to
shareholders on 28 February 2018.
Required:
may prescribe.
may prescribe.
In the case
In theof case
employment
of employment
income, income,
a withholding
a withholding
certificate
certificate
covers the
covers
partthe
of the
part calendar
of the calendar
year year
during which
during the
which
employee
the employee
is employed;
is employed;
and served
and byserved
30th byJanuary
30th January
after theafter
endtheof the
end year
of the year
(assuming
312 Computation(assuming
ofcalendar
Taxablecalendar
year) or,year)
Income where or,the
where
employee
the employee
has ceasedhas employment
ceased employment
with the with
withholding
the withholding
agent agent
during the
during
year,the
noyear,
morenothan
more 30 than
days 30from
days
thefrom
datethe
on date
whichon the
which
employment
the employment
ceased. ceased.
Example
Example
Robots Robots
and Assembler Design Design
and Assembler Makers Makers
Ltd withheld taxes ontaxes
Ltd withheld employees’ salaries,salaries,
on employees’ amounting to
amounting to
Tshs10,000,000 on 3 January
Tshs10,000,000 2018, and
on 3 January on dividends
2018, amounting
and on dividends to Tshs8,000,000
amounting which were
to Tshs8,000,000 paid
which to paid to
were
shareholders on 28 February
shareholders 2018. 2018.
on 28 February
Required:
Required:
State theState
due the
dates
dueof dates
filing the withholding
of filing tax statements
the withholding if the company
tax statements uses calendar
if the company year as its
uses calendar year as its
accounting year. year.
accounting
Answer Answer
All withholding agents are

All withholding required
agents to file statements
are required accounting
to file statements for the amount
accounting withheldwithheld
for the amount within 30within
days 30 days
after theafter
end the
of each
end 6ofmonth
each 6calendar period. So,
month calendar the person
period. So, theshould
personfile the statement
should on or before
file the statement on or30th
before 30th
July 2018 for2018
July thesefor
payments, and should
these payments, andagain
should fileagain
it on file
or before
it on or30 January
before 2019. 2019.
30 January
Withholding Tax Base

Withholding Tax Base
Tax shallTax
be shall
computed on the gross
be computed amount
on the gross paid without
amount paid deduction of expenses
without deduction or allowances.
of expenses The
or allowances. The
withholding tax basetax
withholding amount
base shall be shall
amount exclusive of any value
be exclusive added
of any valuetax or any
added taxother indirect
or any other tax included
indirect tax included
in the payment amount.amount.
in the payment
Withholding Tax rates

Withholding Tax rates
The tax The
to betax
withheld
to be withheld
is basedisonbased
a certain
on a percentage
certain percentage
of the gross
of the
income
gross depending
income depending
on the nature
on theofnature of
the income.
the income.
The taxes
Theto taxes
be withheld
to be withheld
for the various
for the payments
various payments
are as shown
are asbelow:
shown below:
WITHHOLDING/INVESTMENT
WITHHOLDING/INVESTMENT TAX RATES
TAX RATES
Tax source
Tax source Resident
Resident Non-Resident
Non-Resident
DividendsDividends
to companies
to companies
controlling
controlling
25% of shares
25% ofor
shares
more or more0% 0% 10% 10%
DividendsDividends
from DSEfrom
listed
DSEcompany
listed company 5% 5% 5% 5%
DividendsDividends
from other
fromcompanies
other companies 10% 10% 10% 10%
Other withholding
Other withholding
payments payments 15% 15% 15% 15%
Interest Interest 10% 10% 10% 10%
RoyaltiesRoyalties 15% 15% 15% 15%
TechnicalTechnical
servicesservices
(Mining)(Mining) 5% 5% 15% 15%
TransportTransport
non-resident
non-resident
operator/charterer
operator/charterer
without permanent
without permanent 5% 5%
establishment
establishment
Rental income 10% 15%
Insurance premium 0% 5%
Natural resource payment 15% 15%
Service fees 15%
Capital gain for disposal of entity’s asset 10% 20%
Advantages of withholding taxes
The system minimises the possibility of evasion or underreporting of income because the agent will file
the correct tax and details for fear of penalties
A steady flow of government revenue is guaranteed
 The method is convenient to the taxpayers as they are spared of huge tax bills at the end of the
year and hence are freed from the need to file returns and other administrative costs.
 It is economical for the Revenue Authority as it does not incur any costs in the collection of
the taxes
Problems of withholding tax administration
(i) Non-deduction
Some organization pays their suppliers without deduction of withholding taxes, the reasons may be
 Out of ignorance
 To help them
 The method is convenient to the taxpayers as they are spared of huge tax bills at the end of the
year and hence are freed from the need to file returns and other administrative costs.
 It is economical for the Revenue Authority as it does not incur any costs in the collection of
the taxes Procedures for Payment of Tax: 313
Problems of withholding tax administration
(i) Non-deduction
Some organization pays their suppliers without deduction of withholding taxes, the reasons may be
 Out of ignorance
 To help them
(ii) Non- remittance
Some tax agents (payer) deduct and fail to remit but rather prefer to make use of the money in their
operations
(iii) Use of wrong rate
Wrong rates are often applied either ignorantly or to help the taxpayer
Ϯ͘ Tax Payment Procedures By Installment

Normally, business and investor taxpayers are required to pay their taxes in installments; and employees
who are employed by non-resident employers are also required to pay their taxes in installments because
the employers are not required to withhold the taxes (Section 88(1)); unless permitted by the
Commissioner of Domestic Revenue to not pay taxes by installments (Section 89(7)).
The calculation of amount of the installments starts with estimation of tax payable of a person at the start
of the year.
The computation of tax payable requires that the taxpayer estimate his or her future gross income,
deductible expenditures etc. and properly uses tax rates to determine it. Then, the taxpayer uses the
formula given in the Income Tax Act, Cap 332 to compute how much of the estimated tax payable should
be paid in each installment.
Generally, taxpayers might pay their tax liabilities in 4 installments i.e. on or before the last day of the 3rd,
6th, 9thand 12th months of the year of income (Section 88(2)). However, when a taxpayer does not have
an accounting period of 12 months, the installments should be made every 3 months and the last one at
the last day of the year (Section 88(2)).
Specifically, the amount of each installment of income tax payable by an installment payer for a year of
income is calculated according to the following formula:
A−C
B
Where:
A is the estimated tax payable by the installment payer for the year of income at the time of the
installment;
B is the number of installments remaining for the year of income including the current installment;
and
C is the sum of any income tax paid during the year of income, but prior to the due date for
payment of the installment, by the person by previous installment, single installments and non-
final withholding taxes (Section88(3)).
However, taxpayers with estimated tax payable for a year of income of TZS 50,000 or less are not
required to pay taxes in installments (Section 88(4)).
Additionally, resident taxpayers engaged in agricultural business make no payments in the 1st and 2 nd
installments but in the 3rd installment pay 75% of estimated tax payable and the balance payable in the
4th installment.
Therefore, when the estimated tax payable is accurately estimated, the final tax liabilities after deducting
previously paid taxes by way of installments and withholding may be small.
Example
Carter Ltd whose accounting period ends on 31 December each year estimated that in 2013 it was going
to make a total income of TZS 20,000,000. After filing the statement of estimated tax payable on time and
paying the first and second installment, the company changed the estimated taxable income to TZS
Additionally, resident taxpayers engaged in agricultural business make no payments in the 1st and 2 nd
installments but in the 3rd installment pay 75% of estimated tax payable and the balance payable in the
4th installment.
Therefore, of
314 Computation when the estimated
Taxable Income tax payable is accurately estimated, the final tax liabilities after deducting
previously paid taxes by way of installments and withholding may be small.
Example
Carter Ltd whose accounting period ends on 31 December each year estimated that in 2013 it was going
to make a total income of TZS 20,000,000. After filing the statement of estimated tax payable on time and
paying the first and second installment, the company changed the estimated taxable income to TZS
30,000,000 and also paid non-final withholding taxes amount to TZS 1,000,000.
Required:
If the tax rate was 30%, estimate the amount that was paid in the 1st, 2nd, 3rd and 4th installment and
state the due date of each installment.
Answer
i] The due date of the first installment will be on or before 31 March 2013 and tax payable along with
filingthe statement of estimated taxes would be TZS, given by:
A−C
B
A is the estimated tax payable by the installment payer for the year of income at the time of the
installment = TZS6,000,000
B is the number of installments remaining for the year of income including the current
installment = 4 installments; and
C is the sum of any income tax paid during the year of income, but prior to the due date for
payment of the installment, by the person by previous installment, single installments and
non-final withholding taxes (Section 88(3)) = Nil
Therefore the first installment amount would be
TZS 6,000,000 − 0
= TZS 1,500,000.
ii] In the second installment

A = TZS6,000,000,
B = 3 installments
C = TZS1,500,000; the amount paid in the first installment
Therefore the amount of the second installment payable on or before 30 June 2013 would be
TZS 6,000,000– 1,500,000
3
=TZS1,500,000
iii] After revision of the estimated amount the value of

A = TZS9,000,000,
C = TZS4,000,000 from (TZS1,500,000 + TZS1,500,000 + TZS1,000,000) i.e. two installments and

taxes paid at the source, and
B = 2 installments.
Therefore the amount of the third installment payable on or before 30 September 2013is
TZS 9,000,000– 4,000,000

A = TZS9,000,000,
C = TZS4,000,000 from (TZS1,500,000 + TZS1,500,000 + TZS1,000,000) i.e. two installments and

taxes paid at the source, and
B = 2 installments.
Therefore the amount of the third installment payable on or before 30 September 2013is
TZS 9,000,000– 4,000,000
= TZS 2,500,000.
iv] While in the last installment the value of

A = TZS9,000,000,
B = 1 installment and
C = TZS6,500,000 from TZS1,500,000 + TZS1,500,000 + TZS1,000,000 + 2,500,000.
Therefore the amount of the last installment payable on or before 31 December 2013would be
TZS 9,000,000– 6,500,000
= TZS2,500,000
Example
Halogen Ltd whose accounting period ends on 31 December each year estimated that in 2013 it was
going to make a total income of TZS20,000,000.
After filing the statement of estimated tax payable on time and paying the 3rd installment, the company
changed the estimated taxable income to 30,000,000.
Required:
If the tax rate was 30% and the company deals with agriculture business, estimate the amount that was
paid in the 1st, 2nd, 3rd and 4th installment and state the due date of each installment.
Answer
i] For agriculture businesses the first and second installments are all zero
ii] The amount of third installment would be 75% of TZS6,000,000 =TZS4,500,000 payable on 30
September 2013.
iii] The fourth installment includes all the remaining estimated tax payable of TZS4,500,000 i.e.
TZS1,500,000 from original estimate plus TZS3,000,000 for the extra revised estimate. Therefore
TZS 4,500,000 should be payable on 31 December 2013.
2.1 Statement of estimated tax payable

The statement of estimated tax payable is a provisional return which a taxpayer is required to complete
and file to the Commissioner within three months from the beginning of the year of income (which for
individuals shall be the calendar year) (Section 89(1)).
These statements include the following information:
 Estimation of the person's chargeable income for the year of income from each employment,
business and investment and the source of that income and the person's total income for the year of
income and the income tax to become payable with respect to that income;
 In the case of a domestic permanent establishment of a non-resident person, the
permanent establishment's repatriated income for the year of income and the income tax to become
payable with respect to that income;
 Estimated tax payable for the year and any foreign tax relief which will be claimed by the person,
and be signed by the person stating whether to the best of their knowledge and belief the estimate
is true and correct; and have attached to it any other information that the Commissioner may
These statements include the following information:
 Estimation of the person's chargeable income for the year of income from each employment,
business and investment and the source of that income and the person's total income for the year of
income and the income tax to become payable with respect to that income;
 In the case of a domestic permanent establishment of a non-resident person, the
permanent establishment's repatriated income for the year of income and the income tax to become
payable with respect to that income;
 Estimated tax payable for the year and any foreign tax relief which will be claimed by the person,
and be signed by the person stating whether to the best of their knowledge and belief the estimate
is true and correct; and have attached to it any other information that the Commissioner may
prescribe.
2.2 Revision of income estimate

An installment payer’s estimate shall remain in force unless unless the person files with the
Commissioner a revised estimate.
This can result in the consequence that all installments are based on an estimate that has not been
corrected during the year although the circumstances of the estimate have changed over the time. For
example, the taxpayer estimated a profit as the basis for his calculation of income tax that proved to be
too low as he could see some months later. If the taxpayer would in such case not adjust his estimation
of income and tax he would have to pay a final tax liability considerably exceeding the amounts of his
installments paid would arise. This could result in a heavy interest. In order to avoid such a situation a
taxpayer is well advised to scrutinize on the due dates for the payments of his second and third
installment whether his first estimate is still valid or needs to be adjusted by, for example, taking into
account an economic development that turned out to be more positive than originally anticipated
2.3 Single installment

The Income Tax Act, Cap 332 requires a person who derives a gain from the realisation of an interest in
land or buildings situated in the United Republic, shares or securities held in resident entity to pay income
tax by way of single instalment (Section 90(1)).
The single instalment tax rate for resident person is 10% of the gain, and for non-resident taxpayers is
20% of the gain. These taxes must be paid before transfer of ownership documents and therefore
before the titles are transferred from one person to another. The Registrar of Titles shall not register
such a transfer without the production of a certificate from TRA certifying that the single instalment has
been paid or is not payable.
In addition to the single instalment at the time of realisation of investment assets, taxpayers involved in
the following businesses pay single instalment at 5% of the gross payment (Section 90(5)):
a non-resident instalment taxpayer who receives a payment in conducting a business of land, sea
or air transport operator or chatterer
where no part of the above business is conducted through permanent establishment of the person
situated in the United Republic
and the payment is received in respect of; the carriage of passengers who embark or cargo, mail
or other moveable tangible assets that are embarked in the United Republic, other than as a result
of transhipment;
or rental of containers and related equipment which are supplementary or incidental to

carriage of
transportation businesses (Section 90(3)).
These payments must be made before the ship, vehicle or aircraft is cleared for customs purposes
(Section
90(6)). The vehicle, ship or aircraft in respect of which the payment shall be received shall not be
permitted to clear customs and leave the United Republic unless a tax certificate has been issued by
the Commissioner showing that the single instalment has been paid.
Exemptions
The following are excluded from capital gains and hence exempt from single instalment payment:
 If the residence has been owned continuously by the individual for three years or more and lived in
by the individual continuously or intermittently for a total of three years or more; and the interest was
realised for a gain of not more than shillings 15,000,000. If he makes a gain of more than Tshs15
million, then he will have to reduce the gain by Tshs15 million (i.e. the excess of Tshs15 million will
be taxed).
 An interest in land held by an individual that has market value of less than shillings 10,000,000 at
the time it is realised and has been used for agricultural purposes for at least two of the three years
prior to realisation.
 Payments received in respect of carriage of fish by a foreign aircraft are not subject to a single
instalment payment (Section 90(4)).
An instalment payer shall be entitled to tax credit for a year of income of an amount equal to the
income tax paid by way of single instalment for the year of income
ϯ͘ Tax Payment Procedures By Return

The Income Tax Act requires a taxpayer to file a final tax return to TRA. Filing a return means making
a statement to TRA’s Domestic Revenue Department of the income sources and the tax a person is
supposed to pay under the law. A return must be filed with supporting documents to verify the
authenticity of the statement in case the TRA audits or investigates the return.
Unlike the statement of estimated tax payable, which is a provisional return based on estimation, the
final return of income is based on actual performance of taxpayers. Returns of income are historical
as they show the true financial performance of a person and must be accompanied by audited
financial statements. Similar to the statements of estimated income, the returns of income are based
on self-assessment.
3.1 Contents of the return of income (ROI)

A return of income of a person for a year of income shall specify:
 the person's chargeable income for the year of income from each employment,
business and investment and the source of that income;
 the person's total income for the year of income and the income tax payable with
respect to that income under Section 4(1)(a);
 in the case of a domestic permanent establishment of a non-resident person, the
permanent establishment's repatriated income for the year of income and the income tax
payable with respect to that income.
 any income tax paid by the person for the year of income by withholding, instalment
or assessment for which a tax credit is available
 the amount of income tax payable after taking tax credit
 any other information that the Commissioner may prescribe
In addition, the return should include a declaration that the return is complete and accurate, be signed
by the person and a Certified Public Accountant in Public Practice (CPA-PP) when the CPA-PP helps
taxpayers in its preparation.
Also the taxpayer should attach any withholding certificates supplied to the person with respect to
payments derived by the person during the year of income, any statement provided to the person from
the CPA-PP; and any other information that the Commissioner may prescribe. Finally, returns on
income of corporations should be prepared or certified by a certified public accountant in public
practice.
3.2 Persons liable to file return of income (ROI)

Actually, all taxpayers are required to file a return on income except a resident individual who has
Also the taxpayer should attach any withholding certificates supplied to the person with respect to
payments derived by the person during the year of income, any statement provided to the person from
the CPA-PP; and any other information that the Commissioner may prescribe. Finally, returns on
income of corporations should be prepared or certified by a certified public accountant in public
318 Computation
practice. of Taxable Income
3.2 Persons liable to file return of income (ROI)

Actually, all taxpayers are required to file a return on income except a resident individual who has
no income tax payable or whose income for the year of income consists exclusively from (either or
both sources):
 income from any employment where the employer withholds ‘Pay
As You Earn’ tax or
 gains from realisation of assets where taxes are paid in the form of a single
instalment (Section 92).
 Also, a non-resident person without a domestic permanent establishment who has no
income tax payable for the year of income or whose income tax payable for the year of
income consists exclusively of gains from realisation of assets where taxes are paid in the
form of a single instalment is not required to submit a return on income (Section 92).
3.3 Nil and excess tax credit returns

Unless a person is exempt from filling tax returns, a return on income must be filed on the due date even
when one has no taxable income: that return is known as a nil tax return. On the other hand tax paid
during the year may exceed the annual tax payable; in that case there will be a tax credit. The excess
may be refunded within
45 days after the person claims the amount or may set off against any unpaid tax. In fact the claim must
be made in writing within three years of the later of:
 the end of the year of income during which the events occurred that gave rise to the payment of
the excess; or
 the date on which the excess was paid.
3.4 Due date of filling returns on income

The due date of filling returns on income is on or before the end of six months after the end of each
year. Where a taxpayer fails or is not required to file a return of income for a year of income, then until
such time as a return is filed, an assessment will be treated as made on the due date for filing the
return.
However, the taxpayer may request extension of the time required to file tax returns to the
Commissioner. The Commissioner might allow the extension which must not exceed 60 days from the
original due date of the tax returns.
TRA has issued a calendar (TRA tax calendar) to remind taxpayers and stakeholders of the important
dates of filing tax returns, making tax payments and other important events. This calendar should help
in planning your tax affairs.
Example
Robots Ltd who has an accounting period ending 31 December each year, estimated that in 2013 it was
going to make a total income of Tshs20,000,000 and paid estimated tax payable as required. Then, after
the year end, the actual taxable income turned out to be Tshs30,000,000 and the tax rate was 30%.
Establish the due date of filing the return on income.
Answer
Returns on income are filed on or before 6 months after the year end, so the due date of filing ROI is on
or before 30 June 2014.
Explain concept tax assessments and notice of assessment; identify documents required to
be maintained by Taxpayers and describe the “EFD” system, its benefits and the possible
revenue risks involved.
[Learning outcome d, e, and f]

EstablishEstablish
the due the
datedue
of filing
date the
of filing
return
theonreturn
income.
on income.
AnswerAnswer
Returns Returns
on incomeon are
income
filed are
on or
filed
before
on or6before
months6 after
monthstheafter
yearthe
end,
year
so the
end,Procedures
due
so the offor
datedue Payment
filing
date ROI isofon
of filing Tax: is
ROI 319on
or beforeor30
before
June 30
2014.
June 2014.
Explain Explain
conceptconcept
tax assessments
tax assessments
and notice
andofnotice
assessment;
of assessment;
identify identify
documents
documents
requiredrequired
to to
be maintained
be maintained
by Taxpayers
by Taxpayers
and describe
and describe
the “EFD”
thesystem,
“EFD” system,
its benefits
its benefits
and the and
possible
the possible
revenuerevenue
risks involved.
risks involved.
[Learning
[Learning
outcomeoutcome
d, e, andd,f]e, and f]
ϰ͘ Theϰ͘Concept
The Concept
Of TaxOf
Assessments
Tax Assessments
And Notice
And Notice
Of Assessment
Of Assessment
4.1 Tax 4.1
assessments
Tax assessments
Tax assessments
Tax assessments
involve calculating
involve calculating
taxable income
taxable and
income
application
and application
of tax rates
of tax
onrates
the taxable
on the taxable
income to
income
determine
to determine
tax payable
tax payable
for the year
for the
andyear
deduction
and deduction
of tax credit
of tax
from
credit
taxfrom
payable
tax payable
for the year
for the year
to determine
to determine
tax payable
tax payable
on assessment.
on assessment.
Normally,
Normally,
there arethere
five categories
are five categories
of assessments:
of assessments:
self-assessment,
self-assessment,
jeopardyjeopardy
assessment
assessment
and and
adjustedadjusted
assessment.
assessment.
;ŝͿ ;ŝͿ
Self- assessment
Self- assessment
This occurs
Thiswhen
occurstaxpayers
when taxpayers
estimateestimate
their tax their
payable
tax payable
themselvesthemselves
or with the
or with
help the
of tax
help of tax
consultants
consultants
and file return
and fileonreturn
income
on as
income
required
as required
i.e. not later
i.e. not
thanlater
6 months
than 6 after
monthstheafter
end of
the end of
each year
each
of income.
year of income.
;ŝŝͿ ;ŝŝͿ
Provision
Provision
assessment
assessment
When aWhen
taxpayer
a taxpayer
has furnished
has furnished
a statement
a statement
of estimated
of estimated
tax payable
tax payable
he is automatically
he is automatically
deemeddeemed
to have to
been
have
provisionally
been provisionally
assessedassessed
on the basis
on theofbasis
estimates
of estimates
contained
contained
in such in such
statement.
statement.
;ŝŝŝͿ ;ŝŝŝͿ
Best judgment
Best judgment
assessment
assessment
If the commissioner
If the commissioner
is not satisfied
is not satisfied
that the that
return
theofreturn
income
of is
income
correctis and
correct
complete,
and complete,
he has he has
the powerthetopower
estimate
to estimate
income income
of the tax
of the
payer
taxtopayer
the best
to the
of best
his judgment
of his judgment
and make
andanmake an
assessment
assessment
accordingly.
accordingly.
;ŝǀͿ ;ŝǀͿ
Jeopardy
Jeopardy
assessment
assessment
This happens when the Commissioner General requires a person to file return on income by
the date specified in the notice disregarding the normal date of filing tax returns. The
Commissioner General may do this:
(a) when a person becomes bankrupt,
(b) when a business is wound-up or goes into liquidation,
(c) when a business is about to leave the United Republic indefinitely,
(d) when a business is otherwise about to cease activity in the United Republic;
4.2 Notice of assessment

The Commissioner General may make jeopardy assessment or interest and penalty assessment.
Where the Commissioner General makes any of these assessments she is required serve a written
notice of assessment on the person. The notice of assessment should state the following.
(i) The name of tax payer and TIN
(ii) The Commissioner’s assessment of the tax payable
(iii) The manner in which the assessment of the income tax payable is calculated
(iv) The reasons why the Commissioner has made the assessment
(v) The date by which the tax payable on the assessment must be paid
(vi) The time, place, and manner of objecting to the assessment
Filing / service of notice of assessment

Notice of assessment shall be considered to have been received in the following circumstances-
(a) in the case of service by handing to a person or leaving at a place, at the time of handing or
leaving
(b) in the case of service by registered post, at the time the document is delivered or the person is
informed that the document awaits the person
(c) in the case of other service by post to an address within the United Republic, ten days after
posting; and
(d) in the case of other service by post to an address outside the United Republic, the time at which
Filing / service of notice of assessment
Notice of assessment shall be considered to have been received in the following circumstances-
(a) in the case of service by handing to a person or leaving at a place, at the time of handing or
leaving
(b) in the case of service by registered post, at the time the document is delivered or the person is
informed that the document awaits the person
(c) in the case of other service by post to an address within the United Republic, ten days after
posting; and
(d) in the case of other service by post to an address outside the United Republic, the time at which
the document would normally be delivered in the ordinary course of post.
An electronic document is considered to be served on a person by the CG under a tax law when a
document registration number is created and the document can be accessed by using the person’s
authentication code
ϱ͘ Documents Required To Be Maintained By Taxpayers

Section 35 of the Tax Administration Act, 2015 states that, every taxable or liable person shall, within
the United Republic, maintain documents in paper or electronic form which-
(a) contain information to be provided or filed with the Commissioner General under any tax law;
(b) enable an accurate determination of tax payable under any tax law;
TRA Practice Note no 06/2004 requires the following records and documents to be maintained
(i) The books of accounts written up at regular intervals. Appropriate entries for each transaction
should be recorded as soon as possible (in any case not later than 30 days after the transaction).
(ii) Supporting documents such as invoices, bank statements, pay-in slips, cheque buts, and
receipts for payments, payroll records and copies of receipts issued should be retained.
(iii) Where any person receives a payment of an amount of one thousand shillings or more from the
sale of goods or performance of service other than as an employee, the person shall issue a
receipt to the person making the payment. The receipts must be serially numbered.
(iv) A valuation of the stock in trade or work in progress should be made at the end of each
accounting period and the appropriate records maintained.
5.1 Official language for documents and records

Section 29 of the Tax Administration Act, 2015 provides that documents and records should be written in
the official language. The official languages for the purposes of tax administration are both Kiswahili and
English language. If the records are written in a language other than the official language, a written
translation is to be provided, at the expense of the entity when requested by the Commissioner
5.2 Period for keeping records

The documents shall be retained for a period of five years from the relevant date or for a further period as
prescribed in the tax law
However, for a person who:-
(i) files an objection or appeal, all documents relevant to the matter in dispute shall be retained
until the matter is finally determined and the decision is executed;
(ii) makes an application to the Commissioner General, all documents relevant to the application
shall be retained until the application is finally decided;
(iii) applies for a refund of tax, all documents relevant to calculation of the refund shall be
retained until the refund is made; and
(iv) has received notice of an investigation or audit by the Commissioner General, all documents
relevant to the investigation or audit shall be retained until the Commissioner General notifies
the person in writing that the investigation or audit is finalised
ϲ͘ The “EFD” System, Its Benefits And The Possible Revenue Risks Involved
As part of improvement of tax administration and tax revenue through proper accounting records, taxable
persons are required to issue electronic fiscal receipts through Electronic Fiscal Devices (EFDs) (The
Value Added Tax (Electronic Fiscal Device) Regulation, 2010). The electronic fiscal devices are normally
connected through a GPRS modem at Tanzania Revenue Authority enabling recording of all sales
transactions at the authority servers.
The EFDs must be acquired by the taxable persons but the costs of first batch of the EFDs are provided
by the government for free, where taxpayers are allowed to deduct the costs as input taxes (Value Added
(iii) applies for a refund of tax, all documents relevant to calculation of the refund shall be
retained until the refund is made; and
(iv) has received notice of an investigation or audit by the Commissioner General, all documents
relevant to the investigation or audit shall be retained until the Commissioner General notifies
the person in writing that the investigation or audit is finalised Procedures for Payment of Tax: 321
ϲ͘ The “EFD” System, Its Benefits And The Possible Revenue Risks Involved
As part of improvement of tax administration and tax revenue through proper accounting records, taxable
persons are required to issue electronic fiscal receipts through Electronic Fiscal Devices (EFDs) (The
Value Added Tax (Electronic Fiscal Device) Regulation, 2010). The electronic fiscal devices are normally
connected through a GPRS modem at Tanzania Revenue Authority enabling recording of all sales
transactions at the authority servers.
The EFDs must be acquired by the taxable persons but the costs of first batch of the EFDs are provided
by the government for free, where taxpayers are allowed to deduct the costs as input taxes (Value Added
tax (Electronic Fiscal Devices) Section 28).
The authority categorizes EFDs into:
1. Electronic Tax Register (ETR): the device is used by retail businesses that issue receipts
manually,
2. Electronic Fiscal Printer (EFP): the device is used by computerized retail outlets. It is connected
to a computer network and stores sale transactions or details made in its fiscal memory,
3. Electronic Signature Device (ESD): the device is designed to authenticate by signing any
personal computer (PC) produced financial document such as tax invoice. The device uses a
special computer program to generate a unique number (Signature).
Definitions
‘Electronic Fiscal Device (EFD)’ means a machine designed for use in business for efficient
management controls in areas of sales analysis and stock control system and which conforms to the
requirements specified by the laws. Tanzania Revenue Authority, 2013
‘First batch’ is the first purchase of order of electronic fiscal devices by taxable persons not applicable of
the subsequent purchase of the electronic fiscal devices. Value Added Tax (EFDs) Section 28(3)
Each EFD has the following features:
ϭ͘ First, they have viable fiscal seals to prevent tampering with the EFDs, when any sign of tampering
with seals is seen it should be promptly reported to the authority.
Ϯ͘ Second, all have fiscal memory to store data; once data is entered it cannot be altered, but when an
error occurs a person should issue another fiscal receipt and make the error adjustment at the end of
the month after providing the proof of the error.
ϯ͘ Third, all have unique serial number within the fiscal memory and the number identifies the owner of
an electronic fiscal device.
ϰ͘ Fourth, all have unique specifications followed when operating their software and hardware.
The EFD offer the following benefits to both taxable persons and the authority:
1. Computerizing the tax auditing process as data are stored electronic; this results into spending little
time on auditing using computers and software auditing techniques even on larger data.
2. With introduction of electronic signature devices, the authorities and taxable persons use less time
when issuing tax documents as electronic fiscal receipts.
3. The availability of accounting records at taxable persons’ place of businesses; EFDs and the
authority servers may reduce disputes between officers and taxable persons during audit as the
evidence can be easily compared. Furthermore, the EFDs issue automatic self-enforcing Z report
daily after every 24 hours;
4. The Z-report is obtained by pressing a button on the device at the end of each business day; the
report reports all transactions of the day and their total.
5. It might reduce tax evasion resulting from falsification of accounting records when the EFDs are used
by taxable persons, because the data are irreversible.
6. They have in-built fiscal memory which cannot be erased by mechanical, chemical or
electromagnetic interferences.
7. Transmits tax information to TRA system automatically. This will save a lot of administrative time and
costs.
8. They issue fiscal receipt/invoice which is uniquely identifiable, enabling taxpayers to comply with tax
laws.
4. The Z-report is obtained by pressing a button on the device at the end of each business day; the
report reports all transactions of the day and their total.
5. It might reduce tax evasion resulting from falsification of accounting records when the EFDs are used
by taxable persons, because the data are irreversible.
6. They have in-built fiscal memory which cannot be erased by mechanical, chemical or
electromagnetic interferences.
7. Transmits tax information to TRA system automatically. This will save a lot of administrative time and
costs.
8. They issue fiscal receipt/invoice which is uniquely identifiable, enabling taxpayers to comply with tax
laws.
9. They have at least 48 hours power backup, and it can use external battery in areas with no electricity
supply. They therefore can work where there are frequent power cuts.
10. They save configured data and records on permanent fiscal memory automatically;
11. They have tax memory capacity that stores data for at least 5 years, which is a benefit to taxpayers
because they are required to keep records at least for 5 years.
4 Answers
4 Answers
Self-Examination to Test Yourself
Questionsto Test Yourself
Self-Examination
Self-Examination
Questions
Questions
Question 1
Robots
Question and 1 Assembler
Question 1 Design Makers Ltd whose accounting period ends on 31 December each year
estimated that in 2013 it was going to make a total income of TZS20,000,000.
Robots andRobots Assembler
and AssemblerDesign Makers
Design Makers
Ltd whoseLtd accounting
whose accounting
period ends
period
onends
31 December
on 31 December
each year
each year
If after
estimatedfiling the
estimated statement
that in 2013
that itinwasof estimated
2013going
it was tax
to going
maketo payable
a total on
makeincome time
a total of and
income paying the
TZS20,000,000. first and
of TZS20,000,000. second installment,
the company changed the estimated taxable income to TZS10,000,000 and also paid non-final
If after filing
If after
withholding thefiling
taxes statement
the statement
amounting oftoestimated
of estimated
tax payable
TZS1,000,000. tax payable
on time onandtime
paying
andthe
paying
first the
andfirst
second
and installment,
second installment,
the company
the company
changedchanged the estimated
the estimated
taxable taxable
income income
to TZS10,000,000
to TZS10,000,000
and also andpaid
alsonon-final
paid non-final
Required:
withholding
withholding
taxes amounting
taxes amounting
to TZS1,000,000.
to TZS1,000,000.
If the taxRequired:
Required: rate was 30%, estimate the amount that were paid in the 1st, 2nd, 3rd and 4th installment and
state the due date of each installment.
If the taxIf rate
the tax
wasrate
30%,wasestimate
30%, estimate
the amount
the amount
that were
that
paid
were
in the
paid1st,
in the
2nd,1st,
3rd2nd,
and 3rd
4th and
installment
4th installment
and and
Question
state thestate2 the
due datedue
of each
date installment.
of each installment.
Samaha
Question Enterprises
Question
2 2 Limited file with the Commissioner its provisional return (statement of estimated tax
payable) on 30 August 2011 in respect of the year of income starting July 1, 2011. The return indicates
th
Samaha
estimatedSamaha
Enterprises
Enterprises
tax payable Limited
of TZSfile
Limited
with file
the with
45,000,000. Commissioner
the Commissioner
During its provisional
that year its provisional
of income, return
the (statement
returnpaid
company (statement
of
orestimated
of estimated
was chargedtax tax
payable) payable)
on 30
the following on 30th 2011
th August
taxes: August
in 2011
respectin respect
of the year
of the
of income
year of starting
income July
starting
1, 2011.
July 1,The
2011.
return
Theindicates
return indicates
estimatedestimated
tax payable
tax payable
of TZS 45,000,000.
of TZS 45,000,000.
During that
During
yearthatof income,
year of income,
the companythe company
paid or was
paidcharged
or was charged
Date
the following
the following
taxes: taxes: Details TZS
September 20, 2011 Withholding Tax – Dividend from non-resident 2,000,000
Date Date company Details Details TZS TZS
September
November September
20,
3, 201120, 2011
2011 Withholding
Single Withholding
Tax Tax
Instalment – Tax – Dividend
–Dividend
Realization from non-resident
from non-resident
of shares 2,000,000
500,000 2,000,000
May 4, 2012 company company
Withholding Tax – Rent from another company 4,000,000
November
Required:November
3, 2011 3, 2011Single Instalment Tax – Realization
Single Instalment Tax – Realization
of shares of shares 500,000500,000
May 4, 2012
May 4, 2012 Withholding Tax – Rent
Withholding – Rent
Taxfrom another
from another
companycompany 4,000,000 4,000,000
Determine
Required: the amount
Required: of tax paid in each instalment.
Determine
Determine
the amount
the amount
of tax paid
of tax
in each
paid instalment.
in each instalment.
Question 3
Mama Africa
Question 3 Company
Question 3 Ltd is a company conducting business and investment. The company lodged
statement of estimated income for 2014/2015 year of income on 28th February 2015 which showed a total
Mama
incomeAfrica
Mama Company
Africamillion.
of TZS.300 Company
Ltd isOnaLtd
company
31 stisDecember
a company
conducting
conducting
2015 business
the business
Companyand lodged
investment.
and the
investment.
The company
returns The
for thecompany
lodged
year of lodged
statement
statement
of estimated
income worth (totalofincome)
estimated
income for
income
TZS.4002014/2015
for 2014/2015
million. year of income
year of on
income
28th February
on 28th February
2015 which
2015showed
which showed
a total a total
income income
of TZS.300of TZS.300
million. million.
On 31st On 31st December
December 2015 the2015
Company
the Company
lodged the
lodged
returns
the for
returns
the year
for the
of year of
Company
income worth
income paid
(total
worth non
income) final withholding
(total income)
TZS.400TZS.400 tax on the
million. million. following dates:-
1.
Company 20 th March 2014 paid TZS.2 million.
Company
paid nonpaid
finalnon
withholding
final withholding
tax on thetaxfollowing
on the following
dates:- dates:-
2. 20th July 2014 paid TZS.3 million.
3.
1. 20
20
th October
1. th March
20th20142014paid
March paid
2014 TZS.3
TZS.2 millionmillion.
paidmillion.
TZS.2
4.
2. 20
2. th July
20
th December
2014
20 th July 2014
paid
2014 paid
paidTZS.4
TZS.3 TZS.3million.
million. million.
5.
3. 3. th January
20
20
th
October 2015 paid
20th October
2014 paid TZS.2
2014 paidmillion.
TZS.3 million
TZS.3 million
Note
4. that:
4. thYear
20 ofth income
December
20 2014 ends
December paid on paid
2014 30thmillion.
TZS.4 June every
TZS.4 million.year and banking lending rate is 7% per
month.
5. Required:
5. January
20 th 20 January
th 2015 paid 2015
TZS.2
paidmillion.
TZS.2 million.
Note that:
NoteYearthat:of Year
incomeof income
ends onends
30th on
June30every
th Juneyear
every
andyear
banking
and banking
lending lending
rate is 7%
rateper
is 7% per
Required:
month. month. Required:
For the year of income 2014/2015:-
Compute tax to be paid in 3rd and 4th instalments
Question 4
(a) Explain four possible reasons why the Tanzania government set deadlines for filling return and or
paying taxes.
(b) A person with a year of income starting 1st July 2014 ending 30th June 2015, his estimated
income tax for the year of income is Tshs.13,000,000. During the first two months of the year of
income, he paid Tshs.1,000,000 income taxes under non-final withholding payments.
Required:
Compute the amount for each installment.
Question 5
(c) Differentiate between final returns and statement of estimated tax returns as per Income Tax Act,
Cap 332. Describe the contents of such returns.
(d) Explain the implication of the various tax assessments admissible by the Commissioner General
for income tax.
Answers to Self-Assessment Questions
Answer to SEQ 1
;ŝͿ The due date of the first installment will be on or before 31 March 2013 and tax payable along with
filing the statement of estimated taxes would be given by:
[A - C]/B
Where A = TZS6,000,000, B = 4 installments and C = Nil.
Therefore the installment amount would 6,000,000/4= TZS15,000,000
;ŝŝͿ In the second installment the value A would be TZS6,000,000, C, TZS1,500,000 amount paid in the
first installment and value of B is 3 installments. Therefore the amount of the second installment
would be
(TZS6,000,000 - TZS1,500,000)/3= TZS1,500,000.
The amount was payable on or before 30 June 2013.
;ŝŝŝͿ After revision of the estimated amount value of A changed to TZS3,000,000, C to TZS4,000,000
from(TZS1,500,000 + TZS1,500,000 + TZS1,000,000) i.e. two installments and taxes paid at the
source, andvalue of B is 2 installments. Therefore the amount of third installment was (TZS3,000,000
-TZS4,000,000)/2= TZS500,000. Therefore nothing will be payable on or before 30 September 2013.
;ŝǀͿ While in the last installment the value of A would be TZS3,000,000, value of B would be 1 installment
and the value of C would be TZS4,000,000 from TZS1,500,000 + TZS1,500,000 + TZS1,000,000.
There fore the amount of the last installment would be (TZS3,000,000 –TZS4,000,000)/1= TZS-
500,000. Again nothing is payable on or before 31 December 2014.
Answer to SEQ 2
There will be four instalments the amounts of which are as follows:
A−C
Installment Amount =
B
The first instalment, 30th September 2011
A = TZS 45,000,000, B = 4, and C = TZS 2,000,000
45,000,000 − 2,000,000
First Installment Amount =
4
First Installment Amount = TZS 10,750,000
The second instalment, 31st December 2011:
A = TZS 45,000,000, B = 3, C = 2,000,000 + 10,500,000 + 500,000 = TZS 13,250,000
45,000,000 − 13,250,000
Second Installment Amount =
3
Second Installment Amount = TZS 10,583,333
The third instalment, 31st March 2012
A = 45,000,000; B = 2; C = 2,000,000 + 500,000 + 10,750,000 + 10,583,333 = TZS 23,833,333
45,000,000 − 23,833,333
Third Installment Amount =
2
Third Installment Amount = TZS 10,583,333
The fourth instalment, 30th June 2012
A = 45,000,000; B = 1;
C = 2,000,000 + 500,000 + 10,750,000 + 10,583,333 + 10,583,333 45,000,000=−TZS 38,416,667

38,416,667
𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹ℎ 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 =
1 38,416,667
45,000,000 −
𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹ℎ 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 =
1
Fourth Installment Amount = TZS 6,583,333

Fourth Installment Amount = TZS 6,583,333
Answer to SEQ 3
Answer to SEQ 3
I = [A – C]
I = [A –BC]
Where-B
Where-
A is the estimated tax payable by the installment payer for the year of income at the time of
I = [A – C]
B
Where-
A is the estimated tax payable by the installment payer for the year of income at the time of
the installment under section 89;
B is the number of installments remaining for the year of income including the current
installment; and
C is the sum of any -
(i) income tax paid during the year of income, but prior to the due d ate for payment
of the installment, by the person by previous installment under this section; or
section 90;
(ii) income tax withheld under Subdivision A of Division II during the year of income,
but prior to the due date for payment of the installment, from payments received
by the person that are included in calculating the person’s income for the year of
income; and
(iii) income tax paid in accordance with section 83(3) or (4) with respect to a
payment of the kind referred to in paragraph (b) that shall be paid to the
Commissioner by the withholding agent or the withholder during the year of
income but prior to the due date for payment of the installment.
I = Installment.
(i) 3RD Installment; 31 March 2015
A 300m*30%=90m TZS
B=2
C=3 + 3 + 4 + 2 = 12m
3RD Installment =90m-12m
2
= TZS 39 m
4TH Installment; 30 June 2015
A=300m*30%=90m TZS
B=1
C=12m+39m=51m
4TH Installment= 90m-51m
TZS 39 m
Answer to SEQ 4
(a) Reasons
(i) Enables entities to plan when to undertake the work on their tax assessment and to
accommodate the cash flow impact.
(ii) Enables the tax authorities to plan their work and for governments to prepare their
budgets more easily.
(iii) Provides reference points for the tax authorities to enforce disclosure and payment of tax
and to determine the amounts of any penalties that may arise.
(iv) Prevent entities from being tempted to spend personal income tax and social security
contributions deducted at source from employees pay. The longer monies remain
uncollected, the greater the risk that employers will use the funds for other purposes.
(a) Reasons
(i) Enables entities to plan when to undertake the work on their tax assessment and to
accommodate the cash flow impact.
(ii) Enables the tax authorities to plan their work and for governments to prepare their
budgets
326 Computation of Taxable more easily.
Income
(iii) Provides reference points for the tax authorities to enforce disclosure and payment of tax
and to determine the amounts of any penalties that may arise.
(iv) Prevent entities from being tempted to spend personal income tax and social security
contributions deducted at source from employees pay. The longer monies remain
uncollected, the greater the risk that employers will use the funds for other purposes.
(b) To compute the amount for each installment

(i) The amount of first installment is
13,000,000-1,000,000 Shs.12,000,000
  Tshs.3,000,000
4 4
(ii) The amount of 2nd installment is
13,000,000- (3,000,000  1,000,000)

 Tshs.3,000,000
3
(iii) The amount of 3rd installment is
13,000,000- (3,000,000  3,000,000  1,000,000)

 Tshs.3,000,000
2
(iv) The amount of 4th installment is
13,000,000- (3,000,000  3,000,000  3,000,000  1,000,000)

 Tshs.3,000,000
1
Answer to SEQ 5
(c) A final return of income is a statement written by the tax payer and submitted to the
Commissioner for income tax. It must be submitted within three months after the end of
accounting period/year of income vs Statement of Estimated Income Tax.
The final return contains:
 All income derived in the year of income

 All expenses incurred during the year of income
 Taxable income
 Tax liability/payable
 And any other information the commissioner may require.
 The term assessment means:

 Computation of income of a taxpayer; or
 Determination of the amount of income tax payable; or
 Entire procedure for imposing liability on the taxpayer as laid down in the Act.
Types of assessments
 Statement of estimated tax payable or Provisional assessment

 Self assessment
 Jeopardy or Accelerated assessment
 Adjusted assessment
 Best judgments assessment
 The term assessment means:
 Computation of income of a taxpayer; or
 Determination of the amount of income tax payable; or
 Procedures
Entire procedure for imposing liability on the taxpayer for Payment
as laid down of Tax: 327
in the Act.
Types of assessments
 Statement of estimated tax payable or Provisional assessment

 Self assessment
 Jeopardy or Accelerated assessment
 Adjusted assessment
 Best judgments assessment
Implication of assessments:
(i) Computation of the income assessable/taxable income;

(ii) Computation of the income-tax payable by taxpayer on the basis of computed income in
(i) and the appropriate rate; and
To issue a notice of assessment intimating the fact of assessment made on him(this notice shows details
of income assessed, gross tax payable, the reliefs, if any, given the set-off or credit of tax deducted at
source or already paid, net amount of tax payable and the due date of payment)
E1
SECTION E
SECTION E: NON-COMPLIANCE
Non-Compliance with
Income
WITHTax Act
INCOME TAX ACT
STUDY GUIDE E1: NON-COMPLIANCE

WITH INCOME TAX ACT
While complying with the Tax laws, following the due dates is very important as any delay in filing returns
and paying tax can lead to heavy penalties and interest. This Study Guide discusses consequences of
not complying with the Income Tax Act, Cap 332
As a tax consultant, you will need this information to advice clients on how to minimize penalties. A
thorough understanding of this topic is important for your examination, as well as in your professional life.
(a) Calculate Interest for Under Estimating Tax Payable.

