TUMAINI NIVERSITY MAKUMIRA (TUMA)

FACULTY OF LAW

2011/2012

FL 303: TAX LAW

LECTURE NOTES LL.B III

AUTHOR: JUMA WILLIAM

(Student LL.B 111 2011/12)

REG NO: TU/M/LLB/09/989

LECTURER: BARAKA J. SHUMA

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 COPYRIGHT
This work is copyright protected under the Copyrights and Neighboring Rights Act [Cap

218 R.E 2002] of the Laws of Tanzania and International Instruments for the Protection

of Intellectual Property Rights.

As such therefore, no part of this work may be reproduced, copied, adopted, abridged or

stored in any retrieval system or transmitted in any form by any means; electronic,

photocopying, recording or otherwise, save for the application of ‘fair use doctrine,’

without prior written permission of the author or of the lecture (Baraka J. Shuma) Faculty

of Law, Tumaini University Makumira.

July, 2012

© All rights reserved

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 TABLE OF CONTENTS
COPYRIGHT................................................................................................................................... ii

TABLE OF CONTENTS................................................................................................................ iii

FIRST SEMESTER ......................................................................................................................... 1

WHAT IS TAXATION ................................................................................................................... 1

THEORETICAL CONCEPTS FOR TAXATION .......................................................................... 2

1. The Basis of the Tax .................................................................................................................... 2

2. Incidence of a Tax........................................................................................................................ 3

3. Nature of the Tax Levied ............................................................................................................. 4

OBJECTIVES OF TAXATION ...................................................................................................... 4

CHARACTERISTICS OF A GOOD TAX ..................................................................................... 5

THEORIES OF TAX DISTRIBUTION .......................................................................................... 6

1. The benefit theory ........................................................................................................................ 6

2. Sacrifice Theory ........................................................................................................................... 6

3. Ability to Pay Theory................................................................................................................... 7

BASIC CONCEPTS IN TAXATION ............................................................................................. 7

1. TAX UNIT ................................................................................................................................... 7

(a) The Individual Tax Unit....................................................................................................... 7

(b) The Married Couple Unit ..................................................................................................... 8

(c) The Family Unit ................................................................................................................... 8

2. TAX BASE .................................................................................................................................. 8

(i) The Income Tax Base .............................................................................................................. 8

(ii) Expenditure Tax Base .......................................................................................................... 9

(iii) The Wealth Tax Base ......................................................................................................... 10

INTERPRETATION OF TAX STATUTES ................................................................................. 10

iii
SOURCES OF TAX LAW ............................................................................................................ 10

1. Statutes ................................................................................................................................... 11

2. Case Law................................................................................................................................ 11

3. Departmental Practice ............................................................................................................ 11

CONSTRUCTION (INTERPRETATION) OF TAX STATUTES ............................................... 11

GENERAL GUIDELINES IN CONSTRUING TAX STATUTES .............................................. 12

i) The Choice of Method of Interpretation ................................................................................ 12

ii) A Position of Collateral Literature ........................................................................................... 14

iii) Comparison with Foreign Law ................................................................................................. 14

iv) Administrative Practices ........................................................................................................... 15

RULES FOR CONSTRUING TAX STATUTES ......................................................................... 16

1. The Strict Construction Rule ..................................................................................................... 16

2. Construction by Considering the Statute as a whole.................................................................. 19

3. Words of the Statutes must be Read in Their Context ............................................................... 20

4. Departure from the Literal Construction of Statutory Language ............................................... 20

5. Misconception of Existing Laws................................................................................................ 20

6. Provisions Dealing with Tax Machinery ................................................................................... 20

7. Tax Acts must be considered as a whole ................................................................................... 21

8. Two Statutes Dealing with the Same Matter ............................................................................. 21

9. Consolidating Statutes ............................................................................................................... 21

TAX EVASION AND TAX AVOIDANCE ................................................................................. 21

TAX EVASION ............................................................................................................................. 21

TAX AVOIDANCE....................................................................................................................... 22

METHODS OF AVOIDING TAX ................................................................................................ 24

1. Income Splitting ..................................................................................................................... 24

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2. Capitalization of an Income ................................................................................................... 24

3. Income or Asset Shifting ....................................................................................................... 25

4. Sheltering of Income .............................................................................................................. 25

5. Dividend Stripping ................................................................................................................. 26

CRITERIA (METHODS) USED TO DETERMINE TAX AVOIDANCE .................................. 26

1. Arm’s length concept ............................................................................................................. 27

2. Inadequate Consideration & Reasonable Allocation ............................................................. 27

3. Benefits .................................................................................................................................. 27

4. Employees .............................................................................................................................. 27

5. The Business Purpose Test .................................................................................................... 28

THE CONCEPT OF INCOME ...................................................................................................... 28

Distinction between Income and Capital ....................................................................................... 28

INCOME TAXATION .................................................................................................................. 30

Basis of Taxation ........................................................................................................................... 30

1. CITIZENSHIP OR NATIOLAITY ........................................................................................... 31

2. DOMICILE ................................................................................................................................ 31

3. COUNTRY OF SOURCE AND COUNTRY OF DESTINATION .......................................... 31

4. RESIDENCE ............................................................................................................................. 32

Meaning of Residence.................................................................................................................... 32

RESIDENCE OF A PARTERSHIP............................................................................................... 33

RESIDENT TRUST....................................................................................................................... 34

RESINDENT OF A CORPORATION .......................................................................................... 34

RULES FOR COMPUTATION OF INCOME ............................................................................. 35

THE TOTAL INCOME CONCEPT .............................................................................................. 35

THE CHARGE TO TAX ............................................................................................................... 37

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GUIDELINE ON THE DEDUCTION OF BUSINESS EXPENSIVE.......................................... 39

PRINCIPLES USED IN DETERMING WHETHER EXPENDITURE HAS BEEN WHOLLY

AND EXCLUSIVELY INCURRED FOR PRODUCTION OF INCOME ................................... 40

1. THE ASSESSEE’S CAPACITY ........................................................................................... 40

2. COMMERCIAL EXPEDIENCY .......................................................................................... 41

3. REASONABLENESS OF THE EXPENDITURE ................................................................ 41

4. THE BUSINESS PURPOSE TEST ....................................................................................... 41

5. PRODUCTION OF ASSESSEE’S ON INCOME................................................................. 45

6. EXPENDITURE FOR FUTURE INCOME .......................................................................... 45

NON- DEDUCTABLE EXPENDITURE ..................................................................................... 46

SECOND SEMESTER .................................................................................................................. 48

RULES IN RESPECT OF SPECIFIC SOURCES OF INCOME .................................................. 48

INCOME FROM OFFICE AND EMPLOYMENT ...................................................................... 48

TESTS USED IN THE CHARACTERISATION OF INCOME .................................................. 51

1. COTROL TEST ..................................................................................................................... 51

2. THE INTEGRATION TEST ................................................................................................. 53

3. ECONOMIC REALITY TEST.............................................................................................. 53

4. THE SPECIFIC RESULT TEST ........................................................................................... 53

COMPUTATION OF EMPLOYMENT INCOME ....................................................................... 54

PROBLEMS OF A SOURCE CONCEPT OF INCOME .............................................................. 54

BENEFITS IN KIND..................................................................................................................... 57

INCOME FROM BUSSINESS ..................................................................................................... 61

MEANING OF GAINS OR CAPITAL ......................................................................................... 62

BADGES OF TRADE ................................................................................................................... 63

1. THE SUBJECT MATTER OF REALISATION ................................................................... 63

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2. LENGTH OF THE PERIOD OF OWNERSHIP ................................................................... 63

3. THE FREQUENCY OF SIMILAR TRANSACTION .......................................................... 63

4. METHODS AND CIRCUMSTANCES OF SALE ............................................................... 64

5. SUPLEMENTARY WORK ON OR IN CONNECTION WITH THE PROPERTY

REALISED .................................................................................................................................... 66

6. MOTIVES .............................................................................................................................. 66

COMPUTING INCOME FROM BUSINESS ............................................................................... 66

INCOME FROM INVESTMENT ................................................................................................. 67

EQUITY INVESTMENTS UNDER SECTION ........................................................................... 68

1. INTEREST............................................................................................................................. 68

2. NATURAL RESOURCES PAYMENTS .............................................................................. 68

3. RENT ..................................................................................................................................... 69

4. ROYALTIES ......................................................................................................................... 69

5. DIVIDENDS .......................................................................................................................... 70

CAPITAL GAINS ......................................................................................................................... 70

RULES FOR COMPUTATION OF GAINS FOR THE REALISATION OF INVESTMENT

ASSET ........................................................................................................................................... 70

WHEN IS AN ASSET REALISED ............................................................................................... 71

TAXATION OF CORPORATION ............................................................................................... 72

PRINCIPLE SYSTEM OF CORPORATE TAXATION .............................................................. 73

1 .CLASSICAL SYSTEM ............................................................................................................. 73

2. IMPUTATION SYSTEM .......................................................................................................... 73

3. THE TWO-RATE SYSTEM ..................................................................................................... 73

TAX PAYMENT PROCEDURES, ENFORCEMENT AND REFUND ...................................... 74

TIME FOR PAYMENT OF TAXES ............................................................................................. 74

PAYMENT BY ASSESSMENT ................................................................................................... 75

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ASSESSMENT .............................................................................................................................. 76

TYPES OF ASSESSMENTS ........................................................................................................ 76

1. SELF ASSESSMENTS ......................................................................................................... 77

2. BEST JUDGMENT ASSESSMENT ..................................................................................... 79

3. JEOPADLY ASSESSMENTS............................................................................................... 79

SUNCTIONS FOR NON-COMPLIANCE ................................................................................... 79

TAX RECOVERY MEASURES .................................................................................................. 82

METHODS .................................................................................................................................... 82

1. By suit .................................................................................................................................... 82

2. Security .................................................................................................................................. 82

3. Creating a charge over the assets of tax debtor ...................................................................... 82

4. Sale of charged assets ............................................................................................................ 83

5. Departure Prohibition Order .................................................................................................. 84

6. Recovery from the officers of entities.................................................................................... 84

7. Recovery from the receiver .................................................................................................... 85

8. Recovery from person owing money to the tax debtor .......................................................... 86

9. Recovery from an agent of a non-resident ............................................................................. 87

TAX ADMINISTRATION POWERS .......................................................................................... 87

INVESTIGATIVE POWERS ........................................................................................................ 88

REMISSION AND REFUND OF TAX ........................................................................................ 89

VALUE ADDED TAX (VAT) ...................................................................................................... 90

VAT IN TANZANIA .................................................................................................................... 91

VAT REGISTRATION ................................................................................................................. 92

EXEMPTIONS AND ZERO RATING ......................................................................................... 94

Exempt supplies ............................................................................................................................. 94

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Zero-Rated supplies ....................................................................................................................... 94

Special relief supplies .................................................................................................................... 95

PLACE, TIME AND VALUE OF SUPPLIES .............................................................................. 95

TIME OF SUPPLY ........................................................................................................................ 96

VALUE SUPPLY .......................................................................................................................... 96

VAT COMPLIANCE .................................................................................................................... 96

OBJECTIONS AND APPEALS.................................................................................................... 97

RESOLUTION OF TAX DISPUTES: A BRIEF REVIEW OF THE LAW IN TANZANIA ...... 98

By Professor Luoga, F.D.A.M. ...................................................................................................... 98

1. Introduction ............................................................................................................................ 98

2. Policy Objectives of Tax Disputes Resolution System .......................................................... 99

3. Requisites of an Effective Disputes System .......................................................................... 99

3.1 Early Identification of Issues ............................................................................................. 99

3.2 Administrative Neutrality and Impartiality ...................................................................... 100

3.3 Accountability Rules........................................................................................................ 100

3.4 Expediency....................................................................................................................... 101

3.5 Expedited Procedures....................................................................................................... 101

3.6 Time Limit ....................................................................................................................... 103

4. The Context of the Review .................................................................................................. 103

5. The Tax Dispute Resolution Process ................................................................................... 103

A Brief Overview of the Pre-TRAA Procedures ......................................................................... 103

The Tax Revenue Appeals Act 2000 ........................................................................................... 104

5.2.1 A Brief Background to the TRAA ............................................................................... 104

5.2.2 The Dispute Process..................................................................................................... 105

5.2.3 A Critical Overview of the Objection Procedures ....................................................... 105

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1. Notice of Objection .............................................................................................................. 105

2. Procedure after Notice of Objection .................................................................................... 106

3. Observed Deficiencies ......................................................................................................... 106

4. TRAB Interventions ............................................................................................................. 107

5. Unaddressed Deficiencies .................................................................................................... 107

5.2.4 A Critical Overview of the Appeals Procedure ........................................................... 109

1. The Jurisdiction of TRAB .................................................................................................... 109

2. Appeals ................................................................................................................................ 109

3. Procedures ............................................................................................................................ 110

(a) Appeals from Assessments .............................................................................................. 110

(b) Non-Assessment Appeals ................................................................................................ 113

(c) Procedures in Respect of Other Matters .......................................................................... 113

6. Conclusions and Recommendations .................................................................................... 114

References .................................................................................................................................... 114

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 FIRST SEMESTER

WHAT IS TAXATION
It is generally difficult to define what a tax or taxation is. In broad terms, a tax may be
defined as a required payment to the government. However this is both an inclusive
definition. This is because not all the required payments to the government are taxes. eg.
When you pay a fine to a court that is not a tax. .

According to the Oxford Dictionary quoted by Luoga in The Source Book of Income Tax
in Tanzania, A tax is defined to mean a compulsory contribution to the support the
government levied on persons, property, income, commodities, transaction etc.

Now as a fixed rate mostly proportionate to the amount on which the contribution is
levied. The definition as noted by Tiley, the definition quoted (falls short) on three
grounds:

1. It limits the purpose of taxation, because not all taxes are levied for a revenue
purpose.
Taxes may be levied to protect the domestic industries. E.g. Tax may be raised for
imported goods to discourage importation of some goods. This may be enhanced through
custom duties in which imported goods are normally levied to protect domestic
industries, or taxes may be used to deter certain behavior or to discourage certain
behavior. E.g. Taxation on alcohol, cigarette and tobacco are high in order to discourage
the use of these commodities. So the purpose of the taxes is to discourage and not to
support the government.

2. The definition gives an irrelevant description of the tax base. The tax base refers
to what
is taxed. It is an irrelevant definition of the tax base because the tax base remains to be
the most contentious issue in taxation.

3. The definition gives under emphasis from proportionate taxation because tax is not
always proportionate. Tax involves being progressive. That is only under the Income Tax
1
Act of 2004. The term tax is not defined. In several European and Latin American
countries which fall under the civil law system, tax is elaborately defined taxes are
viewed as a subset of a more general category of a compulsory contribution

According to most of these countries, taxes are defined as monetary contribution

unilaterally imposed under public law which serves in part to raise revenues and it is
payable to public authorities.

Again this definition relies on the contribution being compelled by law. However the
current trend have tried to focus to eliminate the elements of compassion and trade such
as collection of revenue through National Lottery, where by people buy lottery tickets
voluntarily while paying taxes at the same time without being coerced.

But most common law countries do not define the term ‘tax’ and the definition is left to
the wisdom of the judiciary. That is why there is no definition of the term ‘tax’ under the
Income Tax Act in which Section 3 Part I of the interpretation provisions provide that,
the term has the meaning ascribed to it under Section 78. But when you visit Section 78
of the Income Tax Act there is no doubt that clearly it fails to define the term tax rather
than dealing with the types of taxes and the methods of payments.

THEORETICAL CONCEPTS FOR TAXATION

According to Beam & Laiken1 as quoted by Luoga,2 taxes can be classified in three broad
categories:

1. The Basis of the Tax

According to the basis of the tax, this will depend on the name of the tax. The name will
reflect what is tax or tax base. For instance a head tax is paid for any individual above the
age of 18. If it is income tax it is a tax of income of the individual/ corporation, or it may

1
Beam, R. E., & Laiken. S. N., Introduction to federal income taxation in Canada, CCH Canadian Ltd:
Ottawa,
pp. 3-4
2
Luoga, F.D.A. M, (2000), A Source book of income tax law in Tanzania, Dares Salaam University Press:
Dar es Salaam
2
be a wealth tax such as capital gains, succession duties, or it may be commodity tax
which is otherwise a consumption tax such as a sales tax, or it may be tariff which is
imposed on imported goods in order to increase the price of such goods relative to the
domestic goods.

2. Incidence of a Tax
This determines the tax payer who ultimately bares the value (pays the tax) and the
incidence of a tax will depend on whether it is a direct or indirect tax. The incidence of a
direct tax is on the initial tax payer. E.g. Income tax. And the incidence of indirect tax is
not on the initial payer but it is on someone else who ultimately pays. E.g. VAT. A sales
tax imposed at the manufacturer’s level is an example of such an indirect tax.
Even though VAT is charged on every stage of production and distribution the ultimate
bearer of the tax is the consumer. In indirect taxes the incidence of taxation is shifted.
However the distinction between the direct and indirect taxes is no longer very useful in
modern economic theory.

According to Victor Thuronyi3 basing classification of taxes on their incidence does not
seem to make a lot of sense. This is because even direct taxes such as income tax may be
shifted to different degrees and different circumstances e.g. Withholding tax, this is held
by the employer at source, or withholding tax on dividends.

When it comes to corporate taxation, the incidence is unknown (tax bearer is unknown).
In determining whether a tax is direct or indirect tax the Court in the case of Toronto v.
Lambe4 the court extended to establish the general tendencies of the tax and the common
understandings of men as to those tendencies. The court distinguishes between taxes that
are likely to be recouped as part of the cost of doing business or those that can be
“passed on” as the element of the price of the transaction subject to tax. And they said
classification is the nature of the tax levying.

3
Victor, T., (2003), Comparative tax law, Kluwer Law Int: The Hague, London & New York, Pp. 54-55.
4
12 App. Cas. 575 at 582 (PC 1887)
3
3. Nature of the Tax Levied
A tax may be classified according to the way it is charged. A tax may either be a
proportional tax, meaning a tax charged at a constant percentage or the income of the tax
payer. eg. According to the 1st Schedule Paragraph 3 (1) of The Income Tax Act
Corporations, Trust and Unapproved Retirement Funds, the tax payable is fixed at 30%
percent subject to some qualifications or it may be a progressive tax. A tax is said to be
progressive when is levied at an increasing percentage of the income of the tax payer, for
example personal income tax as per the 1st Schedule Part 1(1) of the Income Tax Act or
the tax may be a regressive tax. This is a tax which is levied at decreasing percentage of
the income of the tax payer.

OBJECTIVES OF TAXATION
1.) One objective of taxation is to increase revenue for government expenditure.
Now the money that is paid as taxes is normally spent on public services which
the private enterprises will not provide. E.g. Defence, law and order. Some of the
money will be used to pay social security benefits and education.
2.) Redistribution of wealth and income.
It is set as redistribution of wealthy because the money collected from the tax
payers should also be spent on social services and that is why it is generally
agreed but not universally accepted that, income tax should be progressive.
Meaning that those with higher income should be taxed more in order to
supplement those with low or no income at all.
3.) Control of the economy.
Taxation may be used to control the economy of the country and the economy is
normally controlled by adjusting the money demand supply and the credit supply.
Such customs duties are used to protect domestic industries.
4.) Social control.
As noted earlier not all taxes are imposed to raise government revenue. Taxation
may also be used as a tool of social control. The government may use taxes either
to encourage or discourage certain behaviours such as the consumption of an
4
 alcohol, cigarette and tobacco or it may be used to encourage certain behavior
such as birth rates.

CHARACTERISTICS OF A GOOD TAX

According to Adam Smith5 there are four principles (canons) that lead to better taxes,
and those are:-
1. The taxes should be proportionate to the taxpayer income and wealth (tax must
be fair).
In determining the fairness of the tax the equity of a tax may either be horizontal or
vertical. In horizontal equity people in equal circumstances should pay equal amount of
taxes. Horizontal equity means that people with similar income will pay similar taxes.

