Value Added Tax (VAT) on Financial Services remains a thorny issue for financial institutions, the Tanzanian public and the Tanzania Revenue Authority (TRA).
It has been over 11 months since the Finance Act 2016 came into force to amend the Value Added Tax Act, 2014 (VAT Act) by introducing VAT on various services offered by financial institutions.
The immediate concern raised by many stakeholders was the impact of VAT on the financial services and how financial institutions would implement the new tax in the unique sector.
Pre-emptively, the (then) Commissioner General of the TRA was quick to issue a Press Release on the application of VAT on financial services, which among other things, clarified that VAT was a tax intended to be levied on the already established bank charges for various fee based services offered by financial institutions. It became clear that VAT was not meant to impose an additional tax imposed by financial institutions, on fees charged to customers.
While the press release was well-intentioned to provide clarity and regain public confidence that the VAT cost would not be punitively passed on to customers of financial institutions, a gaping void still remained with respect to the administrative intricacies, attached to the new VAT obligation.
To date, only the sounds of proverbial crickets chipping have emanated from Parliamentary quarters and the TRA Commissioner General's desk regarding the matter, which leave a lot to be desired. The lack of VAT regulations or in the alternative, practice notes, on how to treat VAT on financial services clearly stipulating the "do's" and "don'ts" results in a thorny conundrum for financial institutions, customers of financial institutions and the government in general.
The primal issue emanates from the definition of financial services adopted in the VAT Act 2014 (as amended by the Finance Act, 2016), and specifically, the exclusion of 'services of arranging and facilitating any of the financial services'. All financial institution representatives (if asked) will tell you in more than a few words that the definition of the financial services is, in the very least, confusing.
A more straightforward definition would be desirable to avoid the numerous hiccups faced in the implementation of the VAT law. One approach would be to adopt a clearer definition which expressly spells out the nature of financial services exempt from VAT, in a clear and concise manner, which also seems to be cognisant of the diverse financial services and products offered in the market.
Financial institutions in Tanzania are experiencing a paradigm shift, and are forced to keep innovating and morphing their product offerings to keep up with the rest of East African banking trends and stay relevant in an increasingly dynamic environment. With numerous alternative financing options, the thought of increasing service fees (despite the TRA Commissioner's directive) in order to accommodate the VAT impact is unwelcome for many financiers, due to the apprehension of losing customers.
In order to maintain competitive fees, most financial instructions have either borne the brunt of the VAT on service fees, while others have actively considered alternative product offerings which scrap the service fees altogether. The ripple effect therefore is that, although the introduction of VAT on financial services was intended to increase the tax base by capitalising on the booming financial services sector and result in collection of more taxes, the effect will be quite the opposite.
For those financial institutions willing to shoulder the VAT cost element, the effect will be an increase allowable expenditure which reduces the taxable profits and results in less corporation tax. The result is that when the financial institutions treat VAT in this manner, the TRA will ultimately lose out when most of their "fat cat" taxpayers report a decrease in revenues.
With barely a month left to the reading of the National Budget for the 2017-2018 financial year, there is still time for legislators to take into consideration the evident lacuna in the VAT law and offer a much needed solution in the impending Finance Act, 2017.