(b) Calculate Interest for failing to pay tax.
(c) Calculate the penalty for failing to maintaining documents.
(d) Calculate penalty for failing to file tax return.
(e) State the penalty for making false or misleading statements.
(f) State the offences from non-compliance.
(g) Describe Procedures to Recover Tax from Taxpayer.
330 Non-Compliance with Income Tax Act
Calculate Interest for Under Estimating Tax Payable; calculate Interest for failing to pay tax;
and calculate the penalty for failing to maintaining documents.
Calculate Interest for Under Estimating Tax Payable; calculate Interest for failing to pay tax;
and calculate the penalty for failing to maintaining documents.
[Learning Outcome a, b, and c]
[Learning Outcome a, b, and c]
1. Computation of Interest for Under Estimating Tax Payable.

Under1. s.75 of the Tax Administration
Computation of InterestAct,for ifUnder
estimated income taxTax
Estimating payable for a year of income is less
Payable.
than 80% of correct amount of final tax), the installment payer (taxpayer) shall be liable for interest for
Under s.75 of the Tax Administration Act, if estimated income tax payable for a year of income is less
each month or part of a month (the period) from the date the first installment for the year of income is
than 80% of correct amount of final tax), the installment payer (taxpayer) shall be liable for interest for
payable until the due date by which the person must file a return of income for that year of income.
each month or part of a month (the period) from the date the first installment for the year of income is
The rate of interest is the statutory rate compounded monthly on the difference between
payable until the due date by which the person must file a return of income for that year of income.
(a) the total amount of income that would have been paid by way of installments during the
The rate of interest is the statutory rate compounded monthly on the difference between
year of income to the start of the period had the person's estimate or revised estimate
(a) the total amount of income that would have been paid by way of installments during the
equaled the correct amount; over
year of income to the start of the period had the person's estimate or revised estimate
(b) the amount of income tax paid by installments during the year of income to the start of the
equaled the correct amount; over
period.”.
(b) the amount of income tax paid by installments during the year of income to the start of the
The formula for calculating interest for under-estimation is given by:
period.”.
I = Pformula
The
N – 1],
[(1- R) for calculating interest for under-estimation is given by:
where; I = P [(1- R)N – 1],
I = Interest charge,
where;
P = difference between
I = Interest actual tax payable and estimated tax paid
charge,
R = monthly statutory rate
P = difference and actual tax payable and estimated tax paid
between
N = number of periods
R = monthly from the
statutory firstand
rate instalment up to the day the return on
income is supposed to be filed.
N = number of periods from the first instalment up to the day the return on
income is supposed to be filed.
Example
Example
MaduhuLtdwhoseaccountingperiodendson31Decembereachyearestimatedthatin2017itwasgoingto
makeatotalincomeofTshs20,000,000.Thecompanyfiledthestatementofestimatedtaxpayableon5May2017a
MaduhuLtdwhoseaccountingperiodendson31Decembereachyearestimatedthatin2017itwasgoingto
ndreturnonincomeon 30August 2018 showing tax payable of Tshs9,000,000butallinstalmentswere paid
makeatotalincomeofTshs20,000,000.Thecompanyfiledthestatementofestimatedtaxpayableon5May2017a
on time and the tax payable on assessment was paid on 30August 2018.
ndreturnonincomeon 30August 2018 showing tax payable of Tshs9,000,000butallinstalmentswere paid
Required time and the tax payable on assessment was paid on 30August 2018.
on
Required
Ifthetaxratewas30%andstatutoryratewas10%, determine whether there is under-estimation of tax payable
in instalments.
Ifthetaxratewas30%andstatutoryratewas10%, determine whether there is under-estimation of tax payable
in instalments.
If yes compute the interest for under estimation.
If yes compute the interest for under estimation.
Answer
If estimated Income tax payable is less than 80% of the actual tax shown in the return; there is
Answer
underestimation.
Solution
underestimation.
Solution
80% of correct tax i.e. 80% xTshs 9,000,000 = Tshs. 7,200,000.
 Income tax paid by installment = 30% x Tshs20,000,000= Tshs6,000,000
 Excess = Tshs 9,000,000 – Tshs 6,000,000 = Tshs. 3,000,000
 Date of 1st instalment = 31/3/2017
 Date of filing return of income 30/6/2015,
 Duration = 15 months (periods)
 BOT statutory rate 10%
Interest:
PV = Tshs. 3,000,000
n = 15 months
i = 15%/12 months
I = 3,000,000*(1+15%/12)15-1
=Tshs614,487
 Income tax paid by installment = 30% x Tshs20,000,000= Tshs6,000,000
 Date of 1st instalment = 31/3/2017
 Date of filing return of income 30/6/2015,
 Duration = 15 months (periods) Non-Compliance with Income Tax Act: 331
Interest:
PV = Tshs. 3,000,000
n = 15 months
i = 15%/12 months
I = 3,000,000*(1+15%/12)15-1
=Tshs614,487
2. Calculate Interest for failing to pay tax.

Under s.75 of the Tax Administration Act, 2015, taxpayers who fail to pay tax on or before the date on
which the tax is payable are liable for interest for each month or part
ofamonthforwhichanyofthetaxisoutstandingcalculatedasthestatutoryrate, compounded monthly, applied
to the amount outstanding at the start of the period
N
The formula for calculating interest is given by: I = P [(1 + R) -1],
Where I = Interest charge
P = Unpaid taxes
R = monthly interest charge rate
N = number of periods in which taxes were unpaid.
MaluluLtdwhoseaccountingperiodends31 Decembereachyearestimatedthatin2013it was going to make

total income of Tshs20,000,000.
The company filed the statement ofestimatedtaxpayableon5May2013and paid the first instalment on the
same date
Required:
If the tax rate was 30% and statutory rate was 15%, compute the interest for failure to pay tax on time.
Workings:
Estimated tax payable 30% x Tshs20,000,000= Tshs6,000,000,
The first instalment is Tshs1,500,000.
N
Interest for failure to pay tax = P [(1 + R) – 1], where
P = unpaid taxes i.e. Tshs1,500,000,
P
R== unpaid
monthlytaxes i.e. Tshs1,500,000,
statutory rate, i.e. (15%)/12=1.25%and
R
N== monthly statutory
number of periodsrate, i.e. (15%)/12=1.25%and
in which failure continued = 2months.
N = numberthe
Therefore of periods
interestiniswhich failure continued = 2months.
Tshs37,734.
Therefore the interest is Tshs37,734.
3. Computation of penalty for failing to maintaining documents.

A person who fails to maintain proper documents as required by a tax law is liable for a penalty for
3. Computation of penalty for failing to maintaining documents.
each month or part of a month during which the failure continues. The penalty shall, in the case of an
individual, be 1 currency point or, in the case of a body corporate 10 currency points. (s. 77 of the
Tax administration Act. 2015)
(1 point currency is equivalent to Tshs 15,000)
Example
During the year of income ended 31 December 2015, KCB Ltd failed to maintain proper documents
Example
and filed a return of income showing business income of Tshs 200,000,000 on which tax of
Example
and filed a return of income showing business income of Tshs 200,000,000 on which tax of
60,000,000 was paid by the due date. On the audit that was carried out, it was established that the
company income was supposed to be Tshs 300,000,000 had a proper documents been kept.
Required:
Compute penalties if any under section 77 of the Tax Administration Act, 2015, assume the failure to
maintain the documents continued for all 12 months of the year of income.
Answer
Penalty per month=10 Currency points = (Tshs 15,000×10) =Tshs 150,000
Total Penalty = 150,000 × 12 Months= Tshs 1,800,000
Calculate penalty for failing to file tax return; state the penalty for making false or misleading
statements; state the offences from non-compliance; and describe Procedures to Recover
Tax from Taxpayer.
[Learning Outcome d, e, f and g]
4. Computation Penalty For Failing To File Tax Return

Under s.78 of the Tax Administration Act, 2015,a person who fails to file a tax return (provisional and
final return) or pay tax on due date as required by a tax law is liable for a penalty for each month or
part of a month during which the failure continues. The penalty is higher of:-
(i) 2.5% of unpaid tax at starts of the month and
(ii) 5 currency points and 15 currency points per month for individual and entity respectively.
5. State the penalty for making false or misleading statements

Section 79 of the Tax Administration Act, 2015 provides that, a person is liable for a penalty if he-
(a) makes a statement to a tax officer which is false or misleading in a material particular; or
(b) omits to include in the statement made to the tax officer, any matter or thing without which the
statement is misleading in a material particular
The penalty shall be
(a) where the statement or omission is made without reasonable excuse, fifty percent of the tax
shortfall; or
(b) where the statement or omission is made knowingly or recklessly, seventy five percent of the tax
shortfall.
The penalty will be-

(a) increased by ten percent for the second or subsequent application of this section to the person;
and
(b) reduced by ten percent if the person voluntarily discloses the statement prior to its discovery by
the tax officer or the next tax audit of the person
6. State The Offences From Non-Compliance

In a self-assessment system, it is important for various offences to be known so that taxpayers organize
their affairs to ensure maximum compliance.
Offences under tax administration act, 2015
1. Offence of failure to comply with Tax Administration Act,2015
A person who fails to comply with a provision of the provisions of Tax

Administration Act commits an offence and shall be liable, on conviction
(a) where the failure results or, if undetected may have resulted in an Section 82
underpayment of tax in an amount exceeding 50 currency points, to a
fine of not less than 20 currency points and not more than 50 currency
and
(b) reduced by ten percent if the person voluntarily discloses the statement prior to its discovery by
the tax officer or the next tax audit of the person
Non-Compliance with Income Tax Act: 333
6. State The Offences From Non-Compliance

In a self-assessment system, it is important for various offences to be known so that taxpayers organize
their affairs to ensure maximum compliance.
Offences under tax administration act, 2015
1. Offence of failure to comply with Tax Administration Act,2015
A person who fails to comply with a provision of the provisions of Tax

Administration Act commits an offence and shall be liable, on conviction
(a) where the failure results or, if undetected may have resulted in an Section 82
underpayment of tax in an amount exceeding 50 currency points, to a
fine of not less than 20 currency points and not more than 50 currency
points, or to imprisonment for a term of not more than six months, or to
both; and
(b) in any other case, to a fine of not less than 10 currency points and not
more than 20 currency points.
2. Offence for failing to pay tax
Any person who fails to pay any tax on, or before the date on which the tax is Section 83
payable commits an offence and shall be liable on conviction-
(a) where the failure is to pay tax in excess of 50 currency points, to a fine
of not less than 25 currency points and not more than 100 currency
points or imprisonment for a term of not less than three months and
not more than one year, or to both; and
more than 25 currency points or imprisonment for a term of not less
than one month and not more than three months, or to both.
3. Offence for making or using false or misleading statements or

documents
Section 84
Any person who, in any matter relating to the excise duty any tax laws set
out under the Part A of the First Schedule to the Tanzania Revenue
Authority Act;
(a) makes any entry of any building, room, place, or item of plant, which is
false or incorrect in any material particular;
(b) makes or causes to be made any declaration, certificate, application,
return, account, or other documents, which is false or incorrect in any
material particular;
(c) when required to answer any question put to that person by an officer,
refuses to answer such question or makes any false or incorrect
statement in reply thereto;
(d) is in any way involved in any fraudulent evasion of the payment of any
tax;
(e) obtains any remission, rebate or refund of tax which he is not entitled
to obtain;
(f) makes any false statement or false representation in order to obtain
any remission, rebate, refund of tax or any tax benefit
(g) acquires possession of, keeps, conceals, removes or in any way deals
with, any excisable goods or any taxable goods which have been
manufactured or supplied without payment of the full tax;
(h) counterfeits or in any way falsifies or uses when counterfeited or in
any way falsified, any document required or issued by or used for the
purpose of the tax;
(i) omits or fails to make or cause to be made any declaration, certificate,
application, return, account, or other documents, which is true or
correct in any material particular; or
(j) acquires, possess, keeps or conceals, or in any way deals with, any
fiscal receipt or fiscal document which is false or incorrect in any
material particular;
Commits an offence and upon conviction is liable for payment of twice of the
amount of the tax evaded.
4. Offence for impeding tax administration Section 85
A person who impedes or attempts to impede the administration of a tax law

commits an offence.
Upon conviction-
(a) where the offence involves fraud or undue force, to a fine of twice the
amount sought to be evaded or recovered or 200 currency points,
whichever is greater or imprisonment for a term of not less than two

years and not more than four years, or to both; and
more than 200 currency points or imprisonment for a term of not more
than two years, or to both.
5. Offence for failing to use electronic fiscal device Section 86
A person who:
(a) fails to acquire and use an electronic fiscal device upon commencement of
business operations or expiry of the period specified by the Commissioner;
(b) fails to issue fiscal receipt or fiscal invoice upon receiving payment for sale
of goods or service
(c) issues a fiscal receipt or fiscal invoice that is false or incorrect in any
material particulars;
(d) uses electronic fiscal device in any manner that misleads the system or the
Commissioner;
(e) tempers with or causes electronic fiscal device to work improperly or in a
manner that does not give a correct or true document,
Commits an offence and shall be liable on conviction to a fine not less than
200 currency points and not more than 300 currency points or to imprisonment
for a term not exceeding three years or to both.
6. Offences authorized and unauthorised person
1. A person authorized by the Authority to perform any function or carryon Section

any duty under a tax law commits an offence where that person- 87
(a) directly or indirectly asks for or takes in connection with the person’s
duties, any payment or reward or promise or security for any such
payment or reward, not being a payment or reward that the person is
lawfully entitled to receive; or
(b) agrees to, permits, conceals, connives at or acquiesces in any act or
thing whereby the Government is or may be defrauded with respect to
any matter under a tax law, including the payment of tax.
2. A person who is not authorized by the Authority commits an offence if that
person-
(a) collects or attempts to collect an amount of tax payable under a tax
law or an amount which that person describes as tax; or
(b) makes representations with the intent to make another person to
believe that, that person is a tax officer.
A person who commits an offence under (1) or (2) shall be liable, on
conviction, to a fine of not less than 200 currency points or imprisonment for a
term of not less than twelve months and not more than five years, or to both.
Offences by entities Section 88
Where an entity has committed an offence under a tax law, every person who
is a manager of the entity at the time of commission of that offence shall be
treated to have committed that offence ,except where the manager has
exercised the degree of care, diligence, and skill that would have been
exercised by a reasonable person in preventing the commission of that offence
Penalty
Upon conviction a person is liable to a fine of not less than 200 currency points
and not more than 300 currency points or to imprisonment for a term not
exceeding three years or to both.
Offence for aiding or abetting Section 89
Any person who aids, abets, counsels or induces another person to commit an
offence under a tax law commits an offence and shall be liable, on conviction,-
(a) where the original offence involves a statement of the kind prescribed
in section 84(1) and, if the inaccuracy of the statement were
undetected, may have resulted in an underpayment of tax to a fine of
not less than 100 and not more than 200 currency points,
imprisonment for a term of not less than one year and not more than
two years, or to both;
(b) where the original offence involves inducing an authorised person to
commit an offence under section 87, to a fine of not less than 200
currency points, or imprisomnent for a term of not less than twelve
months and not more than five years, or to both; or
(c) in any other case, to a fine of not less than 50 currency points and not
more than 100 currency points, or to imprisonment for a term of not
less than six months and not more than one year, or to both.
7. Describe Procedures to Recover Tax from Taxpayer

Taxpayer may financially unable to pay their tax liabilities but more often times they simply refuse to
pay their taxes. It may be necessary to compel/force payment. In order to reduce tax arrears regular
collection measures are desirable. Various penalties as already been discussed do assist to compel
the payment but they may not be adequate. Commissioner General has several other options to
enforce tax collection.
Specific tax collection devices to compel tax payment –Section 59 to 69 of the Tax Administration
Act, 2015
(a) Suit for unpaid tax
Tax that has not been paid when it is payable may be sued for and recovered in any court of
competent jurisdiction by the Commissioner General acting in the Commissioner's official capacity. It
is generally accepted principle that the tax due and payable by any person is a debt to the
government and the Commissioner General is doing so on behalf of the government.
(b) Security for withholding tax

The Commissioner-General shall have a first claim over the assets before any distribution in
liquidation or bankruptcy of a withholding agent is made
(c) Charge over assets

Where a taxpayer fails to pay tax on time, the Commissioner General may create a charge in favour
of the Government over assets owned by that taxpayer .The assets of a taxpayer shall be charged to
the extent of the unpaid tax, interest accruing and any costs of charge and sale. Generally the charge
over an asset is like levying a distress upon the taxpayer’s goods and chattels. It is some sort of
distrait.The charge of an asset comes to an end when the tax debtors has paid the tax to which the
charge relates to the commissioner A charge will be released when the taxpayer pays in full the
amounts of unpaid taxes ,interest accruing and any costs of charge and sale to the Commissioner
General.
(d) Sale of charged assets

The provision requires charged assets to be sold at public auction.
The proceeds of sale shall be used to pay-
;ĂͿ the costs of charge and sale of the assets sold;
;ďͿ the outstanding tax and interest accrued ; and
;ĐͿ any other unpaid tax.
Where there is any balance of money after making payment described above, such balance shall be
paid to the taxpayer.
Where the sale proceeds are insufficient to pay in full the costs of charge and sale, the tax due and
interest accrued with respect to that tax, the Commissioner General may proceed to collect the
insufficiency with fresh actions.
(e) Restraint person

Where a person fails to pay tax on time and such person is likely to flee from the United Republic, the
Commissioner General may, by notice in writing or any other means of official communication to the
Director of Immigration Services, order the Director of Immigration Services to prevent that person
from leaving the United Republic. The Director of Immigration Services shall, on receiving the notice,
prevent the person from leaving the United Republic for a period of fourteen days from the date the
notice is served. The Commissioner General shall, where the person pays the tax or arranges for
payment in a manner satisfactory to him, withdraw the notice.
(f) Restraint of assets

Where the Commissioner General is satisfied that-
(a) the value added tax has not been paid in respect of the supply or import of goods;
(b) a vehicle contains any fuel on which road and fuel tolls has not been paid;
(c) transit charges have not been paid with respect to a foreign vehicle;
(d) Motor vehicle registration or transfer tax has not been paid with respect to a vehicle; or
(e) Any provision of the Excise (Management and Tariff) Act has been breached with respect to
excisable goods
The Commissioner General may
(a) restrain the goods, vehicle, vessel or any other asset
(b) restrain and search any premises, place, vehicle, vessel or any other asset which he believes the
goods, vessel or vehicle are located;
(c) mark, lock up or seal any building, room, place, receptacles or item of plant in any factory,
exercisable goods, or materials in a factory
Recovery from third parties
(a) Liability of managers of entities

Where an entity fails to pay tax on time, a manager or a person who was the manager of that
entity within a period of twelve months prior to the entity default shall be jointly and severally
liable with the entity for payment of the tax. Except where the manager has exercised the degree
of care, diligence, and skill that would have been exercised in preventing the failure to pay tax.
(b) Receivers
A person who has been appointed to be a receiver shall, sell sufficient assets that come into his’s
possession under the receivership to pay for any entity’s tax due. The receiver shall, to the
extent that he fails to set aside an amount as required, be personally liable to pay to the
Commissioner General on account of the taxpayer's tax liability the amount that should have
been set aside.
(c) Third party debtors and guarantors

Where a taxpayer fails to pay tax on time, the Commissioner General may serve on the third
party debtor who owes money to that taxpayer a notice in writing requiring that person to pay the
money to the Commissioner General.
The following shall be treated as money owed to a taxpayer-
(a) money currently owing or that may subsequently become owing to the taxpayer;
(b) money held or that may subsequently be held for or on account of the taxpayer;
(c) money held or that may subsequently be held on account of a third person for payment to
the taxpayer; and
(d) money held by a person who has authority from a third person to pay the money to the
taxpayer.
(d) Agents of non-residents

Where, a non-resident taxpayer fails to pay tax on time or the Commissioner General has good
reasons to believe that a non-resident taxpayer shall not pay tax on time, the Commissioner
General may, by notice in writing, require the agent who is in possession of an asset owned by
the non-resident taxpayer to pay tax on behalf of that taxpayer.
Self -Test
Self
Examination
-Test Examination
Questions
Questions
Question Question
1 1
ABC Co.ABC Ltd’sCo.
main Ltd’s
linemain
of business
line of business
is manufacturing.
is manufacturing.
The company’s
The company’s
12 months 12 months
accounting accounting
period runs
period runs
from 1 from
st 1 September
Septemberst each year.For
each year.For
the yearthe of year
income of income
20X6, the 20X6,
company
the company
furnished furnished
a statement
a statement
of of
estimated estimated
income incometax on tax 15st on 15st20X6,
April April for20X6,
the foryeartheof year
income of income
of an income
of an income
of Tshsof140 Tshs 140
million.However
million.Howeveron 16th on June 16th20X6,
Junethe 20X6,
company
the company
paid thepaid full the
incomefull income
taxes shown
taxes onshown
statement
on statement
of of
estimated estimated
income tax income
payable
tax payable
for the yearfor the
of income
year of 20X6.
incomeOn 20X6.
20 On
th May2020X7,
th Maythe20X7,
company
the company
furnishedfurnished
the return theofreturn
income of for
income
the yearfor the
declaring
year declaring
an income an of
income
Tshs 200
of Tshs
million.
200 million.
Required: Required:
Calculate Calculate
i) Penalties
i) Penalties
for failingfortofailing
file taxtoreturn
file taxif return
any payable
if any payable
under section
under 78section
of the78
Taxof the
administration
Tax administration
Act, Act,
2015. 2015.
ii) Interest
ii) Interest
payable payable
on under-estimation
on under-estimationof estimated
of estimated
tax under taxsection
under 75 section
of the75Tax
of the
administration
Tax administration
Act, 2015. Act, 2015.
iii) Compute
iii) Compute
interest interest
for failing fortofailing
pay tax to pay
(if any),
tax (ifunder
any),section
under 76 section
of the76Tax
of the
administration
Tax administration
Act, Act,
2015. 2015.
BOT statutory
BOT statutory
rate 15%rate 15%
Question Question
2 2
Muhidin Muhidin
& Co. Ltd & isCo. a company
Ltd is a company
established
established
in the Unitedin theRepublic
United Republic
of Tanzania of Tanzania
since 1990s.since Its
1990s. Its
accounting
accounting
period starts
period onstarts
1st October
on 1st October
each year. each During
year. theDuring
yeartheof income
year of ended
income30 ended
th September
30th September
2014, the2014,
companythe company
filed its statement
filed its statement
of estimated of estimated
tax payabletax payable
on 28th February
on 28th February
2014 with 2014
taxable
with taxable
income amounting
income amounting to TZS. 240,000,000/=
to TZS. 240,000,000/=and paidand the paid
1 installment
st the 1 installment
st amount amount
on that dateon that
whiledate
thewhile
2nd the 2nd
and 3rd installments
and 3rd installmentswere paid were
on their
paid on
respective
their respective
due dates due asdates
per S.88
as per of the
S.88ITAof (Cap.
the ITA 332)
(Cap.(R.E.
332) (R.E.
2014). The
2014). company
The company
filed revisedfiled estimates
revised estimates
with an income
with an taxincome
amounting
tax amounting
to TZS.75,000,000
to TZS.75,000,000on 31 st on 31 st
December December
2014 and 2014paidandthe paid
amount
the amount
due thereof. due thereof.
On 30 June
th On 302015,
th June the
2015,
company
the company
filed its final
filed tax
its final tax
return with
returntaxable
with income
taxable of income
TZS. 300,000,000/=.
of TZS. 300,000,000/=.
Required: Required:
(i) (i)
What was Whatthe was
due the
datedue
for date
fillingfor
thefilling
provisional
the provisional
returns for returns
Muhidinfor Muhidin
& Co. Ltd & as
Co.perLtdS.89
as per S.89
of the ITA, of the
CapITA,332,Cap
(R.E.
332, 2014)?
(R.E. 2014)?
(ii) State
(ii) theState
due thedateduefor date
fillingforthefilling
finalthe
return
finalfor
return
Muhidin for Muhidin
& Co. Ltd & Co.
as per Ltdthe
as provisions
per the provisions
under the under
ITA, theCap.ITA,
332,
Cap.(R.E.332,2014).
(R.E. 2014).
(iii) Compute
(iii) Compute
the amount the amount
of income of tax
incomepaid tax
by paid
Muhidin by Muhidin
& Co. Ltd & Co.
on 1Ltd on 1 st installment
st installment and 4th and 4th
installment. installment.
(iv) (iv)
ComputeCompute the amount the amount
of income of tax
incomepaid tax
by Muhidin
paid by Muhidin
& Co. Ltd & on
Co.30 Ltd on 302015
th June th June(ignore
2015 (ignore
any interest any and/or
interestpenalty
and/or thereof).
penalty thereof).
AscertainAscertain
the amount the amount
of penalty of payable
penalty payable
by Muhidin by Muhidin
& Co. Ltd & as
Co.per LtdS.78
as perof the
S.78Taxof the
Administration
Tax Administration
Act, Act,
2015 (if 2015
any). (if any).
Question Question
3 3
Zuma ZumaZumaCompany
Zuma Company
Ltd is a Ltd
company
is a company
dealing dealing
with wholesale
with wholesale
and retail and
business
retail business
in Singidain Singida
for the for the
period ofperiod
five years
of five
now.
years
The
now.
company’s
The company’s
financialfinancial
year is January
year is January
to December.
to December.
During the
During
financial
the financial
year 2016,
yearit 2016,
was discovered
it was discovered
by the tax
by audit
the tax
done
audit bydone
Tanzaniaby Tanzania
RevenueRevenue
AuthorityAuthority
that the that
Company
the Company
did not comply
did not with
comply
the with
requirement
the requirement
of the law
of the
of filling
law oftaxfilling
return
taxand
return
tax and
payment.
tax payment.
The following
The following
information
information
was revealed:
was revealed:
(c) (c)
It submitted
It submitted
the provisional
the provisional
statement statement
of estimated
of estimated
tax payable
tax payable
on 14/09/2016
on 14/09/2016
and paidand
all paid
the all the
tax due on
taxthe
duesame
on theday.
same day.
(d) (d)
The taxable
The income
taxable calculated
income calculated
was supposed
was supposed
to be TZS.115,000,000.
to be TZS.115,000,000.
(e) (e)
Other balance
Other balance
of tax wasof tax
paidwas
as required.
paid as required.
(f) (f)
The return
Theonreturn
incomeon (final
incomeaccounts)
(final accounts)
was submitted
was submitted
on 30/09/2017.
on 30/09/2017.
(g) (g)
The Bank
The
of Bank
Tanzania
of Tanzania
discounting
discounting
rate at the
rate
time
at the
wastime
10%.
was 10%.
Required:
Required:
Calculate
Calculate
the penalties
the penalties
and interest
and to
interest
be paid,
to be
if any,
paid,asif per
any,tax
aslaws
per tax
in the
laws
country.
in the country.
QuestionQuestion
4 4
The accounting
The accounting
period ofperiod
the Great
of theCo.
Great
Ltd Co.
endsLtd onends
31st on
December
31st December
of each of year.
eachDuring
year. the
During
yeartheof year of
income income
2017, the2017,
company
the company
fails to fails
file/furnish
to file/furnish
the statement
the statement
of estimated
of estimated
income income
on the due on the
date.due date.
However,However,
on 30/9/2017,
on 30/9/2017,
the company
the company
files the files
estimated
the estimated
income of income
Tshs 100
of Tshs
million.
100 million.
Unfortunately,
Unfortunately,
the company
the company
also, delayed
also, delayed
the submission
the submission
of the final
of the
return
finalofreturn
incomeof which
incomeiswhich
submitted
is submitted
on 30/9/2018
on 30/9/2018
showingshowing
an incomean tax
income
amounting
tax amounting
to Tshs. to40Tshs.
million.
40 The
million.
corporation
The corporation
tax rate tax
is 30%.
rate is 30%.
Required:
Required:
ComputeCompute
penaltiespenalties
if any payable
if any payable
under section
under 78section
of the78Tax
of the
Administration
Tax Administration
Act, 2015.Act, 2015.
Answers
Answers
to Self-Test
to Self-Test
Examination
Examination
Questions
Questions
AnswerAnswer
to SEQ 1 to SEQ 1
(a) Penalties
(a) Penalties
for late for
submission
late submission
of Statement
of Statement
of Estimated
of Estimated
Income Income
Tax Payable
Tax Payable
and Return
and Return
of of
Income Income
(Section(Section
78 of the 78Tax
of the
Administration
Tax Administration
Act, 2015)
Act, 2015)
(i) (i)
Penalty Penalty
for the failure
for the to
failure
file Statement
to file Statement
of Estimated
of Estimated
Tax Payable
Tax Payable
on or before
on or the
before
duethe due
date date
 Duedate: Due30/11/20X5
date: 30/11/20X5
 Filling  date:
Filling
15/4/20X6.
date: 15/4/20X6.
 Months  late:
Months 5 Months
late: 5 Months
 Penalty  forPenalty
eachformonth
eachormonth
part oforapart
month
of a month
The greaterThe ofgreater of
(i) (i)
2.5% (Tshs 2.5%42,000,000-0)=
(Tshs 42,000,000-0)=
Tshs 1,050,000
Tshs 1,050,000
(ii) 15
(ii) Currency
15 Currency
point = Tshs
point225,000
= Tshs 225,000
Penalty Penalty
= Tshs 1,050,000
= Tshs 1,050,000
X 5 Months=
X 5 Months=
Tshs 5,250,000/=
Tshs 5,250,000/=
(ii) (ii)
Penalty Penalty
for the failure
for thetofailure
file Return
to file of
Return
Income
of Income
on or before
on orthe
before
due the
date
due date
 Duedate: Due date: 28/2/20X7
28/2/20X7
 Filling
 date:
Filling date: 20/5/20X7.
20/5/20X7.
 Duration
 Duration
of failureof: failure : 3 months 3 months
 Income tax Income
payable
tax payable
= = Tshs. 60,000,000
Tshs. 60,000,000
 Tax paidTax out paid
at the
outstart
at the
of month,
start ofMay
month,
(installments
May (installments
= Tshs= 42,000,000
Tshs 42,000,000
 Penalty
 for Penalty
eachfor
month
eachormonth
part oforapart
month
of a month
The greater
The ofgreater of
(i) 2.5% (Tshs 60,000,000-42,000,000)= Tshs 450,000

(ii) 15 Currency point = Tshs 225,000
Penalty = 450,000 x 3 Months= Tshs 1,350,000
(b) Interest payable for the under estimation of estimated income tax payable (Section 75 of the
Tax Administration Act, 2015)
underestimation.
Solution
 80% of correct tax i.e. 80% xTshs 60,000,000 = Tshs. 48,000,000.
 Income tax paid by installment = Tshs. 42,000,000
 Date of 1st instalment = 30/11/20X5
 Date of filing return of income 28/2/20X7,
 Duration = 15 months (periods)
Interest:
PV = Tshs. 18,000,000
n = 15 months
i = 15%/12 months
I = 18,000,000*(1+15%/12)15-1
=Tshs 3,686,925
(c) Interest payable for the late payment of taxes (Section 76 of the Tax Administration Act, 2015)
(i) Payment for quarterly installment taxes (Section 88 Of the Income Tax Act Cap 332
Tax payable= (A – C)/B
B- Estimated income tax payable for the year income under section 4(1)a & b of the Income Tax Act
Cap 332 2004 R.E 2014
(Tshs 140 million 30% =Tshs 42,000,000
C- Number of installments remaining including the current installment
D- Income tax paid prior the due date for the payment of installment tax by the way of withholding or
installment
 1st installment
The due date for payment of the 1st installment is 30/11/20X6
Date paid 16/6/20X6.
Since it is paid after the due date, there is an interest under section 75
Amount of 1st installment = (42,000,000-0)/4 = shs.10, 050,000
Duration of failure = 7 months
BOT interest rate 15%
Interest
I = 10,050,000*(1+15%/12)7-1
= 913,047
 2nd installment
The due date for payment of the 2nd installment is 28/02/20X6
Amount of 2nd installment = (Tshs 42,000,000-Tshs 10,500,000)/3 = shs.10, 050,000
Duration of failure= 4 months
Interest
I = 10,050,000*(1+15%/12)4-1
= 512,001
 3rd installment
The due date for payment of the 3rd installment is 30/05/20X6
Amount of 3rd installment = (Tshs 42,000,000-Tshs 21,000,000)/2 = shs.10, 050,000
Interest
I = 10,050,000*(1+15%/12)1-1
= 125,625
 4th installment
The due date for payment of the 4th installment is 31/08/20X6
No failure
(ii) Interest for the late payment of Income tax to be paid on the date of filling Return of Income
Due date for payment: 28/2/20X7

Date the tax is paid: 20/5/20X7
Amount payable on 28/2/20X7 = Tshs. 60,000,000 – 42,000,000 = Tshs. 18,000,000.
I = 18,000,000*(1+15%/12)3-1 = 683,473
Answer to SEQ 2
(i) The due date for filling provisional return was 31st December 2013.
(ii) The due date for filling the final return was 31st March 2015.
(iii) Amount of Income tax paid on 1st instalment was as follows:
First instalment = A – C
B
A = income tax payable by the start of the period = TZS 240,000,000 x 30%
= TZS 72,000,000/=
C = income tax paid by the start of the period
B = No. of instalment = 4
1st instalment = 72,000,000 – 0

4
Amount paid by Muhidin & Co. Ltd. on 1st instalment = TZS 18,000,000
4th instalment = Revised estimate – Income tax paid

No. of remaining instalment
Income tax payable on revised estimate = 75,000,000

Income tax paid before the last instalment = 18,000,000 x 3
= TZS 54,000,000
Fourth instalment = TZS 75,000,000 – TZS 54,000,000
1
= TZS 21,000,000/=
(iv) Income tax paid on 30th June 2015 by Muhidin & Co. Ltd.
Income tax payable = 300,000,000 x 30%
= 90,000,000
Income tax paid = 90,000,000 – 75,000,000
Therefore, the income tax paid on 30th June 2015 was TZS 15,000,000/=
(v) Penalty paid by Muhidin & Co. Ltd. As according to s.78 of Tax Administration Act 2015:
Penalty for late lodging of provisional returns: 2 months late

Penalty = 72,000,000 x 2.5% x 2
= 3,600,000 vs 15,000 x 15 x 2
= 3,600,000 vs 450,000 (whichever is higher)
= TZS 3,600,000/=
Penalty for late filling of return of income: 3 months late

Tax payable = 300,000,000 x 30%
= TZS 90,000,000
Tax paid = TZS 75,000,000
Penalty = (90,000,000 – 75,000,000) x 2.5% x 3 vs 15,000 x 15 x 3
= 1,125,000 vs 675,000 (whichever is higher)
= TZS 1,125,000/=
Answer to SEQ 3
Calculated income was Tshs. 115,000,000/=

Tax will be 115,000,000 x 30% = 34,500,000
Per each Quarter payment will be = Tshs. 8,625,000/=
(a) Penalties for late submission provision and final return of
(i) Provision return

In the 1st Quarter the company was supposed to submit the statement of provision of tax payable
on March 16 but was submitted on 14/09/2016, months late = 6 months
Penalty for late submission of return is;
Ͳ The higher of 2.5% of the tax assessed or 15 currency point whichever is higher, times
months failure continues
Ͳ Tshs. 34,500,000 x 2.5% = 862,500
Or 15,000 x15 =225,000
The higher is 862,500
Penalty for failure to file provision = Tshs.862,500 x 6
= Tshs.5,175,000
(ii) Final return

Return on Income was supposed to be submitted on end of June 2017
Ͳ Was submitted on 30/09/2017
Ͳ Months late was 3 months
Ͳ Penalty for late submission of return is;
Ͳ The higher of 2.5% of the tax assessed or 15 currency point whichever is higher, times
months failure continues
 0×2.5%=0
 Penalty on late submission will be 15 currency point times the months late
(15 15,000)3= 675,000/
(b) Interest payable for the late payment of taxes
(i) 1st installment tax

The company was supposed to pay 1st installment tax which was Tshs. 8,625,000 on the end of
Month.
Ͳ But was paid on 14/09/2016
Ͳ Month late 6 months
Ͳ Interest on late payment
0.1
Ͳ = 8,625,000 x (1+ )6 – 1) = 440,335
12
(ii) 2nd installment of tax

For 2nd instalment the company was supposed to pay tax due ofTshs. 8,625,000 on end of
June but paid on 14/09/2016
Ͳ Month late equal to two months
Ͳ Interest of failure to pay tax will be
0.1
Ͳ 8,625,000 x (1+ )3 – 1) = 217,427
12
(iii) 3rd installment of tax

For 3 installment the company was supposed to pay tax due, of Tsh. 8,625,000/= on 30/09/2016
rd
Was paid on 14/09/2017 – no interest
Therefore
(i) Total Penalties are 5,175,000/ + 675,000/ = Ths 5,850,000/

(ii) Total Interest is 440,335 + 217,427 = Tsh 657,762
Hence the amount of penalty and interest to be payable to TRA will be TShs.6,507,762
Answer to SEQ 4
Year of income: 1/1/2017 to 31/12/2017
Due date for filing estimate: 31/3/2017
Date the estimate filed: 30/9/2017, (there is failure)
Due date for filing the return of income: 30/6/2018

Date the return filed: 30/9/2018 (there is failure as well)
Type of Failure and its penalty:

Failure to file statement of estimated income
Due date: 31/3/2017
End of failure: 30/9/2017
Duration: 6 months
Income tax payable on the income as per s. 4(1)(a) and (b)
= Tshs. 100 million x 30% =Tshs. 30 milion
Income tax paid at the start of the month = NIL
Penalty:
= (30 million-0) x 2.5% = 750,000 or 15 points currency ( 1 currency =Tshs 15,000) ,whichever is greater.
The greater (penalty) is Tshs. 750,000
Tshs 750,000 is imposed for each month of failure i.e 6 months

The penalty amount is 750,000 x 6 = Tshs 4,500,000
Failure to file the return of income:

Due date: 30/6/2018
End of failure: 30/9/2018
Duration: 3 months
Income tax payable Tshs. 40million.
Tax paid out of it at te start of month,- NIL
Penalty:
Tshs. (40 million – 30 million) x 2.5% =Tshs. 250,000
Compare with 15 currency points ( 1 currency =Tshs 15,000), take the greater.
The greater (penalty) isTshs. 250,000
Tshs 250,000 is imposed for each month of failure i.e 3 months
Penalty = Tshs. 250,000*3 =750,000

F1
SECTION F
SECTION
SECTION
Value Added Tax Act
F: VALUE
F: VALUE
ADDED
ADDED
TAX
TAX
STUDY
STUDY
GUIDE
GUIDE
F1: F1:
INTRODUCTION
INTRODUCTION
TO TO
VATVAT
(THEORY
(THEORY
ANDAND
PRACTICE)
PRACTICE)
Value Added
Value Tax
Added
(VAT)
Taxis(VAT)
one ofis the
onemost
of the
important
most important
sources sources
of government
of government
revenuerevenue
in Tanzania.
in Tanzania.
So, So,
proper understanding
proper understanding
and implementation
and implementation
of the VAT
of the
laws
VAT is laws
paramount.
is paramount.
In this Study
In this Guide,
Study the
Guide, the
meaning,
meaning,
nature, types
nature,
andtypes
methods
and methods
of computing
of computing
of VAT are
of VAT
introduced.
are introduced.
a) Explain
a) the
Explain
meaning,
the meaning,
nature and
nature
operationalization
and operationalization
of VAT of VAT
b) Illustrate
b) Illustrate
types of types
VAT(Consumption,
of VAT(Consumption,
Gross-product,
Gross-product,
and Income
and type
Income
VAT)type VAT)
c) Explain
c) methods
Explain methods
of VAT computation
of VAT computation
(addition,
(addition,
subtraction
subtraction
and credit
and
method)
credit method)
d) Explain
d) the
Explain
argument
the argument
for and against
for and VAT
against VAT
e) Describe
e) Describe
the Tanzanian
the Tanzanian
VAT System
VAT System
ExplainExplain
the meaning,
the meaning,
nature nature
of VAT of
andVAT andIllustrate
Illustrate
types types
of VAT of
(Consumption,
VAT (Consumption,
Gross-product,
Gross-product,
and Income
and Income
type VAT).
type VAT).
[Learning
[Learning
outcomeoutcome
a, and b]
a, and b]
1. The1.Meaning,
The Meaning,NatureNature And Operationalization
And Operationalization Of VATOf VAT
VAT is anVAT abbreviation
is an abbreviation
for Value-Added
for Value-Added
Tax. It isTax.
an indirect
It is an taxindirect
on the
taxconsumption
on the consumptionof goodsofand goods and
servicesservices
in the economy.
in the economy.
The natureTheofnature
ValueofAdded
ValueTax Added(VAT) Taxis(VAT)
such thatis such
it follows
that it supply
followschains
supply chains
of taxable
of goods
taxableandgoods
services.
and services.
This nature
Thismeans
nature each
means party
each in party
a supply
in achain
supply ofchain
taxableof goods
taxableorgoods or
servicesservices
pays VAT pays
on VAT
his/heron purchases;
his/her purchases;
and when and thewhen
personthe is person
a taxable
is a person,
taxable person,
collects collects
VAT on VAT on
his/her taxable
his/her sales.
taxableThese
sales.taxable
These sales
taxableinclude
sales sales
include and
sales
purchases
and purchases
of most of goodsmostandgoodsservices.
and services.
For instance,
For instance,
a supplyachain
supply of chain
mobileofphones
mobile might
phones include
might wholesaler
include wholesaler
importers, importers,
other wholesalers
other wholesalers
who buywho frombuythefrom
importers,
the importers,
retailers retailers
and finally,
and the
finally,
finalthe
users.
final At
users.
the stage
At theofstageimportation,
of importation,
the the
importersimporters
pay VATpay on VAT
imported
on imported
mobile phones;
mobile phones;
the VATthe is known
VAT is as known
inputas taxinput
as part
tax ofas customs
part of customs
taxes. But,
taxes.
uponBut,
selling
uponthe selling
mobilethephones
mobile to
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othertowholesaler’s importers
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charges charges
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as taxes.
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by the wholesaler
by the wholesaler
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other wholesalers.
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the otherthewholesalers
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taxes in liability
a particular
in a particular
month tomonth
a revenue
to a revenue
authority. authority.
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paidauthority
to the authority
is the difference
is the difference
betweenbetween
output tax output tax
348 Value Added Tax Act
and input tax in that month. Alternatively, the amount can be computed by applying the VAT rate
on the
and input difference
and
taxinput
in that between
taxmonth. the Alternatively,
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computed computed price
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before VAT.
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persons
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taxes collected and
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by the retailers.
Consequently,
Consequently,
VAT is VAT is
a tax on aconsumption
tax on consumption
as it is borne
as it is
byborne
the final
by theusers
final
of users
taxable of goods
taxableand goods
services.
and services.
2. Types of VAT (Consumption, Gross-product, and Income type VAT)
2. The 2.selection
Types VATofof
ofTypes an appropriate
(Consumption,
VAT type of Gross-product,
(Consumption, VAT is crucial
Gross-product, and Income inand
theIncome
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VAT)
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of an appropriate consumption,
type of VAT type of income,
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VAT is incrucial and gross
the formulation domestic
in the formulation product
of a viable of aVATtypes.
viablesystem.
VAT system.
(i)
There are Consumption
There
threeare
possible VAT
three possible
VAT options:
VAT options:
consumption,consumption,
income, income,
and gross and domestic
gross domestic
product product
types. types.
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(i) consumption
ConsumptionConsumptionVAT VAT VAT all supplies of goods and services including purchases of capital
goods are
Undertaxable
Under consumption and
VATtheir
consumption inputalltaxes
all VAT
supplies are deductible
supplies
of goods ofandgoods in the
services
and periodincluding
services
including ofpurchases
acquisition of .In
purchases this
capitalof capital
case,
goodsthe are firm
goods inare
taxable question
taxable is and
and their allowed
input
their toinput
taxes deduct
are the are
taxes gross
deductible value
in theofperiod
deductible its
in product not of
the ofperiod only
acquisition the
.Innon-
this .In this
acquisition
capital
case, the inputs
firm purchased
case, the
in question from
firm in question other
is allowed is firms butto
allowed
to deduct also
the
deductthe
grosscapital
the
value equipment
gross of value ofso
its product itspurchased
product
not only not i.e.
the thethe non-
only
non-
tax base is
capital inputs sales proceeds
capitalpurchased
inputs purchased minus
from other (capital
from firms goods
other
butfirms purchased
also but the also
capital + materials
theequipment purchased).
capital equipment
so purchasedso purchased
i.e. the i.e. the
(ii) Production
tax basetax VAT is
is sales
base (Gross
proceeds Product
sales proceeds VAT)
minus (capital
minus goods
(capitalpurchased
goods purchased
+ materials + materials
purchased). purchased).
(ii) Production
(ii)
Production VAT
Production recognizes
VAT (Gross VAT Product
(Gross onlyProduct
revenueVAT)
VAT) transactions and totally disallows input taxes
deduction
Production on capital
Production goods.
VAT recognizes
VAT recognizes
only revenueonly revenue
transactions transactions
and totally and disallows
totally disallows
input taxes input taxes
The tax deduction
deduction base under
on capital ongross
goods.
capitalproduct
goods.VAT for any firm is just sales minus materials (other than
capital
The taxgoods/fixed
The
basetax underbase assets).
gross This
grosskind
underproduct of for
product
VAT VAT VAT
anydiscourages
firm
for any
is just
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sales
is just minus because
sales minus the
materials VAT than
materials
(other paid
(other than
on purchase
capital goods/fixedof fixed
capital goods/fixed assets is not
assets). assets). refunded.
This kindThis of VAT
kind discourages
of VAT discourages investment investment
becausebecause
the VATthe paidVAT paid
on purchaseon purchase
of fixed assets
of fixedisassets
not refunded.
is not refunded.
(iii) Income VAT
(iii) In
(iii)the income
Income VAT approach,
Income VAT all goods and services supplied are taxable but inputs paid on the
purchases
In the income of capital goods
In the approach, allisgoods
income approach, spread
allandover
goods the
services
andspan of thesupplied
services
supplied products or assets
are taxable
are but
taxable as
inputs deprecation.
butpaid
inputs
on paid
the on the
Hence,
purchases the tax
purchases base is
of capitalofgoods sales proceeds
capitalisgoods
spreadis over less
spread material
theover
spanthe purchased
of span
the products + depreciation
of the products
or assetsoras of
assets capital
deprecation.
as deprecation.
equipment.
Hence, Hence,
the tax thebasetaxis base
sales isproceeds
sales proceeds
less material
less material
purchasedpurchased
+ depreciation
+ depreciation
of capital
of capital
equipment.
equipment.
Explain the meaning, nature and operationalization of VAT and
ExplainExplain
the
Illustrate meaning,
the
types of meaning,
VATnaturenature
of VATofand
VAT and
Illustrate
Illustrate
types types
of VATof VAT
[Learning
[Learning
outcomeoutcome
c, d, and
c, e]
d, and e]
3. Methods of VAT computation