In vertical equity people in different circumstances should pay an appropriate different

amount of tax, although it is generally agreed that the richer should pay more tax than the
poor people.

2. Taxes must be certain and should not be arbitrary.

The tax system should be clear so that the tax payer will know in advance how much tax
must be paid, and that there must be an effective enforcement mechanism to ensure that
all people pay their taxes. The element of certainty requires that the rules must be clear
and easily understood and that the taxes should not be imposed arbitrarily. Referring to
Article 138.6

3. The taxes should be levied in the most convenient way .i.e. you pay as more as you
earn.

5
In Wealth of Nations,
6
The Constitution of the United Republic of Tanzania, 1977 [ Cap. 2 of the Revised Laws of 2008],
provides that; No tax of any kind shall be imposed save in accordance with a law enacted by Parliament or
pursuant to a procedure lawfully prescribed and having the force of law by virtue of a law enacted by
Parliament. The provisions contained in sub article (1) of this Act shall not preclude the House of
Representatives of Zanzibar from exercising its powers to impose tax of any kind in accordance with the
authority of that House.

5
4. The cost of imposing or collecting the taxes should be kept minimal.

The cost effectiveness of the tax partly depends on the enforcement mechanism and
partly on the total cost of running and complying.

THEORIES OF TAX DISTRIBUTION

The theories of tax distribution try to answer the following questions:
1. Who is taxed?
2. What is taxed?
3. How much is taxed.
The theories try to answer questions as to the rates and bases upon which taxation is
levied. There are three major theories of tax distribution:-

1. The benefit theory

People normally receive benefits from government in terms of social services. The
benefit or enjoyment of this service requires that the citizen should pay for such service.
The individual who receives the benefits from the government should pay for it.

According to the benefit theory the person must have received a direct and measurable
benefit. The individuals tax obligations must as far as possible be based on the benefits he
receives from the enjoyment of public services.
However the benefit theory is difficult to implement because it is not practicable or ease
to measure the proportionality of the benefits of income. It is difficult to appropriate
measure the benefit received as it is difficult to quantify such benefits from the economy
as a whole through personal consumption. It is also difficult to implement because policy
makers cannot individual valuation of a public service.

2. Sacrifice Theory
According to the sacrifice theory, the payment of tax is a sacrifice that an individual
makes towards the support of the government. The measure of the sacrifice is found in
the giving up of enjoyments. The tax payer gives up parts of his income which would

6
otherwise have been used in luxuries. Practically the sacrifice theory demands that
individuals should only pay tax on that portion of income that is spent on luxuries. The
sacrifice should only be in respect of individuals means over and above subsistence. The
sacrifice theory is associated with proportional rates of income taxation. Inadequacies in
the benefit and sacrifice theories of taxation led to the development of the concept of
ability to pay.

3. Ability to Pay Theory

This refers to ability of taxpayers to pay taxes. The ability to pay the taxes should not
cause undue hardships to the person paying or an unacceptable degree of interference
with objectives considered being important by the other members of community.7

BASIC CONCEPTS IN TAXATION

1. TAX UNIT
A tax unit refers to who is taxed e.g. Family group. In formulating a tax policy, policy
makers are occupied with the desire identifying the tax pay unit. The tax pay unit must
taking into account the ability to pay.
A tax unit can either be:
(a) The individual.
(b) The married couple.
(c) The family unit.

(a) The Individual Tax Unit

A tax unit may either be an individual whose ability to pay is determined separately and
tax is levied on the individual in personal. According to Section 5 (2) of The Income Tax
Act8 the total income of each person is to be determined separately. Under The Income

7
Goode, R., (ed), (1976), Individual income tax revenue, The Books Institute: Washington, p.17.
8
Act No 11 of 2004 provides that; The total income of each person shall be determined separately.
7
Tax Act the preferred tax unit is the individual according to what Section 5(2) refers.
They collect tax from the sources of your income e.g. Employment etc.

(b) The Married Couple Unit

According to this unit the husband and wife should be assessed and taxed jointly as
opposed to the individual. It is from the total income of both husband and wife during the
year of income. However, under The Income Tax Act the married couple unit is not
provided for. This was formally provided for under the East African Income Tax
Management Act which was repealed and replaced by the Income Tax Act, 2004.

(c) The Family Unit

This is considered to be the most appropriate unit of taxation. However there is no
agreement on what methods are to be used in determining the family’s taxable capacity.
It is only people who are employed or who has formal business are paying tax. It is most
appropriate because it considers the real expenditure of the people and the income
generated by them. People who do business tend to take loan so that tax amount could be
reduced. Some argue that there is no individual ability to pay but only a family ability
while others maintain that a family has ability of its own but it possesses cumulative
ability of its members.

2. TAX BASE
The tax base refers to what is taxed. Basically there are three competing tax bases that
should be taxed.
(i) The income tax base.
(ii) Expenditure base.
(iii) Wealth base.

(i) The Income Tax Base

It is not ease to define income as the term income has not been defined in the Income Tax
Act. However income is normally considered as cash received from a regular source or
from a number of definite and ascertainable sources. In Tanzania income is normally
8
defined in terms of sources. According to Section 69 a person’s chargeable income for a
year of income may either come from the employment, business or investment assets.
Income from the different sources for resident person is the income from employment,
investment or business irrespective of the source but the income of a non-resident for a
year of income from employment, business or investment is only the income which has a
source in the United Republic of Tanzania.

It is not a matter of citizenship, but what they are interested with is whether a person is a
resident irrespective of the source. It is argued that the source concept of income does not
provide an ideal base of taxation. This is because if an amount cannot be traced into a
source then it is outside the definition of income for taxation. It is argued that the source
definition of income is inequitable because it may lead to preferential treatment of certain
items such as capital gains and it may exclude others such as gifts, bequests etc. from the
income tax base.

(ii) Expenditure Tax Base

The expenditure tax base is sometimes referred to as the consumption tax base. This is a
tax levied on individual consumption expenditure during the course of the year. In such a
tax base the taxable income is arrived at by looking all the cash receipts during the year
of income minus expenditure.

It is argued that an expenditure tax is more equitable than income tax base. This is
because expenditure tax takes into consideration the amount spent by the tax payer.
Whoever most countries that used the expenditure tax base such as India and Srilanka,
they have discarded the system because of the difficulty of administering the system.
Task assigned: Read Wealth Tax Base.

9
Section 6.-(1) Subject to the provisions of subsection (2), the chargeable income of a person for a year of
income from any employment, business or investment shall be (a) in the case of a resident person, the
person's income from employment, business or investment for the year of income irrespective of the source
of the income; and
(b) in the case of a non-resident person, the person's income from the employment, business or investment
for the year of income, but only to the extent that the income has a source in the United Republic.
(2) The chargeable income of a resident individual who at the end of a year of income has been resident in
the United Republic for two years or less in total during the whole of the individual’s life shall be
determined under subsection (1)(b).
9
 (iii) The Wealth Tax Base
The expenditure or consumption tax base has been criticized on the ground that it
increases the returns on savings and increases the opportunities to amass great wealth
compared to the existing tax system. Similarly the income tax has been criticized as being
an inadequate method to tax wealth and is an inefficient way to reduce disparities in
wealth between persons.

Briefly, a wealth tax is a tax on a person’s total assets minus his liabilities. There are
certain accretions that neither income nor expenditure taxes can reach, for example,
wealth which no explicit cash return is earned and which are not spent. This wealth may
be held to generate various forms of non-money income such as the imputed rent on
owner-occupied housing, the imputed liquidity income derived from holding cash and
amenities derived from owning works of art, antiques and jewellery.

However, this base of taxation has been difficult to apply. Experience from the few
developing countries that have attempted to introduce this tax shows that they lack
sufficient administrative expertise to successfully levy this tax. Fairness of tax is
undermined by the difficulty of discovering the ownership of intangible assets and their
valuation. It is also likely to present a problem to tax payers who have property, but little
or no current income. It forces them to dispose of part of their assets in order to pay tax.

INTERPRETATION OF TAX STATUTES

SOURCES OF TAX LAW

Before embarking an interpretation of tax statutes, the source of tax law has to be looked
at. It is generally agreed that sources of tax law are similar in all countries but their
relative role differ depending on the particular legal system.10 These are three main
sources of tax law, namely, statutes, case law and departmental practices.

10
Victor, T., (2003), Comparative tax law, Kluwer Law Int: The Hague, London & New York, p. 62
10
 1. Statutes
These are Acts of Parliament which includes; The Income Tax Act, 2004, Value Added
Tax Act, 1997, Stamp Duty Act, 1972, Hotel Levy Act, 1972, Annual Finance Act. These
are normally passed at the end of the budget session.

2. Case Law
These are decisions of judicial authorities on matters concerning taxation to which
reference is frequently essential. But it should be noted that, however in construing taxing
statutes the courts or judicial authorities do not create new law. This is because it is
through case law that the interpretation of various sections of the statutes that the law gets
application. That’s why we have the Tax Law Reports.

3. Departmental Practice
Statement of departmental practice or an interpretation put on the statutory provision in
the matter of practice become of a great importance and assistance. For instance under
section 130 of The Income Tax Act, the Commissioner of Income Tax Act General may
issue what is known Practice Notes. The practice notes issued, act as guidance to person
affected by the Income Tax Act and officers of the TRA. The practice notes set out the
Commissioners interpretation of the Income Tax Act. Such practice notes are binding on
the Commissioner until the moment they are revoked but they are not binding on other
persons affected by the Income Tax Act of, 2004.

The aim of the practice notes is to achieve consistence in the administration of the
Income Tax Act and to provide guidance to persons affected by the Income Tax Act.

CONSTRUCTION (INTERPRETATION) OF TAX STATUTES

There are two basic principles to be employed in construing tax statutes:-
1. No tax may be imposed on a subject (individual) without words in the Act
showing clearly the intention to impose tax.

11
NOTE: Tax statutes and criminal statutes are normally construed in favour of subjects in
case of conflict in interpretation. Hence it gives benefit of doubt to subjects.

Tax Statutes must be construed strictly and there is no room for intendment (intention of
the parliament) although a fare and reasonable construction must be given to the language
used without leaving to the one side or another. The principle is also enshrined in Article
138.11

2. In tax cases the court may ignore the legal position and regard the substance of
the matter
of the equivalent financial results as per the case of IRC v Duke of Westminster.12

GENERAL GUIDELINES IN CONSTRUING TAX STATUTES

i) The Choice of Method of Interpretation
In choosing the method of interpretation or opposing another, one will point out to the
court the consequences of adopting the unwanted interpretation. In pointing out the
consequences of the unwanted interpretation such a person will present in court in what is
known as Parade of Horribles. In the parade of horrible the person tries to show the
court the undesirable consequences which may result from adopting an alternative
method of construction.
Task assigned; Read a summary of the following cases from “A Source Book of Income
Tax in Tanzania” - Jafferali Alibhai v. CIT, Vol. 3 EATC 328
- X v. CIT Vol. 2 EATC 39
- Mandavia v. CIT Vol. 2 EATC
In Jafferali Alibhai v. CIT13 the appeal emanated from an order of the Commissioner of
the Income tax that 60% of undistributed company income be deemed to have been
11
Of the Constitution of the United Republic of Tanzania, 1977 [Cap. 2 R.E, 2008]. It provides that; No tax
of any kind shall be imposed save in accordance with a law enacted by Parliament or pursuant to a
procedure lawfully prescribed and having the force of law by virtue of a law enacted by Parliament. The
provisions contained in sub article (1) of this Act shall not preclude the House of Representatives of
Zanzibar from exercising its powers to impose tax of any kind in accordance with the authority of that
House.
12
(1936) AC 1
12
distributed as dividends. The Commissioner’s order was based on section 22 (2) of The
East African Income Tax (Management) Act, 1958. This provision was not applicable to
a public company in which the public is free to participate during the “relevant period.”
The company was a private company which later on become public (at midyear) and
challenged the Commissioner’s order as being incompetent.

The issue was whether the terms “relevant period” meant throughout the year of income
or at any time during such year of income. The Commissioner proposed the adoption of
the mischief rule of interpretation arguing that the intention of the legislature by enacting
section 22(2) (a) was to curb the evil of evasion through capitalization of income. The
contention of the Commissioner was that to hold that term “relevant period” meant the
whole year of income would make nonsense of the provision because the company which
was private for 364th days of the year but became a public company on the 365th day
would escape the application of section 22.

The argument by the Commissioner in the above case seeks to influence a court to select
a method of interpretation favourable to the taxing authority by parading the horror of tax
evasion.14 (However, the court in the said case rejected the proposed mischief rule in
favour of the ordinary meaning rule because the words of the said provision were clear
and unambiguous)

The party seeking a particular interpretation of a statute or opposing another will point
out to the court the dire consequences of adopting unwanted interpretation i.e. he presents
the court with a “parade of horrible.”

In the case of X v. CIT15 the tax payer in supporting of his proposed construction of the
statute suggested that adopting of another construction would allow the Commissioner to
make assessments which were arbitrary and fantastically high.

13
Vol. 3 EATC 328
14
However, the court in the said case rejected the proposed mischief rule in favour of the ordinary meaning
rule because the words of the said provision were clear and unambiguous.
15
Vol. 2 EATC 39
13
In Mandavia v. CIT16 the counsel for the taxpayer had asked the court to consider the
serious consequences which he thought would arise from the interpretation of the statute
in question put forward by the Commissioner.

The question involved interpretation of section 72 of The East African Income Tax
(Management) Act, 1958 which the counsel contended that it should have a restricted
rather than a general application because it inflicts hardship on the taxpayer. He proposed
that the interpretation should be as one in a previous English Statute providing that where
a penal statute or taxing statute is of ambiguous meaning, the construction more
favourable to the subject should be adopted.

ii) A Position of Collateral Literature

Collateral literature includes views, Hansards (parliamentary records in the course of
their debates), Commission Reports etc. The general position is that such collateral
literature cannot be used as a legitimate aid to construction (statutory interpretation).17 In
the case of CIT v. BG18 the court was concerned with consideration of commission
recommendations which led the enactment of a particular Act. The court was of the view
that the commission recommendations are not proper guidance to the interpretation of the
enactment.

iii) Comparison with Foreign Law

There may be instances where Tanzanian Statutes are similar to other Common Law
(wealth) countries. Sometimes consideration is made of the interpretation assigned to the
provision in other countries where the statutes are in pari material. If such statutes are in
pari material the interpretation used in the foreign provision may provide guidance in the

16
2EATC 39
17
Note, however the position in Tanzania in this regard appears to have been changed by the decision in
Joseph Sinde Warioba vs. Steven Wassira & AG Civil Appeal No. 52 of 1996, (Dar es Salaam)
(Unreported) using the “purposive” approach of appears that the court can read words into a provision of
law in order to give effect to the objects which the statute was designed to achieve. Refer, Kammis
Ballrooms Co. Ltd v. Zenith Investments(Terquay) Ltd. [1970]2All ER 871 at 893 & Nothman v. Barnet
London Borough Council [1978]1All ER 1243 at p. 1246
18
EATC 165
14
construction subject to the differences. E.g. In the case of Ralli Estate Ltd v. CIT19 the
phrase under consideration was, “expenditure wholly and exclusively expended in the
production of income.” Refer Section 11 of The Income Tax Act. Counsel wanted to
rely on an English statute interpretation which read, “Expenditure wholly and exclusively
laid out for the purpose of trade, profession or vocation.” The court observed that the
differences in the words used must be handled careful and that where the provisions are
so different any comparison may be rendered useless.
Assignment: Read- BJ v. CIT 3 EATC 263
-CIT v. Director of A.Y. Ltd 2 EATC 414
In the case of BJ v. CIT20 the taxpayer in support of his claim for a child allowance and
an education allowance argued that Section 52 of The East African Income Tax
(Management) Act, 1958 should be compared with section 212 of the English Income
Tax Act, 1952. The court rejected the tax payer’s argument that the statutes were quite
different.

Also in CIT v. Director of A.Y. Ltd21 it was the Commissioner who based his position on
the alleged similarity of the English Income Tax Act,1952 ( provisions regarding pension
rights of directors and employees) to sections of the East African Income Tax
(Management) Act, 1952. The court rejected the Commissioner’s argument because of
significant differences between the statutes.

iv) Administrative Practices

Sometimes the courts are asked to look into administrative practices in order to determine
the meaning of the statutes. This technique of construction is referred to as practical
construction and is only used when the practices is in favour of the taxpayer.
Assignment: Read –TM Bell v. CIT Vol. 3 EATC 102
- Commissioner for Special Purposes of the Income Tax v. Pensel 1891
AC 431

19
2EATC 203
20
3 EATC 263
21
2 EATC 414
15
 22
In TM Bell v. CIT the Department of Income Tax had adopted an arrangement of
convenience of allowing the practice of filing one memorandum of appeal against several
assessments.
The issue was whether it was competent for the appellant taxpayer to file one
memorandum of appeal in relation to several assessments.

Section 78 of The East African Income Tax (Management) Act, 1952 provided only for
appeal against the assessment. The court held that departmental practice could not be
used as a guide to construction. That, however, even though at times courts have admitted
departmental practice, it has to be very careful. It is vary unsafe to rely on departmental
practice.

Commissioner for Special Purposes of the Income Tax v. Pensel23 the court reasoned that
in deciding whether departmental practice has to be taken into account one has to assume
that legislature every time it sits is aware how the law is applied by the tax officers.
Therefore, where the term used in a statute is the same as that used by the department it
should be inferred that the legislature intended that the interpretation should be like that
of the department.

RULES FOR CONSTRUING TAX STATUTES

1. The Strict Construction Rule

The general rule is that, tax statutes must be strictly construed. Strict construction
basically means two things:
i.) It means the use of the plain meaning approach. According to the case of Kliman v.
Winkworth24 it was stated that, in taxation, “you have to look simply what is clearly said
there is no room for any intendment, there is no equity about taxation, there is no

22
Vol. 3 EATC 102
23
1891 AC 431 at 590-91
24
(1933) 17 TC 569
16
presumption as to tax, you read nothing in and you imply nothing, but you look fairly at
what is said and at what is said clearly, and that is the tax.”

ii.) It means the use of the contra- preferentum rule (Standard form contract). Meaning
construction against the maker. Where there is ambiguity taxing statutes are to be
construed in favour of the tax payer.
Assignment: Read- Commissioner General and Another v. Mc Arthur (2000) Vol. 1 EA
33

Commissioner General and Another v. Mc Arthur. 25

Issues
1. Companies - Resident company- Registration - Effect of registration- Whether a
foreign company registered under section 320A and 321 was entitled to resident status -
Companies Ordinance (Chapter 212), section 14, 15, 320A and 321.
2. Statutes – Construction-“Registered”- ejusdem generis - Natural meaning - Whether
the term “registered” should be construed narrowly.
3. Tax - Foreign corporation - Management fees withholding tax- Resident company –
Exemption From payment- Whether the Respondent was a resident company for the
purposes of paying withholding tax- Income Tax Act No 33 of 1974, section 2 (1) (2) (b)
(i) and 34 (1).

