Tanzania - VAT Updates

September 9, 2024

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Earlier this year, the Zanzibar Minister for Finance and Planning (MoF) presented the 2025 Budget plan, proposing changes to various tax laws, including the Value Added Tax (VAT) Act. The proposed changes were then reviewed by the Zanzibar House of Representatives, which approved the proposal and sent it for the assessment and signature of the Zanzibar President.

Once the process for adopting proposed amendments was finished, on July 1, 2024, some new rules related to VAT, excise duties, and property taxes came into force.

Changes to the VAT Act

Zanzibar, an insular semi-autonomous region of Tanzania, made several significant changes to the VAT Act, mainly affecting non-resident taxable persons, such as foreign businesses or individuals doing business in Zanzibar.

Non-residents who make taxable supplies should register for VAT purposes once they exceed the VAT registration threshold set at TZS 100 million (around USD 33,100). According to new rules, foreign taxable persons should appoint a local tax representative to complete registration. Apart from completing the VAT registration process for foreign taxable persons, tax representatives are also responsible for paying VAT on their behalf, including any fines, penalties, or interests that may occur.

However, since there are separate VAT rules regulating electronic services, this does not affect foreign digital service providers and their supplies to local consumers.

Speaking of electronic services, new VAT rules brought changes regarding the competent authority for the administration and collection of VAT on electronic services supplied by non-residents to consumers in Zanzibar. The authority for the collection of the VAT shifted from the Zanzibar Revenue Authority (ZRA) to the Commissioner of the Commissioner General of Tanzania Revenue Authority (TRA), which should bring the more harmonized application of the VAT rules regarding electronic services in the whole of Tanzania.

Additionally, amendments adopted increased the VAT rate applicable to insurance and digital services from 15% to 18%.

Conclusion

Foreign businesses should clarify which rules and regulations apply to their business models. Digital service providers may find this especially important since there is still no VAT registration threshold for the supply of electronic services to consumers in Zanzibar.

Also, with the change of the competent authority, foreign digital services providers should not be surprised if they receive a notice or other request from the Tanzania Revenue Authority instead of the Zanzibar Revenue Authority.

Source: PwC

What are the recent changes to the VAT Act in Zanzibar?

Effective July 1, 2024, Zanzibar implemented significant amendments to its VAT Act. Non-resident entities making taxable supplies exceeding TZS 100 million (approximately USD 33,100) are now required to register for VAT and appoint a local tax representative. This representative is responsible for completing the VAT registration and handling VAT payments, including any associated fines, penalties, or interest.

How do these changes affect foreign digital service providers?

The amendments specify that existing VAT regulations for electronic services remain unchanged. Foreign digital service providers supplying to consumers in Zanzibar are not impacted by the new registration threshold or the requirement to appoint a local tax representative. However, the authority for administering and collecting VAT on electronic services has shifted from the Zanzibar Revenue Authority (ZRA) to the Tanzania Revenue Authority (TRA), aiming for a more harmonized application of VAT rules across Tanzania.

Have there been any changes to VAT rates on specific services?

Yes, the VAT rate for insurance and digital services in Zanzibar increased from 15% to 18%, aligning with the standard VAT rate applicable in mainland Tanzania.

What are the VAT registration thresholds in Tanzania?

In mainland Tanzania, businesses with an annual taxable turnover exceeding TZS 200 million are required to register for VAT. In Zanzibar, the threshold is set at TZS 100 million. Professional service providers, such as accountants, lawyers, and engineers, must register for VAT regardless of their turnover.

Are there any VAT exemptions or zero-rated supplies in Tanzania?

Yes, Tanzania's VAT system includes exemptions and zero-rated supplies. Zero-rated supplies, taxed at 0%, allow suppliers to claim input tax credits and include exports and international transport services. Exempt supplies are not subject to VAT, and suppliers cannot claim input tax credits on these goods and services. Examples include financial services, educational services, health services, unprocessed agricultural products, and residential accommodation rentals.

How should businesses prepare for these VAT changes?

Businesses, especially non-resident entities operating in Zanzibar, should assess their taxable supplies to determine if they meet the new VAT registration threshold. If required, they must appoint a local tax representative to ensure compliance with VAT obligations. Additionally, businesses should update their accounting systems to reflect the increased VAT rates on insurance and digital services and stay informed about the administrative shift to the Tanzania Revenue Authority for electronic services.

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