In the
3.design
3. Methods ofofVAT
Methods VAT,of there
VATare
computation three options for VAT computation:
computation
Addition
(i) In method
the design
In theofdesign
VAT, ofthere
VAT,arethere
threeare
options
three for
options
VAT for
computation:
VAT computation:
(i) This method
Addition
(i) takesmethod
Addition
method the total of rewards to factor of production and applies tax rates on that figure. The
rewards might
This method
This include
method
takes wages,
thetakes
total the interest,
of rewards rents,
total of rewards
to and
factorto profits
offactor
production
of production
and applies
and tax
applies
ratestax
onrates
that figure.
on thatThe
figure. The
rewards rewards
might include
might wages,
include interest,
wages, interest,
rents, and
rents,
profits
and profits
(ii) Subtraction method
(ii) Under(ii) this
Subtraction method
Subtraction
method the tax base is found by deducting purchases from sales. Under this method the
method
tax base
Under this for
Under a VAT
method is calculated
this method
the tax base as
the tax Grossisby
is found
base receipts
found less
deducting
by purchases
deducting
purchases of goods
purchases
from (less
sales.
from capital
Under
sales. goods
this
Under
methodif VAT
this method
the the
is consumption
tax basetax forbaseVAT)
a VATforisacalculated
VAT is calculated
as Grossasreceipts
Gross receipts
less purchases
less purchases
of goodsof(less
goods
capital
(lessgoods
capitalif goods
VAT if VAT
is consumption
is consumption
VAT) VAT)
(iii) Credit method/The Invoice Method
(iii) The
Creditcredit
(iii) method
method/The
Credit requires
Invoicethe
method/The deduction
Invoice
Method of input tax from output tax in every VAT accounting period.
Method
This is the
The credit The method
method Tanzania
credit method
requires theuse
requiresforthe
itsdeduction
deduction VAT. Therefore,
of input tax
of input under
fromtax fromthe
output tax tax
outputcredit
in every
tax in method,
VAT
every a taxpayer
accounting
VAT is period.
accounting
period.
This is the
Thismethod
is the method
TanzaniaTanzania
use for its
useVAT.
for itsTherefore,
VAT. Therefore,
under the
under
tax credit
the taxmethod,
credit method,
a taxpayer
a taxpayer
is is
allowed to deduct all deductible taxes paid (and payable) from all taxes collected (and collectible) in
the respective reporting period.
4. Argument For And Against VAT

Value Added Tax is a type of tax which is valued in each stage of production, exchange and
distribution.
The advantages of Value Added Tax (VAT) include:
(i) It is a broad –based tax. VAT covers many goods and services.
(ii) VAT promotes efficiency in production
(iii) VAT has a neutral distributive effects
the respective reporting period.
4. Argument For And Against VAT

Value Added Tax is a type of tax which is valued in each Introduction to VAT (Theory
stage of production, and Practice):
exchange and 349
distribution.
The advantages of Value Added Tax (VAT) include:
(i) It is a broad –based tax. VAT covers many goods and services.
. (ii) VAT promotes efficiency in production
(iv) VAT is simple in administration e.g only two tax rates (0% and 18%)
(v) VAT minimizes tax evasion, as selling prices are inclusive of VAT. Therefore, the customer
has no option to evade VAT.
.
The disadvantages of value Added Tax (VAT) include:
(i) Generally, the VAT is regressive in nature. The rich and the poor have to pay the same
rate of VAT on commodities. This may further increase income disparities among the rich
and the poor.
(ii) VAT increases costs of goods and services for final consumers. This increase in price
might results in inflation
(iii) There is need for appropriate record keeping and frequent cross-checking. This tends to
impose burden to small firms. e.g monthly filling requirement, the apportionment of input
tax.
(iv) It is or consumption tax, therefore it may affect the Level of consumption in a country.
5. The Tanzanian VAT System

Tanzania VAT system is a consumption type, taxing all taxable transactions whether involving capital
or revenue expenditures. It follows the same nature of the VAT system described above.
Consumption tax system encourages investment as input taxes incurred on purchase of capital
goods are deductible in computation of value added tax liabilities.
Meanwhile, the consumption encourages saving and penalizes consumption, particularly
consumption of taxable goods and services. On the other hand, Tanzania uses credit method of
VAT computation. Under the tax credit method, a taxpayer is allowed to deduct all deductible taxes
paid (and payable) from all taxes collected (and collectible) in the respective reporting period.
Another important part of Tanzania VAT system is tax rates. According to the system, taxable goods
can be taxed either at standard rate i.e. 18% or zero rate i.e. 0.
Probably, the two VAT rates are easier to implement. Moreover, Tanzanian VAT system requires
taxpayers to self-assess their tax liabilities each month and simultaneously file VAT returns
and pay any owned VAT liabilities. Finally, the system also does not tax every transaction as only
taxable supply of goods and services in Tanzania Mainland are taxable. Other goods are either
exempted from VAT or outside the scope of VAT.
Question 1
List three types of VAT systems. Which system has been adopted in Tanzania and why?
Question 2
Briefly explain the methods of computing VAT which is being used by Tanzania VAT and explain the
advantages of the said method.
Question 3
Give four reasons as to why the Value Added Tax (VAT) has become a prominent feature in tax
systems of many LDCs.
Question 4
Discuss the reasons as to why the Value Added Tax (VAT) has become prominent feature in tax
systems of many Less Developed Countries (LCD’s).
Question 5
After more than twenty years’ experience in Value Added Tax administration in Tanzania, there is a
danger that many commercial enterprises now are familiar with the regular administrative
requirements of VAT will believe the hype that VAT is a simple tax. It is not!
Required:
systems of many LDCs.
Question 4
Discuss
350 Value Added Taxthe
Act reasons as to why the Value Added Tax (VAT) has become prominent feature in tax
systems of many Less Developed Countries (LCD’s).
Question 5
After more than twenty years’ experience in Value Added Tax administration in Tanzania, there is a
danger that many commercial enterprises now are familiar with the regular administrative
requirements of VAT will believe the hype that VAT is a simple tax. It is not!
Required:
Comment on the truth or otherwise of this statement.
Question 6
The Value Added Tax (VAT) is a mainstay of fiscal systems in over 130 countries around the world.
A variety of structures is used to tax the value of goods and services consumed by taxpayers in these
countries.
Required:
(a) Discuss methods used in computation of the Value Added Tax and assess their practical
applicability.
(b) Discuss reasons why the tax credit method is mostly preferred by many countries.
Answer to SEQ 1
(a) VAT systems are:-
(i) Consumption VAT
(ii) Production VAT (Gross Product VAT)
(iii) Income VAT
(b) Tanzania VAT system is a consumption type, taxing all taxable transactions whether involving
capital or revenue expenditures.
Answer to SEQ 2
(a) Thereto
Answer areSEQ
three
2 options for VAT computation:
(i) Addition method
(a) There are three options for VAT computation:
This method
(i) Addition takes the total of rewards to factor of production and applies tax rates on that figure. The
method
rewards might include
This method takes the wages, interest, to
total of rewards rents, and
factor of profits
production and applies tax rates on that figure. The
rewards might include wages, interest, rents, and profits
(ii) Subtraction method
Under this method
(ii) Subtraction methodthe tax base is found by deducting purchases from sales. Under this method the
tax base for a VAT is
Under this method thecalculated
tax base as Gross by
is found receipts less purchases
deducting purchases of goods
from (less
sales. capital
Under thisgoods if VAT
method the
is consumption VAT)
tax base for a VAT is calculated as Gross receipts less purchases of goods (less capital goods if VAT
is consumption VAT)
(iii) Credit method/The Invoice Method
Under method/The
(iii) Credit the tax creditInvoice
method, a taxpayer is allowed to deduct all deductable taxes paid (and payable)
Method
Under the tax credit method, a taxpayerinisthe
from all taxes collected (and collectible) respective
allowed reporting
to deduct period. taxes paid (and payable)
all deductable
from all taxes collected (and collectible) in the respective reporting period.
(b) Tanzania uses credit method of VAT computation.
Advantages
(b) Tanzania of this
uses method
credit method of VAT computation.
·Advantages
It works well with the consumption-type VAT.
of this method
·· It It attach
works well with thetoconsumption-type
tax liability each transaction ,VAT.
providing good audit trial
·· It It attach
allows tax
application of each
liability to multiple rates. , providing good audit trial
transaction
· It allows application of multiple rates.
Answer to SEQ 3
VAT is common
Answer to SEQ 3feature of most LDCs tax systems as it offers the following advantages.
(i) common
VAT is broad –based
It is afeature of mosttax.LDCsVAT covers
tax many
systems asgoods andthe
it offers services.
following advantages.
(ii)
(i) VAT promotes efficiency in production
It is a broad –based tax. VAT covers many goods and services.
(iii)
(ii) VAT
VAT has a neutral
promotes distributive
efficiency effects
in production
(iv)
(iii) VAT
VAT is simple
has in administration
a neutral e.g only two tax rates (0% and 18%)
distributive effects
(v)
(iv) VAT is simple in administration e.g onlyprices
VAT minimizes tax evasion, as selling arerates
two tax inclusive of VAT.
(0% and 18%)Therefore, the customer
(v) has no option to evade VAT.
VAT minimizes tax evasion, as selling prices are inclusive of VAT. Therefore, the customer
Answer to SEQ 4
(iv) VAT is simple in administration e.g only two tax rates (0% and 18%)
(v) VAT minimizes tax evasion, as selling prices are inclusive of VAT. Therefore, the customer
Introduction to VAT (Theory and Practice): 351
Answer to SEQ 4
Value Added Tax (VAT) has become prominent feature in the tax systems of many Less Developed
Countries (LDC’s), due to the following reasons: -
(i) Broad Tax Base

VAT ensures broader tax base and therefore high tax revenue at a relatively low tax rate
compared to a single stage sales tax which would collect the same amount of tax revenue at a
higher tax rate. This is made possible by the fact that VAT covers all VAT eligible taxpayers at
all economic stages from manufacturing to the retail level and almost all goods and services.
High tax revenue is also ensured by the fact that under VAT, taxpayers have incentive to keep
proper records so as to facilitate future claims for refund, something which increase compliance.
(ii) Economic Neutrality

The VAT system is economically neutral i.e. it can raise the desired revenue for the Government
without affecting economic decisions of producers and consumers. The choice of what
economical resources to use in any economic activity or the decision on what item to buy or
consume is determined by the productivity or utility or the product and no the tax effectiveness of
that product. It does not matter therefore whether a product is produced by a labour intensive or
capital intensive technology because the effective rate or tax is the same in whatever option.
VAT does not tax investment and savings. VAT is payable on personal income only when the
money spent on consumption rather than when it is earned as is the case with income tax.
Under VAT system input tax paid on investment goods can be easily identified and fully credited.
(iii) Administrative Advantages

Budgetary effects VAT are efficient tax to administer, because it is simple and easy to
understand since its value is based on the actual selling price; its rate is uniform; and exclusion
of goods and services from the tax are limited to those essential for social or administrative
reasons. It is easy to comply with and it does not affect much the free functioning of business
and trade. This is because the tax is attuned closely to actual business transactions and
accounting methods in application in the country, and is chargeable by the taxable businesses
regardless whether the purchaser is a firm, a consumer, or a government entity.
(iv) Enforceability
VAT is easy to enforce by the use of invoice method of accounting for the tax i.e. self policing
and the structure of VAT, which unlike other indirect consumption and turnover taxes such as
sales tax, it does not provide for ample scope for evasion and corruption. Avoidance and
evasion of tax, for example can easily be detected by cross checks of VAT invoices received by
the purchasers against those retained by the sellers. VAT collection costs are low since the tax
administered fully on a self-assessment basis and it normally exempts the typically hard to tax
small businesses.
(v) Export Promotion

The VAT system encourages exports through prices identification and rebate of the VAT element
in the export prices. It is almost impossible to determine the correct amount of tax element in the
export prices because of the existing complicated rebate systems. One of the frequently voiced
arguments of replacing other forms of indirect taxes with the tax credit type of VAT is that exports
can easily be freed of tax under the later but not under the former. This may be done under VAT
merely by zero rating all exports.
Answer to SEQ 5
(a) The statement that VAT is a simple tax is true in the following three main aspects:
(i) The registration requirement is simple i.e. any trader or businessman with a gross
sales/turnover of TZS 100 million or above per annum is required to register.
(ii) One tax rate is applicable (standard rate of 18%) instead of numerous rates as in the
repealed sales tax system/regime.
(iii) The determination of the tax payable or refund is simple. The input tax on purchases is
deducted from the output tax on gross sales to determine the VAT payable.
(iv) There are no complicated capital deduction calculations, deductions etc.
On the other hand, the tax is complex (not simple) in the following aspects.
(i) Monthly filing requirements. In contrast to Income Taxation where filing is twice only in a
year by way of provisional return and final return (excluding amendments), VAT filing is
monthly.
(ii) Although only one standard rate is applicable exempted and zero rated supplies require
distinction or consideration which is a source of complexity.
sales/turnover of TZS 100 million or above per annum is required to register.
(ii) One tax rate is applicable (standard rate of 18%) instead of numerous rates as in the
repealed sales tax system/regime.
(iii) The determination of the tax payable or refund is simple. The input tax on purchases is
deducted from the output tax on gross sales to determine the VAT payable.
(iv) There are no complicated capital deduction calculations, deductions etc.
On the other hand, the tax is complex (not simple) in the following aspects.
(i) Monthly filing requirements. In contrast to Income Taxation where filing is twice only in a
year by way of provisional return and final return (excluding amendments), VAT filing is
monthly.
(ii) Although only one standard rate is applicable exempted and zero rated supplies require
distinction or consideration which is a source of complexity.
(iii) The apportionments of input VAT another source of complication.
(iv) The determination of the value of imports for VAT purposes is not so straightforward.
Therefore, it is true that VAT is simple in some aspects but it is quite complex in several other
administrative considerations.
Answer to SEQ 6
(d) VAT is computed by adopting three alternative methods. These are:
1. The addition method.
2. The subtraction method
3. The tax credit/or invoice method
(i) In addition method, value added could be determined by summation of all elements of
value added i.e. wages, profits, rent, and interest.
(ii) The subtraction method estimates value-added by taking the difference between the
value of output and input.
(iii) Under the credit method, the tax on input is deducted from the tax on sales to arrive at
the VAT payable by the dealer.
(e) (i) Makes crosschecking of tax paid at earlier stage more amenable as dealers are
required to state the amount of tax in invoices.
(ii) Tax burden being dependent upon tax rate at the final stage dealers at intermediate
stages do not have any incentive to seek treatment in tax rate.
(iii) Under invoice method, exports can easily be relieved of domestic indirect taxes through
zero-rating exports.
F2
SECTION F
Value Added Tax Act
STUDY GUIDE F2: IMPOSITION AND

LIABILITY TO VAT
This Study Guide describes persons liable to pay VAT, types of supplies, place and time of supply.
Also it explains the procedures for calculating net amount of VAT. Knowledge of computing VAT
liabilities and supplies liable for VAT is important in ensuring smooth compliance of the tax law.
a) Explain persons liable to pay Value Added Tax (Taxable persons)

b) Explain classification/ type of supplies (Taxable, zero-rated and exempt supplies)
c) Distinguish between composite and multiple supplies
d) Explain place of supply/Taxation for goods and services.
e) Describe when Value Added Tax becomes payable (Time of supply)
f) Explain the concept of consideration and value for supply
g) Describe the procedures for calculation and payment of net amount (VAT payable or refundable)
Explain persons liable to pay Value Added Tax (Taxable persons); explain
classification/ type of supplies (Taxable, zero-rated and exempt supplies); and
distinguish between composite and multiple supplies.
[Learning outcome a, b, and c]
1. Persons Liable To Pay Value Added Tax (Taxable Persons)
Imposition
Value added tax is imposed and payable on taxable supplies and taxable imports. (Section 3)
Person liable to pay VAT

Section 4 of the Act provides that, the following persons are liable to pay Value Added Tax-
(a) in the case of a taxable import, the importer;
(b) in the case of a taxable supply that is made in Mainland Tanzania, the supplier; and
(c) in the case of a taxable supply of imported services, the purchaser.
2. Type Of Supplies
Supplies are grouped into taxable, exempt, and supplies outside the scope of value added taxes.
The proper application of value added tax system largely depends on classification of supplies
because taxing exempt supplies may impose value added taxes when it should not. Also
computations of input taxes deductible depends significantly on these classifications .
Moreover, determination of when a trader is required either to apply for registration or deregistration
depends on reaching a threshold of taxable supplies. The exemption and zero schedules may help in
understanding these classifications.
Generally, a ‘supply’ can be defined as something, goods or services available for another person
either for consideration or otherwise.
The term ‘’supply’’ has been defined under section 2 of the VAT Act, 2014 as any kind of supply
whatsoever.
Types of supply
For VAT purposes, there are 3 types of supply. These are:
(i) Taxable supplies
 Standard rate - 18%
 Zero rate - First Schedule
(ii) Exempt supplies
(iii) Outside the scope
Taxable supplies
Section 2 of the VAT Act, 2014, define “taxable supply” as
b. a supply, other than an exempt supply, that is made in Mainland Tanzania by a taxable
person in the course or furtherance of an economic activity carried out by that person; or
c. a supply of imported services to a taxable person who is the purchaser and acquires the
services in the course of an economic activity if had the supply been made in Mainland
Tanzania by a taxable person in the course of furtherance of an economic activity-
(i) it would have been taxable at a rate other than zero; and
(ii) the purchaser would not have been entitled to a credit for ninety percent or more of
the value added tax that would have been imposed on the supply;
Taxable supply could be at:-

i. Standard-rated Supply
Technically, they include all supplies which are not zero rated supplies, exempted
supplies, nor those outside the VAT system. The list of standard rated supplies is huge but
not listed in the VAT Act 2014.
ii. Zero-rated Supply

Zero rated supplies are the second type of taxable supplies which differ from the standard
rated supplies on tax rates; the standard rated supplies are taxable at 18% while the zero
rated supplies are taxed at 0%. Consequently, zero rated supplies bear no value added
taxes. The zero rated supplies are specified from section 54 to 63 of the Act as follows
1. A supply of immovable property, if the land to which the property relates is outside the
United Republic.-section 54
2. A supply of goods exported outside URT including goods supplied to a tourist or visitor by
a licensed duty-free vendor-section 55
3. A supply of goods by way of lease, hire, license, or similar supply, to the extent that the
goods are used outside the United Republic. However, if the goods are a means of
transport and the total period of the lease, hire, license, or similar supply is equal to or
less than thirty days, are not zero rated –section 56
4. A supply of goods made in the course of repairing, maintaining, cleaning, renovating,
modifying, treating, or otherwise physically affecting temporary imported goods.(i.e goods
imported for re-export)-section 57
5. A supply of goods or services ,relates to the repair or replacement of goods under
warranty, by warrantor, who is a non-resident and is not a registered person- section 58
VAT Registration and Deregistration and Liability and VAT: 355
6. Goods for use in international transport, (section 59) e.g

 Goods for use in repairing, maintaining, cleaning, renovating, modifying, treating, or
otherwise physically affecting an aircraft or ship engaged in international transport.
 Goods for use in the aircraft or ship, fuel, and spare parts, and other articles or equipment,
whether or not for immediate fitting.
7. A supply of services directly related to land outside the United Republic including a supply
of services physically performed on goods situated outside the United Republic at the time
the services are performed.-section 60
8. A supply of services made in the course of repairing, maintaining, cleaning, renovating,
modifying, treating, or otherwise physically affecting temporary imported goods.(i.e goods
imported for re-export)-section 61
9. A supply of services consisting of filing, prosecuting, granting, maintaining, transferring,
assigning, licensing, or enforcing intellectual property rights for use outside the United
Republic.-section 62
10. A supply of telecommunication services by a telecommunications service provider to a
non-resident telecommunications service provider. –section 63
Exempt supplies
Section 2 of the VAT Act,2014 define an exempt supply as supply or import that is specified as
exempt under the Act or a supply of a right or option to receive a supply that will be exempt;
The consequence of exemption is that:
 VAT is not charged on exempt supplies
 VAT incurred on purchases used in the making of exempt supplies cannot be reclaimed
 Accordingly if a business only has exempt supplies, it cannot register for VAT and cannot reclaim
VAT incurred on inputs.
 If a business has both taxable supplies and exempt supplies, then special rules apply in respect
of the input tax which may be deducted.
List of exempt supplies under the VAT, 2014 schedule

Supplies and imports exempt from value added tax
1. Agricultural implements
1 Tractors for agricultural use 8701.90.00
Agricultural, horticultural or forestry machinery for

soil preparation or cultivation except lawn mower
2 or sports ground rollers and parts. 84.32
Harvesting or threshing machinery except

machines under Hs code 8433.11.00, 8433.19.00,
3 8433.90.00 84.33
4 Liquid sprayers for agriculture 8424.81.00
5 Powder sprayers for agriculture 8424.81.00
6 Spades 8201.10.00
7 Shovels 8201.10.00
8 Mattocks 8201.30.00
9 Picks 8201.30.00
10 Hoes, 8201.30.00
11 Forks 8201.90.00
12 Rakes 8201.30.00
13 Axes 8201.40.00
14 Tractor trailers 8716.10.10
New Pneumatic Tyres of a kind used in agriculture

15 and forest vehicles 4011.61.00
16 Rotavator
17 Poultry incubator 8436.21.00
18 Irrigation equipment 8424.81.00
Irrigation parts (sprinkler system, chemical

injection system, water disinfection system, rain
guns ,high pressure fogging equipments, irrigation
19 computer ,filter for irrigation system 8424.90.00
20 Green house system 9406.00.10
21 Semen for bovine animal 0511.10.00
22 Semen for bovine animal 0511.99.10
23 Dam liner 3920
2. Agricultural inputs
No. Item HS code
1 Fertilizers Chapter 31
2 Pesticides 3808.99.10 or 3808.99.90
3 Insecticides 3808.91.11 to 3808.91.99
4 Fungicides 3808.92.10 or 3808.99.90
5 Rodenticides 3808.92.10 or 3808.99.90
6 Herbicides 3808.93.10 to 3808.92.90
7 Ant sprouting products 3808.93.10 or 3808.93.90
8 Plant growth regulators 3808.93.10 or 3808.93.90
3. Livestock, basic agricultural products and foods for human consumption
1 Live cattle 0102.21.00

2 Live swine 0103.10.00
3 Live sheep 0104.10.10
4 Live goats 0104.20.10
5 Live poultry 0105.11.10
6 Unprocessed edible animal products Chapter 2

7 Unprocessed edible eggs 0407.29.00
Unpasteurized or pasteurized cow milk except with
8 additives and long life milk 4.01
Unpasteurized or pasteurized goat milk except with
9 additives and long life milk 4.01
10 Unprocessed fish 3.02
11 Unprocessed edible vegitable Chapter 7
12 Unprocessed fruits 8.1
13 Unprocessed nuts 8.02
14 Unprocessed bulbs 0601.10.00
15 Unprocessed tubers 0601.20.00
16 Unprocessed cereals Chapter 10
17 Wheat or meslin flour 11.01
18 Maize flour 11.02
19 Unprocessed tobacco 2401
20 Unprocessed cashew nuts 0801.31.00
21 Unprocessed coffee 0901.11.00
22 Unprocessed tea 0902.10.00,
23 Soya beans 12.01
24 Ground nuts 12.02
25 Sunflower seeds 12.06
26 Oil seeds 12.07
27 Unprocessed pyrethrum 1211.90.20
28 Unprocessed cotton 1207.21.00
29 Unprocessed sisal 5303.10.00
30 Unprocessed sugarcane 1212.93.00
31 Seeds and plants thereof 12.09
4. Fisheries Implements
1 Floats for fishing nets 7020.00.10
2 Fishing nets 5608.11.00
Fishing vessels, factory ships and other vessels for
3 processing or preserving fishery products 8902.00.00
4 Nylon fishing twine
5 Outboard engine 8407.21.00
5. Bee-keeping implements
Any
1 Bee hive Description
2 Protective bee keeping jacket veil 6113.40.00
3 Mask 6307.9
4 Honey strainer
5 Bee hive smoker 8424.89
6. Diary equipment
1 Hay making machine 8433.30.00
2 Cans and ends for beverages 7310.29.20
3 Milking machines 8434.10.00
4 Homogenizer, Butter churn, milk 8434.20.00
pasteurizer
5 Cream separator 8421.11.00
6 Milk plate heat exchanger 8419.50.00
3917.31.00,4009.12.00,4009.32.0
7 Milk hose 0
8413.60.00,8413.70.00,8413.81.0
8 Milk pump 0
8419.89.00,7309.00.00,7310.00.0
9 Heat insulated cooling tanks 0
1
0 Milk storage tanks
7. Medicine or pharmaceuticals products, including food supplements or vitamins supplied to

the Government entities.
8. Articles designed for people with special needs
Orthopaedic appliances, including crutches, surgical

belts and trusses, splints and other fracture
appliances, artificial parts of the body, hearing aids
and other appliances which are worn or carried, or
implanted in the body, to compensate for a defect or
disability excluding other items under
1 HSC9021.90.00 90.21
2 White cane for blinds or visually impaired
3 Spectacle for correcting vision 9004.90.10
4 Contact lenses 9001.30.00
5 Spectacle lenses of glass 9001.40.00
6 Spectacle lenses of other materials 9001.50.00
7 Sunscreen and sun tan preparation used by albino 33.04
8 Braille 8469.00.007
Mechanically propelled tricycle for carriage of
9 disabled persons 8713.1.00
9. Education materials
1 Dictionary and encyclopedia 4901.91.00
2 Printed books 4901.10.00
3 Newspapers 4902.90.00
4 Children pictures drawing or colouring 4903.00.00
5 Maps and hydrographic charts 4905.99.00
6 Examination question papers 4911.99.20
7 Instructional charts and diagrams 4911.90.10
Examination answer sheet 4911.99.90
8
10. Health care

1 A supply of medical, dental, nursing, convalescent, rehabilitation, midwifery,
paramedical, optical, or other similar services where the services are provided:
(a) by or in an institution approved for the provision of those services by the
Government; and
(b) by, or under the supervision and control of, a person who is registered as
being qualified to perform that service under Tanzania laws, or whose
qualifications to perform the services are recognised in Tanzania.
2 A supply of services in a nursing home or residential care facility for children, or

for aged, indigent, infirm, or disabled persons who need permanent care, if the
facility is approved for the provision of those services by an appropriate
Government
11. Immovable property Institution.
1 A sale of vacant land.
A lease, license, hire or other form of supply, to the extent that it is a supply of the
2 right to occupy and reside in residential premises.
A sale of immovable property, to the extent that the property relates to residential
premises, not including:
(a) the first sale of newly constructed residential premises; or
(b) a subsequent sale if the premises have been occupied as a residence for less
3 than two (2) years.
12. Educational services

1 A supply of services consisting of tuition or instruction for students provided by an
institution approved by the Minister responsible for education, being:
(a) a pre-primary, primary, or secondary school;
(b) a technical college, community college, or university;
(c) an educational institution established for the promotion of adult education,
vocational training, improved literacy, or technical education;
(d) an institution established for the education or training of physically or mentally
handicapped persons; or
(e) an institution established for the training of sportspersons.
13. Intermediary Services
1 Supply of financial services supplied free of charge.
2 Insurance premiums for aircraft.
3 Life insurance or health insurance.

4 Insurance for Workers Compensation.
14. Government entity or institution

A non commercial activity carried on by a Government entity or institution, except to the extent that the
activity involves making supplies of goods, services or immovable property that are also supplied are to
be supplied in Mainland Tanzania by at least the person who is a non government entity
15. Petroleum products

1 Aviation spirit 2710.12.30,
2 Spirit type jet fuel 2710.12.40
3 Kerosene type jet fuel (Jet A-1) 2710.19. 21
4 Petrol (MSP and MSR) 2710.12.20
5 Diesel (GO), 2710.19.31
6 Kerosene (IK) 2710.1922.
27.14
2713.20.00
and
7 Bitumen 2715.00.00
8 Liquefied petroleum and Natural gases 2711
9 Compressed Petroleum and Natural gases 2711
Compressed or liquefied gas cylinders for petroleum and Natural

10 gases for cooking 7311.00.00
16. Supply of water, except bottled or canned water or similarly presented water.
17. The transportation of person by any means of conveyance other than taxi cabs, rental cars or boat
charters.
18. Supplies of arms and ammunitions, parts and accessories thereof, to the armed forces.
19. Funeral services, for the purpose of this item funeral services includes:-coffin, shroud, transportation,
mortuary and disposal services of human remains
20. Gaming supply.
21. Supply of solar panels, modules, solar charger controllers, solar inverter, solar lights, vacuum tube
solar collectors and solar battery.
22. Supply of air charter services.
IMPORTS EXEMPT FROM VALUE ADDED TAX

Item
No. Description
1 An import of baggage or personal effects exempt from customs duty under
the Fifth Schedule of the East African Customs Management Act, 2004.
2 An import of goods given, otherwise than for the purposes of sale, as an

unconditional gift to the State.
3 An import of goods (including containers), if the goods have been exported
and then returned to Mainland Tanzania by any person without being
subjected to any process of manufacture or adaptation and without a
permanent change of ownership, but not if at the time when the goods were
exported, they were the subject of a supply that was zero-rated under
this Act or under repealed Value Added Tax Act, Cap. 148.
4 An import of goods shipped or conveyed to United Republic for
transshipment or conveyance to any other country.
5 An import of goods made available free of charge by a foreign government

or an international institution with a view to assisting the economic
development United Republic.
6 An import of food, clothing and shoes donated to non-profit organization for

free distribution to orphanage or schools for children with special needs in
Mainland Tanzania.
7 Import of goods by non-profit organization for the provision of emergency
and disaster relief, and where such goods are capital goods, the goods
shall be handled to the National Disaster Committee upon overtion,
completion or diminishing of the disaster.
8 An import of goods by the religious organization for the provision of health,

education, water, religious services in circumstances that, if services are
supplied-without fee, charge or any other consideration in a form of fees; or
on payment of any consideration, the fees or charges does not exceed
fifty percent of the fair market value.
9 An import of goods that is exempt under an agreement entered into

between the Government of the United Republic and another government
or an international agency.
1010 AnAn import

importof of
goods
goods byby a registered
a registeredand and
licensed
licensed explorer
explorer or or
prospector
prospectorforfor
thetheexclusive
exclusiveuseuse
in in
oil,oil,
gas gas
or or
mineral
mineralexploration
exploration or or
prospection
prospectionactivities
activities
to to
thetheextent
extentthat
that
those
those goods
goods areare
eligible
eligibleforfor
relief
relief
fromfrom
customs
customsduties
duties
under
underthetheEastEastAfrican
AfricanCustoms
CustomsManagement
Management Act,
Act,
2014.
2014.
1111 AnAn import

import
of of
aircraft,
aircraft,
aircraft
aircraft
engine
engine
or or
parts
parts
byby
a a
local
local
operator
operator
of of
airair
transportation.
transportation.
1212 AnAn import
import
of of
railway
railway
locomotive,
locomotive, wagons,
wagons,tramways
tramwaysand
and
their
their
parts
parts
1313 AnAn
import
import
of of
firefire
fighting
fighting
vehicles
vehicles
byby
thethe
Government.
Government.
1414 AnAnimport
import
of of
laboratory
laboratory
equipment
equipmentandandreagents
reagents
bybyeducation
education
institution
institution
registered
registered
byby
thetheMinistry
Ministry
Responsible
Responsibleforfor
education
education
to to
bebe
used
usedsolely
solely
forfor
educational
educational purpose.
purpose.
1515 AnAnimport
importof of
CNG CNG plants
plants
equipment
equipment natural
natural
gas
gaspipes,
pipes, transportation
transportation and and
distribution
distributionpipes,
pipes,CNG CNGstorage
storagecascades,
cascades,CNG CNGspecial
specialtransportation
transportation
vehicles,
vehicles,natural
naturalgasgasmetering
meteringequipment,
equipment,CNGCNGrefueling
refuelingof offilling,
filling,gasgas
receiving
receivingunits,
units,
flare
flare
gasgassystem,
system,condensate
condensate tanks
tanks and andleading
leading facility,
facility,
1616 Motor
Motorvehicle
vehiclespecifically
specifically
designed
designedforfor
useuse
byby
persons
persons withwith
disability
disability
system
systempiping
pipingand andpipe
piperack,
rack,condensate
condensatestabilizer
stabilizerbybya anaturalnaturalgas gas
distributor.
distributor.
1717 AnAnimport
importof ofmachinery
machineryof ofHSHSCodes Codes8479.20.00,
8479.20.00, 8438.60.00,
8438.60.00,
8421.29.00,
8421.29.00,
8419.89.00
8419.89.00 byby a local
a local manufacturer
manufacturer of of vegetable
vegetable oilsoils
forfor exclusive
exclusive useusein in
manufacturing
manufacturing vegetable
vegetable oil oil
in in Mainland
Mainland Tanzania.
Tanzania.
1818 AnAn import
import of of machinery
machinery of of HSHS Code
Code 8444.00.00,
8444.00.00,8445.11.00,
8445.11.00,
8445.12.00,
8445.12.00,
8445.13.00,
8445.13.00, 8445.19.00,
8445.19.00, 8445.20.00,
8445.20.00,8445.30.00,
8445.30.00,
8445.40.00,
8445.40.00, 8445.90.00,
8445.90.00,
8446.10.00, 8446.21.00,
8446.10.00, 8446.21.00, 8446.29.00,
8446.29.00, 8446.30.00,
8446.30.00,
84.47,8448.11.00,
84.47,8448.11.00,
8448.19.00,
8448.19.00, 8449.00.00,
8449.00.00, 8451.40.00or or8451.50.00
8451.40.00 8451.50.00bybya alocal local
1919 manufacturer
manufacturer
AnAnimport of of
textiles
textiles
importof ofmachinery forfor
exclusive
exclusive
machineryof ofChapter useuse
in in
manufacturing
manufacturing
Chapter8484bybya alocal of of
textiles
textiles
localmanufacturer
manufacturerof in of
in
Mainland
MainlandTanzania.
Tanzania.
pharmaceutical
pharmaceutical forforexclusive
exclusiveuse usein inmanufacturing
manufacturingpharmaceutical
pharmaceutical
products
products in in Mainland
Mainland Tanzania.
Tanzania.
2020 AnAn import

import of of machinery
machinery of of HSHS Code
Code 8453.10.00
8453.10.00bybya alocal
local
manufacturer
manufacturer
of of
hide
hide
and
and
skins
skins
forfor
exclusive
exclusive
use
use
in in
manufacturing
manufacturing
leather
leatherin in
Mainland
Mainland Tanzania.
Tanzania.
2121 Import
Import of of ambulance
ambulance of of HSHS Code Code8703.90.10
8703.90.10 bybya registered
a registered
health
health
facility
facility
other
other
than
than
a pharmacy,
a pharmacy,
health
health
laboratory
laboratory
or or
diagnostic
diagnostic
centre.
centre.
2222 AnAn
import
import
of of
firefire
fighting
fighting
vehicles
vehicles
byby
thethe
Government.
Government.
Supplies
Suppliesoutside
outsidethethescope
scope of of
VAT VAT
AA supply is is
supply outout
of of
VATVATsystem
system if itif results from
it results fromanan activity which
activity which is is
notnot
anan
economic
economic activity. ForFor
activity.
instance, salaries,
instance, other
salaries, government
other government taxes, appropriation
taxes, appropriation of of
cash from
cash frombusinesses
businessesandandother supplies
other supplies
made
madebyby
non-VAT
non-VAT registered traders.
registered traders. There is no
There listlist
is no of of
supplies
supplieswhich
whichareare
outside thethe
outside scope of of
scope VAT.
VAT.
The following are examples of goods or services that are outside the scope of VAT. No VAT shall be
charged or paid with respect of its supply:
i] Goods supplied by a trader not registered for VAT and is not required to do so.
ii] Goods or services bought or sold outside the United Republic of Tanzania
iii] Goods or services supplied in the course of something other than business
iv] Goods or services supplied for your own personal use - such as a hobby
v] donations to charity freely given by a business where the giver does not receive anything in
return
vi] low cost welfare services provided by charities
The following are examples of goods or services that are outside the scope of VAT. No VAT shall be
charged or paid with respect of its supply:
i] Goods supplied by a trader not registered for VAT and is not required to do so.
ii] VATUnited
Goods or services bought or sold outside the Registration andofDeregistration
Republic Tanzania and Liability and VAT: 363
iii] Goods or services supplied in the course of something other than business
iv] Goods or services supplied for your own personal use - such as a hobby
v] donations to charity freely given by a business where the giver does not receive anything in
return
vi] low cost welfare services provided by charities
vii] dividends
viii] wages
The list is not exhaustive.
3. Distinction Between Composite And Multiple Supplies

There is a little problem of categorizing a supply into either standard rated, zero rated or
exempt supplies when it involves a supply of a single good or service. Yet, there is a
challenge in deciding whether there is a single composite supply hence, single tax liabilities,
or multiple supplies hence, multiple tax liabilities, when goods and services are supplied in
bulk.
A composite supply
A composite supply occurs if a mixture of goods and/or services is supplied together in such a
way that it is not possible to split the supply into its component parts. Thus, the supply as a
whole must be considered in order to determine the rate of tax due (if any).
The composite supply applies where there is a principal element as well as an ancillary
element and where ancillary element would not be supplied on its own without the principal
element.
An ‘ancillary service’ is defined as something that does not constitute for customers an aim in
itself but is a means of better enjoying the principal service supplied.
Example
 Supply of mobile phone with an instruction manual
 Supply of lectures and learning materials
 Supply of Computer software coupled with training on how to operate
Multiple supply
Multiple supply is defined as being two or more supplies made in conjunction with each other to a
customer for a total consideration covering all those where each of those supplies are physically and
economically dissociable from each other.
 For example a car dealer may sell new or used cars with one year’s free servicing.
 A computerised accountancy package is sold with one year's after sales support
In this arrangement each of this supplies made in conjunction with others is treated as an individual
supply and taxable /exempt in its own right.
If none of the forms of supply is exempt and all are subject to VAT at the same rate, then it is not as
critical to separate the elements of a supply.
Section 14 the VAT Act provides that where a supply consists of more than one element, the following
criteria shall be taken into account when determining how this Act applies to the supply-
(a) every supply shall normally be regarded as distinct and independent;
(b) a supply that constitutes a single supply from an economic, commercial, or technical point of
view, shall not be artificially split;
(c) the essential features of the transaction shall be ascertained in order to determine whether the
customer is being supplied with several distinct principal supplies or with a single supply;
(a) there is a single supply, if one or more elements constitute the principal supply, in which case the
other elements are ancillary or incidental supplies, which are treated as part of the principal
supply; or
(b) a supply shall be regarded as ancillary or incidental to a principal supply if it does not constitute
for customers an aim in itself but is merely a means of better enjoying the principal thing
supplied.
Explain place of supply/Taxation for goods and services; describe when Value
Added Explain place of
Tax becomes supply/Taxation
payable for goods
(Time of supply); and services;
explain describe
the concept of when Value
Added Tax
consideration and becomes
value for payable (Time
supply and of supply);
describe explain thefor
the procedures concept of
calculation
consideration and value for supply and describe
and payment of net amount (VAT payable or refundable) the procedures for calculation
and payment of net amount (VAT payable or refundable)
[Learning outcome d, e, f and g]
[Learning outcome d, e, f and g]
4. Place Of Taxation For Goods And Services.