On 15th May 1997 Mc Arthur and Baker International (Inc.) (“MBI”) concluded a dept
collection agreement with the then National Bank of Commerce. At that time MBI, a
Delaware, USA- incorporated company, was not yet registered in Tanzania. Registration
was subsequently affected on 25th August 1997 under section 320A and 321 of The
Companies Ordinance. On 31st May 1997, national Bank of Commerce wired a sum of
Tshs 147 865 625 to MBI, pursuant to the contract terms, without paying any
management fees withholding tax on it to the Tanzanian authorities. Upon learning of
this, the Income Tax Commissioner, purportedly acting under section 34 (1) of the
Income Tax Act, recovered the tax on this some from National Bank of Commerce and

25
(2000) Vol. 1 EA 33 (Court Appeal DSM), Before Makame, Kisanga and Rugakingira JJA
17
on five further payments to MBI affected between 2 October 1997 and 19th May 1998.
MBI sought redress in the High Court in the form of orders of certiorari quashing the
decisions of the appellants. The application was granted. The appellants now appealed on
the grounds, inter alia, that the trial Judge erred in finding that compliance with section
320A and 321 of the Companies Ordinance amounted to the registration required by
section 2 (2) (b) (i) of The Income Tax Act, and in finding that MBI was a resident
company. Counsel for the MBI contended that the word “registered” in the Income Tax
Act should be construed under the ejusdem generis rule with the words “incorporated”
and “established”, as suggested by the Appellants. Rather it had to be construed literally
with the effect that, with this context, the certificate issued to MBI under section 320A
and 321 conferred upon it the status of residence.

Held- Tax provisions were to be interpreted strictly and, in construing a Taxing Act, one
had to look merely at what was clearly stated. Applying this principle to section 2 (1) and
(2) (b) (i), the word “registered” had to be given its natural meaning and in this instance
registration under section 14 and 15 of the Companies Ordinance was not contemplated.
Registration under section 320A and 321 was sufficient to confer resident status on MBI.

As registration did not take place until 25th August 1997, MBI was not registered
company at the time of the first payment by the National Bank of Commerce and it was,
therefore, liable to pay management fees withholding tax on the first sum it received.

Section 34 (1) of the Income Tax Act clearly imposed an obligation to pay tax at the time
of payment of “any amount to any non-resident” and it was therefore incorrect to argue,
as counsel for MBI did, that where a foreign company subsequently had itself registered,
it was liable to pay only corporation tax.

The appeal would be allowed in part and the Appellants would therefore have to refund
the collections made in respect of all payments save the first. (No case referred to in
judgment).

18
However strict construction has come under attack especially when interpreting anti
avoidance provisions the courts have adopted a liberal interpretation because it is not
always possible to foresee and forestall ingenious tax payers schemes of avoiding tax.
Take note that, tax avoidance is not illegal rather, tax evasion.

It is argued that, courts in East Africa have been reluctant to use strict interpretation
especially in anti avoidance provisions where there is “casus omissus” (courts are not
supposed to supply missing words in the statute) as it shall be vested to the parliament to
supply.

2. Construction by Considering the Statute as a whole

In construing words and phrases in a taxing statute the Act should be considered as a
whole. This is so because a word or phrase might be ambiguous in one place and yet if
read in another part of the statute it might even give a truth or might be clear. Where
there are two irreconcilably provisions, each has to be interpreted in a manner which will
not negate the other (which will not render provision superfluous).
Assignment: Read- CIT v. Jail Vol. 1 EATC 80

In the case of CIT v. Jail26 the issue was whether the Respondent was entitled, in arriving
at the figure for his chargeable income, to deduct from his total income the sum of £350
which is allowed to be deducted under section 24 (1) (a) of The Income Tax Ordinance
by any person who is in the year preceding the year of assessment had a wife living with
or wholly maintained by him. The Commissioner refused to allow the deduction on the
strength of section 34 (3) within the said Ordinance which provides that:-

When a married woman is not living with her husband each spouse shall for all the purposes of
this Ordinance be treated as if he or she were unmarried.
The commissioner argued that since the wife was not living with the Respondent the
words “for all the purposes” operates to grant an independent status to her and as such the
Respondent was not entitled to the claimed deduction. The Respondent taxpayer argued
for the expression “living with or wholly maintained by him” in the said Section 24

26
Vol. 1 EATC 80
19
saying that if the Commissioner’s interpretation would be adopted the said Section 24 (1)
(a) would be redundant and useless.
The court found that there is an obvious conflict and held that the words “for all
purposes” must be read in the context of Section 34 (3) (a). That is, they must be read
subject to the implied exception in Section 24 (1) (a).

3. Words of the Statutes must be Read in Their Context

In reading tax statutes the words must be read in their context. Words should be
construed in their ordinary way they are used. If the word has a technical meaning in law
then such word shall be construed according to their technical meaning.

4. Departure from the Literal Construction of Statutory Language

The cardinal principle in statutory interpretation is that, statutes must be construed
plainly. Where a literal interpretation leads to an absurd results then the court may depart
from the literal construction. Where the words are not ambiguous then the court is bound
to apply the literal construction.

5. Misconception of Existing Laws

Where there is a law which is passed in misconception of the existing law then the law
remains as it was and the pre- existing law is not affected by the misconceived law.

6. Provisions Dealing with Tax Machinery

These provisions are presumed not to impose a tax/charge and they cannot be construed
to defeat a charge/ tax.27 What does this mean a procedural tax law (Tax Revenue
Appeals Act). This is a procedural law providing the mechanisms of solving tax law
disputes. Hence this procedural law cannot be used to impose tax or to defeat tax law.

27
IRC (Inland Revenue Commissioner)
20
7. Tax Acts must be considered as a whole
Hence it should be read as a whole. Different Tax Acts has to be considered as forming
a single code. The meaning of the word may be ascertained from words used in the Tax
Act as a whole.28

8. Two Statutes Dealing with the Same Matter

Where there are statutes dealing with the same matter they may be used to explain the
other. However this position is not settled as case laws are not anonymous on the matter.

9. Consolidating Statutes
The interpretation of consolidating statutes should not be made in reference to earlier
Acts. But other rules of statutory interpretation e.g. (Ejusdem generis) and aids to
statutory interpretation (e.g. Marginal notes, long title, and short title) may also be used in
the interpretation of tax statutes and other statutes. e.g. Interpretation of Laws Act,

TAX EVASION AND TAX AVOIDANCE

The object of “tax evasion” and “tax avoidance” is the reduction or elimination of tax
liability. The major distinction between the two is on the different consequences in the
event of unsuccessful attempt by the taxpayer. The consequences of tax evasion is
criminal in nature and may lead to the imposition of a fine, imprisonment or both
however tax avoidance is not criminal. Should the tax payer be found to be avoiding tax
should be required to pay the tax plus interest. Hence tax payer only pays tax and interest
because tax avoidance is considered as a debt lieu from the tax payer to the government.

TAX EVASION
Tax evasion may be defined as the willful attempt by the taxpayer to suppress or not to
disclose income and hence not pay tax. In the case of Regina v. Branch29 the accused who
was a dentist live in the city of Calgary in Canada and he admittedly had not filled his tax

28
Refer the case of Peney General Investment Trust Ltd vs. IRC (1943) AC 486
29
(1976) CTC 193
21
returns for four consecutive years between 1970- 1973. The issue was whether he had
willfully evaded payment of taxes. He (the accused) pleaded that his omission to file
returns for four consecutive years was not intentional because he was emotionally washed
up and could not attend to many of his affairs.

The court was of the opinion that the word ‘evasion’ implies something of deceitful
nature and deliberate attempt to escape the requirement of paying tax on income that had
been earned. And the intention to evade tax can be inferred from acts of omission or
commission.

From evidence adduced in the case the court found that, the accused had no intention to
evade from paying tax and hence was acquitted. From this case it can be summed up that
before an accused may be convicted of tax evasion it must be established that he has a
requisite mens rea.

TAX AVOIDANCE
Tax avoidance refers to any activity aimed at reducing tax which is not criminal in nature.
In tax avoidance the taxpayer utilizes the loopholes available in the Tax Act and plans his
tax affairs in such a way that he reduces his tax liability.

The taxpayer will typically have structured transaction that qualifies for favorable tax
treatment under the literal language of the statute. In tax avoidance what the tax payer
tries to do may be inconsistence with fairness in taxation and the court may be inclined to
disallow the benefits if there is a legal basis for doing so.

However the crucial question is when the taxpayer activity ceases to be legitimate tax
minimization and become tax avoidance which the law prohibits. According to the case
of IRC v. Duke of Westminster30 a man may arrange his tax affairs in such a way that he
pays less tax amount. But tax avoidance can be distinguished from tax mitigation which
is tax planning and tax minimization.

30
(1936)
22
According to the case of IRC v. Willoughby31 the court said, “the whole mark of tax
avoidance is that the tax payer reduces his liability to tax without encourage the economic
consequences that parliament intended to be suffered by any tax payer qualifying to such
reduction to his tax liability. The wholly mark of tax mitigation is that the tax payer takes
advantage of fiscally attractive option afforded to him by tax legislation and genuine
suffer the economic consequences and the parliament intended to be suffered”.

Tax avoidance is the behavior of taxpayers aimed at reducing tax liability but which is to
be found legally ineffective either because of ant-abuse doctrine or by construction of the
tax law.

In tax minimization or tax planning or mitigation this is a behavior that is legally

effective in reducing tax liability as it has been allowed by the legislature.

Until the 1980’s British courts took the view that as long as what tax payer did was
within the terms of the law then there was nothing wrong with it even if the tax payer
managed to find a clever an artificial way to reduce tax. And the courts was of the view
that, if parliament though a particular transaction is not effective in reducing tax then the
remedy was for the parliament to change the law and not for the court to change the law
for the parliament.

After 1980’s the British courts abandon this view and adopted a liberal interpretation of
anti-avoidance provision in order to curb the problem of tax avoidance.

In interpreting anti-avoidance provisions the court gave a liberal interpretation which

suppressed tax avoidance.

31
[1997] STC 995 at 1003
23
 METHODS OF AVOIDING TAX

1. Income Splitting
Section 34 of the Income Tax Act32 provides that, income splitting is the splitting of the
income between more than one taxpayer so as to reduce the marginal rate of tax
chargeable.

In the case of Millard v. FCT33 a licensed bookmaker entered to an agreement with the
family company whereby it was agreed that, the family company would take over and
carry on the bookmaker business. The bookmaker would carry on the activities as an
agent of the company. The Commissioner of Income Tax assessed the bookmaker on the
basis that the sums paid by him to the companies account were included to the taxable
income. The court held that the profits made were delivered wholly from bookmakers
own activities and the provisions made by the agreement for the subsequent disposition
of the profit was for the purposes of avoiding tax.

Similarly in the case of Peate v. FCT34 a tax payer who was a medical practitioner
(doctor) form the family company which purchased his practice and equipment. He
agreed to serve for a salary. The court held that this amounted to income splitting which
was tax avoidance.

Under Section 34 of The Income Tax Act35 income splitting includes a transfer either
directly or indirectly between a person and associate either of income or an asset and the
transfer must be for the purposes of lowering the tax payable. In considering whether the
transaction is an income tax splitting in case of an assets the Commissioner must consider
the market value of and payment made for the transfer of the assets.

2. Capitalization of an Income
In income tax normally a distinction is made between income and capital. What is
normally taxed is income and not capital. Therefore in order to avoid tax income may be

32
( Act No. 11 of 2004)
33
(1962) 10CLR 336
34
(1966) 4C ALJR 155
35
( Act No. 11 of 2004)
24
converted into capital which may be remained untaxed or taxed at a laser rate. For
instance the non declaration of dividends despite of making income in the form of large
profits, the money is pumped to the company. This technique is called transformer or
leveling device.

3. Income or Asset Shifting

This occurs when income or an income producing asset is shifted to another person or
entity to which a taxpayer has a beneficial interest and which is chargeable to less tax.
Such a person or entity could be a corporation, trust, charitable organization or firm or
any entity which has a preferential tax treatment.

In the case of AD v. CIT,36 X trust had created a trust to assist poor and need Muslims and
he appointed himself and his two sons as a trustees. According to the trust deed, the
trustees had total control of the trust conducted the business of the trust and provided all
the revenue and property of the trust. Although their arrangement had the quality of tax
avoidance, the Commissioner fails to assess the trustees on the profit made by a trust. The
court held that, only the trust was assessable to tax and not the trustees.

NB: This was the old principle or rule that income of the trust should only be assessed on
a trust and no other person. However the position is different nowadays under Section 52
of the Income Tax Act,37 a trust is liable to tax separate from its beneficiaries.

4. Sheltering of Income
This includes the use of tax havens. Tax havens are countries which have low tax or
which levy no tax at all. Sheltering of income could also be the use of shelters implicit in
the domestic tax schemes eg. Generous capital allowances, investment allowance, and
liberal reduction offered to agricultural and mining business.

36
Vol. 2 EATC 89
37
( Act No. 11 of 2004)
25
 5. Dividend Stripping
For example, a solvent company is bought by a share holding company, then a large
dividend is declared and shares sold at a less than market value (loss) to the former
shareholders which then is used as a basis for tax refund claim.

The case of BD Co. Ltd v. CIT38 is very illustrative of the use of such striping device. In
this case, the appellant company which was in receivership at the instance of a debenture
holder owned half the shares in W. Ltd which later company was in a position to declare
a large dividend. If the dividend were declared the appellant company would be able to
pay off the debenture holder and as the result the receivership would be terminated. The
remaining halves of the shares in W. Ltd. were held by L.W., who because of the income
tax liability which he would incur if the dividend were declared was not prepared to agree
to the declaration of a dividend. The receivers of the appellant company entered into a
dividend stripping agreement with L.W., by which L.W., sold his shares to the appellant
company for certain (high) amount. The dividend was declared and the appellant
company resold the shares to L.W., for an amount considerable less than the purchase
price. As a result L.W. was enabled to realize a capital gain on which he paid no tax, and
the appellant company received the dividends and as it had a loss for income tax purposes
in excess of the amount of dividends declared became entitled to refund of tax paid by it
on the profits out of which the dividend was declared.

The court, however, nullified the transaction holding that one of the main purposes of the
transaction was the avoidance or reduction of liability to tax. Therefore, the adjustments
order by the Commissioner was held to be appropriate to counteract the reduction of tax
liability.

CRITERIA (METHODS) USED TO DETERMINE TAX AVOIDANCE

These are the mechanisms used by the court to determine whether there is tax avoidance.
These criteria are:

38
3EATC 41
26
 1. Arm’s length concept
In tax law it is assumed that profits/gains made by a taxpayer are achieved through the
interplay of market forces that are independent of the taxpayers’ control. However this
assumption seizes to be so when parties to the transaction do not have opposing economic
interest but because of particular relationship they have a common economic interest.
Where the taxpayers have common economic interests which enable them to arrange the
terms of the transaction to produce the least amount of tax, such persons are said not to
deal with each other “at arm’s length” and transaction between them is referred to as
“transactions not at arm’s length.”
Assignment: Read definition of “associate” under Section 3 of The Income Tax Act,
2004

2. Inadequate Consideration & Reasonable Allocation

Where there is inadequate consideration passing between the taxpayers not at the arm’s
length, then such a transaction may be deemed not to represent a fare market value for the
purposes of determining the tax payers’ income. And likewise the court will look at the
reasonableness of the expenses incurred by the tax payer in generating the income and the
reasonableness of deductions of corporations in terms of entertainment expenses in order
not to avoid corporate tax.
Section 11of the Income Tax Act provides for types of expenses allowed to be deducted.

3. Benefits
These may be benefits that an individual receives and which increases his economic
wealth but they don’t come directly in the form of money. Where such benefits are
conformed on a non employee for example where a company gives benefits to its
shareholders in the form of entertainment allowance and such benefit could be taxed.

4. Employees
In employment income, employers may replace salary income in the form of fridge
benefits which are not taxed such as the use of Company cars, free housing and providing
cafeteria services to employees.

27
 5. The Business Purpose Test
According to this test, the courts will look at the substance and not the form to determine
the results of the transaction. The courts should not be interested in the name attached to
the transaction but rather the final result of the transaction (what have you aimed to
achieve).

THE CONCEPT OF INCOME

Income is not defined under the Income Tax Act, 2004 but Section 3 only identifies the
sources of income. It is not accidental that income was not defined. The meaning of
income is to be ascertained from ordinary use and general trading practices. For Income
Tax purposes people are not so much concerned with the definition of income, but the
distinction between income and capital.

Distinction between Income and Capital

What is taxable or changeable to income tax is income and not capital receipts.
According to Lord MacNaughter in the case of AG v. London Country Council39 “Income
tax if I may be pardoned for saying so is a tax on income. It is not meant to be tax on
anything else” Income tax is a tax that is imposed exclusively on income.

According to the case of Longsdon v. Minister of Pension and National Insurance,40

income in its natural and ordinary meaning it means that which comes in. To constitute
income a receipt of money or money’s worth is usually necessary to constitute income.

According to the case of Dewar v. IRC41 receivability without receipt is not sufficient to
constitute income although some types of income are specifically exempt or not deemed
to be income.

39
[1901] AC 26
40
[1956] vol. 1 All ER 83
41
[1935] 2 kb 351
28
Section 1042 of Income Tax Act read together with 2nd Schedule of The Income Tax Act
which gives amounts that should ordinarily liable to income tax but exempted because of
the exception that is given to some income by law.

The 2nd Schedule is not exhaustive because it always under amended by the Minister.

A person cannot be taxed on profits that he might have made but has not actually made
(meaning receivability).
According to Justice Pitney in the case of Eisney v. Macomber,43 “Income denotes a gain
derived from capital (property). It is not a gain accruing to capital not growth or increase
in the value of the investment but a gain, a profit, something of value preceeding from the
property but severed (separate) from it. It is something that comes in or accrued. It is
derived, that is, received or drawn by the recipient for his separate use, benefit and
disposal.”

Income is created. Income is a result of the application of efforts to capital by the tax
payers in pursuit of gain. Receipts which are accrued to the tax payer from disposition of
profit making assets or to agreements affecting them are capital receipts. The rule is
therefore that where the owner of the investment chooses to sell it and obtains a greater
price for it, than he originally acquired it the enhanced value (the profit) is not income.

In the case of Greyhound Racing Association (Liverpool) Ltd v. Cooper44, the appellants
were a company which acquired a racing track and kept it for Greyhound Racing. The
Greyhound business failed and the debenture holders appointed a receiver. In order to
realize money due to the debenture holders the receiver hired the track to another
company which went into voluntary liquidation and paid £ 15, 640 as full surrender value
42
10.-(1) The Minister may, by order in the Gazette, provide – (a) that any income or class of incomes
accrued in or derived from the United Republic shall be exempt from tax to the
extent specified in such order; or
(b) that any exemption under the Second Schedule shall cease to have effect either generally or to such
extent as may be specified in such Order.
(2) The Minister may, by Order in the Gazette, amend, vary or replace the Second Schedule.
(3) Notwithstanding any law to the contrary, no exemption shall be provided from tax imposed by this Act
and no agreement shall be concluded that affects or purports to affect the application of this Act,
except as provided for by this Act or by way of amendment to this Act.
43
(1919) 252 Us 189
44
20 TC 273 or [1936] 2 ALL ER 742
29
of the hiring agreements. The issue was how to treat the surrender value. It was argued
that the sum was the realization of the capital asset and hence not income for taxation
purposes. However, the court rejected this argument on the ground that the hiring
agreement was a trading venture and not a capital asset; therefore the amount should be
liable to income tax.

Again in the case of Y Co. v. CIT,45 a partnership bought land for business. A partnership
was later dissolve and the land transferred to a new Company. A Company was also
liquidated and sold its investments, but before selling the land it subdivided it into small
plots thus selling at a substantial profit. The issue was whether the profits realized to
constitute an income. The Commissioner of Income Tax argued that, by subdividing the
land and selling it at a profit the company had engaged in business.

The Court held that since the selling was of a capital asset the receipts though enhanced,
that is, the profit were capital receipts and not income.

NB: Compensatory payments such as payment for loss of profits, damages for breach of
contract (ejusderm generis) such payments are income and not capital receipts since they
are merely compensation which comes to fill the hole.

