Why VAT scares away SMEs from Dar’s tourism industry
The tax regime considers bookings as income to operators
WEDNESDAY July 31, 2019
By Joe Lihundi
Tranquility News Reporter, Arusha
Value Added Tax (VAT) is likely to send packing small and medium enterprises (SMEs) in the tourism industry if the Tanzania government fails to revisit its administration, a latest study shows.
The government had in December 2017 reviewed the Tanzania Tourism business License popularly known as Tala to attract local SMEs in the formal sector in a bid to expand its tax base.
Before the government’s decision, many briefcase firms clandestinely provided services to tourists to evade tax and often to con their customers at the expense of the country’s tourism image.
SMEs with between one and three tourists vans have since been paying $200 each, down from $2,000 flat rate fee paid in the past.
Other local investors with between four and 10 vans are now paying $2,000 each, between 11 and 50 vans $3,000 each and those with 51 plus vans $5,000 each.
Foreigners with between 11 and 50 vans pay $7,500 each and those with 51 plus vans $10,000 each.
Barely one year and a half after the new license fees were introduced, local entrants in the formal tourism industry complain over challenges preventing them from complying with the tax regime, particularly the VAT.
VAT is a form of taxation end consumers pay. Businesses collect VAT by adding it on top of their rates, but also pay VAT on products and services they purchase.
If a business collects more VAT than it has paid, then it has to pay the difference to the government. And if a business has paid more VAT than it has collected, it can reclaim the difference from the government.
The SMEs call on the government to amend Section 13(1) of the VAT Act, 2014, in a bid to exclude deposits from tourists booking accommodation, vehicles or seats on airplanes.
The amendment will reduce tax compliance among SMEs, simplify tax audit and encourage growth of business and government revenue, they say.
Creating a tax point (the date on which VAT becomes chargeable on transaction) on deposits is onerous to administer to the taxpayers and the TRA, as it adds cost for both parties without generating extra revenue for the government, they argue.
The study was conducted by one Deogratius Mahangila, who was commissioned by the Tanzania Association of Tour Operators (TATO) through financial support from BEST Dialogue.
BEST Dialogue, which is winding up the third phase (2013 – 2019) of its activities in the country, has been providing funding, training, mentoring and networking opportunities to private sector and civil society organisations in need of business reforms, including TATO.
The TATO study specifically cites Section 15 of the VAT Act, 2014, on tax point; saying it is a tall order to tour operators who issue deposit receipts.
The section of the Act says VAT imposed on a taxable supply shall become payable when the supplier issues invoice for the supply, when the consideration for the supply is received in whole or in part, or at the time of supply.
As a result, the Tanzania National Parks online portal deducts money from tour operators’ accounts without issuing electronic fiscal device (EFD) invoices, denying them of VAT refunds.
Tax Point
The date a transaction takes place is important for VAT purposes, as it sets the exact time when output tax should be declared and when input tax may be claimed.
It is also used for calculating turnover, establishing the period for partial exemption and for determining time for deducting input tax.
The failure to know correct tax point may compel taxpayers to pay interests or penalties for delaying to declare VAT or for claiming input tax too early.
“VAT must be accounted for during the tax point and at the rate in force,” the study recommends.
Deposits are not income
Majority of respondents in the study considered the provision of section 15 of the VAT Act, 2014, to be testing to them.
A deposit indicates a client is committed to travel and the operator should reserve accommodation, flights and vehicles.
An itinerary, date of travel, number of people travelling, services booked may change and all services may even be cancelled.
European countries, for instance, do not consider a deposit an income to a tour operator and strong consumer protection laws show time a client is legally allowed to request a full refund of safari costs.
If the cost of a safari is raised after the date of confirmation of the safari and before the date of travel, a client can cancel his travel and request a full refund without penalty.
And if the content of a safari is changed after the date of confirmation of the safari and before the date of travel, the client can also cancel his travel and request a full refund without penalty.
TRA though gives a tour operator room to submit a credit or debit note for the taxpayer to adjust; filing notes and sending them manually to TRA take between two and three productive hours.
Deposits create a gap between VAT payment and VAT claims, badly affecting cashflows of especially SMEs, as failure to claim VAT refunds severely hampers their activities and put their financial viability at risk.
Considerable man-hours are spent on chasing EFD receipts. To tour operators with insufficient resources to recruit personnel, it is an administrative burden that does not add value to both SMEs and the taxman.
Given most of the SMEs neither acquired tax knowledge nor do they employ accountants, the administrative burden significantly affects SMEs belonging to the former cooks and drivers.
The VAT Act contradicts with Section 21 Cap 322 RE, 2008, of the Income Tax Act and Section 115 of the Tax Administration Act, 2015.
The last two legislations require the tourism sector to account for income according to Generally Accepted Accounting Principles (GAAPs) on accrual basis.
One of the principles of GAAP is the Matching Concept Principle whereby revenues and their related expenses occur in the same accounting period.
Under the accrual basis of accounting, revenues are reported on the income statement when they are earned.
If they are registered as income in a different financial year, the profit and loss accounts will no longer reflect the correct financial position of the company.
The difference between revenue as VAT and that of the income shown in the financial statement becomes a recipe for tax audit queries.
Currently, the EFD system does not allow credits. Additional correspondences and man-hours are, instead, required to reconcile the actual with the machine accounts, another potential source for confusion.