VAT is a4.destination
Place Ofbased Taxation Forthe
tax, i.e., Goods And Services.
goods/services will be taxed at the place where they are
consumedVATandis not
a destination
at the origin. based tax,state
So, the i.e., the goods/services
where will be will
they are consumed taxed at the right
have placetowhere
collectthey are
consumed
VAT. This, in turn, and
makes not the
at the origin.ofSo,
concept the of
place state where
supply they under
crucial are consumed
VAT as allwillthe
have the rightofto collect
provisions
VAT.around
VAT revolve This, init.turn, makes
Section the53concept
44 to of place
of the VAT of supply
Act,2014 crucial
provides theunder
placeVAT as all the
of taxation provisions
rules as of
VAT revolve
discussed below around it. Section 44 to 53 of the VAT Act,2014 provides the place of taxation rules as
discussed below
a) Supplies of goods
a) Supplies
A supply of goods of goods
shall be treated as a supply made in Mainland Tanzania if the goods are delivered
or madeAavailable
supply ofingoods
MainlandshallTanzania.
be treated as a supply made in Mainland Tanzania if the goods are delivered
or made available in Mainland Tanzania.
b) Inbound and outbound goods
 b) Inbound
Goods and or
installed outbound
assembledgoodsin Mainland Tanzania by, or under a contract with the supplier
 Goods installed or assembled
shall be treated as a supply made in Mainland in Mainland Tanzania by, or under a contract with the supplier
Tanzania.
 A supply of goods shall be treated as a supply made inTanzania.
shall be treated as a supply made in Mainland Mainland Tanzania if the goods are
 A supply
dispatched of goods from
or transported shallMainland
be treatedTanzania
as a supply
to amade
place in Mainland
outside Tanzania
the United if the goods are
Republic.
dispatched or transported from Mainland Tanzania to a place outside the United Republic.
c) Supplies relating to immoveable property
 c)A supply
Supplies relating toproperty
of immovable immoveablesituatedproperty
in Mainland Tanzania or a supply of services directly
 A supply of immovable property situated
related to land situated in Mainland Tanzania shall in be
Mainland
treated Tanzania or made
as a supply a supply of services directly
in Mainland
Tanzania. related to land situated in Mainland Tanzania shall be treated as a supply made in Mainland
 A supplyTanzania.
of service directly related to immovable property shall be treated as a supply made in
 A Tanzania
Mainland supply of if-service directly related to immovable property shall be treated as a supply made in
Mainland
(a) the land toTanzania
which theif-property relates is not situated in Mainland Tanzania; and
(a) the land
(b) the supplier is- to which the property relates is not situated in Mainland Tanzania; and
(b) the supplier is- i. a resident of Mainland Tanzania; or
i. a resident
ii. a non-resident whoofcarries
Mainland Tanzania;
on an economic or activity at or
ii. a non-resident
through fixed place inwho carriesTanzania.
Mainland on an economic activity at or
through a fixed place in Mainland Tanzania.
d) Supply of services directly related to land
d) Supply
A supply of services
of services directlytorelated
directly related to landoutside Mainland Tanzania shall be treated as a
land situated
A supply of services directly related
supply made in Mainland Tanzania if the supplier to landis situated outsidewho
a non-resident Mainland Tanzania
is operating shallabe
through treated as a
fixed
supply made in
place in Mainland Tanzania.Mainland Tanzania if the supplier is a non-resident who is operating through a fixed
place in Mainland Tanzania.
e) Supply of essential services

e) water,
Where Supply of oil,
gas, essential services
electricity, or thermal energy is supplied through a pipeline, cable, or other
Where
continuous water, gas,
distribution oil, electricity,
network or thermal
and delivered energy
to a place is supplied
in Mainland throughor
Tanzania a from
pipeline, cable,
a place in or other
continuous distribution network and delivered to a place in Mainland Tanzania
Mainland Tanzania to a place outside the United Republic such supply shall be treated as a supplyor from a place in
made in Mainland
Mainland Tanzania
Tanzania.to a place outside the United Republic such supply shall be treated as a supply
made in Mainland Tanzania.
f) Services supplied to a registered person
A supply of services by a non resident who is a registered person to a customer who is a registered
person shall be treated as a supply made in Mainland Tanzania. However, this shall not apply if the
customer is a non-resident who carries on an economic activity at or through a fixed place outside
Mainland Tanzania and the supply is made
(a) for the purpose of that economic activity; or
(b) to that fixed place.
g) Telecommunication services
 A supply of telecommunication services shall be treated as a supply made in Mainland
Tanzania, if a person in Mainland Tanzania, other than a telecommunications service
A supply of services by a non resident who is a registered person to a customer who is a registered
person shall be treated as a supply made in Mainland Tanzania. However, this shall not apply if the
customer is a non-resident who carries on an economic activity at or through a fixed place outside
Mainland Tanzania and the supply is made
(a) for the purpose of that economicVAT Registration
activity; or and Deregistration and Liability and VAT: 365
(b) to that fixed place.
g) Telecommunication services
 A supply of telecommunication services shall be treated as a supply made in Mainland
Tanzania, if a person in Mainland Tanzania, other than a telecommunications service
provider, initiates the supply from a telecommunications service provider, whether or not the
person initiates the supply on his own behalf. A person who initiates a supply of
telecommunication services is the person who-
(a) controls the commencement of the supply;
(b) pays for the supply; or
(c) contracts for the supply.
 If it is impractical for the supplier to determine the location of a person due to the type of
service or the class of customer, the person who initiates the supply of telecommunication
service shall be the person to whom the invoice for the supply is sent.
 However, the requirement will not apply if the person who initiates the call in Mainland
Tanzania is a non-resident who is global roaming while in Mainland Tanzania and who pays
for the supply under a contract made with a non-resident telecommunications service
provider, through a place outside the United Republic at which the non-resident is established.
Definition
“electronic services” means any of the following services provided or delivered through a
telecommunications network-
i] websites, web-hosting, or remote maintenance of programmes and equipment;
ii] software and the updating thereof;
iii] images, text, and information;
iv] access to databases;
v] self-education packages;
vi] music, films, and games, including gaming activities; and
vii] political, cultural, artistic, sporting, scientific, and other broadcasts and events including
broadcast television.
h) Services supplied to an unregistered person in Mainland Tanzania

A supply of any of the following services shall be treated as a supply made in Mainland Tanzania
when supplied to a customer who is not a registered person-
(a) Services performed in Mainland Tanzania, if the services are received by a person in Mainland
Tanzania who effectively use or enjoy the services in Mainland Tanzania;
(b) Services received for radio or television broadcasting at an address in Mainland Tanzania; and
(c) Electronic services delivered to a person who is in Mainland Tanzania at the time when the
service is delivered.
i) Other services supplied to unregistered person within Mainland Tanzania

 Any other supply of services shall be treated as a supply made in Mainland Tanzania, if-
(a) the customer is a resident of Mainland Tanzania and is not a registered person;
and
(b) the supplier is-
i. a resident of Mainland Tanzania; or
ii. a non-resident who carries on an economic activity at or
through a fixed place in Mainland Tanzania; and
(c) the supply is made in the course of that economic activity or through that fixed
place.
 A supply of services shall be treated as a supply made in Mainland Tanzania, if it is not
treated as a supply made in-
(a) Mainland Tanzania in accordance with sections 51; and
1. a resident of Mainland Tanzania; or
2. a non-resident and carries on an economic activity at or through a fixed place in Mainland
Tanzania.
j) Progressive or periodic supplies
Where a progressive or periodic supply is a series of separate supplies, the place where each
supply takes place shall be determined separately.
5. The Time When Value Added Tax Becomes Payable (Time Of Supply)
treated as a supply made in-
(a) Mainland Tanzania in accordance with sections 51; and
1. a resident of Mainland Tanzania; or
2. a non-resident and carries on an economic activity at or through a fixed place in Mainland
Tanzania.
j) Progressive or periodic supplies
Where a progressive or periodic supply is a series of separate supplies, the place where each
supply takes place shall be determined separately.
5. The Time When Value Added Tax Becomes Payable (Time Of Supply)
The tax point is the time when a supply is deemed to have taken place for VAT purposes.
The tax point is important in respect of supplies for VAT purposes because:
The tax point is used for determining the tax period in which VAT relating to the supply should be
accounted for and;
The tax point is used to decide which scheme or VAT rate will apply to a supply when there is a
change in the VAT scheme of VAT rate.
Section 2 of the VAT Act, 2014 provides the rules for determining time of supply as follows
Time of supply
 in relation to a supply of goods, the time at which the goods are delivered or made
available;
 in relation to a supply of services, the time at which the services are rendered, provided, or
performed;
 in relation to a supply of immovable property, the earlier time at which the property is-
created, transferred, assigned, granted, or otherwise supplied to the customer; or delivered or
made available
6. The Concept Of Consideration Of Supply

Generally the consideration of a supply is the tax base on which the VAT is charged. The amount of
VAT is the consideration of supply multiplied by VAT rate.
The consideration of supply is the amount in money paid or payable by the person in response to, or
for the inducement of the supply; and the fair market value of anything paid or payable in kind,
whether directly or indirectly, by any person in respect of, in response to, or for the inducement of the
supply. The consideration for a supply includes-
(a) any duty, levy, fee, charge, or tax including value added tax imposed under this Act that
a) is payable by the supplier on, or by reason of, the supply; and
b) is included in or added to the amount charged to the customer;
(b) any amount charged to the customer that is calculated or expressed by reference to costs incurred
by the supplier;
(c) any service charge that is automatically added to the price of the supply; and
(d) any amount expressed to be a deposit paid when goods are sold in a returnable container and
which may be refunded on the return of the container.
However, the consideration for a supply shall not include a price discount or rebate allowed and
accounted for at the time of the supply.
Taxable of Value of imports

The value of an import of goods is the sum of -
(a) the value of goods for the purposes of customs duty under the East African Customs Management
Act, whether or not duty is payable on the import;
(b) of the amount of any customs duty payable on the import; and
(c) to the extent not included under paragraph (a) or (b) in respect of-
i. the cost of insurance and freight incurred in bringing the goods to Mainland Tanzania; and
ii. the amounts of any tax, levy, fee, or fiscal charge other than customs duty and value added tax
payable on the import of the goods.
Example
Joshua Co. Ltd imported goods worth Tshs20,000,000 from London, after paying freight of Tshs2,000,
000; insurance for Tshs1,000,000 and Tshs200,000 for clearance at a UK port. Determine the taxable
value for VAT purpose given the import duty as 25%, excise duty of 20%, Railway and Development
Levy of 1.5% and VAT rate of 18%.The taxable value of imported goods is the value of the goods after
including other expenses and taxes except VAT according to customs valuation model. Therefore the
taxable value of imported goods is computed as follows:
payable on the import of the goods.
Example
Joshua Co. Ltd imported goods worth Tshs20,000,000 from London, after paying freight of Tshs2,000,
000; insurance for Tshs1,000,000 and Tshs200,000 for clearance at a UK port. Determine the taxable
value for VAT purpose given the import duty as 25%, excise duty of 20%, Railway and Development
Levy of 1.5% and VAT rate of 18%.The taxable value of imported goods is the value of the goods after
including other expenses and taxes except VAT according to customs valuation model. Therefore the
taxable value of imported goods is computed as follows:
Costs 20,000
Freight 2,000
Insurance 1,000
Clearance 200
Total before import duties 23,200
Import duties 25% 5,800
Valued before excise duty 29,000
Excise duty 20% 5,800
Railway and development Levy 348
at 5% of CIF)
Taxable value 34,800
7. Procedures For Calculating And Payment Of Net Amount (VAT Payable Or

Refundable)
VAT on a taxable supply of goods or services shall be payable by a taxable person at the end of
a prescribed accounting period or at any time which the Commissioner may prescribe. The
prescribed accounting period currently prescribed by the Commissioner is each calendar month.
The amount of VAT payable required to be submitted to the Commissioner by each taxable
The amount
person of determined
shall be VAT payable required to be submitted to the Commissioner by each taxable
as follows:
person shall be determined as follows:
Output VAT XXX
Output VAT XXX
Less: Deductible XXX
Less: Deductible XXX
Input Tax
Input Tax
VAT Payable XXX
VAT Payable XXX
The Output VAT is the VAT charged on taxable supplies (sales). There is no possibility for Output VAT to
The Output VAT is the VAT charged on taxable supplies (sales). There is no possibility for Output VAT to
be related to exempt supplies.
be related to exempt supplies.
The Deductible Input VAT involves VAT incurred on both purchases and importation of goods or services
The Deductible Input VAT involves VAT incurred on both purchases and importation of goods or services
as well as on business expenses and capital goods. However, the business purchases and expenses
as well as on business expenses and capital goods. However, the business purchases and expenses
whose associated Input VAT is allowable for deduction must be related to taxable supplies. Therefore,
whose associated Input VAT is allowable for deduction must be related to taxable supplies. Therefore,
not all Input VAT incurred is allowable for deduction.
not all Input VAT incurred is allowable for deduction.
Question 1
Question 1 to pay Value Added Tax as provided under Section 4 of Tanzania Mainland VAT Act, 2014
Who is liable
Who is liable to pay Value Added Tax as provided under Section 4 of Tanzania Mainland VAT Act, 2014
Question 2
Question 2 of value added tax explain the following:
In the context
In the
1. context
Taxableofsupplies
value added tax explain the following:
1. Exempt
2. Taxable supplies
supplies
2. Standard
3. Exempt supplies
rated supplies
3.
4. Standard
Zero ratedrated supplies
supplies
4. Zero rated supplies
Question 3
Explain how making exempt supplies differs from making zero rated supplies for the purpose of VAT.
Question 4
a) Define the time of supply and explain the importance of the time of supply for the purpose of
Value Added Tax.
Explain how making exempt supplies differs from making zero rated supplies for the purpose of VAT.
Question 3
Question
Explain how 3
4 making exempt supplies differs from making zero rated supplies for the purpose of VAT.
a) Define
Question
Explain how the time
3 making of supply
exempt and explain
supplies the importance
differs from making zero of rated
the time of supply
supplies for purpose
for the the purpose of
of VAT.
368 Value Added ValueTaxAdded
Act Tax.
Question
Explain how 4 making exempt supplies differs from making zero rated supplies for the purpose of VAT.
b) Explain how time of supply is determined
a) Define
Question 4 the time of supply and explain the importance of the time of supply for the purpose of
Question 4 Added
a) Value
Define the timeTax.of supply and explain the importance of the time of supply for the purpose of
b) Value
ExplainAdded
how time
Tax. of supply is determined
a) Define
Question 5 the time of supply and explain the importance of the time of supply for the purpose of
b) Value
ExplainAdded
how time
Tax. of supply is determined
Why is it necessary for a VAT Act to provide clarification on the place of supply?
b) Explain how time of supply is determined
Question 5
Why is it necessary
Question 5 for a VAT Act to provide clarification on the place of supply?
Answers to Self-Examination
Why is it necessary
Question 5 for a VAT Questions
Act to provide clarification on the place of supply?
Why is it necessary for a VAT Act to provide clarification on the place of supply?
AnswersAnswer to SEQ 1
to Self-Examination Questions
The following persons shallQuestions
Answers to Self-Examination be liable to pay value added tax-
 in thetocase
Answer SEQof1a taxableQuestions
import, the importer;
Answers to Self-Examination
The in thetocase
following
Answer SEQ of1a taxable
persons supply
shall be liablethat is made
to pay valueinadded
Mainland
tax-Tanzania, the supplier; and
The in thetocase
following
Answer SEQ of1a taxable
persons supply
import,
shall be liableof
theimported
to importer;
pay value services,
added the
tax-purchaser
The in the casepersons
following of a taxable supply
import,
shall be liablethat
the is made
valueinadded
to importer;
pay Mainland
tax-Tanzania, the supplier; and
 in the case of a taxable supply import, of theimported
that is madeservices,
importer; in Mainlandthe Tanzania,
purchaser the supplier; and
Answer to SEQ 2
 in the case of a taxable supply of thatimported
is madeservices,
in Mainlandthe Tanzania,
purchaser the supplier; and
Taxable supplies
 in the
These are case of a ontaxable
whichsupply
Valueof imported
Tax services, the purchaser
Answer tosupplies
SEQ 2 Added (VAT) is charged, and they consist of standard-rated
supplies and Zero-rated supplies.
Taxable to
Answer supplies
SEQ 2
Standard-rated supplies are those on which VAT is charged at the rate of 18% on the VAT exclusive
These
Taxable
Answer are supplies
supplies
to SEQ 2 onfraction
which Value Added Tax (VAT) is charged, and they consist of standard-rated
amount and the VAT of 18/118 is used if the amount is inclusive of VAT.
supplies
These areand Zero-rated
supplies supplies. Added Tax (VAT) is charged, and they consist of standard-rated
Taxable
Zero-rated supplies arewhich
supplies on thoseValue
on which VAT is charged at the rate of 0%.
Standard-rated
supplies and supplies supplies.
Zero-rated are those on which VAT is charged at the rate of 18% on the VAT exclusive
These
Exempt are supplies
supplies on which Value Added Tax (VAT) is charged, and they consist of standard-rated
amount and thesupplies
Standard-rated VAT fraction of 18/118
are those on whichis used if the amountat is the
inclusive of18%
VAT.
supplies
These areand Zero-rated
supplies of goodssupplies.
and services onVAT
whichis charged
no VAT is rate of
charged, and no on theVAT
input VATattributed
exclusiveto
Zero-rated
amount and supplies
the VAT are those
fraction on
of which
18/118 VAT
is is
used charged
if the at
amount the israte of 0%.
inclusive of VAT.
Standard-rated
them is available supplies
for credit.areThese
those supplies
on whichare VAT notis taken
charged
intoataccount
the rateinofdetermining
18% on thewhether
VAT exclusive
or not a
Exempt
Zero-rated supplies
supplies are thoseof on18/118
which is VAT is charged at theisrate of 0%.of VAT.
amount
trader isand the VAT
a taxable fraction
person. used if the amount inclusive
These
Exempt are supplies of goods and services on which no VAT is charged, and no input VAT attributed to
supplies
Zero-rated supplies are those on which VAT is charged at the rate of 0%.
them
These is available
are suppliesforofcredit.
goodsThese supplieson
and services arewhich
not taken
no VATintoisaccount
charged, inand
determining
no input whether or not a
VAT attributed to
Exempt supplies
traderisisavailable
them a taxablefor person.
credit. These supplies are not taken into account in determining whether or not a
These are supplies of goods and services on which no VAT is charged, and no input VAT attributed to
trader
them isisavailable
Answer atotaxable
SEQ 3forperson.
credit. These supplies are not taken into account in determining whether or not a
trader
The main is adifference
taxable person.
between making exempt supplies and zero rated supplies are as follows:
Answer to SEQ 3
1. A trader who only makes exempt supplies cannot register for VAT while a trader who makes only
The maintodifference
Answer SEQ 3 between making exempt supplies and zero rated supplies are as follows:
zero rated supplies can register for Value Added Tax.
The main
Answer todifference
SEQ 3 between
2. When determining whether making
a traderexempt
shouldsupplies
registerand zero by
for VAT rated suppliestoare
reference theas follows:
level of turnover, the
1. A trader who only makes exempt supplies cannot register for VAT while a trader who makes only
The turnover
main difference
of exempt between
supplies making
is notexempt supplies
taken into andwhile
account zerothat
rated
of supplies
zero rated aresupplies
as follows:is taken into
zero
1. account.rated
A trader supplies
who can register
only makes exemptfor Value Added
supplies cannotTax.
register for VAT while a trader who makes only
2. When
zero determining
rated supplies whether
can a traderValue
register should register for VAT by reference to the level of turnover, the
1. All
3. A trader
the who
input only
vat makes
that exemptfor
is attributed exemptAdded
tosupplies cannot Tax.
register
supplies cannotforbeVAT while a while
recovered traderallwho
themakes only
input vat that is
2. turnover
When of exempt
determining supplies is not taken into accountforwhile
VATthat of zero rated supplies
level ofisturnover,
taken into
zero torated
attributable
Answer SEQ to4 zero whether
supplies can register
rated a trader
supplies should
forisValue register
Added
recoverable. Tax. by reference to the the
account.
turnover of exempt whether
suppliesaistrader
not taken intoregister
account while that of zero rated supplies isturnover,
taken into
2.
(a) When
Thethe determining
time of supply should for VAT by reference to the level of the
Answer
3. All toinput
account. SEQ 4 thatisisa attributed
vat tax point when a supply
to exempt is said
supplies to made.
cannot For VAT while
be recovered purposes theinput
all the timevat
of supply
that is
turnover
is importantof exempt
because: supplies is not taken into account while that of zero rated supplies is taken into
3. attributable
(a) All
The time
the of to
input vatzero
supply rated
thatis taxsupplies
isa attributed toisexempt
point when recoverable.
a supply is said
supplies to made.
cannot For VAT while
be recovered purposes theinput
all the timevat
of supply
that is
account.
(i) It is used for supplies
the purpose of determining the tax period in which VAT on a supply is to be
is important
attributable because:
to zero
3. All the input accounted rated
vat that is attributed is recoverable.
to exempt supplies cannot be recovered while all the input vat that is
(i) It is used forfor,
the purpose of determining the tax period in which VAT on a supply is to be
attributable
(ii) to zero rated
In the casefor, supplies
of a change is recoverable.
in the VAT rate or scheme the tax point will be used to
accounted
(ii) determine
In the casewhich VAT rate
of a change in or
thescheme
VAT rateapplies to a particular
or scheme supply.
the tax point will be used to
(b) Time of supply determine which VAT rate or scheme applies to a particular supply.
(b) Time(i)of supply in relation to a supply of goods, the time at which the goods are delivered or made
(i) available;
in relation to a supply of goods, the time at which the goods are delivered or made
(ii) in relation to a supply of services, the time at which the services are rendered, provided,
available;
(ii) or performed;
in relation to a supply of services, the time at which the services are rendered, provided,
(iii) in relation to a supply of immovable property, the earlier time at which the property is-
or performed;
(iii) created,
in relationtransferred,
to a supply assigned,
of immovable granted, or otherwise
property, the earliersupplied to thethecustomer;
time at which or
property is-
delivered or made available
created, transferred, assigned, granted, or otherwise supplied to the customer; or
delivered or made available
Answer to SEQ 5
The place
Answer to of
SEQsupply
5 is the place where a supply is made and where VAT may be charged and paid.
When goods or services
The place of supply is the areplace
supplied, then
where a for VATispurposes,
supply made andit iswhere
essential
VATtomay
know
bethe 'place of
charged andsupply'.
paid.
This
Whendetermines whether are
goods or services the supplied,
supply is then
subject
for to VAT
VAT chargingitrules
purposes, in Mainland
is essential Tanzania
to know or it of
the 'place is supply'.
outside
the
Thisscope of VATwhether
determines in Mainland Tanzania.
the supply Therefore,
is subject to VATgoods or services
charging are VAT Tanzania
rules in Mainland chargeableor in Mainland
it is outside
Tanzania if the place of supply is Mainland Tanzania.
the scope of VAT in Mainland Tanzania. Therefore, goods or services are VAT chargeable in Mainland
Tanzania if the place of supply is Mainland Tanzania.
F3
SECTION F
Value Added Tax Act
STUDY GUIDE F3: VAT REGISTRATION

AND REGISRATATION
The tax authority needs to know who is going to pay the tax and whom it can pursue in the event of
non-payment. Basing on that, the authority is assured of tax payments by obliging traders to register
for the tax. This guide discusses registration and deregistration procedures.
a) Explain the purposes and types of VAT Registration

b) Describe registrations for branches and divisions
c) Explain the statutory records to be maintained by VAT registered traders.
d) Explain the causes and effects of cancellation of registration
Explain the purposes and types of VAT Registration; and describe registrations for
branchesExplain
and divisions.
the purposes and types of VAT Registration; and describe registrations for
branches and divisions.
1. The Purposes And Types Of VAT Registration

VAT is1.charged and thus payable
The Purposes by every
And Types Of person registered under the provisions of the VAT Act,
VAT Registration
2014 to become
VAT is acharged
VAT registered
and thustrader.
payableOther tradersperson
by every or anyregistered
other persons
underwho
theare not registered
provisions of the VAT Act,
for VAT are not allowed to charge VAT whatsoever.
2014 to become a VAT registered trader. Other traders or any other persons who are not registered
1.1 Purposesfor of VAT
Registration for VAT
are not allowed to charge VAT whatsoever.
The purposes of registration are to:
1.1 Purposes of Registration for VAT
(a) The purposes
Record of registration
the particulars are to:persons for the purpose of control and collection of
of taxable
tax.
(a) Record the particulars of taxable persons for the purpose of control and collection of
(b) Enable them to take credit of input tax on their purchases of taxable supplies; and
tax.
(c) Allow them charge output tax on their taxable supplies and to issue tax invoices.
(b) Enable them to take credit of input tax on their purchases of taxable supplies; and
(c) Allow them charge output tax on their taxable supplies and to issue tax invoices.
1.2 Types of VAT Registration

There are 3 main types of registrations: Normal registration, Compulsory registration and intending
1.2 Types of VAT Registration
traders’ registration.
There are 3 main types of registrations: Normal registration, Compulsory registration and intending
traders’ registration.
(i) Normal registration
If a person’s taxable sales exceed the registration threshold or have the reason to believe
that it will exceed, then the person need to register. The registration limit is currently a
If a person’s taxable sales exceed the registration threshold or have the reason to believe
cumulative total taxable turnover of Tshs 100,000,000 for the last twelve consecutive
that it will exceed, then the person need to register. The registration limit is currently a
months. Whether the threshold is exceeded or not may be tested as follows:
cumulative total taxable turnover of Tshs 100,000,000 for the last twelve consecutive
Historic Turnover Test
months. Whether the threshold is exceeded or not may be tested as follows:
The trader is required to look at the cumulative total of taxable sales for the last 12 months if
Historic Turnover Test
it exceeds Tshs 100,000,000 (or for the last 6 months if it exceeds 50mil) or since the
The trader is required to look at the cumulative total of taxable sales for the last 12 months if
commencement of business whichever is shorter.
it exceeds Tshs 100,000,000 (or for the last 6 months if it exceeds 50mil) or since the
If the total exceeds the registration limit, currently Tshs 100 mil, then the trader must apply
commencement of business whichever is shorter.
for registration by notifying the Commissioner in writing within 30 days since the end of the
If the total exceeds the registration limit, currently Tshs 100 mil, then the trader must apply
month in which the turnover exceeded the limit.
for registration by notifying the Commissioner in writing within 30 days since the end of the
month in which the turnover exceeded the limit.
Future Prospects Test
This test isFuture
considered at anyTest
Prospects time, when taxable supplies in the next 30 days are expected
to exceed a per annum cumulative total taxable turnover of Tshs 100mil or a consecutive 6
This test is considered at any time, when taxable supplies in the next 30 days are expected
months cumulative total taxable turnover of Tshs 50mil.
to exceed a per annum cumulative total taxable turnover of Tshs 100mil or a consecutive 6
months cumulative total taxable turnover of Tshs 50mil.
Turnover for VAT purposes
Section 28(5) provides that for the purpose of VAT registration, a person’s turnover shall be the
Turnover for VAT purposes
sum of-
Section 28(5) provides that for the purpose of VAT registration, a person’s turnover shall be the
(a) total value of supplies made, or to be made, by the person in the course of an economic
sum of-
activity carried out during that period; and
(a) total value of supplies made, or to be made, by the person in the course of an economic
activity carried out during that period; and
(b) total value of supplies of imported services made, or to be made, to the person during
the period that would be taxable supplies if the person was a taxable person during that
period.
Regulation 10(2) of the VAT (General) Regulations, 2015 provides that, a person’s turnover in
respect of supplies of imported services shall be considered for registration where that person
has a turnover resulting from taxable supplies other than supplies of imported services.
Amounts excluded from the Turnover
Section 28(6) states that the following amounts shall be excluded when calculating the person’s
turnover -
(a) the value of a supply that would not be a taxable supply if the person were a taxable
person;
(b) the value of a sale of a capital asset of the person;
(c) the value of a supply made solely as a consequence of selling an economic activity or
part of that economic activity as a going concern; and
Regulation 10(2) of the VAT (General) Regulations, 2015 provides that, a person’s turnover in
respect of supplies of imported services shall be considered for registration where that person
has a turnover resulting from taxable supplies other than supplies of imported services.
Amounts excluded from the Turnover
VAT Registration and Regisratation: 371
Section 28(6) states that the following amounts shall be excluded when calculating the person’s
turnover -
(a) the value of a supply that would not be a taxable supply if the person were a taxable
person;
(b) the value of a sale of a capital asset of the person;
(c) the value of a supply made solely as a consequence of selling an economic activity or
part of that economic activity as a going concern; and
(d) the value of supplies made solely as a consequence of permanently ceasing to carry on
an economic activity.
Regulation 10(1) of the VAT (General) Regulations, 2015, provides that:-
Any application for registration under sections 28 shall be made in the form VAT 101
prescribed in the schedule to these regulations and lodged with the Commissioner within thirty
days from the date of such requirement (section 30).
(ii) Compulsory registration

When a person fails to apply for the VAT registration within 30 days, the Commissioner
General, compulsory register the person and not later than 14 days after the day on which
the registration is done, notify the person on the registration. Also where there is a good
reason including protection of government revenue, the commissioner general may register
the person for VAT regardless of the turnover
The following are other persons required to register regardless of turnover:
 The person carries on an economic activity involving the supply of professional
services in Mainland Tanzania, whether those professional services are provided by
the person, a member or employee of that person-section 29(1)(a)
 A Government entity or institution which carries on economic activity (section 29(2)
(iii) Intending traders registration

VAT Act, 2014 allows any person who has grounds for believing he will qualify for registration
to apply for registration. Traders who intend to start trading fall into this category and may
seek registration in order to recover any input tax incurred in setting up the business (e.g.
equipment, office machinery, lawyers, and architects fees).
Section 28(3) provides that the Commissioner General may register a taxable person as
intending trader upon fulfilling the following conditions-
(a) provide sufficient evidence to satisfy the Commissioner of his intention to commence an
economic activity, including contracts, tenders, building plans, business plans, bank
financing;
(b) the person makes or will make supplies that will be taxable supplies if the person is
registered;
(c) Specify the period within which the intended economic activity commences production
of taxable supplies.
Regulation 13(2) further provides that, the Commissioner General shall register
applicant as an intending trader upon satisfaction that the documentary evidence
indicates that the applicant will make taxable supplies and the registration threshold will
be attained within a period of twelve months from the date of commencement of
producing taxable supplies.
2. Registrations Of Branches And Divisions

Many businesses operate from more than one set of premises (branches) or may structure their
organization and create autonomous units within same legal entity and describe them as divisions.
However, the registration by a kind of business shall be a single registration, which shall cover all
economic activities undertaken by that person’s branches or divisions.
This means that, all branches/divisions activities are part of one legal entity and all figures (turnover,
VAT etc.) are amalgamated for completion of a single VAT return.
3. Rights And Obligations Of Vat Registered Persons

Once registered, the taxable person will be issued with a registration certificate and the VAT
Registration Number (VRN). The taxable person will be required to display the certificate at a
conspicuous place in the business premises. Moreover, he will be required to quote the VRN number
on each tax invoice issued. Then the person will be entitled to the following requirements:
i] Charge output tax on each taxable supply
However, the registration by a kind of business shall be a single registration, which shall cover all
economic activities undertaken by that person’s branches or divisions.
This means that, all branches/divisions activities are part of one legal entity and all figures (turnover,
VAT etc.)
372 Value Added Tax are
Act amalgamated for completion of a single VAT return.
3. Rights And Obligations Of Vat Registered Persons

Once registered, the taxable person will be issued with a registration certificate and the VAT
Registration Number (VRN). The taxable person will be required to display the certificate at a
conspicuous place in the business premises. Moreover, he will be required to quote the VRN number
on each tax invoice issued. Then the person will be entitled to the following requirements:
i] Charge output tax on each taxable supply
ii] File returns
iii] Recover input tax (subject to some restrictions)on business purchases and expenses
iv] Maintain appropriate VAT records
v] Use Taxpayer Identification Number and a Value Added Tax Registration Number on all
documents required to be issued.
On top of the above requirements, the registered person is required to notify the Commissioner in writing
in respect of “changes in business circumstances”.
A Person’s particulars/circumstances often change after registration. Quite often these changes can
affect the ‘legal entity’ of the business and action needs to be taken by the trader and by the VAT
Department. Section 37 of the VAT Act and Regulations 16 deals with this situation, under section 37 ,a
registered person shall, notify the Commissioner General in writing; within fourteen days of the
occurrence of the following changes-
(a) the name of the registered person, business name, or trading name of the person;
(b) the address or other contact details of that person;
(c) one or more places through which the person carries on an economic activity in Mainland
Tanzania;
(d) the nature of one or more of the economic activities carried on by the person;
(e) the person’s status as a registered person; and
(f) any other changes as prescribed in the regulations.
Explain the statutory records to be maintained by VAT registered traders; and

explain the causes and effects of cancellation of registration.
4. Statutory Records To Be Maintained By VAT Registered Traders

Complete records are essential in insuring that correct VAT has been paid and claimed by taxable
persons. Incomplete records means VAT is computed from inaccurate information.
The following are statutory records to be maintained by VAT registered traders.
(i) Tax invoice

The VAT registered trader must issue a serially numbered true and correct tax invoice
generated by electronic fiscal device in respect of supplies made .Tax invoice shall include
the following information-
i] the date on which it is issued;
ii] the name, Taxpayer Identification Number and Value Added Tax Registration
Number of the supplier;
iii] the description, quantity, and other relevant specifications of the things supplied;
iv] the total consideration payable for the supply and the amount of value added tax
included in that consideration;
v] if the value of the supply exceeds the minimum amount prescribed in the
regulations, the name, address, Taxpayer Identification Number and value added
tax registration number of the customer; and
(ii) Adjustment notes

Taxable persons should issue the adjustment notes when there is increasing or decreasing
adjustment event of the previously accounted VAT. An adjustment note which is required to
be issued shall include the following information-
 the date on which it is issued;
 the name, Taxpayer’s Identification Number and Value Added Tax Registration
 the nature of the adjustment event and the supply to which it relates;
tax registration number of the customer; and
(ii) Adjustment notes

Taxable persons should issue the adjustment notes when there is increasing or decreasing
adjustment event of the previously accounted VAT. An adjustment note which is required to
be issued shall include the following information-
 the date on which it is issued;
 the name, Taxpayer’s Identification Number and Value Added Tax Registration
 the nature of the adjustment event and the supply to which it relates;
 the effect on the amount of value added tax payable on the supply;
 if the effect on the value added tax payable on the supply exceeds, the minimum
amount prescribed in the regulations, the name, Taxpayer’s Identification Number
and Value Added Tax Registration Number of the customer; and
(iii) Documentation issued by or to agents

Where a taxable supply is made by an agent or to an agent on behalf of a principal and both
the agent and principal are registered persons, any documentation required to be issued by
the principal, including tax documentation, may be issued by the agent or to an agent in the
name, address, Taxpayers Identification Number and value added tax registration number of
the principal.
Where a taxable supply is made to an agent acting on behalf of a principal and both the
agent and the principal are registered, any documentation required to be issued to the
principal, including a tax invoice generated by electronic fiscal device or adjustment note,
may be issued to the agent and shall be in the name, address, Taxpayer Identification
Number and value added tax registration number of the principal.
(iv) Records and accounts

A taxable person shall keep record of all accounts, documents, returns, and other records
that are required to be issued or given under this Act, or such other tax law, including
 tax invoices and adjustment notes issued and received by the person;
 customs documentation relating to imports and exports of goods by the person;
 records relating to supplies of imported services to the person, whether or not those
supplies were taxable supplies;
 a value added tax account that records, for each tax period, all the output tax payable
by the person in that period, or the input tax credit the person is allowed in that period,
and all the increasing and decreasing adjustments that the person is required or
entitled to make in that period; and
 records showing the deposit of amounts paid to the Commissioner General under this
Act.
The records referred to shall be maintained-
 for at least five years from the end of the tax period to which they relate; or
 until a later date on which the final decision is made in any audit, recovery
proceedings, dispute, prosecution, or other proceedings under this Act relating to
that tax period.
5. Causes And Effects Of Cancellation Of Registration

Deregistration is the process of removing or cancelling a registered person from the VAT register
5.1 Circumstances for deregistration
(i) Taxable person ceases to make taxable supplies.
If a taxable person ceases to make taxable supplies such person will then be cancelled from VAT
registration.
(ii) Taxable turnover falls below the registration threshold.

A registered person ceased to be liable for registration when the Commissioner is satisfied that
the level of taxable supplies has fallen below the registration threshold.
(iii) Cessation of economic activity /business

If a registered person ceases to carry on an economic activity and will no longer carry on a
business, the registration may be cancelled. Section 41(1) (b) gives powers to the Commissioner
General to cancel the registration of a person who is not carrying on an economic activity;
(iv) Provision of false or misleading information
Section 41(1) (a) provides that, the commissioner may cancel the registration of the person
obtained registration by providing false or misleading information;
5.2 Liabilities or obligations after cancellation of registration

(iii) Cessation
the level of of economic
taxable activity
supplies /business
has fallen below the registration threshold.
If a registered person ceases to carry on an economic activity and will no longer carry on a
(iii) business,
Cessationthe of registration may be /business
economic activity cancelled. Section 41(1) (b) gives powers to the Commissioner
General to cancel
If a registered the registration
person ceases to ofcarry
a person
on anwho is not carrying
economic activityon an will
and economic activity;
no longer carry on a
374 Value Added Tax Act of false or misleading information
Provision
(iv) business, the registration may be cancelled. Section 41(1) (b) gives powers to the Commissioner
Section 41(1)
General (a) provides
to cancel that, theofcommissioner
the registration a person whomay
is notcancel theon
carrying registration of the
an economic person
activity;
obtained registration
(iv) Provision of false orby providing false
misleading or misleading information;
information
Section 41(1) (a) provides that, the commissioner may cancel the registration of the person
5.2 Liabilities
obtainedorregistration
obligationsbyafter cancellation
providing false or of registration
misleading information;
A person who ceases to be registered remains liable for any liabilities or obligations incurred while
he was registered
5.2 Liabilities and required
or obligations after not to issue Tax
cancellation of Invoices(s)
registrationor show VAT on all of his/her receipts for
the whole period he/she remain de- registered.
A person who ceases to be registered remains liable for any liabilities or obligations incurred while
he was registered and required not to issue Tax Invoices(s) or show VAT on all of his/her receipts for
the whole period he/she remain de- registered.
Question 1 Questions
Self-Examination
Explain the types of registration for the purposes of Value Added Tax (VAT).
Question 1
Explain the types of registration for the purposes of Value Added Tax (VAT).
Question 2
Explain what is meant by pre-registration input VAT and describe the circumstances under which a
Question 2 recover pre-registration input VAT.
business may
Question 3
List any Six (6) contents which must appear on the tax invoice.
Question 4
Nchimunya started running a retail business making standard rated taxable supplies on 1 June 2017.
She made sales of Tshs 6,000,000 in the month of June. Her sales increased by Tshs 21,000,000 each
month from July 2017 to November 2017. From December 2017, she expects sales to be Tshs
17,000,000 per month. Her standard rated expenses were Tshs 35,000,000 per month and are expected
to remain at this level in future. Nchimunya is not sure whether she is required to register her business for
Value Added Tax.
Required
(i) Explain the Value Added Tax registration requirements to Nchimunya.
(ii) State, giving reasons, when Nchimunya will be required to register for VAT.
(iii) Explain three (3) obligations Nchimunya will have once she registers her business for VAT.
Question 5
Describe three (3) circumstances which may result in a business being de-registered for VAT
Question 6
Briefly discuss different types of Value Added Tax (VAT) registrations and minimum criteria/threshold for
each type as given in the Value Added Tax Act, 2014.
Question 7
(a) Explain how the accrual basis of VAT tax accounting may adversely affect a taxpayer’s cash flow
position. Suggest one way for ameliorating the cash flow problem.
(b) It has sometimes been suggested that the current TZS 100 million turnover thresholds for VAT
registration and the 18% VAT single rate should be reduced to TZS 50 million and 15% respectively.
What is the basis or justification for the above suggestion?
(c) The VAT single rate policy or structure has been in operation for more than five years. It is now
probably appropriate to review this policy in favour of a VAT multiple rates policy or structure. The
change would allow the provision of preferential rates for essential business inputs such as the
utilities (water, electricity and telephone) for the mega consumers of such utilities (mining and
industry) to increase their production and tax revenue. Comment.
Answer to SEQ 1
A trader is required by law to register for VAT if the turnover of his/her taxable supplies,
excluding VAT, for the twelve months or six months exceeds registration threshold.
The current registration threshold is Tshs 100,000,000 per twelve months or Tshs 50,000,000
per six months. Registration should be made within 30 days from the date when the registration
threshold is exceeded.
When a person fails to apply for the VAT registration within 30 days, the Commissioner General,
Answer to SEQ 1
A trader is required by law to register for VAT if the turnover of his/her taxable supplies,
excluding VAT, for the twelve months or six months exceeds registration threshold.
The current registration threshold is Tshs 100,000,000 per twelve months or Tshs 50,000,000
per six months. Registration should be made within 30 days from the date when the registration
threshold is exceeded.
When a person fails to apply for the VAT registration within 30 days, the Commissioner General,
compulsory register the person and not later than 14 days after
Intending traders registration
Intending traders are suppliers who are registered for VAT before they commence trading
Intending traders
activities. Such are suppliers
registration who for
is normally aretheregistered for VAT
sole purpose beforeinput
of claiming theytax.
commence trading
activities. Such registration is normally for the sole purpose of claiming input tax.
Answer to SEQ 2
Answer to SEQ 2
This is the VAT that is incurred on supplies acquired prior to the time of obtaining registration for VAT
This is thefor
Conditions VAT that is incurred
recovery on supplies
of pre-registration of acquired
input VATprior to the time of obtaining registration for VAT
Conditions for recovery of pre-registration
For pre-registration tax to be recoverable: of input VAT
For pre-registration tax to be recoverable:
 The goods should have been acquired within a period of up to six months prior to the effective
 Thedate goods should have
of registration been
may be acquired within a period of up to six months prior to the effective
allowed,
date of registration may be allowed,
 The goods are in stock on the effective date of registration.
In other The
 goods
words, are
input taxinincurred
stock onprior
the effective date ofcannot
to registration registration.
be recovered with regard to goods that have
In other words, input tax incurred prior to registration cannot
already been supplied out or consumed regardless of the six-month be recovered
period.with regard to goods that have
already been supplied out or consumed regardless of the six-month period.
Answer to SEQ 3
Answer
Details on tothe SEQ
tax3invoice:
Details on the tax invoice:
i] the date on which it is issued;
ii]i] the date
the name, onTaxpayer
which it isIdentification
issued; Number and Value Added Tax Registration Number of the
ii] the name,
supplier; Taxpayer Identification Number and Value Added Tax Registration Number of the
iii] supplier;
the description, quantity, and other relevant specifications of the things supplied;
iii]
iv] the description,
the quantity,
total consideration and other
payable for relevant
the supply specifications
and the amountof theofthings
valuesupplied;
added tax included in
iv] the total consideration
that consideration; payable for the supply and the amount of value added tax included in
v] ifthat
theconsideration;
value of the supply exceeds the minimum amount prescribed in the regulations, the
v] ifname,
the value of the
address, supply Identification
Taxpayer exceeds the Number
minimumand amount
value prescribed
added tax in the regulations,
registration numberthe of
name, address,
the customer Taxpayer Identification Number and value added tax registration number of
the customer
Answer to SEQ 4
Answer to SEQ 4
(i) VAT registration is required when a business makes taxable supplies in the following circumstances:
(i) VAT VAT registration
registration isisrequired
requiredwhen oncea the
business makes taxable
VAT exclusive taxablesupplies
suppliesin the
of following
a business circumstances:
exceed Tshs
VAT registration
100,000,000 is required
for any period ofoncetwelvethemonths,
VAT exclusive taxable supplies
or Tshs 50,000,000 for anyofperiod
a business exceed Once
of six months. Tshs
100,000,000 for any period of twelve months, or Tshs 50,000,000 for any period
this happens, a business has an obligation to inform TRA within 30 days of the end of the month in of six months. Once
this happens,
which a business
the registration limithas
is an obligationRegistration
exceeded. to inform TRAwill within
become 30 effective
days of theon end of the
the first daymonth in
of the
which themonth.
following registration limit iswhich
A business exceeded.
expectsRegistration
the turnoverwillofbecome effective on
taxable supplies, the firstVAT,
excluding day for
of the
the
following month. A business which expects the turnover of taxable supplies,
following twelve months to exceed Tshs 100,000,000 or for the following six months to exceed Tshs excluding VAT, for the
following twelve months to exceed Tshs 100,000,000 or for the following six
50,000,000 must register for VAT immediately under this same rule. In such cases, notification ismonths to exceed Tshs
50,000,000
required must
by the endregister
of that for VATperiod
30 day immediately under this
with registration same
being rule. Infrom
effective suchthecases,
start ofnotification
that period.is
required by the end of that 30 day period with registration being effective from the start of that period.
(ii) The sales will exceed the annual VAT registration limit of Tshs 100,000,000 in September 2017,
(ii) when
The sales will exceedsales
the cumulative the annual VAT2017
from June registration
will be limit
Tshsof150,000,000.
Tshs 100,000,000 in therefore
She will Septemberhave 2017,
to
when the cumulative sales from June 2017 will be Tshs 150,000,000. She will therefore
inform TRA by the end of October 2017 and her VAT registration will be effective as of 1 November have to
inform TRA by the end of October 2017 and her VAT registration will be effective as
2017, or from an earlier agreed date. Alternatively, the half year registration threshold of Tshs of 1 November
2017, or from
50,000,000 will an earlier agreed
be exceeded date. 2017,
in August Alternatively, the halfsales
when cumulative year will
registration threshold
be 81,000,000. of Tshs
In this case
50,000,000 will be exceeded in August 2017, when cumulative
the TRA will have to be informed by the end of September 2017. sales will be 81,000,000. In this case
the TRA will have to be informed by the end of September 2017.
(iii) Nchimunya will have the following obligations in relation to VAT once registered:
(iii) Nchimunya will have the following obligations in relation to VAT once registered:
 She will be required to issue fiscalised tax invoices/EFD receipts in respect of the supplies she
She will be required to issue fiscalised tax invoices/EFD receipts in respect of the supplies she
 makes.
makes.
 She will be required to complete and submit VAT returns, and pay VAT on the due dates.
 She will be required to complete and submit VAT returns, and pay VAT on the due dates.
 Nchimunya must maintain VAT records for a minimum period of at least five years and allow VAT
inspectors access to the VAT records at any time.
 Nchimunya will have informed the Tanzania Revenue Authority of any change in the legal
circumstances of her business that will warrant a cancellation of the VAT registration.
Answer to SEQ 5
Circumstances for deregistration
(i) If the taxable person ceases to make taxable supplies. .
(ii) If the taxable turnover falls below the registration threshold.
(iii) If the taxable person ceases to carry on an economic activity and will no longer carry on a business
Answer to SEQ 6
;ŝͿ Normal registration
Occurs when a taxpayer register for VAT when his taxable turnover exceeds registration
threshold of TZS.100,000,000 for consecutive 12 months or TZS.50,000,000 for
consecutive 6 months. Or when a person required to be registered for VAT apply for
registrations as service professional providers and government entity.
;ŝŝͿ Compulsory registration

This occurs when a person fails to apply for VAT within 30 days, the Commissioner
General compulsory register the person and later than 14 days after the day of registration,
notify the person on registration. Or this can be done if there is good reason of doing so
including protection of government revenue. The person may be registered regardless of the
person’s turnover.
;ŝŝŝͿ Intended traders
This can be referred to the person in process of setting economic activity with intention of
making taxable supplies with a turnover of excess of the VAT registration threshold but
have not yet started making the taxable supplies.
Answer to SEQ 7
(a) VAT is computed and accounted for on accrual basis of accounting of sales and purchases
whether the sales or purchases are made in cash or on credit. Where the sales or purchases are
made on credit and the credit period is prolonged, the seller is still required to pay the tax on the
due date although he has not collected adequate cash from his customers. Since there may not
be adequate cash for payment of the tax, the seller is forced to pay the tax out of his private
resources or borrow money at considerable interest in order to avoid penalties for failure to pay
the tax on the due date. Even where a VAT refund is due to the taxpayer it takes at least six
months to secure the refund from the TRA. TRA should allow payment of VAT in instalments or
pay on cash basis.
(b) The reduction of the VAT registration threshold and the rate of VAT will have the following
advantages:
Reduction of registration threshold.