INCOME TAXATION

Basis of Taxation
The basis of Taxation tries to answer the question as who is subject to tax and why. The
most common basis of imposing income tax used by nations are the following:-
1. Citizenship or nationality
2. Domicile
3. Residence
4. Country of source and country of destination

45
1995 of EATC pg. 50
30
1. CITIZENSHIP OR NATIOLAITY
This is based on the traditional obligation of every citizen or national to help support the
state through taxation whether the citizen is living inside or outside the state boundaries.

2. DOMICILE
Domicile is used as a basis of income tax but more so in the case of inheritance or state
tax. When a person dies, the estate of the deceased may be liable to estate or inheritance
tax. In such situations, the domicile of the deceased becomes relevant. For a person to
be domiciled in a particular jurisdiction that person must be present within the
jurisdiction and the person must have an intention to maintain a permanent home within
the jurisdiction. Domicile is a difficult basis to apply as it traces problems of
interpretation.

3. COUNTRY OF SOURCE AND COUNTRY OF DESTINATION

In addition to citizenship domicile and residence a country may also use a concept of
taxation of source. Tax may be imposed because income comes from the country of
source through employment, investment or carrying on a business.

Under Section 646 of Income Tax Act, a resident person’s income from employment,
business or investment is changeable to income tax irrespective of the source of income.
The rules of residents are contained in Section 66 of Income Tax Act. In the case of
nonresident u/s.6 their income from employment, business or investment for a year of
income is only chargeable to income tax only to the extent that the income has a source in
the United Republic of Tanzania. Read Section 6 (2) of Income Tax Act, 2004.

46
Section 6.-(1) Subject to the provisions of subsection (2), the chargeable income of a person for a year of
income from any employment, business or investment shall be (a) in the case of a resident person, the
person's income from employment, business or investment for the year of income irrespective of the source
of the income; and
(b) in the case of a non-resident person, the person's income from the employment, business or investment
for the year of income, but only to the extent that the income has a source in the United Republic.
(2) The chargeable income of a resident individual who at the end of a year of income has been resident in
the United Republic for two years or less in total during the whole of the individual’s life shall be
determined under subsection (1)(b).

31
In country of destination this occurs in a situation where the income in taxed by virtue of
being earned by a resident abroad which ends up in Tanzania, that is, Tanzania becomes
country of destination.

4. RESIDENCE
It is important to determine the residence of an individual or an entity and the source of
such income. The residual status of a person or entity is relevant to income tax for two
purposes
1. It Determines the scope of the change to tax
2. It determines a graph of personal reliance

Meaning of Residence
Under The Income tax Act, residence is defined in relation to individuals, cooperation
and a body of parsons. A person is deemed to be a resident in the United Republic of
Tanzania in a year of income where such person has a permanent home in the United
Republic of Tanzania and is present in the United Republic during any part of the year of
income.

The individual under Section 66 (1) (a)47 of Income Tax Act, only need to set foot in the
United Republic of Tanzania during the year of income for however brief a moment and
he does not even need to visit his permanent home. A permanent home is not defined but
should be given its ordinary dictionary meaning. Under Section 66 (1) (b),48 this is a
scenario where individual has no permanent home in the United Republic of Tanzania.
Where a person has no permanent home, mere physical presence is a year of income does
not automatically constitute presences. Under Section 66 (1) (b), a person must be present
in the United Republic Tanzania during the year of income for a period/periods
amounting in aggregate to 183 days or more. Such a person must have spent an
aggregate of 183 days or more in the “same” year of income e.g. X came to Tanzania for
47
It provides that; An individual is resident in the United Republic for a year of income if the individual -
(a) has a permanent home in the United Republic and is present in the United Republic during any part of
the year of income;
48
It provides that; An individual is resident in the United Republic for a year of income if the individual (b)
is present in the United Republic during the year of income for a period or periods amounting in aggregate
to 183 days or more;
32
business purpose in 2009 and stayed from the 1st of Jan to 3rd of April 2009 and then left
and returned on the 1st of August 2009 to the 30th Nov. 2009.
Counting the aggregate number of days that X has spent in the URT during the 2009 year
of income, one will find X has spent a total of 240 days during the 2009 years of income.
According to Section 66 (1) (b) X was resident for the 2009 year of income because he
has spent more than 183 days in the same year of income.
Section 66 (1) (c)49 provides another scenario where a person with no permanent home
may gain residential status. Under this section, a person who is present in the United
Republic of Tanzania during a year of income and in each of the “two” preceding years
of income is present for periods averaging more than 122 days in each such year of
income then such a person qualifies to be a resident.
For example the year of income in question is 2010, suppose that Y was in Tanzania in
2008 and spent 135 days and left. Suppose that in 2008 he was in Tanzania for 160 days
and in 2007 he was in Tanzania for 165 days. In determining his residential status, the
different number of days in different years he spent is added which you get a 260.
You take the 460 days he spent and divide by 3 years and you get an aggregate no of 153
days. Since he has exceeded 132 days then Y becomes a resident for the purposes of
income Tax for the year 2009.
According to the case of CIT v. Sir George Arnatogh,50 for a person to be resident under
Section 66 (1) (c) the definition is to be construed as the aggregate number of days
resident in the year of income and in the two previous years divided by three.
Under Section 66 (1) (d) an employee or an official of the government of the United
Republic of Tanzania posted abroad during the year of income, he’s a resident for that
year of income.

RESIDENCE OF A PARTERSHIP
This is contained under section 66 (2) of the Income Tax Act, 2004.

49
It provides that; An individual is resident in the United Republic for a year of income if the individual- is
present in the United Republic during the year of income and in each of the two preceding years of income
for periods averaging more than 122 days in each such year of income;
50
3 EATC 473
33
A partnership is resident for the year of income if at any time during the year of income a
partner is resident in the United Republic.

RESIDENT TRUST
Contained under section 66(3) of the Income Tax Act, 2004.
A trust is considered to be a resident if it was established in the United Republic; at any
time during the year of income, a trustee of the trust is a resident person; or at any time
during the year of income a resident person directs or may direct senior managerial
decisions of the trust, whether the direction is or may be made alone or jointly with other
persons or directly or through one or more interposed entities.
One thing to note of the resident of a trust, a trust which is not established in the United
Republic will always be treated as non-residence for as long as it was established in
Tanzania.

RESINDENT OF A CORPORATION
It contained under section 66(4) of the Income Tax Act, 2004.
For a Corporation to be considered as resident it must be incorporated or formed under
the laws of the United Republic; or at any time during the year of income the
management and control of the affairs of the corporation are exercised in the United
Republic.
With the first requirement of the incorporation/ formation under the laws of the United
Republic, this does not form much problem. The difficulty arises to the determination of
where the management and control of the affairs of the corporation are excised.
According to the case of De Beers Consolidation Mines v. Howe51, the residence of a
company is where the central management and control actually abides.
This definition of residence is not clear as to where the management and control of the
company actually abides.
According to the case of Kaitoki Para Rubber Estates Ltd v. FTC52, the court tried to
clarify the statement as to whether the central management and control of a company

51
(1906) AC 455
34
actually abides. it was held that, the management and control of the company is excised
where its Boards of Directors habitually meet for the purposes of contracting the business
of a company.
This matter was better clarified on the leading case of Unit Construction Co. Ltd v.
Bullock.53 According to this case, the residence of a company is where de facto the
management and control of a company is excised even though the constitution of the
company may require that it be excised elsewhere.
The management and control of the affairs of the company does not rely on de jure seat
of the company but relies on de facto seat.

RULES FOR COMPUTATION OF INCOME

THE TOTAL INCOME CONCEPT

The total income concept is provided under section 5 of the Income Tax Act, 2004.
According to section 5, the total income of a person is equal to chargeable income for the
year of income from each employment, business and investment minus any reduction
allowed for the year of income under section 61.
Section 61 deals with retirement contributions to approve retirement funds.
The total income chargeable to tax for the year of income is income from business,
investment or employment.
In the case of a resident person, the person's income from employment, business or
investment for the year of income irrespective of the source of the income, under section
6 (1) (a).
In the case of a non-resident person, the person's income from the employment, business
or investment for the year of income, but only to the extent that the income has a source
in the United Republic, under section 6 (1)(b).
If a person has been in Tanzania for two years or less in total during the whole of the
individual’s life shall be determined under 6 section (1)(b).

52
(1940) 64 CLR 15
53
(1959) Ch 147; (1959) 3 All E.R 186
35
Under section 20 (1), the year of income is the calendar year with the period of twelve
month commencing on 1st Jan and ending 31st Dec.
However the year of income may be altered by the tax payer upon application to the
Commissioner.54 Where such application is granted the person may be allowed to prepare
his accounts for the standards twelve months periods but ending on other date than the
31st day of Dec.
READ SECTION 20 (8).55
The total income of a person should be calculated from different sources.
In calculating the total income of a tax payer, the amount that are required to be included
in arriving in the total income are called inclusions, and the amount that are not included
in calculating the total income or those that are exempted are called exclusions and the
payments that are allowed to be reduced are called deductions.
Exempted amount are normally gazetted by the Minister by the power conferred to him/
her under section 10 of the Income Tax Act, 2004. Such exceptions are normally read
together with the Second Schedule of the Act.
The exceptions contained in the 2nd Schedule may be altered, amended or replaced by the
Minister.
However, section 10 is criticized on the ground that it does not spell out the criteria upon
which the Minister considers in exempting income from taxation.
The inclusions, these are amounts to be included in calculating gains or profits from
employment, business or investments.
For example, under section 7(2), the amount to be included from calculating income from
employment include the payments of wages, salary, payment in lieu of leave, fees,
commissions, bonuses, gratuity or any subsistence travelling entertainment or other
allowance received in respect of employment or service rendered; etc.

54
Section 20 (2) of the Income Tax Act, 2004
55
It provides that; The initial year of income of a person shall be the period of twelve months or less or
subject to the approval of commissioner eighteen months or less from the time the person starts to exist
until the end of the person's year of income as calculated according to the foregoing subsections.

36
Deductions are normally limited to expenditures incurred wholly and exclusively I the
production of income from the business or investment and deductions are generally
controlled by section 11.

THE CHARGE TO TAX

The main charge section is section 4 of the Income Tax Act, 2004. Section 4 states
persons who are liable to tax.
According to section 4, income tax is imposed on any person who has total income for
the year of income. It also imposed on every person who has a domestic permanent
establishment that has repatriated income for the year of income; or who receives a final
withholding payment during the year of income.

DOMESTIC PERMANENT. READ SECTION 356

REPATRIARED INCOME . READ SECTION 7257

56
It provides that; domestic permanent establishment" means all permanent establishments of a non-
resident individual, partnership, trust or corporation situated in the United Republic
57
It provides that; Subject to the provisions of subsection (2), the repatriated income of a domestic
permanent establishment of a non-resident person for a year of income shall be calculated according to the
following formula -
A+B-C
Where -
A. is the net cost of assets of the permanent establishment at the start of the year of income plus the market
value of capital contributed to the permanent establishment by the owner during the year.
B. is net total income of the permanent establishment for the year of income; and
C. is the net cost of assets of the permanent establishment at the end of the year of income plus, where the
establishment has no total income for the year of income, any unrelieved loss for
the year of income referred to in section 19(4). 69
(2) The repatriated income shall not exceed -
(a) the net total income of the permanent establishment for the year of income plus the balance of the
permanent establishment's accumulated profits account referred to in subsection (3) at the end of the
previous year of income after the adjustments referred to in that subsection, less
(b) where the permanent establishment has no total income for the year of income, any unrelieved loss for
the year of income referred to in section 19(4) for the year of income.
(3) For the purposes of calculating repatriated income, a domestic permanent establishment shall maintain
an accumulated profits account which, at the end of each year of income, shall be -
(a) credited with the net total income of the permanent establishment for the year of income; and
(b) debited with the repatriated income and, where the permanent
establishment has no total income, any unrelieved loss referred to in section 19(4) for the year of income.
(4) For the purposes of this section -
37
Any person who receives a financial withholding payments as per sections 81,82,83 and
the 1st schedule para 4.
Financial withholding payment section 86 read together with 1st schedule, these include
certain class of dividends; interest paid by financial institutions to a resident individual in
respect of the deposits held with the institutions. This is qualified. Also rent paid to
resident individual under a lease of land.

Read section 86 (4).58

Services fee paid to resident person u/s 83 (1) (a). For the income to be chargeable to tax,
it must be the gains or profits from business, investment or employment and they must
have a source in the United Republic.

TASK: READ WHOLE OF SECTION 4.

“net cost of assets” of a domestic permanent establishment -

(a) at the start of a year of income equals the net cost of assets at the end of the previous year of income, if
any; and
(b) at the end of a year of income is calculated as -
(i) the written down value of the permanent establishment's pools of depreciable assets at the end of the
year of income plus the net cost of other assets of the permanent
establishment at the end of the year of income; less
(ii) the net incomings for liabilities of the permanent establishment at the end of the year of income;
"net incomings for a liability to a particular period” means the amount by which cumulative incomings for
the liability exceed cumulative costs for the liability to the time; and
“net total income” of a domestic permanent establishment for a year of income is its total income for the
year of income (calculated without any deduction under section 19(1)(b)) less income tax payable under
section 4(1)(a) with respect to that income.
58
It provides that; Where –
(4)
(a) a resident individual (the "landlord") receives rent during a year of income in respect of residential
premises situated in the United Republic that are leased by another individual as the residence of that other
individual;
(b) the rent is not received by the landlord in conducting a business; and
(c) the total of the rent received by the landlord under the lease and any other lease meeting the
requirements of paragraphs (a) and (b) during the year of income does not exceed Tshs. 500,000,
then the landlord shall not have tax liability under section 4(1)(c) with respect to receipt of the rent.

38
 GUIDELINE ON THE DEDUCTION OF BUSINESS EXPENSIVE
And the general rule for deduction is contained in section 11(2) of the same Act.
It is worthwhile to note that section 11(2) is limited to deduction in calculating income
from business and investment.
In calculating person’s total income for the year of income from a person’s business or
investment all expenditures incurred by the person wholly and exclusively in the
production of income from business or investment shall be deducted.
It is only that expenditure that is incurred wholly and exclusively in the production of
income that is an allowable deduction. This means that not all expenditures are allowed
to be deducted.
There are expenditure that are prohibited from being deducted in calculating person’s
total income from business or investment.
Under section 11 (1), in calculating person’s income no deduction is allowed for
consumption on expenditure incurred or excluded expenditure incurred or otherwise
unless provided by the Act.
Under section 11 (4), consumption expenditure and excluded expenditure are defined.
Consumption expenditure means any expenditure incurred by any person in the
maintenance of himself, his family or establishment, or for any other personal or
domestic purpose; and excluded expenditure means tax payable under this Act; bribes
and expenditure incurred in corrupt practice; fines and similar penalties payable to a
government or a political subdivision of a government of any country for breach of any
law or subsidiary legislation.
Under section 11 (2), the controlling words are wholly and exclusively. These two words
refer to two different things.
According to the case of Copeman v. Flood,59 the term wholly refers to the quantum of
the expenditure. It means that the whole of the expenditure de and must be for the trade
and not only part of it.
In the case of Dollar v. Lyon.60 In this case a parent has farming business . he sought to
claim deduction for pocket money paid to his children for working on the farm. The

59
(1941)1 KB 202.
39
deduction was disallowed because the expenditure was not wholly for the purpose of
business because children are expected to work on the family farm for no pay.
The term exclusively refers to the purpose of the expenditure. In the case of Callebote v.
Quinn,61 it was held that a self employed person cannot deduct the cost of his food at
work because the sole purpose of the food is not trade but also to feed himself.

TASK: READ SECTION 11(a) in relation to the case.

Section provides that;
11.-(1) for the purposes of calculating a person's income no deduction shall be allowed -
(a) For consumption expenditure incurred by the person or excluded expenditure incurred
by the person.

PRINCIPLES USED IN DETERMING WHETHER EXPENDITURE HAS BEEN

WHOLLY AND EXCLUSIVELY INCURRED FOR PRODUCTION OF INCOME

1. THE ASSESSEE’S CAPACITY

The person claiming a deduction out of an expenditure must be the assesses himself in his
own capacity has a trade or some other capacity.

An expenditure incurred on a training capacity would be presumed to be for the purposes

of trade and hence deductible.

The expenditure claimed as a deductible must be incidental to the business but does not
need to be necessary for business.

However a mere connection of the expenditure to the business is not enough.

60
(1981)The Times, 19th Feb 1981.
61
(1975)2 All E.R 412.
40
 2. COMMERCIAL EXPEDIENCY
The expenditure claimed as a deduction must be incurred voluntary for business
expediency. Meaning that the expenditure must be for the benefit of the business.

According to the case of British Insulated & Helsby Cables v. Atherton62 , a sum of
money expended not of necessity and view to direct and immediate benefit to the trade
but voluntary on the ground of commercial expediency and in order indirect to facilitate
the carrying of business it may said to be expended wholly and exclusively for the
purpose of the business (trade).

In the case of Heather v. PE Consulting Group Ltd63, in this case expenditure to keep
employees happy in the form of office parties was held to be deductable as business
expenditure.

3. REASONABLENESS OF THE EXPENDITURE

An amount that is claimed as deduction must be reasonable. The test of reasonableness
will depend on the circumstances of the expenditure and common business practice.

The test to be applied in determining the reasonableness of the expenditure is

objective and not subjective.

4. THE BUSINESS PURPOSE TEST

The purpose of the expenditure must be connected to the business and it must have a
direct purpose to facilitate trade.

TASK ASSIGNED:
Read the following cases;
1) The Liquidator of Mazinde Estate 1961 Ltd v. CIT [1967] EA 734.
2) Kenya Meat Commission v. CIT [1968] EA 281.

62
10 TC 155
63
(1973) Ch 189
41
The Liquidator of Mazinde Estate Ltd v. Commissioner of Income Tax.64

-Income Tax: Deductible expense – severance allowance.

-Whether accrued liability for severance allowance under the Severance

Allowances Act, 1962 on sale of business to second employer is a deductible
expense by first employer in liquidation.

-EA Income Tax (Management) Act 1958, section.14 (1)

FACTS

Under the severance allowance Act 1962 an employer is required to pay a severance
allowance to an employer at the termination of his service based on wages and period of
service at date of termination under s. 8A of the Act where a business is transferred from
one employer to another and the employee continues his employment with the second
employer the employee is not entitled to any severance allowance until his service finally
terminates under the Act on transfer of the business the first employer ceases to be liable
to pay the allowance and the second employer takes over the liability. The appellant
liquidator sold an estate and in the agreement for sale there was no provision that the
vendor would pay to the purchaser ₤12,500 (being the accrued liability to the date of sale)
in settlement of all claims for severance allowance by any African employee.

The Appellant claimed to deduct the sum of ₤ 12500 as “expenditure wholly and
exclusively incurred in the production of income” under section 14 (1) of the East
African Income Tax (Management) Act 1958, in arriving at the total taxable income
immediate by preceding the completion date. The respondent request to allow the sum of
₤12,500 to be deducted as expenditure incurred in the production of income and on
appeal to the High court the refusal was upheld. On further appeal to the East African
Court of Appeal.

64
[1967] EA 734

42
Held

The sum was not a deductible expense under section 14 (1) of the East African
Income Tax (Management) Act 1958 because, although the expenditure was of a revenue
nature, it was not:

(a) Expenditure imposed on the appellant (on behalf of the vendor) by statute in the
operation imposed on the purchaser (or second employer0 under the Severance
Allowance Act not.
(b) Expenditure incurred by the appellant in production of income, because the
vendor went into liquidation immediately after in curing the expenditure the
expenditure was not therefore incurred for the production of income.

Appeal dismissed.

Kenya Meat Commission v. Commissioner of Income Tax.65

Summary:

The Kenya meat commission (KMC) offered to donate £10,000 to the Kenya National
Fund, conditionally on the money being used by the Director of Veterinary services “in
research and other work which will be of benefit to the Kenya beef and mutton industry”.
The fund accepted the donation subject to that condition, as it was entitled to do, and after
considerable delay specific projects were agreed and the money was handed over, with
occurred interest, by the fund to the Director of Veterinary Services.

