Dar es Salaam — The Court of Appeal has overturned a decision that exempted an industrial chemical dealer from paying the Tanzania Revenue Authority (TRA) Sh664.8 million in additional value-added tax (VAT).
The decision means Ecolab East Africa (Tanzania) Limited will pay the amount after a protracted dispute over the payment of additional VAT following a tax audit.
The verdict is a setback to Ecolab which had unsuccessfully challenged the tax bill at the Tax Revenue Appeals Board (Trab) before the decision was reversed by the Tax Revenue Appeals Tribunal (Trat) January last year.
The case has shed more light among large taxpayers on whether the sale of an interest in land was an exempt supply under the VAT Act.
The tax dispute has its roots in May 2012 when Ecolab sold its properties on plots number 33 and 34 Block A located at Makuburi Industrial Area, Nyerere Road, Dar es Salaam at $1.1 million and paid capital gain tax and VAT.
Two years later, TRA conducted an audit on the company's tax affairs for the years of income 2010 to 2012 and issued an assessment for additional VAT of Sh664.8 million for buildings that stood on the sold land.
The assessment discounted Ecolab which unsuccessfully challenged the tax before administrative channels of TRA, which immediately confirmed the assessment plus interest.
With more avenues to oppose the assessment, Ecolab took its case before Trab, insisting that the sale of an interest in land was an exempt supply under section 10 (1) of the VAT Act.
TRA challenged the appeal, maintaining that Ecolab was obliged to pay additional VAT in respect of the buildings on the land despite the fact that the buildings were sold as a whole. The taxman contended that prescription of the VAT Act separated the single transaction into two.
Having considered what is exempt supply of goods and services under section 10 (1) of the VAT Act and item 8 (1) and (2) of the second schedule, Trab observed that Ecolab was wrong charging VAT on buildings only and left the land uncharged.
Section 10 (1) of the VAT Act, read together with paragraph 8 (1) of the second schedule to the Act says whenever land sold as bare is an exempt supply but once building erected on the land is not exempt supply.
"The VAT that the appellant paid on the building is just a portion of what ought to be paid. TRA acted lawful when demanded additional VAT on the sale of the land and building," Trab ruled then.
Case at Trat
Ecolab was not happy with the decision of Trab and successfully appealed at Trat.
Discontented with the decision, TRA moved to the highest court of the land last year to oppose Trat decision.
The taxman argued that the tribunal grossly erred by interpreting section 10 of the VAT, when read together with item 8 (1) of the second schedule to the act, to mean that sale of interest of land is exempt supply without considering a note under item 8 (2) of the second schedule to the Act.
In its recent decision, the Court of Appeal reversed Trat's decision and held that the tribunal was justified to reverse the decision of the board.