 The current TZS 100 million threshold is too high resulting into:
 Many businessmen below the TZS 100m turnover are excluded;
 Some big businessmen try to fit themselves below the TZS 100m threshold.
 The reduction of the threshold will increase the tax base, i.e. increase the number of
registered taxpayers as more people will qualify for registration
 An increase in registration will in turn increase revenue collection although administration

costs may also increase.
Reduction of VAT rate:

 The current 18% rate is too high, which may cause tax evasion as people try to avoid the
heavy tax burden.
 A lower rate will encourage a higher level of voluntary tax compliance.
 As compliance improves it will boost revenue collection.
 The reduced rate will make Tanzania more competitive to investors within the East
African Community region.
(c) Advantages of a multiple VAT rate structure and lower rate for the utilities.
 It is likely to increase revenue yield as consumption of the utilities increases with more
production.
 Lower VAT rate on utilities will also reduce the cost of industrial inputs resulting into
cheaper goods.
 Affordable goods for the public raises the standard of living for the people.
Disadvantages:
 A multiple VAT rate structure reverts to the old sales tax system which was full of
administrative complexity and cumbersome administration.
 Complexity of the law leads to tax evasion (less revenue) as taxpayers try to reclassify
goods to take advantage of the lower rates categories.
F4
SECTION F
Value Added Tax Act
STUDY GUIDE F4: INPUT TAX CREDITS
After knowing types of supplies, one needs to know how input taxes are computed and when input
taxes can be deducted as explained in the characteristics of VAT. This Study Guide deals with
conditions necessary for deduction of input taxes
Learners will be able to:

a) Explain conditions for the person to claim /deduct input tax
b) Describe non -deductible input taxes
c) Explain conditions for claiming pre- registration input tax
d) Explain conditions for deduction of input tax on bad debts
e) Describe deduction and payments of input tax on imported goods and services
Explain conditions for the person to claim /deduct input tax and describe non -
Explain
deductible conditions
input taxes. for the person to claim /deduct input tax and describe non -
deductible input taxes.
1. Conditions For The Person To Claim /Deduct Input Tax

1. Conditions For The Person To Claim /Deduct Input Tax
A taxable person is entitled to claim as a deduction any VAT, he has incurred on acquisition of goods
A taxable person is entitled to claim as a deduction any VAT, he has incurred on acquisition of goods
or services for the purpose of his business provided that the goods or services are acquired wholly or
or services for the purpose of his business provided that the goods or services are acquired wholly or
partly for the purpose of making taxable supplies, including zero rated supplies. The “input tax” is
partly for the purpose of making taxable supplies, including zero rated supplies. The “input tax” is
claimed by deducting it from the “output tax” in the VAT return.
claimed by deducting it from the “output tax” in the VAT return.
The general rules for input tax deduction is that:

The general rules for input tax deduction is that:
(a) All input tax directly attributable to taxable supplies is allowed (except on non creditable
(a) All input tax directly attributable to taxable supplies is allowed (except on non creditable
purchases)
purchases)
(b) Input tax directly attributable to exempt supplies is not allowed
(b) Input tax directly attributable to exempt supplies is not allowed
(c) Where the input tax that is not directly attributable to either taxable or exempt supplies, an
(c) Where the input tax that is not directly attributable to either taxable or exempt supplies, an
apportionment must be done for each tax period, to determine the allowable amount of that
apportionment must be done for each tax period, to determine the allowable amount of that
input tax.
input tax.
Conditions for the taxable person to claim/deduct input tax
Conditions for the taxable person to claim/deduct input tax
Apart from the above rules the following are general conditions for input tax deduction:-
Apart from the above rules the following are general conditions for input tax deduction:-
i) The amount to be claimed must actually be VAT properly charged by the another
i) The amount to be claimed must actually be VAT properly charged by the another
taxable person or relate to a taxable importation
taxable person or relate to a taxable importation
ii) The supplies on which the tax was charged must be made to the taxable person
ii) The supplies on which the tax was charged must be made to the taxable person
seeking to claim the input tax
seeking to claim the input tax
iii) The supplies must have been incurred for the purpose of the business. Goods or
iii) The supplies must have been incurred for the purpose of the business. Goods or
services must be used or to be used for the purpose of the business
services must be used or to be used for the purpose of the business
iv) The person seeking to claim input tax must hold satisfactory documentary evidence of
iv) The person seeking to claim input tax must hold satisfactory documentary evidence of
the supplies in support of his/her claim.
the supplies in support of his/her claim.
v) The input tax must be incurred not more than six months from the date of tax invoice,
v) The input tax must be incurred not more than six months from the date of tax invoice,
fiscal receipt or other evidence
fiscal receipt or other evidence
vi) The supplies received must not be subject to input tax restrictions i.e motorcars,
vi) The supplies received must not be subject to input tax restrictions i.e motorcars,
entertainment, and subscription.
entertainment, and subscription.
2. Non -Deductible Input Taxes
Generally a taxable person will be able to deduct or claim input tax credit against the output tax
chargeable on his taxable supplies except on the following purchases/expenses. (Section 68(3)-
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. The restrictions are discussed in more details below
Explain conditions for claiming pre- registration input tax; explain conditions for
deduction of input tax on bad debts and describe deduction and payments of
out, c)
or providing transport
An acquisition services
or import of in
a passenger vehicles
vehicle, and
or ofthe vehicle
spare was
parts or acquired formaintenance
repair and that
purpose.services
The restrictions are discussed
for a passenger vehicle,inunless
more details below economic activity involves dealing in, hiring
the person’s
out, or providing transport services in passenger vehicles and the vehicle was acquired for that
purpose. The restrictions are discussed in more details below Input Tax Credits: 381
deduction of input tax on bad debts and describe deduction and payments of
input tax on imported goods and services.
deduction of input tax on bad debts and describe
[Learning outcomededuction
c, d, and e]and payments of
input tax on imported goods and services.
3. Conditions For Claiming Pre- Registration Input Tax

Section 79, generally provides that, a person who is not formally registered for the tax is not entitled
3. credit
to tax Conditions For
in respect of Claiming
VAT paid onPre- Registration
goods Input TaxHowever when such person
or services purchased.
becomesSection
registered, tax creditprovides
79, generally may be that,
claimed for anywho
a person input
is tax
not paid on taxable
formally goods
registered heldtax
for the in is
stock
not entitled
at the date
to taxofcredit
registration,
in respectprovided the taxable
of VAT paid on goodsperson has the
or services necessary
purchased. tax invoice
However and person
when such
documentary evidence
becomes to support
registered, the claim.
tax credit may beInput tax credit
claimed is input
for any allowed
tax only
paid for
on stock
taxablepurchased or in stock
goods held
importedatwithin the period
the date of six months
of registration, prior the
provided to the date of
taxable registration.
person has theThe taxable person
necessary is
tax invoice and
allowed documentary
to make an appropriate deduction
evidence to support from the output
the claim. Inputtax
taxpayable
credit isin allowed
any oneonly
of the
forfirst three
stock tax
purchased or
periods after the person
imported within becomes a registered
the period person.
of six months prior to the date of registration. The taxable person is
allowed to make an appropriate deduction from the output tax payable in any one of the first three tax
periods after the person becomes a registered person.
4. Conditions For Deduction Of Input Tax On Bad Debts
A VAT Registrant may also claim an input tax deduction for VAT on any bad debt that was written off,
4. output
since Conditions For Deduction
tax for such debt would Of Input
have beenTax On Bad
reported for Debts
in the tax period when the credit
agreement commenced.
A VAT RegistrantIfmay
at any time
also a taxpayer
claim an input recovers any of
tax deduction forthis
VAT debt, the bad
on any VATdebt
recovered must
that was written off,
be reported
sinceasoutput
outputtax
taxfor
once again,
such debtinwould
that period. Regulation
have been 25 of
reported forVAT (General)
in the Regulations,
tax period when the credit
2015 provides that;-commenced. If at any time a taxpayer recovers any of this debt, the VAT recovered must
agreement
(i)beAreported
taxable person maytax
as output deduct
onceinput taxininthat
again, respect of debt
period. which has
Regulation 25 become irrecoverable.
of VAT (General) Regulations,
(ii)2015
A taxable that;-may deduct input tax if –
person
provides
(a) consideration for a taxable supply was payable in monetary terms;
(b) the taxable person accounted for the supply in a value added tax return; and
(c) the amount of input tax to be claimed is calculated by applying a tax fraction to the
actual amount written off.
(iii) A debt shall be considered irrecoverable, if-
(a) the taxable person has undertaken action for recovery of the debt or has handed
over the bad debt to an attorney or debt collector for recovery.
(b) The action for recovery has exhaustively proven futile; and
(c) the taxable person has made all necessary entries in the books of account,
including writing-off the bad debt;
(iv) Where a taxable person subsequently receives payment in respect of a bad debt written
off, the person shall account for output tax in the tax period in which the payment is
received.
Note
Under section 74 (2) (a),of the principal Act, the debt is deemed overdue and hence subject to
the write off if it became overdue by more than 18 months
5. Deduction Of Input Tax On Imported Goods And Services

The destination principle requires a charge to VAT to be placed on all imports. This is usually done
through a charging provision that parallels the one on internal supplies. The parallel provision
Under section 74 (2) (a),of the principal Act, the debt is deemed overdue and hence subject to
the write off if it became overdue by more than 18 months
5. Deduction Of Input Tax On Imported Goods And Services

The destination principle requires a charge to VAT to be placed on all imports. This is usually done
through a charging provision that parallels the one on internal supplies. The parallel provision
normally adopts and adapts the laws imposing customs duties on the imported goods. The laws
determining whether items are goods (inclusion in the tariff), whether they are imported (rules of
origin), and when and where they are imported will serve for VAT purposes as for customs duty
purposes, although it may be necessary to make clear that the act of importing occurs within the
territory of the state for VAT purposes to avoid any legal problems. Customs regimes, such as free
ports, duty-free shops, and tax-free zones can be applied readily to VAT on this basis, the zones
being regarded as outside the territory of the state.
5.1 Imported goods

Because the VAT system depends on the levying of tax on every person when the person
acquires goods, it is logical that when that person acquires goods by importation VAT should
also be charged. VAT will be collected by customs and excise department on entry for home
consumption of imported goods in terms of the Customs and Excise Management Act. Section 3
states that the, Value added tax shall be imposed and payable on taxable supplies and taxable
imports. Whereas section 4(a) provides that the person liable to pay value added tax, in the case
of a taxable import, the importer;
5.1.1 Value of import for VAT purpose

Section 9 of the VAT Act provides that, the value of an import of goods shall be the sum
of -
(a) the value of goods for the purposes of customs duty under the East African
Customs Management Act, whether or not duty is payable on the import;
(b) the amount of any customs duty payable on the import; and
(c) to the extent not included under paragraph (a) or (b) in respect of-
i) the cost of insurance and freight incurred in bringing the goods to
Mainland Tanzania; and
ii) the amounts of any tax, levy, fee, or fiscal charge other than customs
duty and value added tax payable on the import of the goods.
5.1.2 Payment and collection of value added tax on imports

Under section 8(1)(a),the value added tax payable on a taxable import is to be paid-
where goods are entered for home consumption in Mainland Tanzania, in accordance
with the provisions of this Act and procedures applicable under the East African Customs
Management Act; The Commissioner General shall collect value added tax due under
this Act on a taxable import at the time of import.(section 8(3)
5.2 Imported Services
VAT on imported services is accounted for by the “reverse charge” method. Any services
sourced from abroad, which would be taxable if obtained from a Tanzanian supplier, are subject
to this reverse charge. Relevant services are treated as being supplied both by and to the
importer. The notional calculated output tax must be accounted for, but the same value may be
deducted as input tax in the same tax period, subject to any restriction imposed by a partial
exemption method. The effect of the procedure is that there is no financial impact on businesses
which make only taxable supplies. Businesses which make exempt supplies will bear the tax on
5.2 Imported Services
VAT on imported services is accounted for by the “reverse charge” method. Any services
sourced from abroad, which would be taxable if obtained from a Tanzanian supplier, are subject
to this reverse charge. Relevant services are treated as being supplied bothInput Tax Credits:
by and to the 383
importer. The notional calculated output tax must be accounted for, but the same value may be
deducted as input tax in the same tax period, subject to any restriction imposed by a partial
exemption method. The effect of the procedure is that there is no financial impact on businesses
which make only taxable supplies. Businesses which make exempt supplies will bear the tax on
imported services in the same way and to the same extent as if they had obtained the services in
Tanzania.
Businesses which make only exempt supplies, and which consequently cannot register for VAT
under normal circumstances are obliged to register if the value of their imported taxable services
exceeds the registration threshold.
Section
Legal 68(2) of the Act provides that,the value added tax payable by the purchaser of a taxable
authority
Section
supply of68(2) of theservices
imported Act provides
shall that,the
be output value
tax added tax payable
and input tax of that by person,
the purchaser
and theofpurchaser
a taxable
Section Section
68(2) of 68(2)
the Act of provides
the Act provides
that,the that,the
value addedvaluetaxadded
payabletax payable by the purchaser
by the purchaser of a taxable
of a taxable
supply
shall notofbeimported
allowedservices
an input shall be output
tax credit taxsupply
for that and input taxhe
unless ofhas
thataccounted
person, and for the
the purchaser
output tax
supply ofsupply
importedof imported
servicesservices
shall be shall
outputbetax
output
and tax
inputand
taxinput taxperson,
of that of that person,
and the and the purchaser
purchaser
shall
in thenot
same be allowed
Value added an input tax credit
tax return for that
in which thesupply unless
input tax heishas
credit accounted for the output tax
claimed.
shall notshall not be allowed
be allowed an inputan taxinput
credittax
forcredit for thatunless
that supply supplyhe unless he has accounted
has accounted for thetax
for the output output tax
in
Thisthemeans
same that,
Valuea added
taxabletax returnwho
person in which the input
acquires tax credit
imported servicesis claimed.
shall treat such supplies as:
in the samein the sameadded
Value Valuetax
added taxinreturn
return whichinthewhich
inputthe
taxinput
credittax
is credit
claimed.is claimed.
(i)ThisSupply
meansby that,
theataxable
taxableperson
personandwhoshould
acquires imported
impose services
output tax as shall
the casetreatmay
suchbe;
supplies
and as:
This means Thisthat,
means that, a person
a taxable taxablewhoperson who acquires
acquires importedimported
servicesservices
shall treat shall treat
such such supplies
supplies as: as:
(i)
(ii) Supply by the taxable person and
to the and should imposeofoutput
treat amount outputtaxtaxassotheimposed
case may as be;
inputand tax of the
(i) (i)
Supply Supply
by by the person
the taxable taxableandperson andimpose
should should output
imposetax output
as thetaxcase
as the
may case
be; may
and be; and
(ii) Supply
taxable to the taxable person and treat amount of output tax so imposed as input tax of the
person.
(ii) (ii) to
Supply Supply to the person
the taxable taxable and
person
treatand treat amount
amount of outputoftax output tax so imposed
so imposed as inputas taxinput
of thetax of the
Section taxable
2 of theperson.
Act define imported services as services supplied to a taxable person if the supply
taxable person.
taxable person.
Section
of 2 of the is
the services Actnotdefine
madeimported services
in the United as services
Republic supplied tounder
as determined a taxablethis person if the supply
Act. Therefore it is
Section Section
2 of the 2Act of define
the Actimported
define imported
servicesservices
as servicesas services
suppliedsupplied
to a taxableto a person
taxable ifperson if the supply
the supply
of the services
service acquiredisfrom not person
made in the United
residing Republic
outside Tanzania as Mainland.
determined under this Act. Therefore it is
of the services
of the services is not made is notinmade in the Republic
the United United Republic as determined
as determined under this under
Act.this Act. Therefore
Therefore it is it is
service acquired from person residing outside Tanzania Mainland.
service acquired
service acquired from personfromresiding
person residing outside Tanzania
outside Tanzania Mainland. Mainland.
Self-Examination
Questions
Question 1
Question
Explain five1 circumstances where input VAT is not claimable
QuestionQuestion
1 1
Explain five circumstances where input VAT is not claimable
Explain
Explain five five circumstances
circumstances where
where input input
VAT VAT
is not is not claimable
claimable
Question 2
Question
BH Trading2 Limited is a company which is registered for value added tax (VAT). The company entered
Question Question
2 2
BH
into Trading Limited
the following is a company
transactions which
in the is registered
month for value added tax (VAT). The company entered
of May 2018:
BH Trading
BH Trading Limited
Limited is is a company
a company which is which is registered
registered for valuefor valuetax
added added
(VAT).taxThe
(VAT). The company
company entered entered
into Sales
(i) the following
to VAT transactions in the month
registered customers wereofTshs
May 200,600,000
2018: out of which Tshs 100,600,000 were
into the following
into the following transactions
transactions in theofmonth
in the month of May 2018:
May 2018:
(i) standard
Sales to VAT
ratedregistered customers
and the balance zerowere Tshs 200,600,000 out of which Tshs 100,600,000 were
rated.
(i) Sales(i) toSales to VAT registered
VAT registered customers customers
were Tshswere Tshs 200,600,000
200,600,000 out ofTshs
out of which which Tshs 100,600,000
100,600,000 were were
standard rated and the balance zero rated.
standard
(ii) Sales tostandard
rated and rated
unregistered and the balance
thecustomers
balance zero zero60,500,000
wererated.
Tshs rated. all standard rated.
(ii) Sales to unregistered customers were Tshs 60,500,000 all standard rated.
(ii) (ii)toSales
(iii) Sales
Standard ratedtopurchases
unregistered
unregistered fromcustomers
customers were Tshs
registeredwere Tshs 60,500,000
60,500,000
customers all
all standard
amounted standard
rated.
to Tshs rated. (VAT inclusive),
141,600,000
(iii) Standard rated purchases
whilst purchases from registered
from unregistered customers
customers amounted
amounted to Tshsto10,600,000
Tshs 141,600,000 (VATTshs
out of which inclusive),
(iii) Standard
(iii) Standard rated purchases
rated purchases from registered
from registered customers
customers amounted
amounted to Tshs 141,600,000
to Tshs 141,600,000 (VAT inclusive),
(VAT inclusive),
whilst purchases
9,080,000 from unregistered
were standard rated and customers amounted
Tshs 1,520,000 to Tshs 10,600,000 out of which Tshs
exempted.
whilst purchases
whilst purchases from unregistered
from unregistered customerscustomers
amountedamounted to Tshs 10,600,000
to Tshs 10,600,000 out ofTshs
out of which which Tshs
9,080,000 were standard rated and Tshs 1,520,000 exempted.
(iv) 9,080,000
Standard 9,080,000
rated were standard
were expenses
standard rated rated
and
amounted to and
Tshs Tshs 1,520,000
1,520,000
Tshs exempted.
exempted.
2,526,000 comprising:
(iv) Standard rated expenses amounted to Tshs 2,526,000 comprising:
(iv)Entertaining
(iv) StandardStandard rated
rated expenses expenses amounted
amounted
customers to Tshs 2,526,000
to Tshs 2,526,000 comprising:
comprising:
990,000
Entertaining
Motor car customers
expenses 990,000
1,005,000
Entertaining
Entertaining customers customers 990,000990,000
Motor car expenses
Telephone bills 1,005,000
121,000
Motor car Motor car expenses
expenses 1,005,0001,005,000
Telephone
Stationery bills 121,000
250,000121,000
Telephone Telephone
bills bills 121,000
Stationery
Utility bills 250,000
160,000250,000
StationeryStationery 250,000
Utility bills
Tshs 32,000 ofUtility
the utility bills were incurred in respect 160,000
of a company house in which the company’s
Utility bills bills 160,000160,000
Tshs 32,000
Managing of the is
Director utility bills were incurred in respect of a company house in which the company’s
accommodated.
Tshsof
Tshs 32,000 32,000 of the
the utility utility
bills were bills were incurred
incurred in of
in respect respect of a company
a company house inhouse
whichinthe
which the company’s
company’s
(v) Managing
The company Director is accommodated.
sold standard rated furniture which was excess to its requirements for Tshs
Managing Managing
Director Director is accommodated.
is accommodated.
(v) The company
10,620,000 soldinclusive).
(VAT standard rated furniture which was excess to its requirements for Tshs
(v) The (v) The company
company sold standard
sold standard rated furniture
rated furniture which waswhich was to
excess excess to its requirements
its requirements for Tshsfor Tshs
10,620,000 (VAT inclusive).
10,620,000
(VAT inclusive).
Telephone bills 121,000
Stationery 250,000
384 Value Added Tax Act of the utility bills were incurred in respect of a company house in which the company’s
Tshs 32,000
Managing Director is accommodated.
(v) The company sold standard rated furniture which was excess to its requirements for Tshs
(vi) The company acquired a motor car at a cost of Tshs 13,920,000 (VAT inclusive) and a delivery van
at a cost of Tshs 20,600,000 (VAT inclusive). VAT on the two vehicles was charged at the standard
rate and both vehicles are used wholly and exclusively for business purposes.
(vii) The company wrote off a debt of Tshs 1,180,000 and Tshs 560,000 in respect of a standard rated
invoice of unregistered customers which were due on 30 June 2016 and on 31 December 2017
respectively.
Unless specifically stated, all the above persons are registered for VAT and the transactions are stated
exclusive of VAT.
Required:
Calculate the VAT payable in respect of the month of May 2018
Question 3
State any four (4) conditions which must be met for a business to claim bad debt relief. (4 marks)
Question 4
Maziku Limited is a cooking oil processing company located in Ndala, Tabora region, and is registered for
value added tax (VAT). Maziku Limited entered into the following transactions in the month of September
2018:
1. Sold taxable supplies to customers as follows: Sales to VAT registered customers Tshs
3,835,000 (VAT inclusive) and Tshs 675,000 to unregistered customers.
2. Bought a brand new pick-up from Toyota at Tshs 3,250,000.
3. Bought stationery worth Tshs 65,000 from suppliers who are not registered for VAT.
4. Entertained major customers at a local hotel at a cost of Tshs 246,100.
5. Bought ground nuts from local farmers at a cost of Tshs 1,250,000.
6. Paid for electricity and telephone at Tshs 32,140 and Tshs 44,100, respectively.
7. A consultant on production processes was hired from South Africa. The consultant has no local
office; as a result he is not registered for VAT. He invoiced Tshs 1,650,000 for the work done.
8. Bought an EFD machine from BMTL Suppliers at Tshs 175,800.
9. Received a deposit on sale to a customer amounting to Tshs 465,000.
Unless specifically stated, all the above persons are registered for VAT and the transactions are
stated exclusive of VAT.
Required:
Calculate the VAT payable or any excess carried forward for the period
Input Tax Credits: 385
Question 5
State three types of expenditure on which the input VAT payable by a registered trader is treated as
‘blocked’ and therefore irrecoverable
Answer to SEQ 1
The taxable person may not be allowed to claim deduction of input tax he/she has so incurred under the
following circumstances:
(i) Where the input tax is directly attributable to an exempt supply.
(ii) Where the input tax deduction claim is not supported by the required documentary
evidence.
(iii) Where the input tax is time barred. Tax is incurred more than six months before the date of
claiming deduction.
(iv) Input tax incurred on purchase of motor vehicles for carriage of passengers or cargo for
other than commercial reasons.
(v) Input tax incurred on provision of business entertainment.
Answer to SEQ 2
Output VAT
Sales to registered
customers:
Standard rated sales 18,108,000

Zero rated sales
Sales to unregistered
customers 10,890,000
Sale of furniture 1,620,000
Total output tax 30,618,000

Input VAT
Purchases from registered
traders 21,600,000
Purchases from unregistered
traders(irrecoverable) -
Standard rated expenses: -

Entertaining customers
(irrecoverable) -
Motor car
expenses(irrecoverable) -
Telephone bills
(irrecoverable) 21,780
Stationery 45,000

Utility bills for directors
accommodation
(irrecoverable) -
Motor car (irrecoverable) -
Delivery van ( 3,142,373
Bad Debt relief: -

Invoice due on 30 June 2016
(18/118 ×1,180,000) 180,000
Invoice dated 31 December
2017 (Does not qualify) -
Total Input Tax 25,012,193
VAT payable 5,605,807
Answer to SEQ 3
The following conditions must met for a business to claim bad debt relief:
(1) A supply of goods and services must have been made for consideration in money
(2) Output VAT must have been accounted for and paid by the supplier,
(3) The whole or part of the debt must have been written off as bad in the records of the supplier,
(4) At least eighteen months must have elapsed since the time when the payment was due.
Input Tax Credits: 387
Answer to SEQ 4
VAT payable or any excess carried forward for the period
Output tax
Sales for the month
Registered Customer 3,835,000 18%/118% 585,000
Unregisterd Customer 675,000 18% 121,500
Consultants 1,650,000 18% 297,000
Deposit 465,000 18% 83,700
1,087,200
Input tax
Capital goods – Toyota 3,250,000 18% 585,000
Stationery 65,000 18% 11,700
Entertainment 246,100 18% 44,298
Groundnuts 1,250,000 Exempt -
Electricity and telephone 76,240 18% 13,723
Consultants 1,650,000 18% 297,000
EFD Machine 175,800 Exempt -
951,721
VAT payable 135,479

Answer to SEQ 5
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.
The restrictions are discussed in more details below
G1
Customs: 389
SECTION G
CUSTOMS
SECTION G: CUSTOMS
STUDY GUIDE G1: CUSTOMS
Customs departments play a major role in collecting government tax revenues. The taxes come from
taxing imported and exported goods. While the value of exported goods can be easily determined by
the exporting country, the value of imported goods is a bit challenging to all customs departments in
the world.
To resolve the valuation faced by custom, customarily six methods of calculating value of imported
goods have been agreed internationally. These are transaction value of imported goods,
transaction value of identical goods, transactional value of similar goods, deductive method,
computed method and fall back method.
This Study Guide deals with operation of customs tax laws, application of customs valuation
methods and computation of customs taxes.
Knowledge of customs tax laws is important in ensuring compliance with the customs tax laws and
efficient administration of the laws.
a) Describe sources of Customs Law

b) Describe the objectives and scope of cooperation in the East Africa Customs Union
c) Explain customs entry and clearance procedures for imports
d) Explain the customs entry and clearance procedures for exports
e) Explain the administration of bonded and customs warehouses
f) Differentiate between prohibitions and restrictions
g) Describe the rules of origin in the East Africa Customs Union
h) Apply Customs Valuation methods
i) Calculate Duties and Taxes collected through customs
j) Explain Customs procedures for prevention of smuggling
k) Determine offences in customs operations
l) Describe recovery measures used to collect unpaid duties
390 Customs
Describe the sources

Describe of customs
the sources law; objectives
of customs and scope
law; objectives and of cooperation
scope in the East
of cooperation in the East
Africa Customs Union; and explain customs entry and clearance procedures for
Africa Customs Union; and explain customs entry and clearance procedures for
imports.
imports.
[Learning outcome
[Learning a, b, and
outcome a, c]
b, and c]
1. Sources of Customs
1. Sources Law Law
of Customs
CustomsCustoms
and excise and department of Tanzania
excise department RevenueRevenue
of Tanzania AuthorityAuthority
collects collects
all importall and export
import and taxes.
export taxes.
These taxes
These taxes include excises duties, value added tax on imports, import duties and duties.
include excises duties, value added tax on imports, import duties and export export duties.
Consequently, the department
Consequently, implements
the department Value added
implements Value tax Act, tax
added 1997;
Act,Electronic Fiscal Devices
1997; Electronic Act,
Fiscal Devices Act,
2010; The East African Community Customs Management Act,
2010; The East African Community Customs Management Act, 2004; The East African 2004; The East African
Community CustomsCustoms
Community Management (Amendment)
Management Act, 2011,
(Amendment) Act,The Excise
2011, The Management
Excise Managementand Tariff
andAct,
Tariff Act,
Chapter Chapter
147; Protocol on the Establishment of the East African Customs Union, The
147; Protocol on the Establishment of the East African Customs Union, The East African East African
Community CustomsCustoms
Community Union (Rules
Union of Origin)
(Rules of Rules,
Origin) Electronic Fiscal Devices
Rules, Electronic Regulation,
Fiscal Devices 2010, East
Regulation, 2010, East
Africa Community Customs Management (Duty Remission) Regulations, 2008;
Africa Community Customs Management (Duty Remission) Regulations, 2008; East Africa CustomsEast Africa Customs
Management Regulations,
Management 2010; East
Regulations, 2010;Africa
East Customs Management
Africa Customs (Compliance
Management and enforcement)
(Compliance and enforcement)
Regulations, 2012. In2012.
Regulations, addition, practice practice
In addition, notes, case
notes,laws
caseand directives
laws made bymade
and directives the council
by the of East of East
council
Africa Community and relevant principles of international laws are sources of
Africa Community and relevant principles of international laws are sources of customs tax laws.customs tax laws.
Throughout this study
Throughout thisguide,
studyany reference
guide, to section
any reference refers torefers
to section the East African
to the East Community CustomsCustoms
African Community
Management Act 2004.
Management Act With
2004.exception of the value
With exception of theadded
value taxaddedlaws,taxother
laws,customs tax lawstaxarelaws are
other customs
implemented at the East Africa Community level because all customs
implemented at the East Africa Community level because all customs in the community in the community are are
managed under the East Africa Community Customs Management Act, 2004. Therefore
managed under the East Africa Community Customs Management Act, 2004. Therefore all East Africa all East Africa
community Partner states
community Partnersuch as.such
states Tanzania, Rwanda,Rwanda,
as. Tanzania, Burundi,Burundi,
Kenya and Uganda
Kenya are required
and Uganda to abide to abide
are required
by theseby
laws.
these laws.
2. Objectives and scope

2. Objectives of cooperation
and scope in the East
of cooperation in theAfrica Customs
East Africa Union Union
Customs
A Protocol for the Establishment

A Protocol of the East
for the Establishment African
of the East Community CustomsCustoms
African Community Union was signed
Union wasby the three
signed by the three
East African
East Heads
AfricanofHeads
State of
onState
2 March
on 22004 in Arusha,
March Tanzania.
2004 in Arusha, Tanzania.
The Republics of Rwanda
The Republics and Burundi
of Rwanda joined the
and Burundi Customs
joined Union inUnion
the Customs 2008 and started
in 2008 andapplying its
started applying its
instruments in July 2009.
instruments in July 2009.
Objectives of the Customs
Objectives Union Union
of the Customs
The objectives of the EAC Customs Union are:
The objectives of the EAC Customs Union are:
 To further
 Toliberalise intra-regional
further liberalise trade in trade
intra-regional goodsinon the basis
goods of basis
on the mutually beneficial
of mutually trade trade
beneficial
arrangements among Partner States;
arrangements among Partner States;
 To promote efficiency
 To promote in production
efficiency within the
in production Community;
within the Community;
 To enhance domestic,
 To enhance cross-border
domestic, and foreign
cross-border andinvestment in the Community;
foreign investment and
in the Community; and
 To promote economic development and diversification in industrialisation in the Community.
 To promote economic development and diversification in industrialisation in the Community.
Scope of Co-operation
Co-operation will apply to any activity undertaken by the EAC Partner States in the field of
Customs Management, and includes the following:
 Customs administration;
 Matters concerning trade liberalisation;
 Trade related aspects including the simplification and harmonisation of trade documentation,
customs regulations and procedures;
 Trade remedies;
 National and joint institutional arrangements;
 Training facilities and programmes on customs and trade;
 Production and exchange of customs and trade statistics and information; and
 The promotion of exports
3. Customs Entry And Clearance Procedures For Imports
3.1 Import Procedures
Reporting procedures for means of conveyance

 National and joint institutional arrangements;
 Training facilities and programmes on customs and trade;
 Production and exchange of customs and trade statistics and information; and
 The promotion of exports Customs: 391
3. Customs Entry And Clearance Procedures For Imports
3.1 Import Procedures
Reporting procedures for means of conveyance

There are various Customs formalities to be accomplished when goods are brought into a Customs
territory in order to ensure compliance with Customs law. These are the operations that must be carried
out by both the persons concerned with the goods and by Customs in order to comply with the statutory
or regulatory provisions which Customs has responsibility to enforce. However as the goods arrives from
the foreign destination it is first essential to identify the means of conveyance used to bring those goods
and the reporting procedure of such means which entails the control purposes from the Customs
perspective as the control of goods and vessel under Customs control is very important for the sake of
combating revenue loss.
,
REPORT OF VESSELS, AIRCRAFTS, AND VEHICLES
Inward report of vessels, aircrafts, and vehicles
This is a Customs procedure where a master of every aircraft or vessel arriving from a foreign port at any
port, make report of such aircraft or vessel, and of its cargo and stores, and of any package for which
there is no bill of lading, to the proper officer on the prescribed form and in the prescribed manner.
e Outwards report of vessels, aircrafts, and vehicles
This is a Customs procedure where the master or agent of every aircraft or vessel in which any goods
are to be exported make a reports of such aircraft or vessel to the proper officer on the prescribed form
and in the prescribed manner
All Aircrafts, Vessels and Vehicles etc, from Foreign must report at appointed ports. When reporting at
appointed ports they must go straight to mooring areas and or landing or boarding areas.
Once the vessel reports, it is not allowed to depart to another port within the country unless the proper
officer has granted permission to the Master.
Once the Master departs to foreign, is not allowed to call at any place within the country unless the
proper officer according to the law has granted him the permission. (Section 21 (1) and (2))
The proper officer may direct the vessels or aircraft place of mooring (Section 22)
Restriction on Boarding Vessel before Proper Officer
Once arriving at the place of mooring it is the duty of proper officer to board the vessels/aircraft. The
agent should know that it is only Proper Officer who is responsible to board vessels/ aircraft and the
agent should facilitate such role in a manner allowed within Customs laws. In some occasion, port pilot,
the health officer or any other public officer in the course of performing his duties and duly authorized,
may board before the proper officer (S 23). The Act provides such exclusion, Provided that prior
permission from the proper officer has been granted.
Making formal reports (S 24 of EAC Customs Management Act, 2004,
The Master of the vessel, Aircrafts or vehicle when arriving from foreign must furnish a formal report to
the proper officer on arrival using the prescribed Customs forms. The report should be within 24 hours
before arrivals in case of vessels and immediately after taking off from the last point of departure to the
Partner States in case of Aircraft. Every report must show goods to be unloaded, in transit; transshipment
and those remain in the aircraft or vessel. Goods in transit, for transshipment, and goods remaining on
board for other ports must be shown separately.
Amendment of report S.24 (5)
In case of obvious error or any omission which result from accident or inadvertence, the agent may be
allowed to amend the report or submit supplementary report.
The Master or Agent may ask for the amendment of the report – (Manifest) using prescribe form. He
must satisfy the officer that:
The Master of the vessel, Aircrafts or vehicle when arriving from foreign must furnish a formal report to
the proper officer on arrival using the prescribed Customs forms. The report should be within 24 hours
before arrivals in case of vessels and immediately after taking off from the last point of departure to the
Partner States in case of Aircraft. Every report must show goods to be unloaded, in transit; transshipment
and those remain in the aircraft or vessel. Goods in transit, for transshipment, and goods remaining on
392 Customs
board for other ports must be shown separately.
Amendment of report S.24 (5)
In case of obvious error or any omission which result from accident or inadvertence, the agent may be
allowed to amend the report or submit supplementary report.
The Master or Agent may ask for the amendment of the report – (Manifest) using prescribe form. He
must satisfy the officer that:
i. Goods were not shipped
ii. Landed at a previous port or
iii. Over carried and landed at a subsequent Port and
iv. If over carried, have been returned to a Port in the Territory
v. Lost at sea
vi. Stolen or destroyed before arrival

All correspondences on short landed goods must be filed in the manifest file.
Each page of the report must be signed initialed, numbered and sealed together by the master or his
agent, if required, signed in the presence of the proper officer.
LANDING PERMIT
Landing permit is required for goods declared as parcel using parcel list. The agent should know the time
limit for the landing permit at the time of submitting it.
The information about the value, classification and taxes with respect of the goods are entered on the
reverse of Landing Permit.
GOODS IN TRANSIT SHED
Due to some working environment some goods may be unloaded in a transit shed. However, Goods in a
transit shed are deemed to be in the importing vessel/aircraft until they are delivered and the owner or
agent shall continue to be responsible.
i. Where goods reported for discharge are not dully unloaded and deposited in a transit shed or
Customs area the master/agent must pay the duty thereof unless he explain to the
satisfaction of the proper officer. (Section 26)
ii. The owner of vessel or aircraft or his agent, or the transit shed owner who fails to count for
the goods in ones custody commits an offence.
iii. The owner of vessel or aircraft or the owner of a transit shed is liable to pay for the
reshipment or for destruction of the goods condemned.
iv.The owner or agent of an aircraft or vessel or owner of a transit shed who fails to meet the
costs of reshipment or destruction of any condemned goods commits an offence.
Goods Reported to be unloaded but not unloaded:
When goods which are supposed to be unloaded and the goods are not in effect not unloaded in a transit
shed the masters or agent of the aircraft or the vessel shall pay duty on the goods unless acceptable
explanation is given to the proper officer.
Shipwrecked or Damaged in an accident in transit
The master of an aircraft or vessel accidentally forced to land in the East African Community States must
report immediately on the cargo and stores to the nearest Customs officer or Administrative Officer. The
cargo and stores of an abandoned vessel or aircraft will be subjected to seizure unless the master o
agent gives satisfactory explanation to the proper officer.
In case of loss or wreck of ships or air craft master or agent of aircraft or vessels shall, with all
reasonable speed make report of such aircraft or vessel and its cargo and stores to the nearest officer or
administrative officer. (Section 28)
Shipwrecked or Damaged in an accident in transit
The master of an aircraft or vessel accidentally forced to land in the East African Community States must
report immediately on the cargo and stores to the nearest Customs officer or Administrative Officer. The
cargo and stores of an abandoned vessel or aircraft will be subjected to seizure unless the master o 393
Customs:
agent gives satisfactory explanation to the proper officer.
In case of loss or wreck of ships or air craft master or agent of aircraft or vessels shall, with all
reasonable speed make report of such aircraft or vessel and its cargo and stores to the nearest officer or
administrative officer. (Section 28)
Manifest, Bill of Lading and Airway Bill
Manifest
A manifest is a list of goods by consignments to be landed at one particular port within the country. If
vessel or aircraft is going to land or call at more than one port a separate manifest should be prepared.
A manifest is a report presented to Customs Department pertaining to goods being conveyed by vessel
aircraft or vehicle arriving from or departing to a foreign port/airport.
The Customs Agents’ Role in Manifest Section
I. To submit reports of all aircrafts, vessels and vehicles arriving from or leaving for a foreign port
II. To apply and recheck the rotation/Manifest numbers allocated by Proper Officers in respect of all
vessels, aircrafts and vehicles arriving from or departing to foreign ports
III. Customs
To agents
liase with theand submit
officers the reasons
in case advanced
of amending the in respect of
manifests asthe applications
applied in satisfaction
for by shipping agents/of
the Customs
Customs Laws
agents andand regulations
submit the reasons advanced in respect of the applications in satisfaction of
Customs
the Customs agents
Laws and submit
and the reasons advanced in respect of the applications in satisfaction of
regulations
IV. To
the Customs Laws and regulations Warehouse Date
advise the client on the Customs
IV. To advise the client on the Customs Warehouse Date
V.
IV. To advise
To ensurethe that all documents
client on the Customs necessary
Warehouse to facilitate
Date compilation of the ships files have been
V. submitted
To ensuretothat Customs
all documents necessary to facilitate compilation of the ships files have been
V. To ensuretothat
submitted all documents necessary to facilitate compilation of the ships files have been
Customs
VI. To compile ships
submitted to Customs files
VI. To compile ships files
VI. To compile ships files
Manifest information (the minimal)
Manifest information (the minimal)
 Ships
Manifest details (Ship’s
information name, ship’s tonnage)
(the minimal)
 Ships details (Ship’s name, ship’s tonnage)
 Voyage details(
Ships details departure/destination
(Ship’s name, ship’s tonnage)date, departure/ destination port)
 Voyage details( departure/destination date, departure/ destination port)
 Owner Voyage–details(
supplierdeparture/destination
names date, departure/ destination port)
 Owner – supplier names
 Consignee’s
Owner – supplier name, address
names
 Consignee’s name, address
 Description
Consignee’sofname, goodsaddress
(types, Weight of packages etc)
 Description of goods (types, Weight of packages etc)
 Marks/numbers
Description of goods of packages,
(types, Weight of packages etc)
 Marks/numbers of packages,
 Marks/numbers of packages,
Arrival of goods by overland route
Arrival of goods by overland route
Arrivals
Arrival ofby vehicles
goods by overland route
Arrivals by vehicles
A personby
Arrivals in-charge
vehiclesof the a vehicle whether carrying any dutiable or un-dutiable goods which arrives
overland
A person at a frontierofofthe
in-charge a apartner
vehicle state from carrying
whether outside the anyEast African
dutiable Community goods
or un-dutiable must adhere to the
which arrives
A person
following in-charge
procedures of the
before a vehicle
unloading whether
or carrying
depositing any
the dutiable
vehicle or or un-dutiable
goods
overland at a frontier of a partner state from outside the East African Community must adhere to the at the goods
frontier which
port. arrives
Report
overland
his/her
followingarrivalat a frontier
procedures of a partner
to the Customs
before state
officer
unloading orfrom
stationedoutside the
at thethe
depositing East African
relevant
vehicle frontier
or goodsCommunity
portathe/she must
enters
the frontier adhere to the
the Partner
port. Report
followingarrival
State.
his/her procedures before unloading
to the Customs or depositing
officer stationed at thethe vehiclefrontier
relevant or goods portathe/she
the frontier
entersport. Report
the Partner
his/her arrival to the Customs officer stationed at the relevant frontier port he/she enters the Partner
State.
State. i. Fill in information in prescribed form about the vehicle and the cargo.
i. Fill in information in prescribed form about the vehicle and the cargo.
ii.i. Sign
Fill inainformation
declarations in ;s to the truth
prescribed of all
form particulars
about filledand
the vehicle in the
theform
cargo.
ii. Sign a declarations ;s to the truth of all particulars filled in the form
iii.
ii. Fully
Sign aand immediately
declarations ;s toanswer any
the truth of relevant questions
all particulars filled put to form
in the him/her by the proper of about
iii. the
Fullyvehicle and cargo. answer any relevant questions put to him/her by the proper of about
and immediately
iii. Fullyvehicle
the and immediately
and cargo. answer any relevant questions put to him/her by the proper of about
iv. Produce
the vehicle all and
consignment
cargo. note.
iv. Produce all consignment note.
v.
iv. Unless
Produceprovided otherwise
all consignment in the Customs laws make due entry of the vehicle and any such
note.
i. Fill in information in prescribed form about the vehicle and the cargo.
ii. Sign a declarations ;s to the truth of all particulars filled in the form
394 Customs
iii. Fully and immediately answer any relevant questions put to him/her by the proper of about
the vehicle and cargo.
iv. Produce all consignment note.
v. Unless provided otherwise in the Customs laws make due entry of the vehicle and any such
goods conveyed. Section 29 of the EACCMA of 2004 provides that the goods and the
vehicle which are dutiable will not be removed from the Customs area until after due entry
and permission to remove the vehicle and the cargo from the Customs area. A person who
contravenes the above procedure commits an offence and may render the goods and vehicle
liable to forfeiture.
Arrivals by International trains
With arrival by international trains the Customs area is the border railway station. The stationmaster or
other person in-charge of the railway station acts on behalf of the Railway Company or corporation.
The procedure then is as follows;
i. The station master or any other person in-charge of the railway station on the arrival of the train
at the port submits to the proper officer copies of invoices, consignment notes, way bills or other
documents relating to the goods in wagons, which are subject to Customs control received by
her/him at the station or supposed to be entered at the station.
ii. The station master or other officer in-charge of the railway station must not allow any goods to
leave the Customs area without the permission of the proper office because removal of such
goods without permission constitutes an offence.
iii. A station master or other person in-charge of the railway stations hall not, without written
permission of the proper officer deliver to the consignee or other person’s goods require to be
entered at any other station.
iv. An owner or user of a private railway siding shall not receive wagons containing goods subject to
Customs control into a private railway siding unless he/she is granted permission from the
commissioner of Customs and excise.
v. Any person who contravenes these provisions as per section 30 of the EACCMA of 2004 may
tender the goods subject into seizure.
Arrivals overland by other means
If a person arrives by land into a Partner State with any goods in his possession shall before disposing of
the goods must follow the following procedure;
i. Report to the proper officer at the nearest point of entry into the Partner of State.
ii. Finish information about the goods in his/her possession in a prescribed form
iii. Declare and sign that all the particulars given in the form are true.
iv. Answer fully and immediately all question asked by the proper officer about the goods.
v. Produce all consignment notes and other documents demanded by the proper officer.
vi. Make entry of such goods unless the Customs laws state otherwise.
vii. Removal of goods received in a Customs area at any place of entry into Partner States is
prohibited except with the permission of the proper officer.
viii. The commissioner however subject to conditions he/she may specify may exempt any person or
a class of persons from the provisions in section 31 of the EACCMA of 2004. However
contravening these provisions may render the goods in question liable to forfeiture.
Customs: 395
Clearance by pipeline:
Pipelines are means of conveying goods such as petroleum or gas. The owners of the pipelines are like
vessels and aircraft's. The procedure for arrivals of such goods is a follows;
i. The nature and quantities of goods imported or exported through a pipe line shall be
recovered and reported by the operator of the pipeline in a manner the commissioner may
direct.
ii. For the purpose of recording and reporting the commissioner may specify the apparatus and
appliances to be used by the operators of the pipeline at their expense.
Passenger clearance
A passenger arriving from a foreign country may be required to make declaration of his/her goods
(Section 46). Likewise, as for aircrafts a passenger from an aircraft or a vessel should disembark only
from it at appointed place. In addition, any person including who is disembarking at that port or place;
who is returning ashore, who has any uncustomed goods; the crew of an aircraft or vessel who are
leaving that aircraft or vessel either temporarily or for any other reason, and wish to remove their
baggage or part thereof, from that aircraft or vessel; any passenger who is temporarily leaving that
aircraft or vessel and wishes to remove therefrom his baggage, or any part thereof or any other person
who may be required by the proper officer to do so; should go direct to the examination baggage room
and remain there until permitted removing (Section 44(2)). Then, the person can use either green or
red channel to exit the port.
Definitions
Green channel means that part of the exit from any customs arrival area where passengers arrive
with goods in quantities or values not exceeding those admissible.
Red channel means that part of the exit from any customs arrival area where passengers arrive with
goods in quantities or values exceeding passenger allowance.
Therefore, the green channel is for passengers with nothing to declare or with baggage consisting of
only goods within the prescribed passenger allowance and the red channel is for passengers
carrying dutiable or restricted goods and for crew members of vessels or aircrafts (Section 45).
Explain the customs entry and clearance procedures for exports; explain the
administration of bonded and customs warehouses; differentiate between
prohibitions and restrictions; and describe the rules of origin in the East Africa
Customs Union.
[Learning outcome d, e, f, g and h]
4. Customs Entry And Clearance Procedures For Exports
Definition
Exportation means the movement of goods from one country to another. In accordance with the
EACCMA, 2004 S.2 (1), the term export means to take or cause to be taken out of a Partner State. There
are three types of exportations, namely outright exportation, temporary exportation and re-exportation.
Transit and Transshipment are also considered as exports.
Categories of exports
Outright exportation
This covers goods which are exported out of the country with the intention to remain there permanently or
to be consumed in those foreign countries e.g manufactured goods like sugar, coffee, tea, nuts etc.
Temporary exportation
This covers goods which are exported out of the country for special purposes and will be brought back
e.g. goods exported for renovation, exhibition or entertainment and declared on the respective procedure
Categories of exports
396 Customs
code whereby the re-importation certificate is issued as confirmation that the goods have left the country
and may be re-imported.
code whereby the re-importation certificate is issued as confirmation that the goods have left the country
and may be re-imported.
Re–exportation
Re–exportation is the Customs procedure whereby goods that were imported for temporary use or
Re–exportation
purpose are to be exported after the end of the intended activities, examples are goods for exhibition or
Re–exportation is the Customs procedure whereby goods that were imported for temporary use or
entertainment. Such goods have to be entered properly and be secured with a Customs security bond.
purpose are to be exported after the end of the intended activities, examples are goods for exhibition or
Re-exportation is normally checked against the preceding entry to ensure that the re-export entry
entertainment. Such goods have to be entered properly and be secured with a Customs security bond.
match/tally with the previously temporary importation entry.
Re-exportation is normally checked against the preceding entry to ensure that the re-export entry
match/tally with the previously temporary importation entry.
Export process
For goods to be exported they need to be entered for export. Once the Customs agent makes an entry
Export process
then goods are to be physically examined before being loaded for export. The export process is
For goods to be exported they need to be entered for export. Once the Customs agent makes an entry
terminated i.e comes to an end, when vessel carrying goods for export leave the boundary of Partner
then goods are to be physically examined before being loaded for export. The export process is
States to foreign destination.
terminated i.e comes to an end, when vessel carrying goods for export leave the boundary of Partner
States to
Export foreign destination.
documentation and declaration
Before export of goods, the owner of the goods is expected to formalize all the procedure for exports.
Export documentation and declaration
These include the following;
Before export of goods, the owner of the goods is expected to formalize all the procedure for exports.
These
(i) include
hasthe following;
to obtain an export license upon the meeting the business requirements.
(i)
(ii) hasgoods
All to obtain an exported
to be export license upon
should be the meeting
loaded onto the
anybusiness requirements.
aircraft or vessel departing to a foreign
part within the boundaries of the port.
(ii) All goods to be exported should be loaded onto any aircraft or vessel departing to a foreign
(iii) part within
The goodsthetoboundaries
be loadedof for
the port.
export should be entered on the export entry (SAD) in
quadruplicate copies and the owner shall be required to furnish full particulars, supported by
(iii) The goods to be loaded for export should be entered on the export entry (SAD) in
documentary evidences. i.e. Commercial invoices, permits, receipts etc that relate to the
quadruplicate copies and the owner shall be required to furnish full particulars, supported by
goods for export.
documentary evidences. i.e. Commercial invoices, permits, receipts etc that relate to the
(iv) goods
The for export.
entry must show the following details:
(iv) Thea.entry Name

must show the following
and address details:
of exporter.
a.
b. Name and address of importer.
exporter.
b.
c. Name and address of Customs
importer. agent.
d.
c. Country
Name andof destination.
address of Customs agent.
e. Commodity code and description of goods.
f. Value of goods and total amount of duty payable.
g. Marks and number of transporting vessel, aircraft, or vehicle.
h. Total number of packages
i. All other information as appeared in SAD
(v) The goods to be exported are grouped into three categories of which are to be entered
separately according to Customs procedure codes:- (CPC) as shown below:
 Exports of domestic goods free of duty.
 Exports of domestic goods liable to export duty.
 Re-exportation of goods not under drawback.