The case for the K.M.C is that this donation was expenditure of a capital nature in cured
on scientific research and so a legitimate deduction by virtue of s. 14 (2) (p) of the Act.
The case of the commissioner is that the donation was a gift to a public charity and so not
deductable.

65
[1967] EA 281
43
Fly note

Income Tax – Deduction – Donation to Kenya National fund to be used for veterinary
research

- Whether allowable as expenditure of capital nature incurred ‘by’ Kenya meat

commission “Wholly and exclusively in production of income.”- Whether for
the purposes of a trade carried on by the commission.
- East African Income Tax (Management) Act 1958, section 14 (1) and (2) (p)
and section 15 (1).

Income Tax – Expenditure – Whether donation to Kenya National Fund to be used for
research is expenditure of a capital mature- East African income Tax (
Management) Act s. 14 (1) and (2) (p) and s. 15 (1).

Income Tax: - Income – Deductions – whether East African income Tax (Management)
Act 1958 section 14 (2) is governed by s. 14 (1).

FACTS

The Kenya meat commission made a donation of K. Shs 200,000/= to the Kenya National
Fund on condition that the money was used by the director of veterinary services “in
research and other work which will be of benefit to the Kenya and Mutton industry. “

The Commission, which had a statutory monopoly of the beef and mutton trade in Kenya,
took care to ensure that the money was to be expended only on specific projects which
would benefit that trade (and not for example, the dairy industry). The Commissioner of
Income Tax refused to allow this donation as a deductible expense, and his refusal was
upheld (on appeal from the local committee) by the High Court of Kenya.

The commission then brought this further appeal, arguing that eh donation was
expenditure of a capital nature incurred on scientific research and therefore deductable
under section14 (2) (p) of the East African Income Tax (Management) Act 1958. The
Commissioner of Income Tax, on the other hand, argued (inter alia) that the donation

44
was not deductible under that provision because it was not expenditure incurred “for the
purpose of a trade carried on” by the commission.

Held

i) Subsection 14 (1) and subsection 14(2) of the East African Income Tax
(Management) Act 1958 must be read independently and the classes of
expenditure set out in subsection 14 (2) are exceptions to the general rules set
out in subsection 15 (1) of that Act;
ii) The donation was expenditure incurred ‘by’ the commission “wholly and
excessively for the production of income and was made for the purposes of a
trade carried on” by the commission within section14 (2) (p) of the Act.
iii) Therefore the donation was a deductible expense under section 14 (2) (p) of
the Act.
Appeal allowed.
No case referred to.

5. PRODUCTION OF ASSESSEE’S ON INCOME

Deductions which are allowed are only those incurred by the assesses in the production of
his own income. Meaning that the expenditure incurred by one person may not be
deducted against the expenses of another.

For example a parent company cannot be allowed a deduction in respect of a loss or

business expenditure incurred by or for the purposes of subsidiary company.

6. EXPENDITURE FOR FUTURE INCOME

An expenditure that is incurred for the production of future income may be allowed such
as expenditure used for advertisement or purchase of raw materials for future use.

In the case of Ward & Company v. Commissioner of Taxes66 it was observed that in
every trade much of the expenditure in each year such as the expenditure in the purchase
of raw materials in repair of plant or advertisement of goods is designed to produce

66
(1923) AC 145
45
 results wholly or partially in subsequent years but such expenditure is constantly allowed
as a deduction for the year in which it was incurred.

According to the case law it’s not necessary that the expenditure results into actually
profit to be deducted.

Other deductions which are allowed under the Income Tax Act are deductions interests,
repairs and maintenance expenditure, agricultural improvement research and
development and environmental expenditure and gives to public charitable and religious
institutions.

However such deductions are subject to the qualifications within the sections.

READ THE FOLLOWING CASES:

1) Morgan v. Tate & Lyle Ltd (1955) AC 21.
2) Brown Ford v. ATA Advertisement Ltd [1972] 3 All ER.
3) CIT v. Buhemba Mines Ltd [1957] EA 589.
4) Ward & Co Ltd v. Commissioner of Taxes (1923) AC 145.

NON- DEDUCTABLE EXPENDITURE

Non-deductable expenditure is an expenditure which is not allowed to be deducted
contained under section 11 (1) of the Income Tax Act, 2004.

Non- deductable expenditure is allowed for;

a) Consumption expenditure or excluded expenditure.

Consumption expenditure is defined under section 11(4) of the Act, and this is
expenditure of personal nature which is used for up keep.
b) Excluded expenditure defined under section 11 (4) of the Act.
Excluded expenditure means any tax that is payable under the Income Tax Act;
Bribes and expenditure incurred in corrupt practice, fines and penalties payable to
the government for a breach of any law or subsidiary legislation.

46
 Expenditure incurred in deriving exempt amount or final withholding payment or
distribution by an entity.

c) Expenditure of capital nature.

This is contained under section 11 (3) of the Act, and its defined under section 11 (4) of
the Act to mean a expenditure that secure benefit lasting longer than 12 months or
incurred in respect of natural resources prospecting, exploration and development.

The court has set tests for determining capital expenditure. In the case of Vallamrosa
Rubber Company v. Farmer,67 Lord Dunedin suggested that capital expenditure is that
which is made once and for all unlike revenue expenditure which will recur year by year.

This test was further expanded in the case by Lord Cave in the case of British Insulated
& Helsby Cable v, Atherton68, where it was stated that “but when an expenditure is made
not only once and for all but to the view of bringing into existence an assets or an
advantage for the enduring benefit of a trade I think that there is a very good reason in the
absence of special circumstances leading to opposite conclusion for treating such an
expenditure as a property attributor not revenue but to capital.”

Therefore, the benefit is not only once and for all but to bringing into existence assets or
advantage for enduring benefit. If it meets these requirements then it is likely to be
treated as a capital expenditure.

However, it should be noted that all expenditure gives rise to an advantage otherwise it
would not have been incurred. Therefore what is important is whether the advantage is
enduring in nature and this implies something which is not necessary permanent but of
which the span appreciably longer than that created by normal revenue charge.

Read section 11(4)69 in the light of what is written above.

67
5TC 529
68
Supra 1
69
It provides that; For the purposes of this section -
47
 SECOND SEMESTER

RULES IN RESPECT OF SPECIFIC SOURCES OF INCOME

INCOME FROM OFFICE AND EMPLOYMENT

Income from employment is income from a source recognized by the Income Tax Act,
2004. In determining income from employment three basic questions must be answered.

1. Who is an employee?
2. When receipts are included in employment income.
3. What is included in employment income?

Under section 3 of the Income Tax Act, 2004, the terms employee, employer and
employment has been defined. The term employee is an individual who is the subject of
employment conducted by an employer.

The term employment is defined in terms of position that an employee holds in

employment of another. It also includes the position of an individual as manager of an
entity other than as partner of a partnership. Even a position entitling the individual to a
periodic remuneration in respect of services performed in employment. Even public
offices held by an individual are considered to be employment.

It is also equally important to determined whether a person is employed or self employed.

This is important for two reasons.

“Consumption expenditure” means any expenditure incurred by any person in the maintenance of himself,
his family or establishment, or for any other personal or domestic purpose;
"Expenditure of a capital nature" means expenditure -
(a) that secures a benefit lasting longer than twelve months; or
(b) incurred in respect of natural resource prospecting, exploration and development; and
“Excluded expenditure” means -
(a) tax payable under this Act;
(b) bribes and expenditure incurred in corrupt practice;
(c) fines and similar penalties payable to a government or a political subdivision of a government of any
country for breach of any law or subsidiary legislation;
(d) expenditure to the extent to which incurred by a person in deriving exempt amounts or final withholding
payments; or
(e) distributions by an entity.
If capital is expended but the intended advantage does not materialize or the intended assets are
not acquired, this does not render the expenditure of revenue nature.

48
 (a) Withholding tax

Normally an employer is required to withhold tax at source from employment income.

The tax withheld is held in trust for the trust (crown) as per section 81 (1) & (2)70 of the
Income Tax Act, 2004. In such cases the employer becomes the withholding agent,
failure to withhold the tax, is liable to pay the tax that could have been paid as per section
84(3)71 of Income Tax Act, 2004.

Where the tax is withheld by withholding agent, such tax must be remitted to the
Commissioner within seven days after the end of each calendar month as per section
84(1)72 of the Income Tax Act, 2004. Failure to withhold tax renders both the withholdee
and withholding agent jointly and severally liable to the Commissioner.

Unlike employed individuals, self employed persons are not taxes at source. Such persons
are required to file returns of income under section 9173 of the Income Tax Act, 2004.

However, those who are employees subject to withholding tax are not required to file
income under section 92(a) (ii) (aa)74 of Income Tax Act, 2004 unless required by the
Commissioner of income tax.

70
The section 81(1) states that; A resident employer who makes a payment that is to be included in
calculating the chargeable income of an employee from the employment shall withhold income tax from
the payment at the rate provided for in paragraph 4(a) of the First Schedule.
(2) The obligation of an employer to withhold income tax under subsection (1) shall not be reduced or
extinguished because the employer has a right or is under an obligation to deduct and withhold any other
amount from the payment or because of any other law that provides that an employee's income from
employment shall not be reduced or subject to attachment.
71
Section states that; 84(3) , A withholding agent who fails to withhold income tax in accordance with
Subdivision A must nevertheless pay the tax that should have been withheld in the same manner and at the
same time as tax that is withheld.
72
It states that; every withholding agent shall pay to the Commissioner within seven days after the end of
each calendar month any income tax that has been withheld in accordance with Subdivision A during the
month.
73
91.-(1) Subject to sections 92, 93, 94 and 96, every person shall file with the Commissioner not later than
three months after the end of each year of income a return of income for the year of income. [ this is
provision according to Income Tax Act of 2008 because the section has been amended]
74
It states that; Unless requested by the Commissioner by notice in writing served on the person and
subject to a right of the person to elect to file a return, no return of income for a year of income shall
be required under section 91 from ;a resident individual; (ii) whose income for the year of income consists
exclusively of either or both of the following: income from any employment where the
49
Others that are not ordinary required to file returns are persons with no income tax
payable for the year of year of income. People who derive gain in conducting an
investment from realisation of interest in land or buildings situated in the United
Republic under section 92(a) (ii) (bb)75 of the Income Tax Act, 2004.

(b) Scope of deduction

This is important in order to determine deductibility of expenses. An employee’s

deductions are strictly controlled by the Income Tax Act, 2004, unlike a self employed
person who has considerable wide scope of controlling deductions.

The year of income of an employee is on the basis of receipts in calendar year. Unlike
income from business where the tax payer may use the ordinary calendar year or he may
change his year of income subject to the Commissioner’s approval. See section 2076 of
Income Tax Act, 2004.

employer is required to withhold tax under section 81 from payments made to the individual that are
included in calculating the individual's income from the employment;
75
It provides that; Unless requested by the Commissioner by notice in writing served on the person and
subject to a right of the person to elect to file a return, no return of income for a year of income shall be
required under section 91 from - (a) a resident individual -(ii) whose income for the year of income consists
exclusively of either or both of the following: (bb) gains of the type referred to in section 90(1).
Section 90(1) provides that; Where a person (an “installment payer”) derives a gain in conducting an
investment from the realization of an interest in land or buildings situated in the United Republic, the
person shall pay income tax by way of single installment equal to-
(a) in the case of a resident person, ten percent of the gain; or
(b) in the case of a non-resident person, twenty percent of the gain.
76
20.-(1) Subject to the provisions of this section, the year of income for every person shall be the calendar
year.
(2) Subject to the provisions of subsections (6), (7) and (8), an entity may apply, in writing, to the
Commissioner for approval to change the entity's year of income from - (a) the calendar year; or
(b) a twelve-month period previously approved by the Commissioner under subsection (3), to another
twelve-month period.
(3) Where, in an application under subsection (2), the entity shows a compelling need to change the entity's
year of income, the Commissioner may, by notice in writing, approve the application subject
to any conditions as the Commissioner prescribes.
(4) The Commissioner may, by notice in writing, revoke an approval granted to an entity under subsection
(3).
(5) Where an entity's year of income changes, the period between the end of its previous year of income
and the beginning of its new year of income shall be another year of income of length of up to twelve
months, or to 18 months subject to approval of the Commissioner.
(6) The year of income for every person's foreign permanent establishment shall be the same as the year of
income of its owner.
50
The process of characterizing income either as employment income or business income
as resulted into a lot of litigations. It becomes difficult to determine whether an amount
received by an individual is an express or implied contract of service which will count as
remuneration to an employee or whether it received under a express or implied contract
for service and thus will sent the business or professional .

The question depends on whether or not a man-servant relationship exists between the
payer and payee. The determinant of this is the matter of fact.

TESTS USED IN THE CHARACTERISATION OF INCOME

There is no single test that is decisive to determine whether an individual is an employee
or independent contractor or self employed person.

Several tests have been evolved by the courts in order to determine whether a person is
employed or independent contractor.

1. COTROL TEST
In determining the existence of master servant relationship, courts have focused on what
is known as a control test. This test refers to the degree of control that the master exerts
on the servant. It looks at how much direct control and supervision a servant acts and is
bound to conform to all the reasonable course of his work.

On the other hand, an independent contractor is entirely independent of any control or

interference and he merely undertakes to produce specified results employing his own
means to produce that results.

The difference between a contractor and a servant is the power retained by employer in
directing what work is done and how it should be done.

(7) The year of income for every non-resident partnership, trust or corporation shall be the period, not
exceeding twelve months, for which the entity makes up its accounts or, if it has no such period, the
calendar year.
(8) The initial year of income of a person shall be the period of twelve months or less or subject to the
approval of commissioner eighteen months or less from the time the person starts to exist until the end of
the person's year of income as calculated according to the foregoing subsections.

51
In the case of Isaac v. MNR,77 in this case the appellant was a registered nurse who
worked in a Canadian Force Hospital. She was not employed on a fulltime basis but she
was civilian hire on a day to day basis subject to the availability of military nurses. She
was paid per diem rate and she did not get paid unless she works and she could be
dismissed within a 24 hours notice. She received no benefits or holidays and had not
signed any form of contract.

The appellant did not consider herself a staff nurse but rather a self employed a private
duty nurse and as such she deducted certain expenses from her income. The
Commissioner disallowed most of the deductions contending that she was an employee.
The court held that, she was self employed under the common law test as the degree of
control which the hospital had over the manner in which she perform her regular duties as
a nurse were not sufficient to establish master and servant relationship.

The traditional control test is of limited utility in the present business environment
because it is difficult to apply in issues relating to professionals and highly skilled
tradesmen.

In the case of Rose v. The Queen,78 the plaintiff had resigned as a full time professor at
the University of Ottawa and joined the civil service. However, he gave lectures on a
part-time basis on data processing in three institutions. He purported to deduct expenses
he incurred in the course of gaining or producing the income from lecturing. He
contended that he was not an employee of any of the three institutions where he gave
lectures but rather an independent contractor engaged in the business of lecturing.

The issue was whether he was an employee of the schools where he was taught or
whether he was an independent contractor engaged in the business of lecturing in these
schools.

The court held that, the control test was of little value in cases involving a professional or
man of particular skills and experience.

77
70 DTC 1285
78
(1976) CTC 462
52
Therefore the court pointed out that the work done by the plaintiff for the three
institutions was done as an integral part of the curriculi of the institutions. Therefore the
business in which he was actively participating was the business of the schools and not
his own and he was an employee engaged for the purpose of delivering lectures on a part-
time basis and not an independent contractor.

2. THE INTEGRATION TEST

This test is the result of the difficulties caused by the control test. It is more applicable to
persons of professional expertise.

The test seeks to examine whether an individual is part and parcel of an organization.
Where an organization hires an individual forms an integral part of the organizations
business then the hired individual is an employee.

3. ECONOMIC REALITY TEST

This test takes into account several economic factors and draws from them an inference
as to the nature of the relationship between the persons.

The economic factor taken into consideration in this test involves the following;

1. The control test

2. The ownership of tools
3. The chance of profit
4. The risk of loss.

Therefore if a tax payer supplies no fund, takes no financial risks and has no liability, the
court have applied the economic reality test and held that the tax payer is an employee.79

4. THE SPECIFIC RESULT TEST

This test is used to distinguish between an employee and an independent contractor. In an
ordinary employer and employee relationship an employee normally put his personal
79
Refer the case of Hauser v. MNR 78 DTC 1532
53
services at the disposal of his employer without reference to specified results and,
generally, envisages the accomplishment of works on an ongoing basis. However, where
a party agrees that certain specified work will be done for the other it may be inferred that
an independent contractor relationship exists.80

COMPUTATION OF EMPLOYMENT INCOME

Taxable income from employment is widely defined under section 7(2) (a) of the Income
Tax Act 2004.81 It includes: wages, commission, bonuses, gratuity and allowances.

Subsistence traveling, entertainment and other allowances are also taxable unless they
represent solely reimbursement of the expenses incurred in the production of income.

All these categories of income from employment are considered to be an individual gains
or profit from employment.

PROBLEMS OF A SOURCE CONCEPT OF INCOME

In countries following a source concept of income, employment income is not always
easy to ascertain. The question arises whether a payment made before employment
begins or after it end is income. This is because in such cases there is no source in
existence at the time the payment is made.

For example in England, a terminal payment in connection with the ending of an office or
employment is not taxed.

However, in Tanzania under section 7(2) (e)82 and section 7(4) 83

& (5)84 of the Income
Tax Act, R.E 2008, payments for redundancy or loss or termination of employment are
considered to be gain or profits from employment and therefore liable to income tax.

80
Refer the case of Lafleur & Pohs v. MNR 84 DTC 1478
81
It provides that; Subject to the provisions of subsection (3), (4) and (5) in calculating an individual's
gains or profits from an employment for a year of income the following payments made to or on behalf of
the individual by the employer or an associate of the employer during that year of income
shall be included:
(a) payments of wages, salary, payment in lieu of leave, fees, commissions, bonuses, gratuity or any
subsistence travelling entertainment or other allowance received in respect of employment or service
rendered;
54
In other jurisdictions such as in U.K, terminal benefits are not taxed because they are in
the nature of capital payments for the loss of opportunity to earn income or for the
abandonment of right to income under the contract of service.

Task assigned: Read the case of Durga Daas Bawa v. CIT85

[COURT OF APPEAL AT NAIROBI]

(Appeal from High Court of Uganda- Sheridan .J)

Facts of the case;

In 1948, the appellant was appointed distributor in the Tororo area for a tobacco
company. His appointment was subject to termination by three month’s notice in writing
by either side. From 1928 to 1948 he had served the company and its predecessor as
agent for the same area. 1n 1949 a private limited company under the name D.D. Bawa,

82
It provides that; Subject to the provisions of subsection (3), (4) and (5) in calculating an individual's
gains or profits from an employment for a year of income the following payments made to or on behalf of
the individual by the employer or an associate of the employer during that year of income shall be included:
payment for redundancy or loss or termination of employment
83
In calculating an individual’s gains or profit from payment for redundancy or loss or termination of
employment, any payment received in respect of a year of income which expired earlier than five years
prior to the year of income in which it was received, or which the employment or services ceased, if earlier
such payment shall, for the purposes of calculation of the tax payable thereon, be allocated equally between
the years of income in which it is received or, if the employment or services ceased in an earlier year
between such earlier year of income and the five years immediately proceeding such year of income in
which such payment is so received or as the case may be, such earlier year of income in which the
employment or services ceased, and each such portion, allocated to any such year of income shall be
deemed to be income of that year of income in addition to any other income in that year of income.
84
Where amount received as compensation for the termination of any contract of employment or services,
whether or not provision is made in such contract for the payment of such compensation -
(a) if the contract is for a specified term, the amount included in gains or profits shall not exceed the
amount which would have been received in respect of the unexpired period of such contract and shall be
deemed to have accrued evenly in such unexpired period;
(b) if the contract is for an unspecified term and provides for compensation on the termination thereof, such
compensation shall be deemed to have accrued in the period immediately following such termination at a
rate equal to the rate per annum of the gains or profits from such contract received immediately prior to
such termination; and
(c) if the contract is for an unspecified term and does not provide for compensation on the termination
thereof, any compensation paid on the termination thereof shall be deemed to have accrued in the period
immediately following such termination at a rate equal to the rate per annum of the gains or profits from
such contract received immediately prior to
such termination, but the amount so included in gains or profits shall not exceed the amount of three years’
remuneration at such rate.
85
[1963] EA 695
55
Ltd was incorporated, which thereafter with the consent of the company operated the
agency. By letter dated March 16, 1957, the company informed the appellant that for
business reasons it was obliged to terminate his appointment as distributor from June 17,
1957 and gave him three month’s notice of termination of appointment. The letter also
stated that, the company had decided “as a mark of our appreciation for the long and
loyal service you personally have rendered to this company, to grant you a personal gift
on an ex gratia basis…” and without admitting any legal liability offered the appellant
shs 100,000/= payable by four installments on September 17 and December 17, 1957 and
on March 17 and June 17, 1957. The appellant accepted the payments which were
assessed as income liable to tax under the East African Income Tax (Management) Acts,
1952 and 1958. The only issue was whether this gift was taxable.

