Exports are incredibly important to modern economies because they offer businesses many more markets for their goods and services. Exports create a flow of funds into the country, which stimulates consumer spending and contributes to economic growth. This, in turn, has a positive impact on production, employment, and investment, just to name a few. Tanzania’s traditional exports are agricultural commodities with tobacco, coffee, cotton, cashew nuts, tea and cloves being the most important. Tanzania main exports include tourism, minerals, manufactured goods, crops, fish and fish products, and horticultural products.
In the 12-month period to 30th April 2020, Tanzania’s value of exports of goods and services reached $9.98 billion. Export of gold ($2.44 billion) accounted for slightly over 56 percent of exports of non-traditional goods ($4.33 billion). Due to the impact of COVID-19 on the tourism sector and other factors, exports of gold also took the lead as the main foreign exchange earner for Tanzania. This is according to the latest Bank of Tanzania’s Monthly Economic Review of May 2020.
The change in Tanzania’s VAT law in 2017 was one of the biggest blows to its exporters of raw products. The Written Laws (Miscellaneous Amendment) Act, 2017 (WLMA 2017) amended section 68 of the VAT law to the effect that exporters of raw products are denied credit of VAT they pay when purchasing inputs related to their exported products. The WLMA 2017 targeted the following raw products (i) raw minerals products; (ii) raw agricultural products; (iii) raw forestry products; (iv) raw aquatic products; and (v) raw fauna products. For raw minerals products, the restriction took effect from 20th July 2017 and for raw agricultural products, the restriction was to become effective from 20th July 2019 (two years later).
The 2017 reform was probably meant to encourage local processing by making export raw products, prohibitively, expensive. But, long term, such a reform would be counterproductive with unintended consequences. It just departs from one of the key VAT’s internationally accepted principles - the Destination Principle (DP). In fact, Tanzania's VAT law which came in 2015 was built around this same principle. DP essentially requires VAT to be collected by the jurisdiction where consumption happens (e.g. importing country). Denial of VAT credits on exports ultimately means the exporting country collects VAT on consumption in another country (i.e. as exporters recover the additional VAT cost from their customers across the border). Based on DP, the country of import is also likely to collect VAT on the already taxed raw products. Double taxation! Thus, adoption of the DP serves to avoid double taxation and helps to foster international trade.
Subsequently, two changes have been made on the VAT law to remove the restrictions related to VAT credits on exports of raw products imposed by the WMAA 2017. Last year, through the Finance Act, 2019, the restriction on raw agricultural products was removed. And this year, the Finance Act, 2020 has removed the restriction on all the remaining products. So, exporters of raw products, just like exporters of other products, are now entitled to VAT credits. With VAT at the standard rate of 18 per cent, the removal of restrictions is a huge relief to exporters in terms of cost.
By Shabu Maurus, Tax Partner, Auditax International.