Other trade related documents are also important as they may be required when goods arrives at the
intended destination. These include certificate of origin, health certificate, certificate from Standard
Bureau etc
Conditions for exports

separately according to Customs procedure codes:- (CPC) as shown below:
 Exports of domestic goods free of duty.
 Exports of domestic goods liable to export duty. Customs: 397

 Re-exportation of goods not under drawback.
Other trade related documents are also important as they may be required when goods arrives at the
intended destination. These include certificate of origin, health certificate, certificate from Standard
Bureau etc
Conditions for exports

Loading of goods on any aircraft or vessel or vehicle departing to a foreign should be done subject to the
permission of the proper officer or conditions as he/she may impose.
The following conditions must be fulfilled before loading any aircraft or vessel:-
(a) Goods shall only be put on board any aircraft or vessel when they are dully entered.
(b) Goods shall only be put on board any air craft or vessel within the time prescribed by the
Commissioner.
(c) Goods shall only be put on board any aircraft or vessel from an approved place of loading or
from a sufferance wharf.
(d) Goods shall only be put on board any aircraft or vessel after an entry outward of such vessel
has been made.
(e) Goods shall be put on board any vessel to be loaded on to any aircraft or other vessel only
when such goods may be directly put on board such aircraft or other vessel.
(f) Goods put on board any vessel to be loaded on to any aircraft or other vessel within the limits
of the port.
The agent should be aware that, no goods that have been put on board any aircraft or vessel for export
should be discharged at any place within the Partner States without a written permission of the proper
officer. This is an offence as per the provision of EACCM Act.
Verification and release of goods for export

The Document Processing unit may, before processing of export entries refer them to the Customs port
of loading or entry for any necessary clarifications. The Unit shall ensure that the declarations in the
registered entry conform to the verification reports.
In case of restricted exports, they must be covered by the appropriate export permits while for goods on
which drawback is to be claimed, the particulars on the entry shall be compared with the particulars of the
respective import entry for conformity.
There should be proper manning of entry gates by Customs enforcement Officers, to confirm the correct
verification report and container details before allowing export containers into the port.
All exports are subject to Customs control, hence a Customs Officer has the power to examine such
goods, but any other person has to seek for authority from the Commissioner of Customs to intervene in
any way on such goods. Goods shall be examined at the risk and expense of the owner, thus the owner
is required to unpack, sort, pile, or otherwise prepare the goods for examination. Exports are referred for
physical examination or scanning before they are exported. Examining Officers must ensure that the
supporting documents have correct information in respect to quantity, weight and value.
Upon satisfaction that the declaration is correct in every aspect, an examination account is to be put in
the Customs system (ASYCUDA/SIMBA) for the export entry to be passed and if liable to any export duty
its then collected. If duty is advalorem then The value of goods for export shall include-
 the cost of the goods;
 transport and all other charges up to the time of delivery of the goods on board the exporting
aircraft or vessel, or at the place of exit from the Partner State.
 If the cost of the goods cannot be determined under the above, the cost of similar or identical
goods exported from a Partner State at about or the same time shall apply.
After payment of export duty if any, export entries shall be referred to the officer in-charge of the export
station for the purpose of allocating officers to witness loading and sealing of containers at the exporters
premises.
After the verification process, all packages in the consignment are to be sealed with Customs
tamperproof seals before leaving the manufacturer’s premises.
Exportation of Bonded Goods:-

 If the cost of the goods cannot be determined under the above, the cost of similar or identical
goods exported from a Partner State at about or the same time shall apply.
After payment of export duty if any, export entries shall be referred to the officer in-charge of the export
398 Customs
station for the purpose of allocating officers to witness loading and sealing of containers at the exporters
premises.
After the verification process, all packages in the consignment are to be sealed with Customs
tamperproof seals before leaving the manufacturer’s premises.
Exportation of Bonded Goods:-

At the Customs port of exportation, the Customs Officer has to confirm exportation by endorsing the hard
copies of the export entry with export certification. Similar certification of shipment account is to be
posted against the respective customs entry.
This account together with the Certificate of Export will be used by Security Bonds Management office for
bond cancellation, or at the border, in the case of automatic acquittal of the bond.
Agent has to make sure that goods loaded for export are loaded in presence of customs officer as no
export cargo shall be received at Export Stations without evidence that it was loaded under Customs
supervision. At export stations, releasing Officers have to check and satisfy themselves that seals have
not been tampered with.
If seals are interfered with, 100% physical verification must be done before release for export.
At all times the releasing Officers have to endorse their findings in form of an examination account.
Once satisfied that the cargo is correctly entered as per inspection results its released with an online
Release Order and issue a certificate of export.
Certificate of Exports
A Certificate of export is issued upon confirmation of exportation by the exporter/Clearing agent
presenting endorsed copy of the original bill of lading from the shipping line confirming that the goods
were exported.
The proper Officer has to confirm both the information on the Bill of Lading and the Customs entry.
If the information matches/tallies then the Officer issues a certificate of export to allow the clearing agent
cancel his security bond in case of bonded goods.
Certificates of Origin
Certificates of Origin are issued to facilitate privileged Customs treatment of goods exported from a
Partner State to countries with which the Community has preferential trading agreements.
These Certificates of Origin are issued in respect of qualifying goods upon payment of the appropriate
fees.
The certification of Certificate of Origin is done by Officers specially appointed for that purpose and
whose stamps and signatures are registered and circulated to the respective trading partners/blocs.
Where the provisions of the trade agreement allow retrospective issuance of Certificates of Origin in
respect of goods exported without such a certificate, then the certificate may be issued provided all the
documentation is in order.
A Certificate of Origin can only be issued by the Officer authorised to sign it after confirmation of exit of
goods and It cannot be substituted by any other document, except where the export destination or
Consignee has changed and this should be done before the goods are exported and approval is granted
by the Officer in-charge of administering the rules of origin.
Trade agreements provide for co-operation between trading partners in the investigation of fraudulent
claims on certificates of origin. Accordingly, requests made for assistance should be fast tracked with
thorough investigations.
The designated Officer should ensure that requests for assistance under the terms of a trade agreement
are expedited and that officers of sufficient seniority and experience are appointed to undertake the
investigations. The Investigation findings are to be conveyed to the foreign Customs Authorities through
the office of the Commissioner of Customs as a matter of acceptable operational protocol i.e (exchange
or information.
Procedures for Outward Clearance of means of conveyance
The master or agent of every aircraft/vessel or vehicle in which any goods are to be exported, should
make entry outwards to the proper officer on the Customs prescribed form. Such entry outwards should
only be made after the whole of the cargo reported for discharge has been discharged.
Goods which have been put on board any aircraft or vessel for export, or for use as stores, or as
passengers’ baggage, should not be discharged at any place within the Partner States, except by written
permission of the proper officer and in accordance with such conditions as he or she may impose.
For the case of a vehicle, A person in charge of a vehicle or not departing from a partner state, whether
or not such vehicle is conveying goods, should depart through the appointed port under Section 11 and
before departing he/she should do the following:-
(a) Report his/her intended departure to Customs officer.
(b) Furnish on the prescribed forms all information related to the vehicle and goods for exports.
The master or agent of every aircraft/vessel or vehicle in which any goods are to be exported, should
make entry outwards to the proper officer on the Customs prescribed form. Such entry outwards should
only be made after the whole of the cargo reported for discharge has been discharged.
Goods which have been put on board any aircraft or vessel for export, or for use as stores, or as
Customs: 399
passengers’ baggage, should not be discharged at any place within the Partner States, except by written
permission of the proper officer and in accordance with such conditions as he or she may impose.
For the case of a vehicle, A person in charge of a vehicle or not departing from a partner state, whether
or not such vehicle is conveying goods, should depart through the appointed port under Section 11 and
before departing he/she should do the following:-
(a) Report his/her intended departure to Customs officer.
(b) Furnish on the prescribed forms all information related to the vehicle and goods for exports.
(c) Fully and immediately answer all relevant questions put to him/her by the proper officer.
(d) Produce any consignment notes or any relevant documents demanded by the proper officer.
(e) Make due entry of the vehicle and goods for exports.
Export Promotion Schemes
Export promotion schemes are schemes designed to promote production of goods for export. Partner
States have agreed in the protocol for the establishment of customs union to engage in some of the
export promotion schemes with a motive to promote trade. Some of the schemes are Manufacturing
Under bond, Export processing zones or special economic zones, Inward/Outward Processing.
Manufacturing Under Bond

Manufacturing under Bond is a facility extended to manufacturers to import plant, machinery, equipment
and raw materials tax free, for exclusive use in the manufacture of goods for export
The EACCMA empowers the Commissioner of Customs to license any person who wishes to
manufacture goods under bond subject to condition he/she may impose.
Conditions for licensing

i. Application for a licence to be made in a prescribed form specifying the purpose for which each
building, room, place or item of plant is to be used.
ii. A security to be furnished as the Commissioner may think appropriate.
iii. Suitable office accommodation to be provided to Customs officer.
iv. Premises for manufacturing process must be approved by commissioner as to suitability and
safety. The Customs officer can inspect the premises to that effect.
v. A prescribed annual licensing fee to be paid.
vi. No alterations to be made on the premises without prior permission of the commissioner
vii. violation of the of the terms or conditions for licensing is an offence and one who commits such
offence shall be liable on conviction to a fine not exceeding five thousand dollars or to
imprisonment for a term not exceeding three years or to both; and any goods in respect to which
an offence has been committed shall be liable to forfeiture.
Responsibility of a bonded factory Licensee
i. Make an entry, prior to commencement of manufacturing under bond, in the prescribed form
specifying the purpose for which each building, room, place or item of plant is to be used.
ii. Provide office accommodation and scales, measures and other facilities materials or just
weights, for examining and taking account of goods and for securing them as the proper officer
may reasonably require;
iii. Keep a record of all types of plant, machinery and equipment, raw materials and goods
manufactured in the factory and keep that record at all times available for examination by the
proper officer;
iv. Provide all necessary labour and materials for the storing, examining, packing, marking,
coopering, weighing and taking stock of the goods in the factory whenever the proper officer so
requires.
v. Non- compliance with set conditions may result into suspension, revocation or refusal to issue a
license by the Commissioner
400 Customs
Export Processing Zones
EPZs are specialized areas in the EAC Customs Union where imported goods are offered duty free
treatment for purposes of processing or manufacturing for export under given conditions.
According to the EACCMA an export Processing Zone is a designated part of the Customs territory
where any goods introduced are generally regarded for the purpose of import duties and taxes as
being outside the Customs territory but are restricted by controlled excess and to which benefits
provided under the Regulations made under Article 29 of the East African Community Customs Union
Protocol.
Application, Licensing and approval of EPZ
Applications for investment in any EPZ, must be made in the first instant to the
relevant Authority.
For operational purposes, export processing zones are considered to be foreign

territories for the purposes of the application of the Customs and Excise Act.
However, the removal of goods from port to an EPZ enterprise must be covered by a
bond. Any goods leaving the Zone into the Partner State must be considered as
imports and are subject to the importation rule and duty. Local goods supplied to as
EPZ enterprises are considered as exports and must comply with all conditions
governing such exports.
The Objectives of the EPZ
i. To attract export led industrialization for diversification and enhancement of

competitiveness.
ii. To earn more foreign currencies.
iii. To increase employment and develop the capacity of skilled labour.
iv. To benefit from technology transfer and
v. To process more local materials for export.
Obligations of EPZ investors
i. To produce for Export markets.
ii. To provide details of all raw materials received at the site of manufacturing during the
previous quarter of the year.
iii. To produce semi-finished or finished products including by products exported or off-

loaded in the Customs territory.
iv. To provide details of waste-products and how they are disposed.
v. To provide accurate records of losses through evaporation, spillage, leakage or other

causes.
vi. To produce balances of law materials and semi finished products including stocks of by
products at the premises of manufacture and transit.
vii. To facilitate inspections and examination by the Customs.
viii. To take all measures to reduce the fears of task cheating in a way that Tanzania
Investment Centre cannot provide.
Treatment of Goods Deposited in EPZ
Section 191(2) required all goods imported for EPZ to be entered in SBE together with cargo receipt and
lending account book and a bond in the form of EPZRI shall be executed. The goods must be destined
vii. To facilitate inspections and examination by the Customs.
viii. To take all measures to reduce the fears of task cheating in a way that Tanzania
Investment Centre cannot provide. Customs: 401
Treatment of Goods Deposited in EPZ
Section 191(2) required all goods imported for EPZ to be entered in SBE together with cargo receipt and
lending account book and a bond in the form of EPZRI shall be executed. The goods must be destined
in sealed containers, boxes or vehicles except in case of exceptionally bulky loads. Goods imported to
EPZ from the custom territory must be treated in the same manner as if such goods were
Duty Remission
Section 140. (1) Of the East African Community Customs Management Act 2004 provides that The
Council may grant remission of duty on goods imported for the manufacture of goods in a Partner
State.
The Council may prescribe regulations on the general administration of the duty remission under this
section.
The manufacturer, and the approved quantity, of the goods with respect to which remission is granted
under this section shall be published by the Council in the Gazette.
Section 141of the same Act provides that where any goods are lost or destroyed by accident
Either on board any aircraft or vessel; or in removing, loading, unloading, or receiving them
into, or delivering them from, any Customs area or warehouse; or in any Customs area or warehouse,
before the goods are delivered out of Customs control to the owner, then, if the Commissioner is
satisfied that such goods have not been and will not be consumed in a Partner State, the
Commissioner may remit the duty payable in respect of the goods.
Duty Draw Back
Most administrations have in place procedures which help promote export trade and are in the interest
of the national economy. Drawback is one such procedure. This procedure grants repayment of import
duties and taxes paid on:
 Goods used in the processing or manufacture of exported products,

 Materials contained in the goods or consumed in the manufacture of the exported products, or
 Imported goods re-exported in the same state.
The repayment may be partial or total. Drawback is one of the several procedures which provides
relief from duties and taxes for the manufacture of exported goods and is extensively used. Some
administrations may allow it in combination with other procedures like inward processing, temporary
admission or Customs warehouses.
“Drawback procedure” means the Customs procedure which, when goods are exported, provides for a
repayment (total or partial) to be made in respect of the import duties and taxes charged on the goods,
or on materials contained in them or consumed in their production.
Economic benefits
The imported goods are used to process or manufacture goods for export by the domestic industries.
The use of domestic labour and processing or manufacturing of goods add value to the finished goods
for export. The repayment of duties and taxes paid on the imported goods enables domestic industries
to offer the goods at competitive prices on international markets.
Some administrations restrict the categories of goods qualifying for drawback. This is usually an
economic consideration and is designed to encourage the use of equivalents of imported goods which
are produced within the country by domestic industry.
Where it may be difficult to identify certain exported goods as being those that were originally imported
or those resulting from the processing of imported goods, administrations should allow the exportation
of equivalent goods (e.g. compensating goods equivalent in all respects to the goods which should
normally have been re-exported) and apply the drawback procedure to repay import duties and taxes
where goods or materials are replaced by equivalent goods or materials. This is a practice which is
to offer the goods at competitive prices on international markets.
Some administrations restrict the categories of goods qualifying for drawback. This is usually an
economic consideration and is designed to encourage the use of equivalents of imported goods which
402 Customs
are produced within the country by domestic industry.
Where it may be difficult to identify certain exported goods as being those that were originally imported
or those resulting from the processing of imported goods, administrations should allow the exportation
of equivalent goods (e.g. compensating goods equivalent in all respects to the goods which should
normally have been re-exported) and apply the drawback procedure to repay import duties and taxes
where goods or materials are replaced by equivalent goods or materials. This is a practice which is
recommended in this Chapter.
Countries wishing to encourage trade through free zones in their territory may also apply the
drawback procedure to goods that are re-exported into these zones.
Usually goods imported with the intention to re-export them, other than those used for processing or
manufacture, are not permitted to be used during their stay in the Customs territory. If such use is
allowed, administrations usually have provisions under which the amount of drawback granted is
reduced according to the extent of the resulting depreciation.
Some administrations use the term drawback for refund of taxes on imported goods that are not
according to specification and are returned to the seller, or goods used in manufacture for home
consumption, or imported goods that are obsolete, etc. The procedure covered by this Chapter does
not relate to such goods. This issue is covered in Standard 4.19 of the General Annex.
The drawback procedure will not apply to repayment of or relief from other taxes (e.g. sales tax, value
added tax) or to items which may be aids to the manufacturing process that are granted relief or
repayment under other provisions.
Other economic benefit of the Duty Drawback System of drawback procedure offers distinct benefits
to national administrations and interested persons in that it:
 Generates domestic economic activities,

 Provides for revenue protection on imported goods released into the Customs territory, and
 Offers options to interested persons when other procedures such as temporary admission
cannot be applied to the goods.
When Customs administers the drawback procedure by implementing modern control techniques of
selective verifications, risk assessment of users, post-audits of users’ records and electronic data
exchange and transfer of payments, drawback can be well managed and offers the full array of
economic incentives to national economies. (See Chapter 6 of the General Annex and its Guidelines.)
Interested persons have import options regarding whether to make the financial commitment to pay
the duties and taxes and wait for repayment to be completed under drawback after the goods are
exported, and whether this affects the competitive pricing of exported goods.
Inward /Outward Processing
The Commissioner of Customs is given power by the law to allow temporarily importation or exportation
of goods for processing operations free from tax provided that the ownership of such goods shall remain
to the exporter, and importer shall only process them under contract. The Commissioner may also allow
the importation of equivalent goods to replace the temporarily exported goods for outward processing.
Inward processing means the Customs procedure under which certain goods can be brought in a partner
state conditionally exempted from duty on the basis that such goods are intended for manufacturing,
processing or repair and subsequent exportation.
Procedure of operation:
The operator shall apply for authorization to the commissioner in a prescribed form to carry out the
inward processing operations. The application detailing the intended inward processing shall be made in
advance prior to importation of the goods subject to the process.
Conditions for granting an authorization
i. The applicant offers the necessary guarantee for the proper conduct of the operation
Procedure of operation:
The operator shall apply for authorization to the commissioner in a prescribed form to carry out the
inward processing operations. The application detailing the intended inward processing shall be made in 403
Customs:
advance prior to importation of the goods subject to the process.
Conditions for granting an authorization
i. The applicant offers the necessary guarantee for the proper conduct of the operation
ii. The administrative arrangements and supervision of the process are not disproportionate to
the economic needs of the applicant.
iii. The applicant is established in the community except where imports of non-commercial
nature are involved.
iv. The imported goods can be identified in the processed products.
v. The applicant has provided Customs security.
Entry and examination of goods
Goods imported for inward processing shall be entered in Customs prescribed form on production of:
(a) Original inward processing authorization
(b) Original invoices and other supporting documents.
The proper officer shall examine such goods at the port of entry or at the owners premises before release
for inward processing.
The person authorized shall keep all records of the inward processing activities and the records shall
indicate:
i. The description of quantity of goods entered for the procedure.
ii. Date of importation.
iii. Details of processing.
iv. Correct amount of duty and taxes payable.
v. Disposal of goods and waste or scrap or by-products.
vi. Compensating products obtained.
Time limit for inward processing:
Inward processing procedure shall be terminated upon:
(a) Re-exportation of the compensating product in one or more consignments within a

period of one year.
(b) Re-exportation of the goods in the same state as imported immediately.
(c) Release of processed products to circulation under duty relief.
(d) Placing the goods in free zones.
(e) Entered for home consumption
However, the commissioner may prescribe specific time limit for in-ward processing.
Exportation of compensating products:
The goods may be exported through a Customs office other than the office through which the goods
under in-ward processing were imported, either in full or in parts under separate entries
Compensating products entered for home consumption:
When goods placed under in-ward processing are entered for home consumption either compensatory
products or goods in an unaltered state, the import duty shall be computed on the basis of the nature,
quantity, Customs value and duty rate applicable to the goods at the time they were entered for in-ward
processing
Exportation of compensating products:
The goods may be exported through a Customs office other than the office through which the goods
under in-ward processing were imported, either in full or in parts under separate entries
404 Customs
Compensating products entered for home consumption:
When goods placed under in-ward processing are entered for home consumption either compensatory
products or goods in an unaltered state, the import duty shall be computed on the basis of the nature,
quantity, Customs value and duty rate applicable to the goods at the time they were entered for in-ward
processing
Outward processing
Outward processing means the Customs procedures under which goods which are in free circulation in a
partner state may be temporarily exported for manufacturing, processing or repair outside the partner
state and then re-imported.
The Commissioner shall only authorize goods to be exported temporarily from the partner state when:
a) The exporter confirms that the compensating product shall result from the processing
operation
b) The outward processing procedure does not affect the interest of the partner state
c) The compensating products shall be re-imported within a period of one year from the date
of export
During re-importation, the compensating products may be re-imported through a Customs office other
than the Customs office through which the goods were exported either in full or in partial consignment
under separate entries. Goods may also be re-imported in an un-altered state.
The imported compensating products or unaltered goods may be granted total or partial relief from
payment of duty when are cleared for home consumption in the name of
(a) An authorized person
(b) Any person with the consent of the authorized person
(c) Where the re-imported goods were repaired and such repair could not have been undertaken
in the Partner States
(d) Equipment or other goods were added to the exported goods that could not be added within
the partner state.
Processing or manufacturing was done on the re-imported goods and the goods exported were the
product of, and originated within the Partner States.
5. Administration Of Bonded And Customs Warehouses
Warehousing means to deposit or to cause imported goods to be deposited. The following goods shall
not be warehoused- the East African Community Customs Management Regulations, 2006 sec 64)
(i) Acids for trade and business;

(ii) Ammunition for trade and business;
(iii) Arms for trade and business;
(iv) Chalk;
(v) Explosives;
(vi) Fireworks;
(vii) dried fish;
(viii) Perishable goods;
(ix) Combustible or inflammable goods except petroleum products for storage in approved places;
(x) Matches other than safety matches;
(xi) Any other goods which the Commissioner may gazette.
Types of warehouses
There 2 types of warehouses

(vii) dried fish;
(viii) Perishable goods;
(ix) Combustible or inflammable goods except petroleum products for storage in approved places;
(x) Matches other than safety matches;
(xi) Any other goods which the Commissioner may gazette. Customs: 405
Types of warehouses
There 2 types of warehouses
(i) Bonded warehouses

(ii) Customs warehouses
Bonded Warehouses:
A bonded warehouse is a place (normally, though not always, a building) licensed by the Commissioner
General for the deposit and storage of dutiable goods. The purpose is to allow goods to be stored under
official supervision before the payment of duty and that duty should become payable only when the
goods are taken out of the warehouse for consumption or use in Tanzania. It is warehouse or other place
licensed by the Commissioner for the deposit of dutiable goods on which import duty has not been paid
and which have been entered to be warehoused; Bonded Warehousing is one of the measures being
implemented by the
(i) Customs and Excise Department to facilitate trade, which is one of its functions.
The other functions are:
(ii) Revenue collection
(iii) Enforcement of prohibition and restrictions and
(iv) Compilation of trade statistics.
Bonded Warehousing creates conducive environment to utilize the import capacities to the maximum and
hence minimize the cost of importation. The facility helps to improve the liquidity position of the importers
as payment of import duties is made on small quantities withdrawn from the bonded warehouses
depending on their needs instead of paying for the whole consignment at the time of importation. Also re-
exportation of imported goods can be done without fiscal obstacles Proper Management of the facility is
very important, as it may become a source of revenue loss to the government due to abuse by
unscrupulous importers.
Advantages Of Bonded Warehouse
(i) Availability of goods for trade in stock.

(ii) Creation of employment to the community.
(iii) Assurance to small traders of keeping their goods while looking gor the market.
(iv) Assurance to the Government to collect tax on imports.
(v) DISADVANTAGES OF BONDED WAREHOUSE:
(i) The traders may get loss on trade due to inflation, and damages.
(ii) A lot of tax revenue is tied up in the stock of goods thus failure to get a real money.
(iii) High cost of control i.e. administrative and maintenance cost.
TYPES OF BONDED WAREHOUSE
Bonded warehouses are approved and licensed as either:
(i) General bonded warehouses for the deposit of dutiable goods generally (i.e. those belonging to
any person); or
(ii) Private bonded warehouses for the deposit of dutiable goods belonging to the licensee only.
(Warehousing goods which are the property of the warehouse keeper.)
WAREHOUSE KEEPER: Is a holder of a license granted in respect of a bonded warehouse

406 Customs
DUTIES OF THE WAREHOUSE KEEPER.
It is the duty of every bonded warehouse licensee to provided/do the following:
(i) Provide an office accommodation for the bond office.

(ii) To provide all the necessary labour, facilitate examination of goods In the warehouse where
never required.
(iii) Keep record of all goods warehoused such that will be available at all times for examination by
Customs officer.
(iv) Stack and arrange goods in the warehouse such that access to and examination of every
package is possible, and that the package marks are clearly visible at all time, also maintain sack
cards.
(v) Maintain the packages in the warehouse in proper state of repair.
(vi) Account for all the warehouse goods to the satisfaction of the
(vii) Account for all the warehouse goods to the satisfaction of the collector.
APPROVAL AND LICENCING
The approval and licensing of bonded warehouses is at the discretion of the Commissioner General after
application by the owner. In considering an application for approval of a bonded warehouse, the
Commissioner General is obliged by law to have particular regard to:
(i) the financial standing of the applicant;

(ii) the amount of revenue involved in the goods proposed to be warehoused;
(iii) the situation of the proposed warehouse;
(iv) the security arrangements at the proposed warehouse; and the bonded warehouse facilities
already available to the public in the area.
Unless he is fully satisfied on all these counts, the Commissioner General will refuse to approve and
license the place as a bonded warehouse.
CONDITIONS FOR LICENSING BONDED WAREHOUSES

General Conditions
(i) An application for the licensing of premises as a Licensed Bonded Warehouse shall be made
to the Commissioner in Form C22. The application shall be accompanied by a plan of the
premises and its situation in relation to other premises and thoroughfares.
(ii) The Commissioner may, subject to the fulfillment of these conditions or any such other
conditions as are prescribed by law and upon payment of a license fee, license any premises
as a Licensed Bonded Warehouse for the deposit of goods subject to Customs control. The
license shall be in Form C23. Customs warehouses and warehouses owned by the
Government shall not be subject to any license fee.
(iii) The operator of a Licensed Bonded Warehouse shall execute a bond security in Form CB6
secured by a licensed guarantor. A bond security of not less than TShs.300 million shall apply
to Private Warehouses and Shs.800 million to General Warehouses to secure duties and taxes
on the goods kept at the Warehouse.
(iv) Customs shall at all times have the right of access to any part of a Licensed Bonded
Warehouse and may examine any goods or records relating to goods therein; and for the
purpose of obtaining such access, a proper officer may break open the warehouse or any part
thereof.
(v) The operator of a Licensed Bonded Warehouse shall keep the warehouse in a proper state or
repair and shall not make any alteration or addition to the warehouse without first obtaining the
(iv) Customs shall at all times have the right of access to any part of a Licensed Bonded
Warehouse and may examine any goods or records relating to goods therein; and for the
purpose of obtaining such access, a proper officer may break open the warehouse or any part
thereof. Customs: 407
(v) The operator of a Licensed Bonded Warehouse shall keep the warehouse in a proper state or
repair and shall not make any alteration or addition to the warehouse without first obtaining the
written permission of the Commissioner.
(vi) Licensed warehouse operators are required to maintain control of the warehouse, warehoused
goods and any activity undertaken in the warehouse. The Commissioner for Customs and
Excise must be notified in the event of any change in the circumstances of the operator, which
may render the operator unable to honor the warehouse bond or acquit its responsibilities to
Customs. Circumstances include a change in the ownership of the warehouse, the death of the
operator, the commencement of proceedings of bankruptcy against the operator or any other
change in the circumstances of the operator. Warehouse licenses are not transferable.
(vii) The operator of a Licensed Bonded Warehouse is responsible for all goods stored in the
warehouse and is liable for the payment of all duties and taxes payable on any goods that
cannot be accounted for. It is a requirement that the records maintained for Customs purposes
shall provide a clear audit trail of all goods that arrive, are stored and/or exit the warehouse.
(viii) No goods stored in the warehouse shall be removed, altered, interfered with, displayed or
demonstrated in any way without prior authorisation from Customs.
(ix) A license holder who contravenes any of these conditions may have their license revoked.
(x) Specific Conditions s. 64
a. Warehouse Premises
The Licensed Bonded Warehouse shall:
 Comprise premises with secure walls, roof(s) and concrete floors
 Include special storage facilities for high value items, loose cargo and seized, abandoned or
overstayed goods (not applicable to motor vehicle ICDs).
 Have a floor area equal to or greater than 1000 square metres for a general warehouse and
350 square metres for a private/factory bonded warehouse.
 Have a single entrance, acceptable lighting and toilets and be hygienic and well ventilated.
 Be secure, accessible and located in a safe environment not more than 10 km from a customs
office or at a location approved by the Commissioner for Customs and Excise.
b. Warehouse Identification
 The words "Customs Bonded Warehouse" and the number allocated to the customs bonded
warehouse shall be clearly marked above the principal entrance to the customs warehouse
or elsewhere as approved by the proper officer and shall be removed when a warehouse
ceases to be so licensed.
c. Security
 Security arrangements shall provide for:
 A perimeter wall or secure fence that is at least three meters high with razor wire and lockable
gates;
 24 hours security coverage; and
 Satisfy any other requirements determined by the Collector of Customs and Excise
d. Customs Facilities
 Secure office accommodation shall be provided within the premises for the exclusive use of
customs staff required to attend the warehouse. The accommodation should include suitable
furnishings, desk(s) and chair(s) and be hygienic and well ventilated with adequate lighting.
Access shall also be provided to warehouse records, a telephone and appropriate toilet
facilities. Details of the facilities should be shown on the premises plan.
 A perimeter wall or secure fence that is at least three meters high with razor wire and lockable
gates;
 24 hours security coverage; and
408 Customs
 Satisfy any other requirements determined by the Collector of Customs and Excise
d. Customs Facilities
 Secure office accommodation shall be provided within the premises for the exclusive use of
customs staff required to attend the warehouse. The accommodation should include suitable
furnishings, desk(s) and chair(s) and be hygienic and well ventilated with adequate lighting.
Access shall also be provided to warehouse records, a telephone and appropriate toilet
facilities. Details of the facilities should be shown on the premises plan.
e. Handling and Examination Equipment

 The Licensed Bonded Warehouse operator shall provide:
 Appropriate handling, stacking and examination facilities and equipment including, but not
limited to, scales, measures, lifting and packing/unpacking equipment etc.
 Sufficient staff to operate the equipment and to pack and/or unpack goods.
f. Permitted Goods and Operations

 An applicant for a licensed bonded warehouse shall nominate the type of the goods to be
warehoused and the operations that are to be performed in the warehouse. The
Commissioner for Customs and Excise will decide what types of goods and/or the extent of
operations that will be permitted in the warehouse. A Licensed Bonded Warehouse operator
shall not store goods or perform operations outside of those permitted by the Commissioner.
g. Communications and Computer Connectivity

 The Bonded Warehouse must have a computer and line connection to the Automated
Systems for Customs Data (ASYCUDA ++) for the purposes of accounting for warehoused
goods, preparing and registering warehousing declarations and for performing other
functions via the system. For the computer to be compatible with ASYCUDA++, It must be at
least a Pentium 4, Windows XP (Professional), 512 RAM, 30 MB disk space, external CD-
ROM with a processor speed of at least 1.7 MHz.
 The operator of a Licensed Bonded Warehouse shall have and maintain appropriate
communication facilities including telephones, a facsimile machine and access to e-mail.
h. Accounting and Record Keeping Requirements

 The operator of the bonded warehouse must be able to fully account for all present and
previous warehoused consignments. The operator shall:
 Submit to customs a return of goods remaining the bonded warehouse at the close of
business on 30th June each year and not later than the 31st July, of the same year.
 Maintain and retain, for a period of five years, records and details related to all goods that
arrive, are stored and/or exit the warehouse. Records must be in a form approved by
customs.
 An applicant for a licensed bonded warehouse shall provide full details of accounting and
record keeping arrangements and systems proposed to be used at the warehouse. Customs
will evaluate such arrangements and systems and if necessary indicate
changes/improvements that need to be made. Once accounting and record keeping
arrangements and systems are approved by Customs, they shall be operated in accordance
with the approval. Prior notification of any proposed changes to arrangements or systems
must be given to customs before they can be implemented.
i. Compliance and Understanding of Warehouse Requirements

An applicant for a Licensed Bonded Warehouse license and all persons who shall participate
in the management or control of the warehouse shall have an acceptable compliance record
to the extent that they shall have complied with all Customs procedures and the laws of
Tanzania.
Applicants and persons that participate in the management or control the warehouse shall
possess a knowledge of Customs requirements relating to the operation of a licensed
warehouse and the control of under-bond goods, including a sound understanding of
Customs requirements and procedures in relation to import entries, warehousing entries,
i. Compliance and Understanding of Warehouse Requirements
Tanzania.
An applicantand
Applicants for persons
a Licensed
thatBonded Warehouse
participate license and all
in the management orpersons whowarehouse
control the shall participate
shall
in the management or control of the warehouse shall have an acceptable compliance record
possess a knowledge of Customs requirements relating to the operation of a licensed Customs: 409
Tanzania.
export entries,
Applicants andand under-bond
persons movements.
that participate in the management or control the warehouse shall
possess a knowledge of Customs requirements relating to the operation of a licensed
export entries, and under-bond movements.
Test yourself 1
Warehousing is the practice of storing, holding and handling goods in a warehouse. A customs bonded
warehouse is a warehouse licensed by the Commissioner of Customs for the storage of goods imported
into the region pending the payment of duties. The goods are stored in the joint custody of the bonded
warehouse
Test keeper
yourself 1 and customs.
Warehousing is the practice of storing, holding and handling goods in a warehouse. A customs bonded
Required: is a warehouse licensed by the Commissioner of Customs for the storage of goods imported
warehouse
into the region pending the payment of duties. The goods are stored in the joint custody of the bonded
(a) What are the benefits of using a Customs Bonded Warehouse?
warehouse keeper and customs.
(b) How many types of bonded warehouses are there? Describe them.
(c)
Required:What is the licensing procedure?
(d) Is the bonded warehouse license transferable? Explain
(e)
(a) records
What are should be
the benefits of kept
usingatathe bondedBonded
Customs warehouse?
Warehouse?
(b)
Customs How many types of bonded warehouses are there?
Warehouse" Describe them.
(c) What is the licensing procedure?
(d)
Means anyIs the bonded
place warehouse
approved by the license transferable?
Commissioner for the Explain
deposit of unentered, unexamined, abandoned,
(e)
detained,What records
or seized, should
goods forbe
thekept at thethereof
security bondedorwarehouse?
of the duties due thereon;
CUSTOMS WAREHOUSE DATE:
(i) Normally customs warehousing date is the 21st day (excluding Sundays and public holidays after
the commencement of discharging goods from the importing vessel or aircraft and in the case of
importation by land it is the 21st day after the arrival of the goods at the frontier station.
(ii) The un entered and un claimed goods are sent to the customs warehouse vide WANT OF
ENTRY LIST prepared by port authorities (T.H.A. TICTS, DAHACO etc.). Other goods are sent
to the customs warehouse vide their respective documents e.g. Notice of seizure – C.58, goods
deposited – by F. 89 etc.
SALES PROCEDURES FOR WAREHOUSED GOODS AND CONDITIONS FOR AUCTION SALE (SEC.
42)
(i) Normally goods deposited in a customs warehouse must be delivered or removed within 30 days
from the day of entry subject to order from the Commissioner to extend the period of stay.
(ii) Goods that are not lawfully removed from the customs warehouse within a specified period, shall
be deemed to have been abandoned and hence be sold by public auction or in any manner as
the Commissioner may direct.
(iii) The Commissioner shall give 30 days notice by publication in the Gazette to the public stating his
or her intention to the deposited goods after the expiry of such period from the of the notice if
goods shall not be lawfully remove.
(iv) Prohibited goods shall either be re-exported or destroyed depending on the Commissioner’s
decision.
(v) Perishable goods, Plants or Animals may be sold without any notice.
(vi) Seized goods will be sold after clearance from the Commissioner on accountthat such goods
might be under appeal or court proceedings.
(vii) Reserve price
(viii) This is a minimum disposable price that includes customs duty and taxes and other
charges due to the Commissioner and Port Authorities Reserve price is confidential to the
department and no way should it be disclosed to the public. During auction sale a bid must be
equal or higher than the reseve price. Goods are normally sold in lots as indicated in bill of
landing or individual depost or sezure notice, so when a bid is lower than the reserve price
thenthe whole lot shall be wiedrawn from sale.
CONDITIONS FOR AUCTION SALE:

charges due to the Commissioner and Port Authorities Reserve price is confidential to the
department and no way should it be disclosed to the public. During auction sale a bid must be
equal or higher than the reseve price. Goods are normally sold in lots as indicated in bill of
landing or individual depost or sezure notice, so when a bid is lower than the reserve price
410 Customs thenthe whole lot shall be wiedrawn from sale.
CONDITIONS FOR AUCTION SALE:
(i) Before bidding the Commissioner announces to the public that a bid shall not necessarily be
accepted and should there be any discrepancy between the quantity stated in the sale list and
the actual quantity available for sale.
(ii) Making a bid shall imply acceptance of the conditions of sale.
(iii) The highest bidder shall be the purchaser of the goods and shall be no withdrawal when
accepted as a purchaser.
(iv) No warranty shall be given by the Customs as to the quality, quantity, packaging conditions and
any other particulars of the goods offered fore sale.
(v) A non refundable deposit as determined by the Commissioner shall be paid in cash at the fall of
the hammer and the balance shall be paid within forty eight (48) hours after the sale, failure to
that, the goods shall be re-offered for sale at the next auction sale.
(vi) Goods purchased shall be removed from the customs warehouse within three (3) days, failing of
which the purchaser shall be liable to pay the warehouse rent and other charges with effect from
the date of sale up to the date of removal.
(vii) The Customs shall not be responsible for any damage that occurs to goods during their removal
by the purchaser or his/her Agent.
(viii) Any goods remaining in the customs warehouse after sale, shall remain at the
purchaser’s risk.
APPLICATION OF SALE PROCEEDS.
(i) The discharge of duty and taxes.