The High Court in dismissing the appellant’s appeal, held inter alia, that although
personal esteem for the appellant may have played some part, there was not sufficient
evidence to show that a preponderant personal regard for him had inspired the gift, that
the payments had something to do with his employment, that while the letter was
personal and gift was described as ex gratia, it was a formal letter and offer was
“sandwiched” between other paragraphs dealing exclusively with business and wording
was not appropriate to a personal gift or testimonial, but rather to the offer of payment in
the nature of remuneration for past services.

On further appeal, it was submitted for the appellant that, the payment were made after
the termination of the legal relationship and therefore the principles applied by the High
Court were not appropriate and that undue weight had been given to certain factors which
were immaterial.

HELD

56
 i. a payment is not taxable merely because it had “something to do” with one’s
employment, if “ the occasion of making it arises out of his past service”;
dictum of ROWLATT. J, in Cowan v. Seymour86 adopted.
ii. while the taxability of a gift is not conclusively determined by the way an
employer describes it, there could be no doubt about the intent conveyed by
the wording of the letter in the present case;
iii. there was no significance in the fact that the letter was written before the
actual termination of the appellant’s employment.
iv. too little weight had been attached to the factors that the gift was made after
termination of the employment, that it was not recurrent, and was not made
pursuant to legal obligation, or any custom or legitimate expectation on the
part of the appellant arising from the nature of his employment;
v. the payment was a personal gift made after termination of employment and
was not taxable as gains or profits from employment or services rendered.
Appeal allowed.

BENEFITS IN KIND
Traditionally under the common law, benefits in kind were not taxed because they did not
constitute income, this is because the common law conception of income is that only
money or something capable of being turned into money that constitute income for tax
purposes.

A mere benefit or advantage which may be of value to the person who enjoys it is not
included in his income.

86
7 Tax Case 372. In this case, the appellant had been secretary and later liquidator of a company without
remuneration. His services had been given gratuitously. At a meeting at the termination of winding up, the
shareholders unanimously resolved that the appellant and another be each asked to accept a moiety of
balance of moneys in hand and that they thanked for the services they had rendered. ROWLATT.J held
that, the gift was liable to tax but was reversed by the Court of Appeal.
In the Court of Appeal, Master of Roll said (at p 379) that; “ But to- day I think the argument was rather
narrowed to this, that a voluntary payment cannot be profit of the office after the office has terminated,
unless that office had been an office of profit beforehand…”
57
However, the position has change and these fringe benefits/ benefits in kind are taxable
as emoluments of employment. It is important to note that, it is the benefit to the
employee and not the cost to the employer that is taxable.

Benefits in kind from employment are taxable except where the payment is unreasonable
or administratively impracticable for the employer to account for or to allocate their
receipts.

The benefits enjoys by the employee are to be quantified according to section 2787 of the
Income Tax Act Cap 332 R.E 2008, and these includes; the provision of premises for
residential occupation by employee, the provision of companies cars and provision of
loans to Directors or employees or their relatives at favourable interest rates.

87
It provides that; 27.-(1) A payment or amount to be included or deducted in calculating income shall be
quantified as follows;
(a) for payments consisting of the availability for use or use of a motor vehicle during a year of income
provided in return for services whether by way of employment or otherwise or
provided by an entity to a member or manager of the entity, the amount of the payment shall be as
prescribed in the Fifth Schedule;
(b) for payments consisting of a loan provided in return for services (whether by way of employment or
otherwise) or by an entity to a member or manager of the entity-
(i) where the loan is made by an employer to an employee, the term of the loan is less than twelve
months and the aggregate amount of the loan and any similar loans outstanding at any time during the
previous twelve months does not exceed three months basic salary, the quantity of the payment is nil; and
(ii) in any other case, the amount by which -
(aa) the interest that would have been paid by the payee during the year of income of the payee
in which the payment is made if interest were payable under the loan at the statutory rate for the year of
income, exceeds;
(bb) the interest paid by the payee during the year of income under the loan, if any;
(c) for payments consisting of the provision of premises (including any furniture or other contents) by an
employer for residential occupation by an employee during a year of income, (i) or (ii), whichever is less,
reduced by any rent paid for the occupation by the employee, where -
(i) is the market value rental of the part of the premises occupied by the employee for the period occupied
during the year of income; and
(ii) is the greater of -
(aa) 15 percent of the employee's total income for the year of income, calculated without accounting
for the provision of the premises and, where the premises are occupied for only part of the year of income,
apportioned as appropriate; and
(bb) expenditure claimed as a deduction by the employer in respect of the premises for the
period of occupation by the employee during the year of income; and
(d) in any other case, the amount prescribed by the regulations or, in the absence of regulations, the market
value.
(2) The amount of a payment is quantified without reduction for any income tax withheld from the payment
under Subdivision A of Division II of Part VII.
(3) The market value of an asset shall be determined without regard to any restriction on transfer of the
asset or the fact that the asset is not otherwise convertible into a payment of money or money's worth.

58
With the provision of company’s cars, the benefits will not be taxable on the employee if
the employer does not claim any deduction or relief in relation to ownership, maintenance
or operation of the car. The rate for charging companies cars are contained in the 5th
Schedule of the Act.

The exclusion of gains or profits from employment are contained in section 7(3)88 and
these exclusions must be read together with section 1089 and 2nd Schedule as amended by
the Finance Act No 5/2011 under part VI section 17 (a) & (b).

88
Section 7 (3) states that; In calculating an individual's gains or profits from an employment, the following
shall be excluded -
(a) exempt amounts and final withholding payments;
(b) on premises cafeteria services that are available on a nondiscriminatory basis;
(c) medical services, payment for medical services, and payments for insurance for medical services to the
extent that the services or payments are -
(i) available with respect to medical treatment of the individual, spouse of the individual and up to four of
their children; and
(ii) made available by the employer (and any associate of the employer conducting a similar or related
business) on a non-discriminatory basis;
(d) any subsistence, travelling, entertainment or other allowance that represents solely the reimbursement to
the recipient of any amount expended by him wholly and exclusively in the
production of his income from his employment or services rendered;
(e) benefits derived from the use of motor vehicle where the employer does not claim any deduction or
relief in relation to the ownership, maintenance or operation of the vehicle;
(f) benefit derived from the use of residential premises by an employee of the Government or any
institution whose budget is fully or substantially out of Government budget subvention;
(g) payment providing passage of the individual, spouse of the individual and up to four of their children to
or from a place of employment which correspond to the actual travelling cost where the individual is
domiciled more than 20 miles from the place of employment and is recruited or engaged for employment
solely in the service of the employer at the place
of employment;
(h) retirement contributions and retirement payments exempted under the Public Service Retirement
Benefits Act;
(i) payment that it is unreasonable or administratively impracticable for the employer to account for or to
allocate to their recipients;
(j) allowance payable to an employee who offers intramural private services to patients in a public hospital;
and
(k) housing allowance, transport allowance, responsibility allowance, extra duty allowance, overtime
allowance, hardship allowance and honoraria payable to an employee of the Government or an institution
the budget of which is fully or substantially paid out of Government budget subvention.
89
Section 10.-(1) The Minister may, by order in the Gazette, provide –
(a) that any income or class of incomes accrued in or derived from the United Republic shall be exempt
from tax to the extent specified in such order; or
(b) that any exemption under the Second Schedule shall cease to have effect either generally or to such
extent as may be specified in such Order.
(2) The Minister may, by Order in the Gazette, amend, vary or replace the Second Schedule.
59
Such amount as exempt amount cafeteria services provided within the employer’s
premises on non-discriminatory basis; the payment for medical services for staff on a
non-discriminatory basis; benefits derived from the use of motor vehicles where the
employer does not claim deductions and donations made under section 1290 of the

(3) Notwithstanding any law to the contrary, no exemption shall be provided from tax imposed by this Act
and no agreement shall be concluded that affects or purports to affect the application of this Act, except as
provided for by this Act or by way of amendment to this Act.
90
Section 12 (1) Any person who–

(a)makes a donation of money or equipment to a Fund's Assisted Educational Project or Programme;

(b)avails sponsorship or a grant to any student for the purpose of enabling such student to pursue secondary
level education or attend tertiary level training, shall be awarded by the Authority a certificate to be known
as a Certificate of Educational Appreciation.

(2) The Certificate of Educational Appreciation shall–

(a)give full particulars of the awardee, the amount of money to which he is eligible for tax relief, the taxes
and the mode to which relief may be elected; and

(b) be signed by both the Director-General, and the Commissioner-General of the Tanzania Revenue
Authority and shall bear the respective seals of the signatories' organizations.

(3) Every awardee of a Certificate of Educational Appreciation shall be entitled at his option, to either–

(a)apply the amount stated in the Certificate of Educational Appreciation as an allowable deduction under
section 16 (2) of the Income Tax Act *;

(b)apply the amount stated in the Certificate of Educational Appreciation as a deduction against the vatable
turnover under the provisions of the Value Added Tax Act *; or

(c)apply the amount stated in the Certificate of Educational Appreciation as a relief for the purposes of
customs or import duties, by way of a deduction against the dutiable value.

(4) The Certificate of Educational Appreciation shall be valid for–

(a)the elected relief only and shall not be used again for any of the other optional relief under subsection (3)
of this section;

(b) the awardee within a period not exceeding six years from the date of the award, but once submitted for
purposes of obtaining any of the elected optional relief it shall remain in the custody of the tax authority to
which it is submitted until the amount thereon is fully utilized whereupon the Certificate of Educational
Appreciation shall be water marked in bold across the face by the word "UTILISED".

(5) Any person who deals, or attempts to deal with the Certificate of Educational Appreciation in a manner
which is inconsistent to the provisions of this Part shall be deemed to have committed an act of default
under this Act.

(6) Any person who is declared by the Commissioner-General to have committed an act of default under
this Part shall be subject to the following sanctions; namely–

60
Education Fund Act as prescribed under section 16 of the Income Tax Act, etc are
amount that are excluded in the computation in the income from employment.

INCOME FROM BUSSINESS

It is provided under section 891of the Income Tax Act. Its person’s gains or profits from
conducting a business.

Under section 3, the term business is defined and it includes; a trade, concern in the
nature of trade, manufacture, profession, vocation or isolated arrangement with a business
character; and a past, present or prospective business, but excludes employment and any
activity that, having regard to its nature and the principal occupation of its owners or
underlying owners, is not carried on with a view to deriving profits.
However, what amount to conducting a business is not defined. It is important to
determine whether income is from business or otherwise because tax payers will
normally prefer to be categorized as being in receipt of business income. This is because
the income is from business; the tax payer has much greater scope of deductions for
expenses incurred in respect to his income from business.

(a)where the Certificate of Educational Appreciation has not yet been utilized, it shall be forthwith
cancelled;

(b)in addition to the sanction provided for under paragraph (a) of this subsection the person who commits
the default shall be liable to criminal prosecution.

(7) For the purposes of this section the act of default shall be deemed to constitute the offence of uttering a
false document or obtaining money under false pretences, as the case may be, and shall be construed in
accordance with the provisions of the Penal Code of Tanzania Mainland * or such similar legislation in
Tanzania Zanzibar.
91
8.-(1) A person's income from a business for a year of income is the person's gains or profits from
conducting the business for the year of income. (2) Subject to the provisions of subsection (3), there shall
be included in calculating a person's gains or profits from conducting a business for a year of income the
following amounts derived by the person from conducting the business during the year of income - (a)
service fees; (b) incomings for trading stock; (c) gains from the realisation of business assets or liabilities of
the business as calculated under Division III of this Part;
(d) amounts required to be included under paragraph 4 of the Third Schedule on the realisation of the
person's depreciable assets of the business; (e) amounts derived as consideration for accepting a restriction
on the capacity to conduct the business; (f) gifts and other ex gratia payments received by the person in
respect of the business; g) amounts derived that are effectively connected with the
business and that would otherwise be included in calculating the person's income from an investment; and
(h) other amounts required to be included under Division II of this Part, Parts IV, V or VI. (3) The
following are excluded in calculating a person's gains or profits from conducting a business- (a) exempt
amounts and final withholding payments; and (b) amounts that are included in calculating the person's
income from any employment.
61
According to case of Trustee of AB Charitable Business Trust v. CIT,92 whether particular
activity constitutes trade is the question of fact to be ascertained from general and
ordinary understanding of the word.
Compliance with trade laws is not a material point in determining whether trade is carried
on. For example, criminal activities like trading without valid licence or operating an
unregistered company will still amount to trading and the profit will be liable to income
tax regardless of non-compliance.

MEANING OF GAINS OR CAPITAL

In taxing income from business, a distinction must be drawn between a gain of income
and gain of a capital nature.
According to the case of Henriksen v. Grafton Hotel Ltd,93 in income tax cases, the same
result in a business sense can be secured by two different legal transactions. One of which
may attract tax and the other not. For example, one may dispose off an interest in land
and void paying capital gains tax. This will depend on how he structured the legal
transaction.
Where the transaction is structured as an outright sale for consideration then the vendor
will be required to pay capital gains tax on the transaction. But where the same
transaction is structured as a gift for the consideration of natural love and affection, then
the same transaction will not attract capital gain tax.
Difficulties have normally arisen in determining whether particular gains in the
circumstances of the particular cases should be regarded as income or gains of capital
nature.
The courts have developed several tests known as “Badges of Trade” in order to
distinguish ordinary income and capital gain.

92
2 EATC 89
93
(1942) 1 All ER 678
62
 BADGES OF TRADE
The tests which are used are;

1. THE SUBJECT MATTER OF REALISATION

Courts will examine the subject matter of realisation. Such forms of property as
commodities or manufactured articles which are normally the subject of trading are only
very exceptionally the subject of investment.

Likewise, property which does not yield to the owner earn income or person income
merely by virtue of its ownership it is more likely to have been acquired with the object
of a deal.

In the case of Grainger & Sons v. Gough,94it was observed that:

Trade in its largest sense is the business of selling with the view to profit, goods
which the trader has either manufactured or himself purchased.

2. LENGTH OF THE PERIOD OF OWNERSHIP

A property that is meant to be dealt in is normally realised within a short period of time
after acquisition.

3. THE FREQUENCY OF SIMILAR TRANSACTION

Where there is realisation of the same sort of property over a period of years of several
such realization at about the same date, a presumption arise that there has been dealing in
respect of each transaction.

The presumption is based on the rationale that from experience, trading activities will
normally involves repetitive or successive activities of the same kind or of a similar kind.

According to the case of H. Company v. CIT,95 it was stated that, trading implies some
continuity, and repeated act of buying and selling in the same or other lines of business.

94
(1896) 3 RTC 462
95
1 EATC 65
63
The frequency of similar transaction is simply a presumption of trading and that is why
even where there is only a single transaction i.e an isolated transaction, one may still be
trading.

In the case of Pickford v. Quick,96 the appellant was involved in four isolated transactions
which netted him a big profit. If the transactions were taken separately each transaction
would be said to be of capital nature but when examining together they form the pattern
of trade. The court held that, the profits were taxable as profit of business.

In the case of Martin v. Lowry,97 the appellant was a merchant of agro-machinery. He

purchased a large quantity of linen intending to resale it at profit. He sold the linen
piecemeal over by period of seven months. The court held that, the purchase and resale
was trading and therefore profit reliable to income tax.

4. METHODS AND CIRCUMSTANCES OF SALE

The court will normally inquire into the circumstances of sale or realisation of a
transaction. In the case of CIT v. Sydney Tate,98 the tax payer has purchased the copper
estate valued at £30,000 for capital investments which failed. The tax payer later
subdivided the estate into residential plots and effected the improvements to the tune of
£15,000 and engaged the real estate agent to make sales and huge profit was made. It was
argued that, the tax payer engaged an organized effort to make profit and he was trading.
However, the court did not agree with this argument and decided in favour of the tax
payer on the ground that the initial intention was not to resale the estate but the
subsequent disposal by way of sale was forced by the turn of events and therefore it
negatives the idea of sale.

In the case of Dunn Trust Ltd v. Williams,99 there was a forced realisation of shares after
the death of a person. The suggestion that the original purchase was made with the view

96
13 TC 251
97
(1927) AC 312
98
3 EATC 417
99
31 TC
64
to resale was negatives. However, where there is an element of speculation, this may be
evidence of trading.

In the case of The Trust of AD Charitable Business Trust v CIT,100 the Trust was
established for the purpose of carrying on some business and it purchased interest in four
partnerships and later sold its interests into two firms at a profit. It again bought shares
in two companies and sold its shares in one company at a profit. It further purchased
under developed property which was held briefly and then sold undeveloped. The Trust
was assessed to income tax on the profits of these transactions, this was done by the court
because it felt that, the interest bought and sold were acquired in contemplation of
realisation at profit when the time was right.

Task assigned: To read the case of:

1) Rutledge v. IRC 14 TC 490

2) Edwards v. Bairstone (1956) AC 14

In the case of Rutledge v. IRC,101 the speculative transaction involved the purchase of a
large quantity (one million) of the toilet tissues which were resold at profit. The court
held that profit was assessable to tax as trading income because the purchase transaction
was effected in contemplation of subsequent resale at profit.

Another example of transaction entered into in anticipation of realisation of profit is the

case of Edwards v. Bairstone,102 in this case the appellants embarked on a joint venture to
purchase a spinning plant and dispose of it at a profit. At no stage did they intend to use it
as machinery or to hold it as income producing asset. They approached potential
purchasers and incurred various expenses in organized carrying out the venture and
within two years sold the machinery in several lots at a profit.

100
2 EATC
101
14 TC 490
102
(1956) AC 14
65
 5. SUPLEMENTARY WORK ON OR IN CONNECTION WITH THE
PROPERTY REALISED
Should the property be worked on in any way during ownership to improve its quality or
exertions are made to find or attract purchasers now there is some evidence of dealing.
When there is an organized effort to obtain profit there is a source of taxable income but
if nothing at all is done the suggestion tends in other way.

6. MOTIVES
There are some cases where the purposes of a transaction of purchase and sale is clearly
discernible motive is irrelevant in such cases.

In the case of CIR v. Fraser,103 the transaction was one of the purchase and resale of
whisky. The court observed that goods were purchased to the clear intention of reselling
at a profit and hence the transaction constituted trading and proceeds thereof were liable
to income tax.

However, the motive for profit is not a necessary requirement but only an indication of
trading.

