Tanzania’s 11th Parliament was dissolved last month to pave way for the General Elections in October, 2020. Assented by the President on June 15, 2020, the Finance Act, 2020 (“Finance Act”) is one of the very last legislations to be passed by the 11th Parliament. Among other things, the Act serves to legalize most of the tax reforms the minister for Finance announced through his Budget Speech a month ago. But, astonishingly, there is one thing that was not mentioned in that speech. Parliamentarians gratuities are now exempt from income tax. According to the Political Service Retirement Benefits Act (CAP 225 R.E. 2015), a gratuity is a payment granted to a leader upon cessation of service.
Section 38 of the Finance Act effectively exempts from income tax all the amounts paid to persons entitled to benefits granted pursuant to the provisions of Part V of the Political Service Retirement Benefits Act. And the exemption is deemed to have started four years back. From July 1, 2016 to be precise. Part V of the Political Service Retirement Benefits Act confers several benefits to former Speaker, former Member of Parliament and their dependents. The benefits include gratuity, winding-up allowance, and pension.
But to be honest, exemption of MPs final perks is not something new in Tanzania. Up to June 30, 2016, paragraph 1(r) of the Second Schedule to the Income Tax Act (CAP 332), read “1. The following amounts are exempt from income tax - (a)…; (r) gratuity granted to a Member of Parliament at the end of each term;”. This exemption was then removed from July 1, 2016 through the Finance Act, 2016. In a bid to end the exemption, the Minister of Finance said in his 2016/17 Budget Speech: “I propose to amend the Income Tax Act, CAP 332 as follows: (i) To remove the income tax exemptions on the final gratuity to members of parliament in order to promote equity and fairness in taxation to all individuals; …”. The removal of exemption was fiercely contested by some MPs. But based on equity, some MPs supported the move and the finance bill was passed.
As the reform was not in the Budget Speech nor was it in the first draft of the Finance Bill 2020 (available in the Parliament website), the rationale for such a U-turn is not immediately clear. Of course, the move would reduce tax revenue, just like other income tax exemptions. Some MPs, back in 2016, argued that gratuity is paid out of their earnings that have already been taxed. And so, to those MPs, taxing gratuity is unfair. Just like pensions to employees are not taxed. However, this might not be an entirely valid argument. Pension is different. MPs gratuity can, arguably, be likened to employee terminal benefits (amounts paid when employment contract ends or is ended). Terminal benefits to employees are not exempt from tax.
Perhaps what is striking is that the new exemption is broader. Arguably, the original exemption was limited to gratuity paid to MPs at end of each term. But the new exemption covers all the benefits (gratuity or otherwise) payable to former Speaker, former Deputy Speaker, former Member of Parliament, and their dependents under Part V of the Political Service Retirement Benefits Act. And the retrospective application from July 1, 2016 renders the earlier removal of exemption ineffective.
By Shabu Maurus, Tax Partner, Auditax International.