(ii) The discharge of sales and handling expenses.
(iii) The discharge of warehouse rent and other charges due to customs.
(iv) The discharge of the Port charges.
(v) The discharge of the freight and other charges if any.
(vi) Net balance if any shall be paid to the owner of goods only if he/she does not have any tax
liability to the government. He/She should lodge an application for payment of the balance
in a prescribed form within twelve months from the date of sale. Failure to that the balance
shall be paid into customs revenue.
DELIVERY OF GOODS FROM CUSTOMS WAREHOUSE
(i) By virtue of section 33(4) of EACCMA, 2004 goods shall not be removed from a customs
warehouse unless such goods have been duly reported and entered. The proper officer must
also have given the authority for their delivery.
(ii) For dutiable goods, which were warehoused protect the loss of government revenue, shall be
delivered from the customs warehouse upon presentation of customs entry showing a payment
of all customs duty taxes. For Seized and Detained goods, shall be delivered from the customs
warehouse upon presentation of the order written by the Commissioner.
Customs warehouse rent.
Rent shall be charged on goods deposited, or deemed to be deposited, in a Customs warehouse at

the rates determined by the Commissioner. Rent shall not be charged on passenger baggage where
the baggage is removed within seven working days from the date of deposit in a Customs
warehouse. The Commissioner may waive the whole or any part of the rent charges. All rents and
charges on goods deposited, or deemed to be deposited in a Customs warehouse shall be paid
before the delivery of the goods.
Customs: 411
Customs premises deemed to be Customs warehouses.
Where at any port or place in the Community where a proper officer is stationed, a building has not
been specifically approved by the Commissioner for use as a Customs warehouse, any customs
remises or any premises occupied and administered by the Customs shall be deemed to be a
Customs warehouse.
6. Differentiate Between Prohibited And Restricted Goods
Governments have the duty and responsibility to protect the society and economy of their respective
countries. The Customs, as government service has the duty to protect the society and the economy of
the country by allowing, prohibiting and restricting goods that enter in the country. This is for the sake of
maintaining security, healthy society and sound economy.
Definitions
Cargo
Includes all goods imported or exported in any aircraft, vehicle or vessel other than such goods as
required as stores for consumption or use by or for the aircraft, vehicle or vessel, its crew and
passengers.
Goods
Includes all kinds of articles, wares, merchandise, livestock, and currency, and, where any such goods
are sold under the, the customs laws, and the proceeds of such sale
Prohibited goods
Prohibited goods are goods, which importation exportation or carriage coastwise are not allowed under
the East African Community Customs Management Act 2004 or any law for the time being in force in the
Partner States;
Restricted means
Restricted goods means any goods the importation, exportation or carriage coastwise of which is
prohibited, save in accordance with any conditions regulating such importation, exportation, transfer, or
carriage coastwise, and any goods the importation, exportation, transfer, or carriage coastwise, of which
is in any way regulated by or under the Customs laws or is allowed subject to certain conditions.
Customs area
Means any place appointed by the Commissioner under section 12 for
carrying out customs operations, including a place designated for the deposit of goods
subject to customs control;
Controls Under The Kyoto Convention
All goods, including means of transport, which enter or leave the Customs territory, regardless of whether
they are liable to duties and taxes, shall be subject to Customs control.
The Customs control shall be limited and applied when necessary to ensure compliance with the
Customs law.
In the application of Customs control, the Customs shall use risk management.
The Customs shall use risk analysis to determine which persons and which goods, including means of
transport, should be examined and the extent of the examination.
412 Customs
The Customs shall adopt a compliance measurement strategy to support risk management.
Customs control systems shall include audit-based controls.
The Customs shall seek to co-operate with other Customs administrations and seek to conclude mutual
administrative assistance agreements to enhance Customs control.
The Customs shall seek to co-operate with the trade and seek to conclude Memoranda of Understanding
to enhance Customs control.
The Customs shall use information technology and electronic commerce to the greatest possible extent
to enhance Customs control.
The Customs shall evaluate traders’ commercial systems where those systems have an impact on
Customs operations to ensure compliance with Customs requirements
The concept of prohibitions and restrictions is also embedded in the WCO Mission Statement.
“The World Customs Organization is an independent intergovernmental body whose mission is to
enhance the efficiency and effectiveness of Member Customs administrations, thereby assisting them to
contribute successfully to national development goals, particularly in the areas of trade facilitation,
revenue collection, community protection and national security.”
CONTROLS UNDER THE EAST AFRICAN COMMUNITY

Category of goods subject to Customs controls are in Sec 16(a) of The East African Community Customs
Management Act, 2004
The following goods shall be subject to Customs control.
(a) Imported goods, including goods imported through the Post Office, from the time of importation
until delivery for home consumption or until exportation, whichever first happens;
(b) Goods under duty drawback from the time of the claim for duty drawback until exportation;
(c) Goods subject to any export duty from the time when the goods are brought to any port or place
for exportation until exportation;
(d) Goods subject to any restriction on exportation from the time th goods are brought to any port or
place for exportation until exportation;
(e) Goods which are with the permission of the proper officer stored I Customs area pending
exportation;
(f) Goods on board any aircraft or vessel whilst within any part or place in a Partner State;
(g) Imported goods subject to duty where there is a change of ownership over such goods from an
exempt person to a non-exempt person;
(h) Goods which have been declared for or are intended for transfer to another Partner State;
(i) Seized goods.
Where any goods are subject to Customs control, then the Commissioner may permit the owner of such
goods to abandon them to the Customs; and on such abandonment such goods may, at the expense of
the owner thereof, be destroyed or otherwise disposed of in such manner as the Commissioner may
direct and the duty thereon shall be remitted or refunded,
Regional Law on Prohibitions and Restrictions, EACCMA, 2004

Legal authority
Legal authority governing prohibitions and restriction is specifically set out in Section 18, 19 and 20
EACCM Act, 2004.
Powers to prohibit or restrict, Sec. 19 EACCM Act, 2004.

i. The Council has the power to prohibit or restrict goods, by order published in the Gazette.
ii. The Council may, by order published in the Gazette, prohibit or restrict certain goods under
Customs: 413
EACCMA, 2004 or any law for the time being in force in the Partner States.
iii. Order made under section 19 may specify goods or any class of goods, either generally or in
any particular manner and may prohibit or restrict the importation either from all places or from
any particular country or place.
Exemptions
Goods imported in Transit, Transshipment or as stores of any aircraft or vessel are exempted from
restriction and prohibitions provided that such goods are not internationally prohibited or restricted and
such goods should be dully re-exported within such time as the Commissioner may specify. (Section 20
EACCMA, 2004)
5 Prohibited Goods
Any goods the importation, exportation or carriage coastwise, of which is prohibited under the EACCMA,
2004 or any customs law for the time being in force in the Partner States.
- Part A of the second schedule list shows the goods whose importation is prohibited. These
include
- False money,
- Pornographic materials,
- Matches- with white phosphorus,
- Distilled beverages- injurious oils or chemicals,
- Narcotic drugs under international control,
- Hazardous wastes,
- Soaps and cosmetics-mercury,
- Used tyres-commercial m/v and passengers cars.
Also the list covers both hazardous agricultural and industrial chemicals and the counterfeit goods of all
kind.
6 Restricted Goods
Any goods the importation, exportation or carriage coastwise of which is prohibited, save in accordance
with any conditions regulating such importation, exportation, transfer, or carriage coastwise, and any
goods the importation, exportation, transfer, or carriage coastwise, of which is in any way regulated by or
under the Customs laws or is allowed subject to certain conditions.
Part B of the second schedule covers the restricted goods whose importation is upon meeting the
regulating conditions, unless they are prohibited.
Restricted goods list cover the following:
- Postal frank machines,
- Traps-for game animals,
- Unwrought precious metals,
- Arms and ammunition (chap93),
- Ossein and bones-treated with acid,
- Ivory (elephant) unworked,
- Hippo teeth (unworked),
- Ivory powder and waste,
- Tortoise shell,
- Coral and similar materials,
- Nuclear reactors,
- Natural sponges of animal origin,
- Worked ivory and articles of ivory,
414 Customs
- Ozone depleting substances (Montreal Protocol 1987) & Vienna Convention (1985), genetically
modified products,
- Endangered Species of world Flora and Fauna-CITES 1973
- Commercial casings (second hand tyres),
- All psychotropic drugs under international control.
Others include goods under chap 36 (i.e. detonators), guns and ammunition, armoured fighting vehicles-
heading 8710, telescope sights-chap 90, bows, arrows, fencing foils-chap95, collectors pieces/antiques
of guns-heading 9706.
Note: Goods may be prohibited or restricted under this law or any other law for the time, being enforced
in the Partner State.
Under EACCMA, 2004 the provisions on prohibited and restricted exports include Section 70, 71,
and 72 of EACCMA, 2004 on which under the third schedule a lists prohibited and restricted exports :
Part A; All goods the exportation of which is prohibited under EACCMA.
Part B;
(i.) All goods the exportation of which is restricted under the Act
(ii.) Waste and scrap of ferrous cast iron
(iii.) Timber from any wood grown in partner states
(iv.) Fresh unprocessed fish (Nile Perch and Tilapia)
(v.) Wood charcoal
The following should not be exported in vessels of less than 250 tons register
(i.) Warehoused goods;
(ii.) Goods under duty drawback;
(iii.) Transhipped goods.
Reasons for imposition of Prohibitions or Restrictions

(i) Political Reasons:
Importation of seditious publications that may entice the public to revolt from a lawful elected
government, are prohibited. Upon importation, such publications should be seized and an
offence instituted against the offender.
(ii) Economic Reasons
- Importation of false money and counterfeit currency notes and coins is prohibited.
- Certain imported manufactured goods that may have material injury (harm) to local industries
in Partner States, such importation are restricted.
(iii) Social Reasons
Importation of pornographic materials in all kinds of media, indecent or obscene prints, books,
cards, lithographs and other materials of similar nature are prohibited.
(iv) Security Reasons
Importations of lethal weapons, silencers, firearms, and flick knives are prohibited. Arms and
ammunition other than military are restricted save by fulfilling the conditions of restriction such
as, obtaining import license from the police.
(v) Health Reasons
- Importation of dangerous drugs, such as drugs of abuse is prohibited unless imported by a
specializing institution i.e. hospitals, laboratories and health centers under the approval of
Ministry of Health.
- Importation of second hand clothing is restricted unless they have been fumigated and
approved by Health authorities.
- Importation of foodstuffs is restricted unless the Health officers have approved the
importation.
Customs: 415
(vi) Agricultural Reasons

The importation of plants, seedlings, seeds for sowing and game animals are restricted. The
importations of such goods save in accordance with any conditions regulating their importation.
(vii) International Conventions on Prohibited and Restricted Goods
 International Convention on Drugs of Abuse
 The Single Convention on Narcotic Drugs, 1961
 The convention on Psychotropic Substances, 1971
 The United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic
Substances, 1988
 Convention on International Trade in Endangered Species (CITES)
The regulating authorities and agencies working in conjunction with Customs.

The customs administration in Tanzania works in conjunction with other regulating authorities and
agencies to effect importation, exportation, transit and other customs procedures. The customs
procedure might not be complete until the regulating authority for such goods has been satisfied and
made certification. Scientific opinion regarding importation from such authorities is paramount for revenue
side, economic growth, public morality, security and safety of society and plants and animals’ health.
Mainland Tanzania
i Tanzania Bureau of Standards (TBS)- overseeing the standards requirement of imports
ii Atomic Energy Commission-
iii Health Department( Ministry of Health)- regulating requirement on human medicine and
certification
iv TFDA (Tanzania Food and Drugs Authority)- regulate the importation and exportation of foods and
drugs
v Police, (Interpol ) and Intelligence Unit
vi Fair Trade Commission (FTC)
vii TCCIA-Chambers of Commerce
viii Money Laundering Commission
ix NEMC- National Environmental Management Commission
x Immigration Department
xi Embassies, NGOs and Business Community
xii Drug Regulatory Authority
xiii Tanzania Investment Centre (TIC) for assessing and certification of potential investors
xiv Ministry of Industries and Trade (BRELA),
Zanzibar
i ZIPA (Zanzibar Investment promotion Agency)
ii Police-Interpol on matters related to security, theft of imported vehicles
iii Anti –Narcotic Unit
iv Zanzibar Medical Board on food and drugs imports
v Immigration Department on further inquiry of drug trafficking suspects.
vi Consumer Protection Unit (Ministry of Tourism, Investment and Trade)
vii Veterinary Department (Ministry of Agriculture and Livestock)
viii Health Department (Ministry of Health)
416 Customs
International Conventions on Prohibited and Restricted Goods
6.1 International Convention on Drugs of Abuse

The control of narcotic drugs has been of global concern ever since the first international conference on
the subject, which was held in Shangai in 1909.
The international control system has been built up step by step, continuing from 1920 under the auspices
of the League of Nations, and since 1946 by the United Nations.
A series of treaties adopted under the auspices of the UN require that:
 Governments should exercise control over production and distribution of narcotic drugs and
psychotropic substances.
 Governments should combat drug abuse and illicit traffic.
 Governments should maintain the necessary administrative machinery and report to international
organs on their actions.
The Single Convention on Narcotic Drugs, 1961

This convention had 177 members as at 1st July 2005. This convention replaced the treaties concluded
before the Second World War on opiates, cannabis and cocaine.
At present, control is exercised over more than 116 narcotic drugs, including opium and its derivatives as
well as synthetic narcotics such as methadone and pethidine.
The convention on Psychotropic Substances, 1971

This convention had 176 states/parties as at 1st June 2005. It controls drugs not covered by previous
treaties. These include hallucinogens, amphetamines, barbiturates, non-barbiturates sedatives and
tranquillizers.
About 105 psychotropic substances are controlled, most of them in pharmaceutical products acting on
the central nervous system.
These calls for substances:
 Those have been judged to be particularly dangerous, such as LSD, to be placed under even
stricter control than narcotic drugs.
 With wide legitimate medical use to be controlled in a less stringent way not to hamper their
availability for medical purposes but on the other hand to avoid their diversion and abuse.
The United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic
Substances, 1988
This has about 172 States/parties as of 1st June 2005.
 Prevents money laundering obtained from illicit trafficking.
 Provides concrete instruments for international law enforcement co-operation.
 Provisions covering tracing, freezing and confiscation of proceeds and property from drug
trafficking.
 Courts are empowered to make available or to seize bank, financial or commercial records, but
bank secrecy cannot be invoked.
 Mutual legal assistance between states on drug-related investigations, controlled deliveries,
transfer of proceeding for criminal prosecution.
 Extradition of drug traffickers.
Convention on International Trade in Endangered Species (CITES)

The Convention of International Trade in Endangered Species of Wild Fauna and Flora was signed on
March 3, 1973 in Washington, USA and amended in Bonn, on 22 June 1979. It came into effect on July
1, 1975.166 member states (Parties)
Customs: 417
The aim of CITES is to ensure that international trade in wild fauna and flora does not threaten the
survival of these species.
Misconceptions about CITES
But most of the people have misconceptions about CITES as follows:
i CITES bans trade in the species listed.
ii CITES regulates the domestic use of species and their trade.
iii CITES focuses on species of well-known large fauna (elephants, rhinoceroses)
iv CITES is the conservation of wild flora and fauna.
Contracting States (Parties) of CITES agree upon the following;
i. Wild fauna and flora in their beauty and varied forms are an irreplaceable part of the natural systems
of the earth that must be protected generations to come.
ii. People and States should get involved in protection of their own wild fauna and flora.
iii. The international co-operation is essential for protection of certain species of wild fauna and flora
against over-exploitation through international trade.
iv. The urgency of taking appropriate measures to end over-exploitation of certain species of wild fauna
and flora.
v. The importation or exportation of goods covered under the CITES is restricted.
Trade Related Aspects for Intellectual Property Rights (TRIPS)

The WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), negotiated in
the 1986-94 Uruguay Round, introduced intellectual property rules into the multilateral trading system for
the first time.
Types of intellectual property
The areas covered by the TRIPS Agreement
- Copyright and related rights
- Trademarks, including service marks
- Geographical indications
- Industrial designs
- Patents
- Layout-designs (topographies) of integrated circuits
- Undisclosed information, including trade secrets
OZONE DEPLETING SUBSTANCES (ODS)

Science of Ozone Layer
What is Ozone?
Ozone is a gas composed of three Oxygen atoms (O3). The regular Oxygen molecules (O2) contained in
the ambient air consists of only two atoms of Oxygen. Ozone molecules are created by a photochemical
reaction; when oxygen (O2) in the Stratosphere is broken into two highly reactive Oxygen atoms (O + O)
by absorbing the Ultraviolet light energy (UV-light) from the Sun. These reactive Oxygen atoms react with
Oxygen molecules (O2) to form Ozone molecule (O3).
(UV light + O O + O).(2O + 2O 2O )

3O 2O + 2O. 2O
• What is Ozone Layer?

The Ozone layer is a term used to describe the presence of Ozone molecules in the stratosphere or a
band of Ozone-rich air (containing Ozone molecules) found at an altitude ranging from 10 – 50 kilometres
above the earth.
418 Customs
• The Stratosphere
The stratosphere is that part of atmosphere, which follows the troposphere. It starts at 10-20 kilometres
above ground level and continues up to 40-50 kilometres height.
• What is Ozone Depleting Substance (ODS)?

It is a chemical substance that has the potential to react with Ozone molecules in the Stratosphere. They
are basically chlorinated, fluorinated or brominated hydrocarbons and include:
(i) Chlorofluorocarbons (CFCs)
(ii) Hydro chlorofluorocarbons (HCFCs)
(iii) Halons
(iv) Hydrobromofluorocarbons (HBFCs)
(v) Bromochloromethane
(vi) Methyl chloroform
(vii) Carbon tetrachloride and;
(viii) Methyl bromide.
The ability of these chemicals to deplete the Ozone Layer is referred to as Ozone Depleting Potential
(ODP).Each substance is assigned an ODP relative to CFC-11 whose ODP is defined as one.
Basel Convention on the Control of Trans-boundary Movements of Hazardous Wastes and Their
Disposal;
The Convention strictly regulates the trans-boundary movements of hazardous wastes and provides
obligations to its Parties to ensure that such wastes are managed and disposed of in an environmentally
sound manner.
The Rotterdam Convention on the Prior Informed Consent (PIC) Procedure for Certain Hazardous
Chemicals and Pesticides in International Trade.
It controls both banned or severely restricted chemicals and severely hazardous pesticide formulations.
Stockholm Convention on Persistent Organic Pollutants

Kyoto Protocol on control of greenhouse gas emissions
It sets binding limits on for developed countries and creating significant incentives for developing
countries to control their greenhouse gas emissions.
7. Rules Of Origin In The East Africa Customs Union

Rules of Origin are the laws, regulations and administrative procedures which determine a
product’s country of origin. The Protocol provides that trade within the EAC will be conducted in
accordance with agreed East African Rules of Origin.
7.1 Criteria for Determination of Origin

Goods shall be accepted as originating in a Partner State where they are consigned directly from a
Partner State to a consignee in another Partner State and where:
(i) they have been wholly produced or obtained in a Partner State
(ii) they have been produced in a Partner State wholly or partially from materials imported
from outside the Partner State or of undetermined origin by a process of production which
effects a substantial transformation of those materials such that the c.i.f. value of those
Customs: 419
materials does not exceed sixty per centum of the total cost of the materials used in the
production of the goods
(iii) the value added resulting from the process of production accounts for at least thirty five per
centum of the ex-factory cost of the goods.
(iv) the goods are classified or become classifiable under a tariff heading other than the tariff
heading under which they were imported as specified in the Second Schedule to these
Rules.;
Principles relating to Rules of Origin

(i) Cumulative Treatment Principles
For the purpose of implementing these rules, the partner state shall be considered as one
territory. Raw materials or semi-finished goods originating in any of the Partner States and
undergoing working or processing either in one or more Partner State shall, for the purpose
of determining the origin of the finished product be deemed to have originated in the Partner
State where the final processing or manufacturing takes place.
(ii) Principle of Asymmetry

Principal of asymmetry” means the principle which addresses variances in the
implementation measures in an economic integrations process for purposes of achieving a
common objective; that is an unequal treatment among trading partners to achieve certain
purpose in a specific period of time.
8. Customs Valuation Methods
There are six methods which can be used to compute custom value of imported goods. The customs
value of imported goods is the value of goods for the purposes of levying ad valorem duties of customs
on imported goods. These methods are transaction value, transaction value of identical goods,
transaction value of similar goods, deductive value, computed value and fall back value. The methods
are sequential used starting the first method, when it fails or not trusted, the second method is adopted
also when the second method is not appropriate, the third method is adopted and so on. With the
exception of deductive and computed value methods where the importer can ask for reverse of the
order (Paragraph 9(3)). The following Section describes each of these methods.
420 Customs
DiagramDiagram 1: Customs
1: Customs valuation
valuation methodmethod
8.1 Transaction
8.1 Transaction
value value
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actualto price
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the goods
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should include all values
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buying commissionmeans feesmeans paid by paid
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should buyers
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buyers andrelationship even if the
sellers relationship parties
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parties are related.
Customs: 421
However, when the parties to the imported goods are related, the importer should show that the
transaction value is approximate to the price of identical or similar goods imported around the same
time between unrelated parties.
The importer also might require comparing the transaction value to the transaction value of identical
goods or similar goods as explained below when the importer and exporter are related.
The importer and exporter are related when they are officers or directors of one another’s
businesses, legally recognised partners in business, an employer and employee relationship, any
person directly or indirectly owns, controls or holds 5% or more of the outstanding voting stock or
shares of both of them, one of them directly or indirectly controls the other, both of them are directly or
indirectly controlled by a third person, together they directly control a third person or are members of
the same family. However, sole agents, distributors and sole concessionaires dealing with others
are normally considered independent unless they have previously discussed conditions.
Question 2
1. Mr Ndikumana imported electrical appliances from England for STG 340,000 and paid for insurance
and freight of STG 17,000 and STG 45,000 respectively. Mr Ndikumana also incurred the following
expenses in respect of the electrical appliance:
STG
Brokerage charges 1,200
Selling Commissions 300
Buying Commissions 400
Royalty 200
Wooden containers used for
packing in England 500
Packing expenses in England 120
Tools and moulds 2,000
Mr Ndikumana shall, after one month from the date of exportation, pay to the exporter STG 120,000 being
the difference between the invoice value and the price of goods; fact revealed to Customs officers by
Ndikumana
Required:
Determine the Customs value according to Transaction value method
.
8.2 Transaction value of identical goods
The transaction value of identical goods is used as an alternative when the transaction value of
imported goods is inappropriate. However, transaction value of identical goods and the goods being
valued should all have been imported at the same time, same commercial level.
In case of the transaction value of identical goods at the same commercial level and/or same quantity
is unavailable best adjustments should be made to adjust for factors as discount resulting from
purchasing in large quantities. Specifically, the transaction value of identical goods in this case may
base on, a sale at the same commercial level but in different quantities; a sale at a different
commercial level but in substantially the same quantities; or a sale at a different commercial level and
in different quantities. Thereafter, the adjustments for quantity factors only, commercial level factors
only or both commercial level and quantity factors as case may be made.
422 Customs
Also, when the transaction value of identical goods includes costs of; transport of the imported goods
to the port or place of importation into the importing country except where the importation is
made by air; loading, unloading and handling charges associated with the transport of the imported
goods to the port or place of importation into the importing country; and the cost of insurance, the value
should be adjusted to consider cost differences as distances and transport modes of the imported
goods. Finally, in case of identification of several transaction values of identical goods, the lowest value
should be used to value the imported goods.
Definition
Goods are identical when they have the same physical characteristics, quality and reputation even
when they have minor differences between them. Furthermore, the goods must have been produce in the
same country by the same person unless the goods produced by the same person are unavailable
others’ goods can be used. The identical goods do not include goods which incorporate or reflect
engineering, development, artwork, design work, and plans and sketches for which no adjustment of the
values can be made.
8.3 Transaction value of similar goods

Where the two first methods are unacceptable, the customs value of imported goods might be
measured using the transaction value of similar goods. In fact, the applicability of the transaction value
of similar goods is exactly the same as the application of transaction value of identical goods, they
differ only on “similar goods” for the former and “identical goods” for the latter.
Definition
Goods are similar when although not alike in all respects; have like characteristics and like
component
materials which enable them to perform the same functions and to be commercially interchangeable.
Factors as the quality of the goods, their reputation and the existence of a trademark may help in
determining similarity of goods. Furthermore, the goods must have been produce in the same country
by the same person unless the goods produced by the same person are unavailable others’ goods can
be used. The similar goods do not include goods which incorporate or reflect engineering,
development, artwork, design work, and plans and sketches for which no adjustment of the values can
be made.
Question 3
Ndala imported an item from Japan. On the arrival of the item, Ndala could not produce valid documents
acceptable by the Customs Department. For that case, Customs Officers came out with the following
values for such imported item:
Values for identical items:
A – Tshs.40 million
B – Tshs.50 million
C – Tshs.45 million
Values for similar items:
D – Tshs.30 million
E – Tshs.35 million
Customs: 423
F – Tshs.60 million
Required:
Determine the Customs value of the item imported
8.4 Deductive value

Where the previous methods are not sufficient in valuing the imported goods, the deductive value may
be appropriate. Under this method the value of the imported goods should be the unit price at which
the imported goods or identical or similar imported goods are sold in the greatest aggregate quantity,
at or about the time of the importation of the goods being valued or the earliest date within 90
days after the importation of the imported goods; between independent persons in the importing
country. However, after deductions of the following items:
(a) Commissions, mark-ups or any expenses charged in the importing country;

(b) Transportation expenses, insurance and associated costs incurred within the importing country;
(c) Cost of transport of the imported goods to the port or place of importation into the importing
country; loading, unloading and handling charges associated with the transport of the imported
goods to the port or place of importation into the importing country; and the cost of insurance; and
(d) The customs duties and other national taxes payable in the importing country by reason of
importation or sale of the goods
However, when the imported goods, identical or similar imported are sold in the importing country after
further process, the importer may requests the Commissioner to value the imported goods based on
the unit price at which the imported goods, after further processing, are sold in the greatest
aggregate quantity between independents persons in the importing country after deduction of the
value added by such processing and the deductions items discussed before.
Example
Consider the following price list of goods sold in an importing country after including Tshs3 covering
profit, Commissioner, transport and customs taxes:
Units sold Price per unit
20 Tshs10
30 Tshs8
60 Tshs7
100 Tshs5
The greatest number of units sold at a price is 100 so the unit price in the greatest aggregate
quantity is 5.
Question 4
XYZ Ltd imported used items from America which do not qualify for Transaction value or Transaction
value of identical or similar goods. The importer provides you with the following information:
424 Customs
 The general expenses and profit of the importer averaged to Tshs 500,000 per item sold.
 The importer paid Tshs 250,000 per item to label it in Tanzania.
 The total duties and taxes on items from America is 25%
 They are sold to retailers as follows
Items sold Price per item

20 Tshs10,000,000
30 Tshs8,000,000
60 Tshs7,000,000
100 Tshs5,000,000
Required:
Calculate the Customs value using deductive method per piece.
8.5 Computed value

The next method is computed value. The computed value method determine the value of imported
goods based on its cost of productions in the exporting country and costs of transportation, insurance
and handling to the importing country. Specifically, the costs of imported goods under computed
value method is the total of:
(a) the cost or value of materials and fabrication or other processing employed in producing
the imported goods;
(b) an amount for profit and general expenses equal to that usually reflected in sales of goods of
the same class or kind as the goods being valued which are made by producers in the
country of exportation for export to the importing country;
(c) The cost of transport of the imported goods to the port or place of importation into the importing
country except where the importation is made by air; loading, unloading and handling charges
associated with the transport of the imported goods to the port or place of importation into the
importing country; and the cost of insurance.
Subsequently, access to accounting records based on GAAPs is important in applying this method,
which can be done through requiring a producer or any person especially when is not resident in the
importing country to produce such access. Also, a tax authority can verify the information produced
by manufacturer in another country after an agreement with the producer and the allow such an
investigation.
Question 5
Sumbawanga Ltd has imported a specialized high-speed night travel vessel from the Tuwindane
Republic. The information available for the import suggests that only the computed value method can be
used.To complete the valuation process, the following information is available:
Production costs
US $
Direct labour 400
Customs: 425
US $
Direct materials 600
US $
Overheads and profit 320
US $
Freight 600
US $
Insurance 200
Required:
Calculate customs value in USD
8.6 Fall back

As the last attempt to value the imported value, a customs authority might use fall back value. This
method requires using reasonable means consistent with the principles and general provisions of
customs laws and on the basis of data available in the importing country. It can also base on
previously determined customs values or by relaxing conditions of previous methods. As the
method is so judgemental the importer may request written information when this method is used to
value the imported goods. Consequently, the fall back value does not base on:
(a) The selling price in the importing country of goods produced in the
country;
(b) A system which provides for the acceptance for customs purposes of the higher of two
alternative values;
(c) The price of goods on the domestic market of the country of exportation;
(d) The cost of production other than computed values which have been determined for
identical or similar goods in accordance with computed value method above;
(e) The price of the goods for export to a country other than importing country; (f) Minimum
customs values; or
(f) Arbitrary or fictitious value

426 Customs
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Item Item Value Value
Customs Customs
value ofvalue
imported
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goods (ZZZ)
goods
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Import (ZZZ)
(%duty
x ZZZ)
(% x ZZZ) xxx xxx XXX XXX
Tax baseTaxforbase
exciseforduty(EDB)
excise duty(EDB) xxx xxx
Excise duties
Excise(% duties
x EDB)
(% x EDB) XXX XXX XXX XXX
Railway Railway
and development
and development
levy(%x levy(%x xxx xxx
ZZZ) ZZZ) xxx xxx
Tax baseTaxforbase
VAT(VB)
for VAT(VB) XXX XXX
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VB)(%x VB) XXX XXX XXX XXX
Total duties
Totaland
duties
taxes
and taxes xxx xxx
Customs: 427
Question 6
Mr. Kwanza imported used Toyota Prado from Japan. The necessary details of the transaction for
customs and taxation purposes were as follows:
FOB value US $ 20,000
Freight Charges US $ 1,500
Insurance US $ 100
Import duty 25%
Excise Duty on age 5%
Excise Duty engine capacity 20%
Value Added Tax 18%
Railway and development levy 1.5%
Applicable Exchange rate: Tshs 2,000/US $ 1
Required:
Compute the total import taxes payable by Mr. Kwanza
Question 7
Mention any four possible reasons for imposition of import duty on imported goods.
10. Customs Procedures For Prevention Of Smuggling
Definition
Smuggling is an act of importing, exporting or carrying coastwise, or transferring or removing into
or out of a country of goods with intent to defraud the customs revenue or to evade any prohibition or
restriction on, regulation or condition as to such importation, exportation, carriage coastwise,
transfer, or removal, of any goods.
10.1 Forms of smuggling
 Outright avoidance of official customs controls across the borders: e.g. On Lake Victoria,
overland on road, rail and often through the bush ways. This form of smuggling is generally
associated with highly marketable goods, goods of high tax value, and prohibited or
restricted goods.
 Under declaration of goods: This is a circumstance where the importer declares less
quantity on importation documents than the actual goods being imported. This form of
smuggling occurs through customs controls – usually deliberately, on the side of the
importer.
 Undervaluation of goods: This is a situation whereby goods are given a lower value than
they actually have. Undervaluation often happens out of ignorance, negligence or
connivance at the customs control. It aids smuggling indirectly.
 Misclassification of goods: This means that goods are declared under a different class of
imports particularly to attract lower rates of tax with intent to reduce the tax liability. This
again may happen out of ignorance, negligence or deliberately. This problem also aids
smuggling.
 Falsification of documents.
 Mis declaration of country of origin.
428 Customs
10.2 Problems associated with smuggling
(i) Loss of revenue: Smuggling is an act of tax evasion which deprives government of
revenue for public expenditure.
(ii) Distortion of market prices: Goods which are smuggled into the country are often sold a
lot cheaper than goods brought onto market through the right procedures. Smuggling
therefore deprives traders of free competition.
(iii) Collapse of local industries: A country achieves better economic growth by developing
its own industrial base. Smuggling under-cuts prices of the locally manufactured goods
thus destroying the market for local products. This leads to collapse of local industries.
(iv) Unemployment: When there is unfair competition in the market, compounded by the
collapsing of industries, the labour market (employment base) is eroded. Many
professionals, skilled and unskilled personnel remain jobless.
(v) Loss of lives
(vi) Increased insecurity.
10.3 Power of customs officers to prevent smuggling

Smuggling is not only expensive but also create unfair in tax systems where smugglers pay no
taxes. So customs departments they may use following procedures or powers to prevent
smuggling and enforce customs tax laws:
(a) Signalling any vessel or aircraft to stop or land for inspection and require the master
of the vessel to facilitate the boarding (Section 149).
(b) To require any aircraft or vessel that is not registered in a partner state to leave the
partner state within 24 hours (Section 150).
(c) To enter upon and patrol and pass freely along any premises other than a dwelling
house or any building. Moreover, they may direct any aircraft, vessel, or vehicle to any
place convenient for search and for any time as the officer deem necessary (Section
151).
(d) To board and search any aircraft or vessel within a partner state and may examine, lock-
up, seal, mark, or secure, any goods on the aircraft or vessel. Moreover, the proper officer
may require goods to be unloaded, or removed, at the expense of the master of such
aircraft or vessel. In case access is not given, force may be used to gain the access
(section152).
(e) To stop any vehicle or on transit vehicle sought to carry any uncustomed goods, search it
or require goods to be unloaded at the expense of the owner of the vehicle. Also force
can be used to gain access when necessary (Section 153).
Customs: 429
(f) To ask any person entering or leaving a country about his or her luggage or anything
carried in it. When the person is leaving or entering the country by a vehicle a proper
officer may ask question to the driver or any person in charge of the vehicle about the
vehicle, goods in it, and documents related to the vehicle and the goods (Section 154).
(g) To search any person who is suspected of having any uncustomed goods but, a
woman officer should search a female suspect and a male suspected must be
searched by male officer. If any uncustomed goods found should be forfeited (Section
155).
(h) To arrest with police coordination when necessary any person who is doing, has done,
or believed to has done an offence within the last year (Section 156).
(i) To enter and search any building at any time suspected of holding uncustomed goods.
Besides, requiring from the owner, or occupier of the building any books, documents or
anything which the customs laws require the owner or occupier to keep. And either
examine, make copies, seize them, ask questions about them, require container opened,
take samples, lock up, seal or secure the building, room, place, tank or container.
Uncustomed goods found in the search might be captured and taken away (Section 157
(j) To ask for search warrant from any magistrate to search a building/ premises for
uncustomed goods with police officer assistance (Section 158).
(k) To inspect and require immediate production of accounts documents related to

suspected smuggling activities or undervaluation of uncustomed goods (Section 159).
11. Offences in Customs Operations

Customs offence is any breach or attempted breach of the statutory or regulatory provisions which
are provided in the EAC Customs Management Act (EAC- CMA).
The following is comprehensive list though not exhaustive of offences according to East Africa
Customs Management Act 2004 it. Criminalizing these acts help in enforcing customs laws.
1. Engagement in corruption practices, upon conviction the parties involved is subjected to a

sentence not exceeding 3 years (Section 9).
2. It an offence to disclose any information obtained during performance of customs duties except
in court of law providing witness, a penalty of not more than 2500 dollars or sentence not more
than 3 years or both on conviction (Section 9(4)).
3. It is an offence to trespass or leave without following required procedures any customs area or
customs airport or bring or take out any goods from the areas. In any contravention, the person,
vehicle or goods involved might be detained for investigation also a fine of not more than one
1000 dollars is payable and any goods involved forfeited (Section 15).
4. It is an offence to conspire with others to commit crimes a sentence of not more than 5 years is
430 Customs
imposed after convictions (Section 193).
5. It is a crime to shoot at any aircraft, vessel or vehicle, or an officer on duty and the
crime attract imprisonment not exceeding 20 years (Section 195(1)).
6. It is also a crime to act against custom laws or carry any goods liable for forfeiture while armed
after conviction a sentence of not more than 10 years may be imposed (Section 195(2)).
7. A person who commits a crime under this Act is disguised any way and while being so disguised,
is found with any goods liable for forfeiture under this Act, commits an offence, shall be punishable
by imprisonment for a period of not exceeding 3 years.
8. It is a crime committing a crime while disguised or carrying any goods liable for forfeiture while
disguised a sentence not exceeding 3 years is imposed after conviction (Section 194(3)).
9. It is an offence to staves, breaks, destroys or throws overboard from any aircraft, vessel or
vehicle any goods for the purpose of preventing the seizure or securing of any goods; or rescues
any person arrested for any offence; or in any way obstructs.
10. It is an offence illegally removing any customs seal from a ship, an aircraft, vehicle, train or
package, and the offender may go to jail for term not exceeding 3 years or pay a fine not
exceeding 2500 dollars or to both (Section 195).
11. It is an offence to procure or induces, or authorises another person to procure or induce, any
other person to commit or assist in the commission of any offence under customs laws on
conviction a sentence not exceeding 1 year may be imposed (Section 196).
12. It is an offence to warn offenders who might have be apprehended without the warning on
conviction a sentence not exceeding 2 years or a fine not exceeding 2,500 dollars or both (Section
197).
13. It is an offence to impersonalize a proper officer; on conviction a sentence not exceeding not 3
years is imposed besides other punishments on other offences (Section 198).
14. It is an offence not stopping a vessel or aircraft when required to do so by proper officer upon
conviction a penalty not exceeding 2000 dollars and the vessel forfeited if it has less than 250 tons
exceeding two thousand register. While, a fine not exceeding 5000 dollars and the aircraft or
vessel detained until the fine is paid or security given is payable where an aircraft or of a vessel of
250 tons register or more is involved in this offence (Section 149(4)).
15. It is an offence concealing, smuggling, throwing overboard, destroying or staving any goods to
prevent seizure; or importing, or carrying coastwise, or exporting any goods contrary to the East
Africa Community Management Act 2004. Upon conviction a penalty not exceeding 7000 dollars
and goods and the vessel forfeited if it has less than 250 tons exceeding two thousand register.
While, a fine not exceeding 10,000 dollars and the aircraft or vessel detained until the fine is paid
or security given is payable where an aircraft or of a vessel of 250 tons register or more is involved
in this offence . Also in case of vehicle the person in charge of the vehicle is fined a penalty not
exceeding 5000 dollars and the vehicle and goods forfeited (Section 199).
Customs: 431
16. It is offence to imports, export, acquire, unload, or carry coastwise any prohibited, uncustomed
or any restricted goods contrary to required conditions (b) unloads after importation or carriage
coastwise. After conviction a penalty of 50% of the dutiable value involved is payable or a term
not exceeding 5 years or both (Section 200).
17. It is an offence to imports or exports any concealed goods to deceive any officer. Upon conviction
sentence not exceeding 5 years or to a fine equal to 50% of the value of the goods involved is
payable (Section 202).
18. It is an offence making a false statements, providing incorrect/counterfeits information,

obtaining any drawback, rebate, remission, or refund, or duty illegally, interfering illegally goods
under customs, bringing into a partner state without lawful excuse any blank or incomplete invoice,
bill head, or other similar document, capable of being filled up and used as an invoice for
imported goods. After conviction a sentence not exceeding 3 years is served or a fine not
exceeding 10,000 dollars is payable (Section 203).
19. It is an offence failing or refusing producing accounting records (Section 204).
20. It is an offence to cuts away, casts adrift, destroys, damages, defaces, or in any way interferes
with, any aircraft, vessel, vehicle, buoy, anchor, chain, rope, mark, or other thing on customs
enforcements. A fine not exceeding 2,500 dollars is payable after conviction (Section 205).
21. It is an offence failing to reports a discovery of any uncustomed goods on land or floating upon, or
sunk in, the sea, to the nearest officer. After conviction a penalty not exceeding 2,500 dollars is
payable besides forfeiting the goods involved (Section 206).
22. It an offence to aid, abets, counsel or procure the commission of any offence the doer commit the
same offence and attract the same penalties under the offence (Section 208).
23. It is an offence seizing goods liable for forfeiture for personal gains, upon conviction a
sentence not exceeding 3 years is served or a fine not exceeding 2000 dollars or to both (Section
213).
24. It is an offence declining to act as agent of a commissioner by giving false or misleading

statement, or wilfully conceals any material fact upon conviction a fine not exceeding 2,500 dollars
or sentence not more than 3 years or to both is imposed (Section 131 (7)).
25. It is an offence to imports, acquires, exports or carries coastwise any prohibited goods or any
restricted goods against required conditions and uncustomed goods in whatever forms (Section
200). The penalty for this offence is a sentence not more than 5 years or a fine equal to 50% of the
dutiable value involved, or both. Furthermore, in case of monetary penalty, the goods involved
must be forfeited (Section 201).
26. Failure to leave the partner state as required without reasonable excuses attract, a penalty of not
exceeding
2000 dollars and the vessel being forfeited if it has less than 250 tons register. Whereas, a
fine not exceeding 5000 dollars and the aircraft or vessel detained until the fine is paid or security
given is payable where an aircraft or of a vessel of 250 tons register or more is involved in this
offence (Section 150(2)).
432 Customs
27. It is an offence to fail to provide food and accommodation of officer who is searching the vessel
or aircraft for long period a fine of not exceeding 1000 dollars is payable (Section 152(3)).
28. It is an offence to temple with goods which are found on vessel or aircraft a penalty of equal to
10% of the dutiable value of the goods is payable (Section 152(6)).
29. It is offence to impersonalize a proper officer and opens, breaks, or in any way interferes with any
lock, seal, mark or other fastening placed any building, room or place a sentence not exceeding 3
years is imposed of penalty not exceeding 2500 dollars is payable (Section 157). When goods
disappear in a sealed premise the owner or occupier is liable to penalty of 25% of the value of the
goods or to imprisonment for a term not exceeding five years (Section 157(5)).
12. Recovery Measures Used To Collect Unpaid Duties.