COMPUTING INCOME FROM BUSINESS

There are allowable expenses and expenses that are not allowed as deductions. The
cardinal principle is contained in section 11 of the Income Tax Act, 2004, and generally
expenses are allowed only if incurred wholly and exclusively in the production of income
from the business or investments.

From sections 12-19 of Act, specific provisions on deductions are explained. These
includes: interests under debt obligation, repair and maintenance expenditure, trading
stock and gifts to public and charitable institutions, etc.

Expenses that are not allowed as deductions are also contained in section 11and they
include expenditure of capital nature.

103
24 TC 498
66
 INCOME FROM INVESTMENT
Under section 9 (1)104 of the Act, a person’s income from an investment is the person’s
gains or profits from computing an investment.

Investment is defined under section 3 of the Act to means the owning of one or more
assets of a similar nature or that are used in an integrated fashion, on similar terms and
subject to similar conditions, including as to location and includes a past, present and
prospective investment, but does not include a business, employment and the owning of
assets, other than investment assets, for personal use by the owner.

An investment asset is also defined under section 3, and it includes shares and securities
in a corporation, a beneficial interest in a non-resident trust and an interest in land and
buildings. However, it excludes business assets, depreciable assets and trading stock.
Section 9(2), provides for what amount derived from investments are to be included in
calculating a person’s gains or profits from conduction investment.
Under section 9(2) (a), this include a class of equity investment. Amount derived from
intangible assets such dividends, distribution of trust, gains of insured from life insurance
and gains from interest in an unapproved retirement fund, interest, natural resources
payment, rent or royalty. Even net gains from the realisation of investment assets are to
be included. Even amount received as a consideration for accepting a restriction on the
capacity to conduct the investment and all other amount required to be included by the
Income Tax Act.
Task assigned: To read section 30 for jointly investments.
The section provides that;
30.-(1) for the purposes of calculating a person's income from an investment that is
jointly owned with another person, amounts to be included and deducted in that
calculation shall be apportioned among the joint owners in proportion to their respective
interests in the investment.

104
It provides that; A person's income from an investment for a year of income is the person's gains or
profits from conducting the investment for the year of income.
67
(2) Where the interests of joint owners cannot be ascertained they shall be treated as
equal.

Amount to be excluded are contained under section 9(3), these includes except amounts
and final withholding payments, and those amount included in calculating the person’s
income from any employment or business.

EQUITY INVESTMENTS UNDER SECTION 9(2) (a)

1. INTEREST
Interest is defined under section 3 of the Act, and it is the payment for the use of money.
According to the case of Riches v. Westminister Bank, 105 the essence of interest is that, its
payment which becomes due because the creditor had not had his money at due date. It
may be regarded either as representing profit he might have made if he had the use of his
money or conversely the loss he suffered because he had not had that use.
The repaid principal sum is not income in the hands of the lender, it is only the interest
which is income and the lender receiving the interest will pay income tax in that interest.
Under section 12 of the Act, a person who pays interest under a debt obligation which
incurred wholly and exclusively in the production of income from a business or
investment is not taxable because the payment of interest is an allowable expense.

2. NATURAL RESOURCES PAYMENTS

Natural resource is defined under section 3 of the Act. Is a payment, including a premium
or like amount for the right to take natural resources from land or the sea by reference to
the quantity or value of natural resources taken. Such payments are class of income from
investments.

105
(1947) AC 390
68
 3. RENT
Is defined under section 3 of the Act, it is any payment made by the lessee under a lease
of a tangible asset including any premium and any other payment for the granting of the
lease but excludes a natural resource payment and a royalty.
Any amount received in a lease is taxable income. The person who receives the rent is
deemed to receive income which should be taxed.

4. ROYALTIES
Royalties are taxable under section 9(2) (a), and according to the case of McCanley v.
FCT,106 royalties are payment based on production or use.
It is kind of payment made by the lessee under a lease of intangible asset. It is payment
for the use or the right to use of a copyright, patent, design, model, plan, secret formula or
process or trademark; or for the supply of know-how. It excludes natural resource
payments.
Royalties may also include payments to owner of land for allowing certain benefits to be
used by an outsider, for example mining royalties.
The distinction is also made between annual payments for the right to use in form of
capital and annual payments for actual use which are known as royalty income.
In the case of IRC v. British Salmon Aero Engine,107 in this case an owner of Aero engine
patent granted an exclusive right to manufacture Aero Engine to manufacturer.
Consideration was paid in part by lump sum money paid in three installments. The other
part was to be paid in annual royalties. It was held that; the lump sum was a capital sum
and the payments were considered to be royalty income. This is because the payments for
royalties need not be periodic. A lump sum award for patent use of an invention is also a
royalty.

106
(1944) 69 CLR 235
107
(1938) 2 KB 482
69
 5. DIVIDENDS
Dividend is deemed to be an income and hence it is taxable. it is income from an
investment because the tax payer will have bought shares or stock from a company and
hence it qualifies as an investment asset under section 3.

CAPITAL GAINS
The realisation of an investment asset attracts tax. Before 1973 in Tanzania, capital gains
were not taxed because they were not considered to be income. This was founded in the
case of Copper Syndicate v. Harris,108 where it was stated that; proceeds from disposition
of capital assets did not constitute income for the purposes of taxation.
However, in 1973, capital gains tax was introduced through the Income Tax Act of 1973.
Capital gain tax was introduced for three major reasons;
1. To fight speculation in property.
This was due to the reason that the tax payer will be liable to taxation for the gain that he
made in dispose of the asset.
1 To curb tax avoidance.
Because people will be discouraged to restructure transactions rather than income
producing transactions.
2 It was only fair and equitable to tax capital gains because was just like any other
income.

RULES FOR COMPUTATION OF GAINS FOR THE REALISATION OF

INVESTMENT ASSET
The rules are contained under sections 36-47 of the Income Tax Act, 2004.
In computing the gains, an owner of an asset take into account the value realised upon
sale minus the amount of money expended in selling the asset. The incoming of an asset
is the amount derived by the owner of the asset by virtue of owning the asset.

108
5 TC 159
70
 WHEN IS AN ASSET REALISED?
The circumstances under which an asset is realised are contained under section 39.109
An asset is said to be realised when an owner parts company with an asset. Such
circumstances as selling an asset, exchanging an asset or transferring an asset,
distributing an asset, destruction of an asset, expiring of an asset or surrendering an asset.
These are circumstances of realisation among others covered under section 39.
The tax payable is to be paid in a single installment and distinction is made between
resident and non-resident person. Where a person realising interest is a resident person is
to pay ten percent as capital gains tax, and where a person is non-resident is to pay twenty
percent of the gain. This is per section 90(1) (a) & (b).110
The registrar of tittles is not to effect the transfer until he has received a certificate of
clearance from the Commissioner of Income tax that capital gain has been paid or if it is
not payable the Commissioner must certifies so.

109
It provides that; A person who owns an asset shall be treated as realising the asset -
(a) subject to paragraph (b), when the person parts with ownership of the asset including when the asset is
sold, exchanged, transferred, distributed, cancelled, redeemed, destroyed, lost, expired or surrendered;
(b) in the case of an asset of a person who ceases to exist, excluding a deceased individual, immediately
before the person ceases to exist;
(c) in the case of an asset other than a Class 1, 2, 3, 4, 5, 6 or 8 depreciable asset or trading stock, where the
sum of the incomings for the asset exceeds the cost of the asset;
(d) in the case of an asset that is a debt claim owned by a financial institution, when the debt claim becomes
a bad debt as determined in accordance with the relevant standards established by the Bank of Tanzania and
the institution writes the debt off as bad;
(e) in the case of an asset that is a debt claim owned by a person other than a financial institution, the
person reasonably believes the debt claim will not be satisfied, the person has taken all reasonable steps in
pursuing the debt claim and the person writes the debt off as bad;
(f) in the case of an asset that is a business asset, depreciable asset, investment asset or trading stock,
immediately before the person begins to employ the asset in such a way that it ceases to be an asset of any
of those types;
(g) in the case of a foreign currency debt claim, on the last day of each year of income;
(h) in the case of an asset owned by an entity, in the circumstances referred to in section 56 (1).
110
It provides that; Where a person (an “installment payer”) derives a gain in conducting an investment
from the realisation of an interest in land or buildings situated in the United Republic, the person shall pay
income tax by way of single installment equal to- (a) in the case of a resident person, ten percent of the
gain; or (b) in the case of a non-resident person, twenty percent of the gain.
71
 TAXATION OF CORPORATION

Under section 53, a corporation is liable to tax separate from its shareholders. This is
because of the concept of legal personality where by upon incorporation, the company
acquires a distinct legal personality from its members, and the two ( i.e company and
members) are considered to be different persons in law.
A company is liable to pay an income tax on its total income at a fixed rate of 30%. This
is refers to as a corporate tax contained in First Schedule paragraph 3(1).111
If the company is newly listed in the Dar es Salaam Stock Exchange (DSE) and at least
35% of its equity ownership issued to the public, it will be charged at 25% corporate tax
for three consecutive years from the date of list. This is provided under First Schedule
paragraph 3(2)112 of the Act.
This act of incentive is to encourage companies to sell their shares to the public and also
to use the DSE.
Members of the company (shareholders) are also liable to pay income tax on their
investment returns when dividends are paid.
Under paragraph 4 (b)(i)(aa)&(bb)113 of the First Schedule which read together with
section 82 (1)(a)&(b),114 the dividends paid is to attract the withholding tax of 10%, and
if the company is listed on DSE then the dividends are to be charged of withholding tax
at 5% .

111
It provides that; The total income of a corporation, trust, unapproved retirement fund or domestic
permanent establishment of a non-resident person for a year of income shall be taxed at the rate of 30
percent..
112
It provides that; (2) Notwithstanding subparagraph (1), a newly listed company with the Dar es Salaam
Stock Exchange with at least thirty five percent of its equity ownership issued to the public shall be taxed at
a reduced corporate rate of twenty five percent for three consecutive years from the date of listing.
113
It provides that; Income tax to be withheld from payments under Division II of Part VII shall be
withheld at the following rates: (b) payments to which section 82 applies - (i) in the case of dividends - (aa)
of a corporation listed on the Dar es Salaam stock Exchange – 5 percent; or (bb) of any other corporation –
10 percent.
114
It provides that; Subject to subsection (2), where a resident person- (a) pays a dividend, interest, natural
resource payment, rent or royalty; and (b) the payment has a source in the United Republic and is not
subject to withholding under section 81.
72
 PRINCIPLE SYSTEM OF CORPORATE TAXATION
These refer to the approaches in taxing corporations. There are three principles system of
corporation taxation.
1 .Classical system
2. Imputation system
3. The two-rate system

1 .CLASSICAL SYSTEM
The classical system takes into account the legal personality of the company where by the
company is treated as a separate from its members.
The profit of the company is subjected to corporation tax and the distributed profit to the
members are chargeable to personal income tax whereby the tax is withheld by the
paying corporation and remitted to the Commissioner.
Taxing corporate distributions encourages capitalisation of profit which may lead to
economic growth of the country.

2. IMPUTATION SYSTEM
Under this system the company’s profit are distributed by way of dividends part of the
corporate tax is paid by the company and that part is treated as tax paid by the
shareholders.
The tax imputed to the shareholders as a credit against liability to personal income tax on
the distribution.

3. THE TWO-RATE SYSTEM

It involves the application of two-rate on company profits. Corporate tax on profits made
by the company will have a lower rate or high rate of the company.
The lower rate will be charged for the distributed profits and the high rate will be for
undistributed profit.
Task: Read types of corporate distribution.

73
Types of corporate distribution include; Ordinary dividend, dividends in kind and stock
dividends, intercorporate dividends under section 54 of the Act. Another type is
shareholder benefits.

TAX PAYMENT PROCEDURES, ENFORCEMENT AND REFUND

Tax that is payable under income tax Act means; income tax, amount payable by a
withholding agent/ withholdee, installment paid by an installment payer, an amount
payable on assessment.
Interest and penalties as well as the amount paid by the tax debtors and taxes payable to
the Commissioner by third parties are all taxes that are payable under Income Tax Act.
Under section 78(2)115 and Regulation 14 of the Income Tax Act, 2004, taxes are to be
paid at the place prescribed in the notice or at all approved bank or at the tax office where
the taxpayer is registered.
Upon payment, the tax payer is to notify the tax office where he is registered.
The modes of payment are contained under Regulation 14 and it may be cheque, cash or
transfer.
Read regulation 4.

TIME FOR PAYMENT OF TAXES

Where the tax is payable by withholding, it must be paid within seven days after the
calendar of month.
If the tax payable by installment, if it is payable under section 90 which is a single
installment pay then it should be paid at the time is realisation.
Where the tax is to be paid by quarterly installment and the taxpayer’s year of income is
twelve months period then the quarterly payment must be paid at the start of calendar
month on or before the last day of the 3rd, 6th, 9th and the 12th month.
All installment payers are to file to the Commissioner an estimate of a tax payable for
that particular year of income by the date for the payment for the first tax installment.
The content of an estimate of tax payable are found in section 89(2).116 Once a person
filled an estimate of the tax payable, he may later on revise his estimate under section 88.

115
It provides that; Tax shall be paid to the Commissioner in the form and at the place is may be prescribed
74
Failure to file an estimate will give the Commissioner power to make an estimate of the
tax payable taking into account the income tax payable under section 4(1)(a)&(b)117 for
the previous year of income.
A singe installment payer is covered under section 90.118 The quarterly installment payer
is provided under section 88.

PAYMENT BY ASSESSMENT
119
Under section 91, a person is to file to the Commissioner of income tax.
The classes of persons covered by section 91 are to file their returns not later than three
months after the year of income.
Section 91 has qualifications and people covered by section 92, 93, 94, and 96 have
different procedure of filling returns.
A return is required to be in a prescribed form and it should specify chargeable income
from each employment, business and investment and total income payable.

116
It provides that; An estimate of tax payable of a person for a year of income shall, subject to any
instructions by the Commissioner to the contrary -
(a) be in the manner and form prescribed estimating -
(i) the person's chargeable income for the year of income from each employment, business and investment
and the source of that income;
(ii) the person's total income for the year of income and the income tax to become payable with respect to
that income under section 4(1)(a);
(iii) in the case of a domestic permanent establishment of a non-resident person, the permanent
establishment's repatriated income for the year of income and the income tax to become payable
with respect to that income under section 4(1)(b); and
(iv) any other information that the Commissioner may prescribe.
(b) be signed by the person's stating whether to the best of knowledge and belief the estimate is true and
collect; and
(c) have attached to it any other information that the Commissioner may prescribe.
117
It provides that; Income tax shall be charged and is payable for each year of income in accordance with
the procedure in Part VII by every person - (a) who has total income for the year of income or is a
corporation which has a perpetual unrelieved loss determined under Section 19 for the year of income and
the previous two consecutive years of income attributable to tax incentives.
(b) who has a domestic permanent establishment that has repatriated income for the year of income;
118
Section 90.-(1) provides that; Where a person (an “instalment payer”) derives a gain in conducting an
investment from the realisation of an interest in land or buildings situated in the United Republic, the
person shall pay income tax by way of single instalment equal to-
(a) in the case of a resident person, ten percent of the gain; or
(b) in the case of a non-resident person, twenty percent of the gain.
119
Section 91.-(1) provides that; Subject to sections 92, 93, 94 and 96, every person shall file with the
Commissioner not later than three months after the end of each year of income a return of income for the
year of income.

75
Filling a return is a precondition for assessment of the tax payable. Not everybody is
required to file a return.
Under section 92,120 resident persons with no income tax payable need not file return or
people who are employed and the employer withholds they need not to file return. People
who have made a gain from the realisation of interest in land or buildings need not file a
return unless requested by the Commissioner.
Even though under section 91, a person is required to file a return not later than three
months after the year of income, the Commissioner of income tax has empowered to
require a person to file a return of income before the stipulated date where the person
becomes bankrupt or goes into liquidation or person is about to leave the United Republic
indefinitely or the Commissioner considered it appropriate as per section 91(3) (a)-(d).
Where the return is filed by a corporation, the return must be prepared by Certified Public
Accountant (CPA) and it must include a declaration that the return is complete and
accurate.

ASSESSMENT
An assessment is not defined under the Income Tax Act (ITA), but it refers to all
procedures involved in the determination of tax liability. Assessment begins with the
filling a return.

TYPES OF ASSESSMENTS
Under ITA, there are three types of assessments;
1. Self assessments, provided under section 94 (a) & (b)
2. Best judgment assessments, provided under section 94(4)

120
It provides that; Unless requested by the Commissioner by notice in writing served on the person and
subject to a right of the person to elect to file a return, no return of income for a year of income shall be
required under section 91 from -
(a) a resident individual - (i) who has no income tax payable for the year of income under section 4(1)(a);
or (ii) whose income for the year of income consists exclusively of either or both of the following:
(aa) income from any employment where the employer is required to withhold tax under section 81 from
payments made to the individual that are included in calculating the
individual's income from the employment; or
(bb) gains of the type referred to in section 90(1); or (b) a non-resident person (other than one with a
domestic permanent establishment) who has no income tax payable for the year of income under section
4(1)(a) or whose income tax payable for the year of income under section 4(1)(a) consists exclusively of
gains of the type referred to in section 90(1).
76
 3. Jeopardy assessments, provided under section 95.

1. SELF ASSESSMENTS
A self assessment is normally done by the tax payer himself upon filling a tax return. In
essence, the taxpayer estimates the amount of tax which is to be paid.
Where a tax payer makes a self assessment, the Commissioner of income tax may
reassess and adjust the tax where he believes the taxpayer is not telling the truth.
Where the Commissioner adjusts the assessment, is to use the best of his judgment in
estimating the income of the taxpayer and to charge tax accordingly.
Where the Commissioner determines an individual amount of income tax and makes an
assessment upon such income tax is required to use the best of his judgment.
According to the case of Gunda Shubbayya v. CIT,121 the phrase “according to the best of
his judgment” it means that the Commissioner must have materials on which to base his
assessment. The assessment must not be capricious and the Commissioner is not entitled
to make the guess without evidence.
Read the case of;
1. CIT v. AA 2EATC 64
2. CIT v. Gian Singh 3 EATC 24
3. Mandavia v. CIT 2EATC 426

CIT v. AA.122 In this case a defendant having failed to submit a return, was assessed to tax
on estimated income. Notice of assessment was served on him by post. No objection was
made against the assessment. Neither any appeal lodged. When demand note for tax was
served, the taxpayer disputed it. It was held that, the taxpayer was liable on the tax
assessed on estimated income.

121
(1939) 71 TR 21
122
2EATC 64

77
 CIT v. Gian Singh.123 The defendant neglected to submit a return on income. He did
not object or appeal against the assessment. Having failed to pay tax due after the
demand note was served, the Commissioner sued him for the tax and penalties. The
defendant claimed that the assessments were excessive. The court held that;
1. Assessments are final and conclusive unless they are varied on objection or
appeal.
2. The obligation to deliver the return is on the taxpayer.
3. The Commissioner may raise an estimated assessment in the absence of a
return even through non-delivery of the return is due to circumstances such as
being lost in the post.
NOTE:
Taxpayer must be given an opportunity to submit a return before a valid estimated
assessment can be made.
124
In the case of Mandavia v. CIT, the appellant was assessable to income tax for the
year of income 1943-51. He had not been required to make a return for all that time.
Subsequently he gave oral notice of his liability to the charge of income tax in respect of
the period in question.
In 1953, the Commissioner sent a notice requiring him to submit a return. But prior to
the time of making such return had expired, the Commissioner raised assessments on his
estimated income subject to final adjustments under section 71 (ITA, section 94).
The Privy Council held that; granting the taxpayer an opportunity to make a return is a
condition precedent to assessment under section 71. Before making an assessment under
section 71 (ITA, section 94) the time allowed for submitting return under section 59
(ITA, section… ) must elapse otherwise the assessments will have been validly made.