When customs taxes become due and payable but taxpayers fail to make good of it customs
department has a number of options to recover the taxes due, including the following to enforce
customs tax laws:
1. Instituting a civil legal debt claims on court of laws (Section 130(1)).
2. Detaining goods under customs control until duties are paid and after two months of detention
goods might be sold to cover the duties (Section 130(2)).
3. Levying distress over goods, chattels and effects, material for manufacturing or plant of a factory,
premises, animals, vehicles or other property of the debtors or their agents or other related persons
when a duty is payable after court proceeding or a penalty is not paid one month after the due
date of payment (Section
130(3)). The items distressed can be kept at owner’s costs for 14 days or till the taxes and
keeping costs are paid before those 14 days, otherwise the goods might be sold (Section 130(6)).
Subsequently, the proceeds from the sale first goes to payment of the taxes due, second, to
payment of any fine imposed for non-payment of the taxes, if any, third to payment of the expenses
or other charges for levying of distress and for the sale and finally the balance of the proceeds if
any, goes to the owner when the owner make application of the residual the Commissioner within
12 months from the date of the sale of the item (Section 130(7).
4. Appointing any person to be an agent of another person, where the former owes or is about to pay
money to the latter, holds money for or on account of the latter, holds money on account or some
other person for payment to the latter, has authority from some other person to pay money to the
latter holds dutiable goods belonging to the latter. However, the appointed person if think
cannot act as agent must inform the Commissioners of that decision by giving reasons. The
appointed agent might be required to provide an account of any moneys or goods held by him/her
within thirty 30 days from the date of notice. In addition, the notice may require the agent pay
duty owed within thirty days of the date of service of the notice on him or her, or, of the date on
which any moneys came into his or her hands or become due by him or her to his or her principal,
whichever is the earlier. Failure to pay the duty as required, the owed duty become the liability of
the appointed from the date when such duty should have been paid (Section 131).
5. Holding land or buildings as security for the duty or tax payable (Section 132).
Customs: 433
AnswerAnswer
to Self-Test
to Self-Test
QuestionQuestion
AnswerAnswer
to TY 1 to TY 1
(a) (a)
The benefits
The benefits
of usingofa using
Customs
a Customs
BondedBonded
Warehouse
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are: - are: -
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the general
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for all traders.
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the applicant
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application
an application
to the commissioner
to the commissioner
accompanied
accompanied
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plan of the
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warehouse.
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license
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fee of US$1500
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will be charged.
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warehouse
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not transferable
is not transferable
(e) (e)
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in a bonded
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include include
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limited
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limited
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nametheofname
the of the
aircraft/vessel
aircraft/vessel
or the registration
or the registration
number number
of the vehicle
of the which
vehicleimported
which imported
the goodstheas
goods
the case
as the case
may be,may the name
be, theofname
the importer,
of the importer,
number number
of packages,
of packages,
value andvalue
particulars
and particulars
of the goods.
of the goods.
In In
case of post
caseparcel
of postarticles,
parcel articles,
the post the
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parcel reference
number number
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be included.
also be included.
AnswerAnswer
to TY 2 to TY 2
Determination
Determination
of customs
of customs
value using
value
Transaction
using Transaction
value method
value method
STG STG
Price paid
Price paid 340,000340,000
Brokerage
Brokerage
charges charges 1,200 1,200
Selling Commissions
Selling Commissions 300 300
Buying Commissions
Buying Commissions
(N/A) (N/A) - -
Subsequent
Subsequent
proceeds
proceeds 120,000120,000
Royalty Royalty 200 200

434 Customs
Wooden containers used for packing in England 500
Packing expenses in England 120
Tools and moulds 2,000
Freight 45,000
Insurance 17,000
526,320
Answer to TY 3
 If the transaction value method (method 1) fails the next method to apply is the transaction
value of identical goods (method 2)
 In case of identification of several transaction values of identical goods, the lowest value
should be used to value the imported goods.
 Hence the customs value of the imported item =Tshs 40 million
Answer to TY 4
Determination of customs value using deductive value method
 The greatest number of units sold at a price is 100 so the unit price in the greatest aggregate
quantity is 5,000,0000
 Hence customs value= Tshs 5,000,000 – 500,000 GE&P – 250,000 labeling = Tshs
4,250,000
 Duties and taxes are 25%
 X =Custom Value
X + (X *0.25) = Tshsh 4,250,000
4,250,000 / 1.25 = Tshs 3,400,000
 Therefore customs value = Tshs 3,400,000
Answer to TY 5
Determination of customs value using computed value method
US $
Production costs
Direct labour 400
Direct materials 600
Overheads and profit 320
Freight 600
Insurance 200
Customs value 2,120
Customs: 435
Answer to TY 6
(ii) Calculation of CIF/Customs value
FOB price 20,000
Freight Charges 1,500

C&F 21,500
Insurance 100
CIF/customs value 21,600
Exchange rate 2,000

CIF/customs value in Tshs 43,200,000
(iii) Calculation of duties and taxes
Customs value of imported

goods 43,200,000
Import duty (25% x

43,200,000) 10,800,000 10,800,000
Tax base for excise
duty(EDB) 54,000,000
Excise duties on engine
capacity (20% x 54,000,000) 10,800,000 10,800,000
Excise duties on age (5% x
54,000,000) 2,700,000
67,500,000
Railway and Development
levy(1.5%x 43,200,000) 648,000 648,000
Tax base for VAT(VB)
68,148,000
Value added tax
(18%*68,148,000) 12,266,640 12,266,640
Total duties and taxes
34,514,640
Answer to TY 7
Four possible reasons for imposition of import duty on imported goods
1. To safeguard local industries
2. Security reasons
3. To safeguard endangered species
4. Agricultural reasons
5. To raise government revenue
436 Customs
Self-Examination Question
Question 1
Mizengwe Importers Ltd (MIL) of Tanga Tanzania, imported goods that are as per East African Community
Customs Management Act (EACCMA) 2004, restricted goods. MIL did observe all requirements regarding
importation of restricted goods. Such goods arrived at Tanga Port on January 3, 2018. The Commissioner of
Customs gave several notices and decided to sell the goods by public auction. The goods were sold for
Tshs22,700,000. MIL had the following obligations to settle:
Duties due to customs Tshs12,500,000

Port charges of Tshs4,500,000
Freight and other charges Tshs13,800,000
Expenses of removal and sale of goods of Tshs2,600,000
Clearing and forwarding charges Tshs670,000
Rent and charges due to customs Tshs8,800,000
Required
(a) Given the above receipts and obligations, determine how the proceeds of sale may be
distributed
(b) To whom the balance, if any, is supposed to be paid to?
Question 2
Tabora Gold Traders of Tabora Tanzania imported used goods from Taiwan. The cost of the car
includes:
Cost (FOB) USD 3,500
Sea freight USD 1,800
Insurance USD 100
Upon arrival of the car at Dar es Salaam, Harbour on March 29, 2018 the customs offices issued
assessment that in fact was based on the customs value that is higher than the actual CIF value by
10%. The following rates were applicable at the date of assessing the car for duty and taxes purposes.
Import duty on the car 20%
Excise duty on the car 5%
Value Added Tax 18%

Railways and development levy 1.5%
Exchange rate Tshs 2,200 per USD

Customs: 437
Required:
(a) Compute the customs value in USD had the customs office not uplifted the value of
the goods
(b) Compute total duties and taxes payable based on uplifted value in Tanzania shillings.
Question 3
Define the following terms as applied in reference to the East African Community Customs
Management Act, (EACCMA) 2004.
(i) Sufferance Wharf
(ii) Duty Draw back
(iii) Export Processing Zone (EPZ)
Question 4
Ndala imported an item from Japan. On the arrival of the item, Ndala could not produce valid documents
acceptable by the Customs Department. For that case, Customs Officers came out with the following
values for such imported item:
Values for identical items:
A – Tshs.40 million
B – Tshs.50 million
C – Tshs.45 million
Values for similar items:
D – Tshs.30 million
E – Tshs.35 million
F – Tshs.60 million
The cargo is subject to 25% import duty, 10% excise duty and 18% VAT and 1.5%
Railway and development levy.
Required
Compute the amount of import duty, excise duty and VAT on importation of this item.
Question 5
For the purpose of determining the value for duty purposes for customs duty on imported goods, there
are six methods that are used. The basic method used is known as the transaction value method.
Required:
(i) Explain what is meant by transaction value for customs duty purpose.
(ii) State four (4) conditions that should be met in order for the transaction value method to be
used.
(iii) Describe three (3) other methods that may be used to value imported goods.
438 Customs
Question 6
(a) Briefly describe any FIVE goods which are under custom control as stipulated in the East African
Community Customs Management Act, 2004
(b) Briefly explain what is Customs Union and outline any five main features of the recently formed
EAC Customs Union.
Question 7
(a) Mention any four types of entries for imported goods as stipulated under section 34 of the East
African Community Customs Management Act 2004.
(b) Briefly explain how the value of goods for export is determined as per the East African Community
Customs Management (EACCM) Act 2004.
Question 8
(a) Explain briefly, four duties of bonded warehouse officer.
(b) Rules of origin are the criteria needed to determine the national source of a product.
Their importance is derived from the fact that duties and restrictions in several cases depend
upon the source of imports. The East African Community (EAC) has its origin criteria which are
used to determine the source of goods.
Required:
Discuss the origin criteria which determine where the goods originate within East African
Community member states.
Question 9
(a) Giving at least one example, briefly explain the term “economic integration”.
(b) Explain the stages of economic integration
(c) For the purpose of prevention of smuggling, the EAC Customs Management Act 2004 grants
several powers for customs proper officers to effect the provisions of the Act in this regard.
Required:
State four powers granted to the proper officer for prevention of smuggling.
(d) State the conditions that must be satisfied for temporary imports to be exempted from import duty.
Question 10
(a) The Second Schedule of the EAC Customs Management Act, 2004, contains a list of prohibited
goods and restricted goods.
Required:
With examples, provide a brief explanation of the following terms:
(i) Prohibited goods

(ii) Restricted goods
(b) Explain five reasons for imposition of import prohibitions and restrictions.
Customs: 439
Question 11
“Smuggling of goods to and from neighbouring countries is a problem to the Tanzania economy”.
REQUIRED
(a) Explain with reasons why illegal cross border trade or business has thrived despite government
measures and efforts to prevent it.
(b) Suggest ways and means which may help to prevent the problem of smuggling across Tanzania
national borders.
(c) Describe briefly the powers of Customs’ Officers and their agents to prevent smuggling.
Question 12
(a) All transit goods are under customs control and the Commissioner General appoints roads or routes
in the country over which goods in transit shall be conveyed. Why is customs control of transit goods
necessary?
(b) Differentiate between ‘green channel’ and ‘red channel’ as used in the East African Community
Customs Management Act, 2004
(c) Mention any four possible reasons for imposition of import duty on imported goods.
Question 13
(a) Briefly describe the role of the customs and excise department of the Tanzania Revenue
Authority (TRA).
(b) Mention four (4) taxes on international trade that are administered by the customs and excise
department.
(c) The East African Community Customs Management Act, 2004 is resourceful on the procedures
to be followed for movement of goods, persons and means of transport directly incoming or
outgoing from a partner state passing from one partner state to another from foreign and
between members of the partner states.
Required:
(i) What do you understand by Carriage coastwise and transfer of goods?
(ii) What are the provisions under East African Community Customs Management Act, 2004
dealing with loading and transfer of goods coastwise?
Question 14
Bonded warehousing is one of the ways by which the Commissioner for Customs and Excise facilitates
trade as it helps to improve the liquidity position of importers by making it possible for import duties to be
payable on small quantities that are withdrawn from the bonded warehouses.
Required
(1) Define the following terms in relation to import duties: -
(i) Bonded Warehouse
(ii) Customs Warehouse
(iii) Bond
(2)Identify any four types of goods that are not allowed to be deposited in bonded
warehouses.
(3)All transit goods are under customs control and the Commissioner General appoints
roads or routes in the country over which goods in transit shall be conveyed. Why is
customs control of transit goods necessary?
440 Customs
Question 15
Explain the following terms as used in customs valuation of imported goods liable to ad-valorem import
duty:
(i) Transaction value
(ii) Transaction value of similar goods
(iii) Deductive value
(iv) Computed value
Question 16
Importation of courier and post parcels items is governed by Section 36(1b) of the East African
Community Customs Management Act (EACCMA), 2004 (Revised in 2009).
Required:
(a) Describe clearance procedure of post parcel as per the East African Community Customs
Management Act (EACCMA), 2004 (Revised in 2009).
(b) What are the main challenges faced in the process of importing/exporting courier and post parcel
items in Tanzania?
Answer to SEQ 1
(i) There is order of payment is presented in the table below.
I Tshs
t
e
m
Proceeds s 22,700,000
Order of payments:
Duties 12,500,000
Balance
10,200,000
Removal and sales expenses
2,600,000
Balance
7,600,000
Rent and other expenses at warehouse
7,600,000
Balance -
Port charges -
Freight charges -
Others expenses -
(viii) There is no balance left as the proceeds cannot cover all of the expenses
Customs: 441
Answer to SEQ 2
(a) Customs values of imported goods in USD without uplifting
USD
Cost 3,500
Freight 1,800
Insurance 100
Total 5,400
(b) Compute total duties and taxes payable based on uplifted value in Tanzania shillings.
Un-uplifted customs value 5,400
Uplifting (10% ×5,400) 540
Uplifted value 5,940
Exchange rates 2,200
Uplifted customs value in Tshs 13,068,000
Import duty (20%×13,068,000) 2,613,600
15,681,600
Excise duty( 5% ×15,681,600) 784,080
16,465,680
Railway and development(1.5%×13,068,000) 196,020
16,661,700
Value added tax(18%×16,712,665) 2,999,106
Answer to SEQ 3
(i) Sufferance wharf means any place, other than an approved place of loading or unloading at
which the
Commissioner may allow any goods to be loaded or unloaded.
(ii) Duty drawback means a refund of all or part of any import duty paid in respect of goods exported
or used in a manner or for a purpose prescribed as a condition for granting duty drawback.
(iii) Export processing zone means a designated part of customs territory where any goods
introduced are generally regarded, in so far as import duties and taxes are concerned, as
being outside Customs territory but are restricted by controlled access.
442 Customs
Answer toAnswer
SEQ 4 to SEQ 4
Customs Customs
value value 40,000,000
40,000,000
Import duty
Import
(25%×40,000,000)
duty (25%×40,000,000) 10,000,000
10,000,000 10,000,000
10,000,000
50,000,000
50,000,000
Excise duty(
Excise
10%duty(
×50,000,000)
10% ×50,000,000) 5,000,0005,000,000 5,000,0005,000,000
55,000,000
55,000,000
Railway and
Railway and
development(1.5%×40,000,000)
development(1.5%×40,000,000) 600,000 600,000 600,000 600,000
55,600,000
55,600,000
Value added
Value added
tax(18%×55,600,000)
tax(18%×55,600,000) 10,008,000
10,008,000 10,008,000
10,008,000
25,608,000
25,608,000
Answer toAnswer
SEQ 5 to SEQ 5
(i) The
(i) term transaction value is used
The term transaction value to isrefer
used to to
the actual
refer price
to the paid price
actual or payable
paid or inpayable
respect inofrespect of
imported goods,
imported including
goods, insurance, freight andfreight
including insurance, other and
incidental charges tocharges
other incidental the extent thatextent that
to the
they have theybeenhave
paid.been paid.
(ii) In(ii)
order for the transaction
In order value to be
for the transaction valueusedto for customs
be used for duty
customspurposes, the following
duty purposes, the following
conditionsconditions
should be should
met. be met.
 There  should
Therebe should
no restrictions to the use to
be no restrictions of the
the use
goods.
of the goods.
 There  should
Therebe should
no conditions to deter the
be no conditions to determination of the VDPof the VDP
deter the determination
 No part  of No
thepart
proceeds
of the on resale would
proceeds on resaleaccrue
would to seller,
accrueunless included
to seller, unlessinincluded
the value.in the value.
 No relationship exists to influence
 No relationship exists to the value. the value.
influence
(iii) Three
(iii) other methods
Three otherthat may be
methods used
that maytobe value
usedimported
to valuegoods
importedinclude:
goods include:
 Transaction value of value
 Transaction identical goods-thisgoods-this
of identical is the price of identical
is the price of goods
identical imported
goods by imported by
another importer
anotherinto Tanzania
importer from the same
into Tanzania from the source
same including
source insurance, freight andfreight
including insurance, other and other
incidental incidental
costs. costs.
 Transaction value of similar
 Transaction value of goods.
similar goods.
This is theThis
priceis of
thesimilar
price goods imported
of similar goods by anotherby another
imported
importer into Tanzania
importer from the from
into Tanzania samethe source,
same including, insurance,insurance,
source, including, freight and otherand other
freight
incidental incidental
costs. costs.
 Deductive Value-thisValue-this
 Deductive is the priceisatthewhich
priceidentical
at whichoridentical
similar goods
or similararegoods
sold inaretheir quantity
sold in their quantity
in Tanzania. in Tanzania.
 Computed value- thisvalue-
 Computed is thethis
priceis based
the price on based
the cost onofthe production, insurance,insurance,
cost of production, freight andfreight and
other incidental costs.
other incidental costs.
Customs: 443
Answer to SEQ 6
(a) The following goods shall be subject to Customs control
(i) Imported goods, including goods imported through the Post Office, from the time of
importation until delivery for home consumption or until exportation, whichever first
happens;
(ii) Goods under duty drawback from the time of the claim for duty drawback until
exportation;
(iii) Goods subject to any export duty from the time when the goods are brought to any port
or place for exportation until exportation;
(i) Goods subject to any restriction on exportation from the time the goods are brought to
any port or place for exportation until exportation;
(ii) Goods which are with the permission of the proper officer;
(iii) Goods on board of any aircraft or vessel whilst within any part or place in a Partner
States;
(iv) Imported goods subject to duty where there is a change of ownership over such goods
from an exempt person to a non-exempt person.
(b) The Customs Union is the first stage in the process of economic integration though in theory of
economic integration; A Customs Union is supposed to be the third stage of integration after
Preferential Trade Area and a Free Trade Area. The EAC Treat provides that the Customs Union
shall be followed by the Common Market then a Monetary Union and subsequently a Political
Federation. The EAC Customs Union encompasses three States; Uganda, Kenya, and
Tanzania.
The main features of a Customs Union include the following (any five):
(i) A common set of import duty rates applied on goods from third countries (Common
External Tariff, (CET);
(ii) Duty-free and quota-free movement of tradable goods among its constituent customs
territories;
(iii) Common safety measures for regulating the importation of goods from third parties such
as phyto-sanitary requirements and food standards.
(iv) A common set of customs rules and procedures including documentation;
(v) A common coding and description of tradable goods (common tariff nomenclature; CTN);
(vi) A common valuation method for tradable goods for tax (duty) purposes (common
valuation system);
(vii) A structure for collective administration of the Customs Union.
(viii) A common trade policy that guides the trading relationships with third countries/trading
blocs outside the Customs Union i.e. guidelines for entering into preferential trading
arrangements such as Free Trade Area’s etc. with third parties.
Answer to SEQ 7
(a) The following are types of entries according to section 34 of the East African Customs
management Act:
444 Customs
(i) Entry for Home consumption

(ii) Entry for warehousing
(iii) Entry for transhipment
(iv) Entry for Transit and
(v) Entry for Export processing zone
(b) The value of goods for export shall include:
(1) (i) Cost of the goods and
(ii) Transport and all other charges up to the time of delivery of the goods on board the
exporting aircraft or vessel or at the place of exit from the Partner state
(2) Where cost of the goods cannot be determined, the cost of similar or identical goods
exported from a Partner State at or about the same time.
(3) Where the value of the goods cannot be determined under (1) & (2) above, then the
proper officer may determine the value of such goods
Answer to SEQ 8
(a) Any four duties of bonded warehouse officer:
(i) To ensure that warehouse licensee gives delivery of goods only against approved
warrants.
(ii) To ensure that the landing Account Books are being kept securely, properly maintained
and up to date all the times.
(iii) The weekly submission of certificate of receipt
(iv) To ensure that the warehouse keeper complies with all provisions related to warehousing
of goods as per EACCMA 2004
(v) To notify the collector of the failure to deposit goods so entered within the prescribed
period.
(vi) To ensure that all damaged and slack packages are reported at once in view of speedy
repair
(vii) Ensuring that all goods entered for warehousing are deposited into warehouse
(b) Goods shall be accepted as originating in a Partner State where they are consigned directly from
a Partner State to a consignee in another Partner State and where:
(i) they have been wholly produced as provided for in Rule 5 of these Rules;
(ii) they have been produced in a Partner State wholly or partially from materials imported from
outside the Partner State or of undetermined origin by a process of production which effects a
substantial transformation of those materials such that:
Customs: 445
(iii) the c.i.f. value of those materials does not exceed sixty per centum of the total cost of the
materials used in the production of the goods:
 the value added resulting from the process of production accounts for at least thirty
five per centum of the ex-factory cost of the goods as specified in the First Schedule
to these Rules; and
(iv) the goods are classified or become classifiable under a tariff heading other than the tariff heading
under which they were imported as specified in the Second Schedule to these Rules.;
Answer to SEQ 9
(a) Economic integration refers to the action of a group of nations towards elimination of all or some of
barriers to trade. Economic integration includes also cooperation in some economic affairs jointly
by member countries.
Examples of economic integration are EAC, COMESA, SADC, ECOWAS or any other relevant
example.
(b) Stages of economic integration are formation of:
(i) Free trade area, that is; where the member countries agree to reduce the barriers to trade
and among themselves, whereas member country is free to impose any barrier to countries
which are non-members.
(ii) Customs union where member countries remove all trade barriers among themselves and
impose a common external tariff to non-member countries.
(iii) Common market which is a stage of economic integration where in addition to meeting
requirements of the customs union there is free mobility of factors of production such as
labor between member countries.
(iv) Total or political integration which is a stage where member countries cooperate in all
economic and political matters. Example is having one assembly, one president, etc.
(c) In sections 149-159 the EAC Customs Management Act 2004 grants the following powers to the
proper officer:
 Power to board vessels
 Power to require vessels to depart
 Power to search premises
 Power to enter upon and patrol and pass freely along premises other than dwelling house
 Power to search persons
 Power to arrest
 Power to require production of books
 Power to stop vehicle suspected of conveying un-customed goods.
446 Customs
(d) The conditions that must be satisfied for temporary imports to be exempted from import duty:
 The proper officer is satisfied that the goods are imported for temporary use;
 The owner pays appropriate deposit or provides security;
 The goods are exported within 12 months from the date of importation.
Answer to SEQ 10
(a) Prohibited Vs Restricted Goods
(i) Prohibited goods are those goods whose importation is not allowed. Examples include
sedition materials, pornographic materials and narcotics
(ii) Restricted goods: are those goods whose importation is not allowed unless
certain conditions are made. Examples include tortoise shells, arms and ammunition,
and nuclear reactors.
(b) Reasons for imposition of prohibitions and restrictions
 Political reasons: Importations of seditious publications that may entice the public to
revolt from lawfully elected government are prohibited, for political reasons
 Economic reasons: Importation of false money and counterfeit currency notes and
coins is prohibited, for their adverse impact on performance of the economy.
 Social reasons: Importation of pornographic materials in all kinds of media, indecent or

obscene prints are prohibited, for their negative effect on morals.
 Security reasons: Importation of lethal weapons, silencers, fire arms, and flick knives
are prohibited for the danger they pose to security.
 Health reasons: Importation of dangerous drugs, such as drugs of abuse is prohibited

unless imported by a specialized institution such as a Hospital, Laboratory or Health
Centre approved by the Ministry of Health.
 Agricultural reasons: The importation of plants, seedlings, seeds of sowing and game
animals is restricted for agricultural development reasons.
Answer to SEQ 11
It is true to say that smuggling is a serious problem to the Tanzanian economy because it results into tax
loss to the government; it creates shortages of goods which results into high prices for the reduced
supply of goods in the country from which the goods are smuggled. Also, it creates corruption and weak
enforcement machinery, hence low probability of detection.
(a) Reasons for smuggling:
 Availability or non-availability of goods in one part of the border.

 Price differentials of goods between countries. Goods will move from low price area to
high price area.
 Government restrictions on cross-border trade (absence of free trade).
 Cumbersome/difficult import regulations and high import duty.
(b) Ways and means to prevent smuggling:
 Allow free trade. Formation of the East Africa Community (EAC) is a step in the right
direction.
 Eliminate or lower import duty and simplify import regulations.
 Increase efficiency of TRA to prevent smuggling and tax evasion by apprehending
smugglers and punishing them.
 Increase the level of production as a long-term solution.
 Cumbersome/difficult import regulations and high import duty.
(b) Ways and means to prevent smuggling:
Customs: 447
 Allow free trade. Formation of the East Africa Community (EAC) is a step in the right
direction.
 Eliminate or lower import duty and simplify import regulations.
 Increase efficiency of TRA to prevent smuggling and tax evasion by apprehending
smugglers and punishing them.
 Increase the level of production as a long-term solution.
(c) Powers of Customs Officers to prevent smuggling.
 Apprehend smugglers
 Impound smuggled goods and auction them.
 Impose fines, penalties and prosecute smugglers.
Answer to SEQ 12
(a) Customs control of transit goods is necessary to ensure that goods that are destined to foreign
countries through the territory of the United Republic of Tanzania are not entered for home
consumption.
(b) Green channel means that part of the exit from any customs arrival area where passengers arrive
with goods in quantities or values not exceeding those admissible; while Red channel means that
part of the exit from any customs arrival area where passengers arrive with goods in quantities or
values exceeding passenger allowance.
(c) Four possible reasons for imposition of import duty on imported goods
6. To safeguard local industries
7. Security reasons
8. To safeguard endangered species
9. Agricultural reasons
10. To raise government revenue
Answer to SEQ 13
(a) Role played by customs and Excise Department in Tanzania.
Customs and Excise Department administers all taxes and duties on international trade in
accordance with the Customs and Excise laws of the country. It also has a responsibility of
controlling prohibited and restricted items/goods imported into the country through the borders,
seaports and airports. The department is also responsible for compilation of trade statistics and
facilitation of intentional trade.
(b) Taxes on international trade administered by the Customs and Excise Department are:
 Import duty
 Excise Duty on imports
 Valued Added Tax on import, and
 Suspended Duties (additional Duties on certain imported goods to address dumping
practices.
(c) (i) Carriage coastwise when goods conveyed by land, by air or by sea from any part of partner
states to any other part thereof are deemed to be carried coastwise any aircraft or vessel,
whether in ballast or conveying such goods by air or by sea shall be deemed to be as
coasting aircraft or coasting vessel as the case may be.
(ii) Conditions under section 99 of EACCMA,2004 dealing with loading and transfer of goods
coastwise are:
 Goods shall not be loaded or unloaded from aircraft or vessel for carriage coastwise at
any time what so ever except as prescribed by the commissioner.
 Goods for carriage coastwise or transfer shall not be unloaded from or loaded on to
any aircraft or vessel except at an approved place of loading or sufferance wharf.
 All goods, which have been unloaded or landed from coasting vessel or coasting
aircraft, shall if the proper officer require, be conveyed forthwith to a Customs area or
transit shed.
 All goods which have been transferred by road shall if the proper officer so requires be
conveyed forthwith to Customs house or to such other place as the proper officer may
direct.
any time what so ever except as prescribed by the commissioner.
 Goods for carriage coastwise or transfer shall not be unloaded from or loaded on to
any aircraft or vessel except at an approved place of loading or sufferance wharf.
 All goods, which have been unloaded or landed from coasting vessel or coasting
448 Customs
aircraft, shall if the proper officer require, be conveyed forthwith to a Customs area or
transit shed.
 All goods which have been transferred by road shall if the proper officer so requires be
conveyed forthwith to Customs house or to such other place as the proper officer may
direct.
(iii) As per section 105

 An officer may go on board any coasting aircraft or vessel in any port place in a partner
states or at any period of voyage of such aircraft or vessel and search the vessel and
examine all goods on board.
 Proper officer may require master or agent thereof to answer questions concerning
aircraft or vessel, its cargo, stores, baggage crew, passengers and to produce any
document, which should be on board.
 An officer may examine goods, which have been unloaded from any aircraft or vessels
after carriage coastwise.
(iv) Transire is a document used as manifest to carry goods coastwise or transfer of goods
coastwise as in accordance with section 98. For the control purposes, the master or agent of
any aircraft or vessel intending to depart coastwise or carrying good for transfer , shall deliver
to the proper officer the transpire for the carriage of the goods specified therein. This is
normally used as the certificate of clearance for such aircraft or vessel for the coastwise
voyage.
Answer to SEQ 14
(i) Definitions
– A bonded Warehouse is any warehouse licensed by the Commissioner for Customs
and Excise for the deposit of dutiable goods on which duty has not been paid, and
which have been entered for warehousing.
– A Customs Warehouse is any place approved by the Commissioner for Customs and
Excise for the deposit of un-entered, un-examined, detained or seized goods for the
security of those goods or for the security of duty payable on them.
– A bond is a legal contract executed under seal whereby parties to such contract bind
themselves to pay a specified amount of money if any of the conditions of the
contract are not fulfilled.
(ii) Goods not allowed to be deposited in bonded warehouses are:

– Duty free goods
– Goods of combustible or inflammable nature (except petroleum products under
specified conditions)
– Acids, arms and ammunition for trade and explosives
– Goods whose duty has already been paid
– Bulk goods of low value e.g. sand, stones, ashes, clay etc.
– Any goods that the proper officer may consider unsuitable for warehousing.
(iii) Customs control of transit goods is necessary to ensure that goods that are destined to foreign
countries through the territory of the United Republic of Tanzania are not entered for home
consumption.
Answer to SEQ 15
(i) Transaction value of imported goods is the price actually paid or payable for the goods when
sold for export to the partner state adjusted according to adjustments stipulated under paragraph
9 of the 4th schedule to the EAC Customs Management Act 2004.
(ii) Transaction value of similar goods: According to paragraph 4 of the 4th schedule of the Act
mentioned in (i) above, is the price of similar goods imported to Partner States at or about the
same time as the goods being valued. It is used when transaction value and transaction value of
identical goods are not available. If more than one transaction value is found, the lowest value
should be used. Adjustment is required to be made to take account of significant differences in
consumption.
Answer to SEQ 15
(i) Transaction value of imported goods is the price actually paid or payable for the goods when
Customs: 449
sold for export to the partner state adjusted according to adjustments stipulated under paragraph
9 of the 4th schedule to the EAC Customs Management Act 2004.
(ii) Transaction value of similar goods: According to paragraph 4 of the 4th schedule of the Act
mentioned in (i) above, is the price of similar goods imported to Partner States at or about the
same time as the goods being valued. It is used when transaction value and transaction value of
identical goods are not available. If more than one transaction value is found, the lowest value
should be used. Adjustment is required to be made to take account of significant differences in
cost and charges between the imported goods and the similar goods in question arising from
differences in distances and modes of transport if costs and charge, under paragraph 9(2) are
included in the transaction value.
(iii) Deductive Value: This is the unit price at which the imported goods or identical or similar
imported goods are so sold in the greatest aggregate quantity at or about the time of the
importation of the goods being valued to the persons who are not related to the persons from
whom they buy such goods subject to deductions for the following:
 Sales Commission paid/payable
 Profit added
 General expenses added
 Transport, insurance at other related costs incurred in Partner States.
 Customs duties and other national taxes payable in Partner States by reason of
importation or sale of goods.
 Costs and charges under paragraph 9(2) of the 4th schedule of EAC Customs
Management Act 2004 where appropriate.
(iv) Computed Value: This is the value obtained by computing the cost of production in the country
of supply (export) basing on the following (i.e. total of the following):
 Cost of materials or other processing employed in producing the goods.

 The profit and general expenses usually reflected in the sales of goods of the
same class or kind in the country of exportation.
The cost or value of all other expenses necessary to reflect the costs added under paragraph 9(2) e.g.
loading, handling and related charges, and transport and insurance costs in the country of export.
Answer to SEQ 16
(a) Clearance Procedure of Post Parcel
 Postal Office records all imported or goods intended to be exported through Post Parcel
advice (Form P 195)
 Original copy of form P 195 is sent to the Addressee
 Duplicate copy is sent to Customs for Clearance
 Counterfoil remains with Postal authority for record purpose
 On receipt of Duplicate P195 form, Customs records details shown on form P195 in a
register.
 On the side of the importer, upon receipt of the original copy of P 195 from the post office
he/she submits a photocopy of his/her identity card to the Post office
 The postal office brings the parcel to Customs Counter
 The importer lodges declaration (form CN23), P 195, invoice, packing list and permit (if
required) at the Customs counter.
 Customs officer examines the documents and the parcel to verify type of goods, quantity,
weight and value in the presence of the owner and the Postal official.
 Customs officer issue tax assessment Importer pays the assessed taxes and is
 Issued with a TRA Receipt and duplicate P 195.
 Importer present TRA receipt and duplicate P 195 to Post office which releases the
parcel.
(b) Challenges faced in the process of importing/exporting courier and post parcel items in
Tanzania.
 Delay in clearance of parcels which needs import/export permits from other government
institutions (OGD’s)
 Most OGD’s such as Tanzania Food and Drug Authority (TFDA, Private Health
Laboratory Board (PHLB), Government Chemistry and Laboratory Agents (GCLA) do not
work on Saturday thus delaying processing of goods imported by Courier companies.
 Review of de-minimus value
 Customs officer issue tax assessment Importer pays the assessed taxes and is
 Issued with a TRA Receipt and duplicate P 195.
 Importer present TRA receipt and duplicate P 195 to Post office which releases the
parcel.
450 Customs
(b) Challenges faced in the process of importing/exporting courier and post parcel items in
Tanzania.
 Delay in clearance of parcels which needs import/export permits from other government
institutions (OGD’s)
 Most OGD’s such as Tanzania Food and Drug Authority (TFDA, Private Health
Laboratory Board (PHLB), Government Chemistry and Laboratory Agents (GCLA) do not
work on Saturday thus delaying processing of goods imported by Courier companies.
 Review of de-minimus value
 The minimum threshold value or deminimus value currently applicable for cargo imported
in Tanzania of US$3 is very low and is not trade facilitative. This is because the large
percentage of items imported by courier services companies have low values ranging
from US$5-20. Although the value are very low, we’re required by the law to collect
duties and taxes on them.
 Delay caused by frequent power cut off and system down time
 Growth of e-business
 Non automation of post offices and OGDs.
 Appointment of Clearing agents firms to clear items imported by courier companies.
 With exception of DHL which has its own Clearing house the remaining courier
companies use different Clearing agents firms to clear their goods (Some of these
Clearing agents firms make their own documents to reduce duty and tax liability thus
prolonging clearance time).
H1
Excise Duties: 451
SECTION H
SECTION H: OTHER
Other Indirect Taxes INDIRECT
TAXES
STUDY GUIDE H1: EXCISE DUTY
Nowadays when the world economy is in the state of recession or slow increase in the economic growth
and individual countries face high deficits of the public finance, ways how to seal the hole in the state
budget are sought for. Governments can either use restrictive measures by lowering the public
expenditures or they can increase the state budget revenues by increasing the tax rates. One favorite
way of each government is to increase the tax rates on products, which have the lowest effect on
reducing their consumption. Such products include for example, alcohol, tobacco or petrol, in other
words, products liable to excise taxes. This study guide describe the nature and objectives of excise
taxes, it also discuss items liable for excise taxes.
a) Describe the nature and objectives of Excise Taxes,

b) Describe methods of charging excise taxes
c) Explain items liable for excise taxes in Tanzania
Describe the nature and objectives of Excise Taxes. [Learning outcome a]
1. The Nature And Objectives Of Excise Taxes

1.1 Definition
Excise duty is an indirect tax imposed on specific goods and services manufactured locally or
imported which are consumed within a country. Tax can be collected from the producer,
manufacturer, wholesaler, importer, or at the point of final sale to the consumer. Excise taxes
can be either specific or ad valorem. Specific excise taxes are charged per quantity, such
as per cigarette, pack, or kilogram (e.g., Tshs 1.50 per pack regardless of price). Ad
valorem excise taxes are charged as a percentage of the value of the product.
1.2 Objective of excise duty

There are several arguments in favor and against the implications of excise taxes, the main
reasons for levying excise taxes are:
452 Other Indirect Taxes
First to, generate revenues with relatively low administrative costs. Since most excise taxes
are specific, these can be levied on goods and services with inelastic demand. Moreover, to
reduce the cost of collection, products which are homogeneous and have a small number of
producers could be easily taxed.
Second, excises are considered to be corrective taxes, as they may be imposed to correct
the external effects produced by the consumption of certain goods. This tax tries to
internalize the external cost of its consumption. For instance, taxes levied on alcoholic
beverages and tobacco products are imposed to alleviate the external costs produced by car
accidents, lung cancer treatment financed through public funds. Excises on motor fuels are
to curb pollution and road congestion generated by vehicles.
Describe methods of charging excise taxes [Learning outcome b]
2. Methods Of Charging Excise Taxes

There are two main methods
(i) Specific rate method
If the tax is levied as an amount per unit of a good (e.g. Afs. per box), the tax is called
per unit or specific. The unit of the good can be measured in weight, volume, or length.
The basic way to calculate the tax would be:
Tax liability = Quantity * Tax per unit = Q * T
The disadvantage with a per unit tax system is that as prices of goods and services
increase over time (with inflation), the tax revenue remains the same. If the tax
collections are measured in real terms the tax revenue decreases over time.
(ii) Ad-valorem tax rate method.-

In an ad-valorem tax rate structure, the excise tax is levied on value. The tax rate is a
percentage of the price of the good or service. Thus, when the price of the good or
service goes up, the tax revenue also goes up. The ad-valorem tax rate structure takes
care of the frequent increases in prices and does not require indexing of the rate as is
the case with the unit tax rate system. However, it is very important that in the ad-
valorem system, the price to be used is chosen carefully.
Explain items liable for excise taxes in Tanzania [Learning outcome c]
3. Items Liable For Excise Taxes In Tanzania

3.1 Items charged under specific rates include:
Wine, spirits, beer, soft drinks, mineral water, fruit juices, Recorded DVD,VCD,CD and audio
tapes, cigarettes, tobacco, petroleum products, Natural gas and telecommunication sim
cards.
3.2 Items charged under ad-valorem rates include:
Money transfer services, electronic communication services, pay to view television services,
imported furniture, motor vehicles, plastic bags, specified aircrafts, firearms, specified cases,
cosmetics and medicaments.
Ad-valorem rates are: 0%, 0.15%, 5%, 10%, 14.5%, 15%, 20%, 25% and 50%.
Wine, spirits, beer, soft drinks, mineral water, fruit juices, Recorded DVD,VCD,CD and audio
tapes, cigarettes, tobacco, petroleum products, Natural gas and telecommunication sim
cards.
3.2 Items charged under ad-valorem rates include: Excise Duties: 453
Money transfer services, electronic communication services, pay to view television services,
imported furniture, motor vehicles, plastic bags, specified aircrafts, firearms, specified cases,
cosmetics and medicaments.
Ad-valorem rates are: 0%, 0.15%, 5%, 10%, 14.5%, 15%, 20%, 25% and 50%.
Question 1
(a) Explain the term “Excise Duty”.
(b) What is the rationale for imposing excise duty on goods?
Question 2
(a) What is excise duty?
(b) State any three (3) types of goods or services where excise duty is levied on.
Question 3
;ĂͿ What is the difference between specific and ad valorem duty charging basis?
;ďͿ Identify four major problems of the specific excise taxes in relation to the alcoholic beverages.
Answer to SEQ 1
(a) Excise duty is an indirect tax imposed on specific goods and services manufactured locally or
imported which are consumed within a country. An excise duty is a tax levied on consumption of
some selected goods such as spirits, alcohol and tobacco that are manufactured within the country. It
is money paid to the government by manufacturing concerns or importer on goods produced or
imported.
(b) Rationale for Imposing Excise Duties
- Excise duty plays important role in the fiscal policies of government. It is therefore a fiscal
weapon that can be manipulated to achieve predetermined economic objectives.
- It has high capacity for re-allocating income.
- Excise duty can be used to influence the exercise of purchasing power by consumers.
- Excise duty has an import substitution effect, this is because, rates of excise duty are
sometimes reduced or completely eliminated in order to give impetus to local production
activities.
- Excise duty can be used to discourage the proliferation of industrial development along
certain lines to the exclusion of others. For instance, it may be increased on certain
commodities to deter investors.
Answer to SEQ 2
(a) Excise duty is a tax on particular goods or products which are normally luxuries. The duty is
imposed on domestic or imported goods by reference to such things as weight, quantity or value.
(b) Three types of goods where excise duty is levied on include:-
 Cigarettes
 Imported furniture
 Wines
Answer to SEQ 2
(a) Excise
duty is a tax on particular goods or products which are normally luxuries. The duty is
imposed on domestic or imported goods by reference to such things as weight, quantity or value.
(b) Three types of goods where excise duty is levied on include:-
 Cigarettes
 Imported furniture
 Wines
 Petroleum products
 Spirits
 Beer
 Soft drinks
Answer to SEQ 3
(c) Difference between specific and ad valorem duty.
Ad valorem is duty that is based on the value of goods while a specific duty is duty charged on
measures like weight or volume of goods.
(d)
(i) Specific taxes may prove “sticky”-difficult to change in the face of inflation, with the result that
real revenues may fall in the face of price increases. Since a principal motivation for differently
higher taxes on alcohol is to raise public revenues in a relatively efficient way, this is clear a
disadvantage. Specific taxes may also discriminate against relatively cheaper products-since
the tax will make up a large a proportion of the final price, the lower that price happens to be
and this may be considered undesirable, for example, because such products are mostly
consumed by low-income people.
(ii) Specific taxes are often levied on “one unit of the good” which may be difficult to define. Is one
unit a litre of beer or a litre of the alcohol component of the beer or some combination of two?
(iii) Since specific taxation is based on some physical characteristics of the product the tax may not
tax the value of the alcohol to the consumer. For example, the packaging or convenience of
availability would not be considered in a typical specific tax on alcohol.
(iv) Moreover, specific taxes are also subject to an “upgrading effect” in the sense that when a
specific tax rate is increased, consumers may increase their demand for the untaxed amenities
of the beverages such as better packaging.
H2
Stamp Duties: 455
SECTION H
Other Indirect Taxes
STUDY GUIDE H2: STAMP DUTIES

It is important to stamp instruments; otherwise, such instrument will not be accepted in criminal cases
proceedings, be admitted in evidence or be available for whatsoever in a claim for title or rights. This
guide the nature and objectives of stamp duty, it also outline instruments chargeable to stamp duty.
a) Explain the nature and objectives of stamp duties

b) Outline the Instruments Chargeable
c) Outline the stamp duties rates and the basis of computation
Explain the nature and objectives of stamp duties [Learning outcome a]
1. Nature And Objectives Of Stamp Duties

Stamp duties are duties basically on instruments (defined as to includes every document by which
any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or
recorded).The duties are either specific (fixed) or ad valorem. It is important to stamp instruments;
otherwise, such instrument will not except in criminal cases proceedings, be admitted in evidence or
be available for whatsoever in a claim for title or rights. Stamp duty are governed by Stamp Duty Act,
Cap 189, which provides for levying of stamp duties on certain documents and matters specified in
the Act.
1.1 Time when instrument must be stamped
All chargeable instruments executed by any person in Tanzania Mainland shall be stamped
within thirty days of execution.
Outline the instruments chargeable to stamp duties [Learning outcome b]
2. Instruments Chargeable To Stamp Duties

The instrument chargeable to stamp duty are specified in the schedule provided they are
executed in Tanzania mainland or if executed outside Tanzania relates to any property or any
matter or thing performed in Tanzania. The Stamp Duty Act specifies the persons to pay stamp
duty where in most cases it is payable by the person drawing, making, or executing the
instrument. Where, in the case of any sale, mortgage or settlement, several instruments are
employed for completing the transaction (whether executed at the same time or at different
times) the principal instrument only shall be chargeable with the duty prescribed in the Schedule
to this Act for the conveyance, mortgage or settlement, as the case may be, and each of the
other instruments shall be chargeable with a duty of one thousand five hundred shillings instead
of the duty (if any) prescribed for it in that Schedule. When a person is in doubt as to whether or
not an instrument is required to be stamped or as to the amount of the Stamp Duty payable in
respect of any instrument, he can refer the matter to the Stamp Duty Officer for adjudication.
Outline the stamp duties rates and the basis of computation [Learning outcome c]
3. Stamp Duties Rates And The Basis Of Computation

The duties are either specific (fixed) or ad valorem
(i) Specific /fixed
These are duties that do not vary with the value of the consideration on the document
that is subject to the stamp. In other words the duty is payable irrespective of the value
on the instrument.
Instruments that attract specific duties includes
 Affidavit
 Cheque
 Valuation
 Power of attorney
 Agreement or memorandum of agreement
(ii) Ad valorem
These are duties that vary with value of the consideration on the document that is
subject to the stamp. Instruments attract ad valorem duties include
 Lease documents
 Transfers of shares
 Transfer of debentures etc
3.1 Rates Applicable to instruments

Stamp duty is charged on specified instruments at varying rates. Some few common instruments
and their duty rates are as follows:
Description of Instruments Proper Stamp Duty
AFFIDAVIT, Including an affirmation or Tshs. 500/=

declaration in the case of persons by law
allowed to affirm or declare instead of taking
oath.
AGREEMENT OR MEMORANDUM OF Tshs. 500/=
AGREEMENT
AGREEMENT RELATING TO DEPOSIT OF Tshs. 500/=
TITLE DEEDS, HYPOTHECATION, PAWN
OR PLEDGE,
APPRAISEMENT OR VALUATION, made Tshs.500/=
otherwise than under an order of the Court in
the course of a suit:
Instrument of EXCHANGE OF PROPERTY 0.5 percent for the first TSHS.
100,000/=, then 1 percent of value
in excess of TSHS. 100,000/=
LEASE, including an under-lease or sublease 1 percent of the annual reserved
and any agreement to let or sublet: rent for lease of all durations
MEMORANDUM OF ASSOCIATION OF A Tshs. 5,000/=
COMPANY
Stamp Duties: 457
POWER OF ATTORNEY, Tshs. 500/=
DIVORCE, INSTRUMENT OF, that is to say, TShs.500/=

any
instrument by which any person effects the
dissolution of his marriage
EXCHANGE OF PROPERTY 0.5 percent for the first TShs.

100,000/=, then 1 percent of
value in excess of TShs.
100,000/=
LETTER OF CREDIT, that is to say, any instrument by TShs. 500/=

which one person authorises another to give
credit to the
person in whose favour it is drawn.
LETTER OF LICENCE, that is to say, any agreement TShs. 500/=

between a debtor and his creditors that the
latter shall for a
specified time suspend their claims and allow
the debtor to
carry on business at his own discretion.
CUSTOMS BOND:
(a) Where the amount does not exceed TShs. 40 per 1,000,
TShs. 9,999/=. Tshs.5000/=
(b) In any other case. the maximum

should not exceed
CHEQUE. TShs. 100/=
ACKNOWLEDGEMENT of a debt: Nil
(a) of an amount not exceeding TShs. TShs. 500/=
1,000/=
(b) of an amount exceeding TShs. 1,000/=
CERTIFICATE OR OTHER DOCUMENT Tshs 500/=

evidencing the
right or title of the holder, or any other person,
either to any
shares, scrip or stock in or of any incorporated
company or
other body corporate, or to become proprietor
of shares,
scrip or stock in or of any such company or
body.
See also Letter of Allotment of Shares
CHARTER PARTY, that is to say, any TShs.500/=

instrument (except
an agreement for the hire of a tug steamer)
whereby a
vessel or some specified principal part thereof
is let for the
specified purposes of the charterer whether it
includes a
penalty clause or not.
TRANSFER (whether with or without 1 percent of the value of the

consideration) of shares in an incorporated shares approved by the Board
company or other body corporate;
RECEIPT for any money or other property:

(i) For an amount not exceeding TShs. (i) Nil
1,000/=. (ii) 1 percent
(ii) For an amount exceeding TShs.
1,000/=.
PARTNERSHIP:
A. Instrument of:
(i) Where the capital does not exceed (i) TShs. 1,000/=
TShs. 10,000/=. (ii) TShs. 2,000/=
(ii) Where the capital exceeds TShs.
(iii) TShs. 5,000/=
100,000/= but does not exceed
TShs. 1,000,000/=.
TShs. 1,000
(iii) In any other case.
B. Dissolution.
ADMINISTRATION BOND:
(a) where the amount is less than TShs. Nill
1,000/= Tshs 500
(b) where the amount is TShs. 1,000/= or
more

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PUBLIC FINANCE

B4 PUBLIC FINANCE AND TAXATION

THE NATIONAL BOARD OF

PUBLIC FINANCE PUBLIC FINANCE

© National Board of Accountants and Auditors (NBAA)

© Get Through Guides 2014

CPA. Pius A. Maneno

Section B 1 Tax Administration in Tanzania

1. Introduction to VAT (Theory and Practice) 347 - 352

1. Excise Duties 451 - 454

Total Page Count: 464

Contents of each Study Guide

‘Learning Outcomes’: on completion of a Study Guide, students will be able to understand

The Learning Outcomes include:

‘Definition’: explains the meaning of important terminologies discussed in the learning

‘Example’: makes easy complex concepts.

‘Tip’: helps to understand how to deal with complicated portions.

‘Important’: highlights important concepts, formats, Acts, sections, standards, etc.

‘Summary’: highlights the key points of the Learning Outcomes.

‘Diagram’: facilitates memory retention.

‘Test yo u r s e l f ’: contains questions on the Learning Outcome. It enables students to

Self-Examination Questions’: exam standard questions relating to the learning outcomes

Section A One compulsory question (covering a range of syllabus content) 40 marks

STUDY GUIDE A1: INTRUCTION TO

1. Explain the meaning

i) Public finance as a science

1.2 Public finance versus private finance

In order to understand public finance better, we need to understand how it is different

(i) (i) Allocation

4.0 Describe the importance of public finance.

[Learning Outcome (c)]

4.0 The Importance of Public Finance

(ii) Optimum utilisation of resources

(iii) Effective tool to tackle unemployment

(iv) Capital formation

(v) Improved income and services of economy

Discuss the rationale for government intervention in the economy.

(iii) (iii) Government

(iv) (iv) Subsidies.

Measures to reduce externalities:

Private Individuals Response

(i) Different schools of thought

 Marginal costs (non rival)

 Decreasing average cost

(b) Economic role of the government in supplying public goods

- Market tend to operate inefficiently (market failures) due to

Market mechanism can supply only a priced good

 Government intervention necessary to address free rider problem

o Market may fail to accelerate desired rate of growth

Infrastructure or social overheads are commercially non-viable and require huge

(ii) Positive and negative implications as a result of government intervention/role

- According to traditional Keynesian Macroeconomics theories, many of the public

Concepts of Public goods and merit goods

(ii) Distribution function

(iii) Stabilization function

(a) Why government interferes a successful free market

(ii) Government may also intervene in markets to promote general economic

(iv) Governments may sometimes intervene in market to promote other goals,

(i) Pollution Taxes