123
3 EATC 24
124
2EATC 426
78
 2. BEST JUDGMENT ASSESSMENT
These are also sometimes called estimated assessments. These are normally made where
the taxpayer has not filled an income tax return but the Commissioner considers that such
a person has income chargeable to tax under section 94(5).125
Where the Commissioner believes that a tax payer has filed a false return he may invoke
his powers to make an estimated assessment using his best judgment.

3. JEOPADLY ASSESSMENTS
These are contained under section 95 (1) which reads together with section 91(3). It is a
class made by the Commissioner according to his best judgment without requiring a
person to file a return.
Jeopardy assessment may be done where the taxpayer becomes bankrupt or the person
who is about to leave the country without an intention to return or the person who is
about to lease or stop business activities in Tanzania. In such circumstances, the
Commissioner may require such a person to file an income tax return at any time and to
pay tax.
The time within which the tax is to be paid will be contained in the notice according to
section 91(3) (d).126

SUNCTIONS FOR NON-COMPLIANCE

There are several sunctions under the ITA for non- compliance with the law. Among the
sunctions that are provided is the interest and penalty. Interest and penalties are payable
under various circumstances.

125
The provision provides that; Where an individual has not filed a return for any year of income, whether
or not he has been required by the Commissioner so to do, and the Commissioner considers that, that
individual has income chargeable tax for such year, the Commissioner may determine, according to the best
of his judgment, the amount of the income of that individual and assess the tax accordingly.
126
The provision provides that; Subject to sections 92, 93 and 95, where prior to the date for filing a return
of income for a year of income under subsection (1) - the Commissioner otherwise considers it appropriate,
the Commissioner may, by notice in writing served on the person, require the person to file, by the date
specified in the notice, a return of income for the year of income or part of the year of income.
79
For example under section 80(2),127 a person is required to maintain documents relating
to taxation for a period of at least five years from the end of the year of income. Where a
person does not maintain proper documents then such person is liable to pay interest and
penalties.
Likewise, under section 91(1)128 failure to file a return also attracts interest and penalties
calculated in accordance with section 98.129
Under estimating tax is also an offence and even withholding agent who fails to file
statements are also liable to pay interest and penalties.
The Act also creates several offences together with their punishments. Such offences
includes; failure to comply with the Act under section 104;130 failure to pay tax under
section 105;131 and making false or misleading statement under section 106;132

127
It provides that; The documents referred to in this section shall be retained for a period of at least five
years from the end of the year of income or years of income to which they are relevant unless the
Commissioner otherwise specifies by notice in writing.
128
It provides that; Subject to sections 92, 93, 94 and 96, every person shall file with the Commissioner not
later than three months after the end of each year of income a return of income for the year of income.
129
Section provides that; 98.-(1) A person who fails to – (a) maintain proper documents for a year of
income as required by section 80(1); (b) file an estimate for a year of income as required by section 89(1);
or
(c) file a return of income for a year of income as required by section 91(1), shall be liable for a penalty for
each month and part of a month during which the failure continues calculated as the higher of -
(d) 2.5 percent of the difference between the income tax payable by the person for the year of income under
section 4(1)(a) and (b and the amount of that income tax that has been paid by the start of the start of the
month; or
(e) Tshs. 10,000 in the case of an individual or Tshs. 100,000 in the case of a corporation.
(2) A withholding agent who fails to file a statement as required by section 84(2) is liable for a penalty for
each month or part of a month during which the failure continues calculated as the higher of -
(a) the statutory rate applied to the amount of income tax required to be withheld under Subdivision A of
Division II of Part VII from payments made by the agent during the month to which the failure relates; or
(b) Tshs. 100,000.
130
It provides that; Except as otherwise provided in this Act, any person who fails to comply with a
provision of this Act commits an offence and shall be liable on summary conviction -
(a) where the failure results or, if undetected, may have resulted in an underpayment of tax in an amount
exceeding shillings 500,000, to a fine of not less than shillings. 100,000 and not more than shillings
500,000; and
(b) in any other case, to a fine of not less than shillings. 25,000 and not more than shillings. 100,000.
131
It provides that; Any person who without reasonable excuse fails to pay any tax on or before the date on
which the tax is payable commits an offence and shall be liable on summary conviction -
(a) where the failure is to pay tax in excess of shillings 500,000, to a fine of not less than shillings 250,000
and not more than shillings 1,000,000, imprisonment for a term of not less than three months and not more
than one year or both; and
(b) in any other case, to a fine of not less than shillings 50,000 and not more than shillings 250,000,
imprisonment for a term of not less than one month and not more than three months or both.
80
impending tax administration; offence of authorised unauthorised person under section
108;133 offence of aiding or abetting under section 109.134

132
Section 106.-(1) A person who –
(a) makes a statement to the Commissioner that is false or misleading in a material particular; or
(b) omits from a statement made to the Commissioner any matter or thing without which the statement is
misleading in a material particular, commits an offence and shall be liable on conviction –
(c) where the statement or omission is made without reasonable excuse –
(i) and, if the inaccuracy of the statement were undetected, may have resulted in an underpayment of tax in
an amount exceeding shillings 500,000, to a fine of not less than shillings 250,000 and not more than
shillings 1,000,000, imprisonment for a term of not less than three months and not more than one year or
both; and
(ii) in any other case, to a fine of not less than Tshs. 50,000 and not more than shillings 250,000,
imprisonment for a term of not less than one month and not more than three months or both; or
(d) where the statement or omission is made wilfully or negligently -
(i) and, if the inaccuracy of the statement were undetected, may have resulted in an underpayment of tax in
an amount exceeding shillings 500,000, to a fine of not less than shillings 500,000 and not more than
shillings 2,000,000, imprisonment for a term of not less than one year and not more than two years or both;
and
(ii) in any other case, to a fine of not less than shillings 100,000 and not more than shillings 500,000,
imprisonment for a term of not less than six months and not more than one year or both.
(2) A reference in this section to a statement made to the Commissioner has the same meaning as in section
101(2).
133
108.-(1) Any person who –
(a) being an officer of the Tanzania Revenue Authority acting in the performance of duties under this Act –
(i) directly or indirectly asks for or takes in connection with any of the officer's duties, any payment or
reward whatsoever, whether pecuniary or otherwise or promise or secure for any such payment or reward,
not being a payment or reward that the officer is lawfully entitled to receive; or
(ii) agrees to, permits, conceals, connives at or acquiesces in any act or thing whereby the\ Government is
or may be defrauded with respect to any matter under this Act, including the payment of tax; or
(b) not being authorised under this Act, collects or attempts to collect an amount of tax payable under this
Act or an amount that the person describes as such tax or otherwise impersonates a person authorised under
this Act, commits an offence and is liable on conviction to a fine of not less
than Shillings 500,000, imprisonment for a term of not less than one year and not more than three years or
both.
(2) Any person who contravenes section 140 commits an offence and is liable on summary conviction to a
fine not exceeding shillings 1,000,000, imprisonment for a term not exceeding one year or both.
134
109. Any person who knowingly or recklessly aids, abets, conceals or induces another person to commit
an offence under this Act (the “original offence”) commits an offence and shall be liable on conviction-
(a) where the original offence involves a statement of the kind mentioned in section 106(1)(a) or (b) that, if
the inaccuracy of the statement were undetected, may have resulted in an underpayment of tax in an
amount exceeding shillings 500,000, to a fine of not less than shillings 500,000 and not more than shillings
2,000,000, imprisonment for a term of not less than one year and not more than two years or both; and
(b) in any other case, to a fine of not less than shillings 100,000 and not more than shillings 500,000,
imprisonment for a term of not less than six months and not more than one year or both.

81
 TAX RECOVERY MEASURES

METHODS

1. By suit
It is covered under section 110.135 A suit may be instituted in a court of competent
jurisdiction.
It may be by summary proceeding. In such proceedings the Commissioner does not need
to adduce any evidence. A certificate issued by him giving the name and addresses of the
tax payer and the amount of tax due and payable is sufficient evidence.

2. Security
It is covered under section 111.136 Where the withholding agent acquires assets into
which the tax withheld may be traced, he holds such assets in trust of the government.
Such assets being held by withholding agent are not liable to attachment in respect of
debtor or liability of agent.
In case of liquidation of the agent such assets do not form part of the estate in liquidation
and the Commissioner of income tax has the first claim over the tax or assets before and
distribution is made

3. Creating a charge over the assets of tax debtor

It is covered under section 112. The Commissioner is empowered to create a charge over
the assets of tax debtor.

135
It provides that; Tax that has not been paid when it is payable may be sued for and recovered in any
court of competent jurisdiction by the Commissioner acting in the Commissioner's official capacity.
136
It provides that; Income tax that a withholding agent is required to withhold from a payment under
Subdivision A of Division II of Part VII shall be-
(a) a first charge on the payment; and
(b) withheld prior to any other deduction that the withholding agent may be required to make by virtue of
an order of any court or any other law.
(2) Income tax withheld by a withholding agent under Subdivision A of Division II of Part VII, including
any assets acquired by the agent into which the tax withheld may be traced -
(a) is held in trust for the Government of the United Republic;
(b) is not subject to attachment in respect of a debt or liability of the agent; and
(c) in the event of the liquidation or bankruptcy of the agent, does not form part of the estate in liquidation
or bankruptcy and the Commissioner acting for the Government has a first claim over the tax or assets
before any distribution in liquidation or bankruptcy is made.
82
A charge is created by securing a tax debtor with a notice in writing specifying the assets
charged and the extend of the charge, and the charge relates and it should also contains
details of Commissioner power of sale.
The charge may be created over the land or building of the tax debtor and such a charge
must be registered with the Registrar of Titles.
Upon payment of the tax due by the tax debtor, the Commissioner is to relies the charge
over the assets and the entry must be removed by the Registrar of Titles within 30 days.

4. Sale of charged assets

Where a charge is being created over the assets of a taxed debtor, the Commissioner is
required to notify the debtor in writing his intention to sale the charged assets.
The contents of a notice are contained in section 113 (2)137 and the duties or powers of
the Commissioner are contained in sub section 3.138
Before sale may be effected, the Commissioner is required to give public notice under
subsection 4.139

137
It provides that; (2) A subsection (1) notice may be incorporated into or accompany a notice referred to
in section 111(2) and shall be in writing, served on the tax debtor and specify -
(a) the charged assets, the Commissioner's intention to sell those assets and the proposed method and
timing of sale; and
(b) in the case of tangible assets that the Commissioner intends to take possession of, the manner in and
place at which the possession shall occur.
138
It provides that; The Commissioner - (a) may take possession of tangible assets referred to in a
subsection (1) notice, whether directly or through an authorised agent, at any time after the notice is served;
(b) for the purposes of taking possession, may enter at any time any premises described in the subsection
(1) notice and request the assistance of the police;
(c) shall, at the time of taking possession, provide the tax debtor with an inventory of assets seized; and
(d) where the assets are tangible assets other than an interest in land or buildings, store the assets, at the
cost of the tax debtor, at any place that the Commissioner considers appropriate.
139
It provides that; Where the Commissioner serves a tax debtor with a subsection (1) notice, the
Commissioner may, after public notice, sell the charged assets but not before -
(a) where the charged assets are an interest in land or buildings, 30 days after taking possession under
subsection (3);
(b) where the charged assets are perishable tangible assets, one day after taking possession under
subsection (3);
(c) where the charged assets are tangible assets other than those referred to in paragraph (a) or (b), 10 days
after taking possession under subsection (3); and
(d) in any other case, 10 days after service of the subsection (1) notice.
83
 5. Departure Prohibition Order
Under section 114,140 the Commissioner has the power to prevent a tax debtor from
leaving the United Republic.

In exercising such power the Commissioner is required to write to the Director of

Immigration who will prevent the debtor from living the United Republic for a period of
72 hours.

Where the tax debtor makes satisfactory arrangement for the payment of the tax then, the
notice may be withdrawn.

The period of 72 hours may be extended when the Commissioner makes an application to
the High Court,

6. Recovery from the officers of entities

It is provided under section115.141 Where the tax debtor is an entity, then the debt may
be recovered from the officer of the entity.

140
It provides that; 114.-(1) Subsection (2) applies where a person fails to pay tax on or before the date the
tax is payable.
(2) Where this subsection applies, the Commissioner may, by notice in writing to the Director of
Immigration, order the Director to prevent the person from leaving the United Republic for a period of 72
hours from the time the notice is served on the Director.
(3) The Commissioner shall withdraw a notice under subsection (2) where the person pays the tax or makes
an arrangement for payment satisfactory to the Commissioner.
(4) On application by the Commissioner, the High Court may extend the period referred to in subsection
(2).
141
It provides that; 115.-(1) Subject to subsection (3), when an entity commits an offence, every person
who is an officer of the entity at that time is treated as also committing the same offence.
(2) Subject to subsection (3), where an entity fails to pay tax on or before the date on which the tax is
payable, every person who is an officer of the entity at that time or was such an officer within the previous
six months shall be jointly and severally liable with the entity and every other such person for payment of
the tax.
(3) Subsections (1) and (2) do not apply to a person where -
(a) the offence or failure is committed by the entity without the person's knowledge or consent; and 98
(b) the person has exercised the degree of care, diligence and skill that a reasonably prudent person would
have exercised in comparable circumstances to prevent the commission of the offence or failure.
(4) Where a person pays tax under subsection (2) -
(a) the person may recover the payment from the entity;
(b) for the purposes of paragraph (a), the person may retain out of any assets (including money) of the
entity in or coming into the possession of the person an amount not
exceeding the payment; and
(c) no claim may be made against the person by the entity or any other person with respect to the retention.
84
Officers of the entity are held to be jointly and severally liable for the debt of the entity if
they were such officers within the previous six months or at the time the debt became due
unless such officer may show that the offence was committed without his consent or
knowledge and that he exercised diligence and skill in the prevention of the commission
of the offence.

7. Recovery from the receiver

It is provided under section 116.142 Where a person is appointed as a receiver is to notify
the Commissioner within 14 days. Upon receipt of such notice, then the Commissioner
has to save a notice on the receiver stating the tax debtor’s liability. Once the receiver is
aware of this liability is to settle the bill after selling debtor’s assets, if he does not pay
the tax debt then he becomes personally liable for the tax due.

(5) For the purposes of this section, "officer" of an entity means a manager of the entity or a person
purporting to act in that capacity.

142
116.-(1) A receiver shall notify the Commissioner in writing within fourteen days of being appointed to
the position of receiver or taking possession of an asset situated in the United Republic,
whichever occurs first.
(2) The Commissioner may serve a receiver with a notice in writing specifying an amount that appears to
the Commissioner to be sufficient to provide for any tax that is due or will become due by the tax debtor.
(3) After receiving a notice under subsection (2), a receiver - (a) shall sell sufficient of the assets that come
into the receiver's possession under the receivership to set aside, after payment of any debts having priority
over the tax
referred to in that subsection, the amount notified by the Commissioner under that subsection; and
(b) shall be liable to pay to the Commissioner on account of the tax debtor's tax liability the amount set
aside.
(4) To the extent that a receiver fails to set aside an amount as required by subsection (3), the receiver is
personally liable to pay to the Commissioner on account of the tax debtor's tax liability the amount that
should have been set aside but may recover any amount paid from the tax debtor.
(5) For the purposes of this section - “receiver” means any person who, with respect to an asset situated in
the United Republic, is -
(a) a liquidator of an entity;
(b) a receiver appointed out of court or by a court in respect of an asset or entity;
(c) a trustee for a bankrupt person;
(d) a mortgagee in possession;
(e) an executor or administrator of a deceased individual's estate; or
(f) conducting the affairs of an incapacitated individual; and "tax debtor" means the person whose assets
come into the possession of a receiver.
85
 8. Recovery from person owing money to the tax debtor
This is provided under section 117.143 Any person who owes money to a tax debtor may
be required to pay the money due to the tax debtor after being saved with the notice by
the Commissioner.

Such people who may owe money to a tax debtor are listed in section 117 (2).

143
117.-(1) This section applies where tax is due by a person, ("the tax debtor") and the tax debtor fails to
pay the tax on or before the date it is payable.
(2) Where this section applies, the Commissioner may by notice in writing require any person, the "payer" -
(a) owing or who may subsequently owe money to the tax debtor;
(b) holding or who may subsequently hold money for or on account of, the tax debtor;
(c) holding or who may subsequently hold money on account of a third person for payment to the tax
debtor; or
(d) having authority from a third person to pay money to the tax debtor, to pay and the payer shall pay, on
account of and to the extent of the tax due by the tax debtor, the money to the Commissioner on the date
specified in the notice.
(3) The Commissioner shall serve the payer with the notice referred to in subsection (2) and, as soon a
practicable after that service, serve the tax debtor with a copy of the notice.
(4) The date specified in the notice under subsection (2) shall not be a date before –
(a) the money becomes payable to the tax debtor or the money is held on behalf of the tax debtor; and
(b) the payer is served with the notice under subsection (3).
(5) A notice under subsection (2) ceases to have effect where the tax with respect to which the notice is
issued is paid or otherwise satisfied.
(6) Where a person served with a notice under Subsection (3) is unable to comply with the notice by reason
of lack of moneys owing to, or held for, the tax debtor, the person shall, as soon as is practicable and in any
event before the payment date specified in the notice, notify the Commissioner accordingly in writing
setting out the reasons for the inability to comply.
(7) Where a notice is served on the Commissioner under subsection (6) the Commissioner may, by notice
in writing-
(a) accept the notification and cancel or amend the notice issued under sub-section (2); or
(b) reject the notification.
(8) A person making a payment pursuant to a notice under subsection (2) is treated as having acted under
the authority of the tax debtor and of all other persons concerned and is hereby indemnified in respect of
the payment of the payment against all proceedings, Civil or Criminal, and all processes, judicial or extra
judicial, notwithstanding any provisions to the contrary in any written law, a contract, or agreement.
(9) For the purposes of this section, "money" includes a debt obligation denominated or payable in money.
“(10) Where a payer fails to pay an amount of tax specified in appointment notice within thirty days of the
date-
(a) of service of such notice on him, or
(b) on which any money comes into his hands or become due by him to, his tax debtor, whichever event is
the later, and the payer has-
(i) not given a notification under subsection(6) of this section; or
(ii) given such notification which has been rejected by the Commissioner, the provision of this Act relating
to the collection and recovery of tax shall apply to the collection and recovery of such amount as if it were
tax due and payable by the payer, the due date for the payment of which was the date upon which such
amount should have been paid by the Commissioner under this subsection.”
86
Where a person who owes money to the tax debtor fails to pay within the stipulated time
in the notice, such person will be forced to pay such tax in a manner that would have
been recovered from tax debtor as per section 117 (10).

9. Recovery from an agent of a non-resident

It is provided under section 118.144 Where a debtor is non- resident, the Commissioner
may recover such tax from a person who is in the possession of an asset owned by the tax
debtor after due notice is saved on such a person.

The agent who is holding the asset of a non- resident will be required to pay up to the
market value of the asset of the tax due.

TAX ADMINISTRATION POWERS

Under the Income Tax Act, the Commissioner may authorise officers to exercise any of
his powers and duties.

However, the Commissioner may not delegate his powers to remit interests and penalties
under section 125. 145

144
118.-(1) Where a non-resident person (the "tax debtor") fails to pay tax on or before the date it is
payable, the Commissioner may, by service of a notice in writing, require a person who is in possession of
an asset owned by the tax debtor to pay tax on behalf of the tax debtor, up to the market value of the asset
but not exceeding the amount of tax due by the tax debtor.
(2) For the purposes of subsection (1) -
(a) a tax debtor who charters an aircraft or ship under a charter exceeding three years shall be treated as
owning the aircraft or ship during that period; and
(b) the captain of any aircraft or ship shall be treated as being in possession of the aircraft or ship.
(3) The Commissioner may, by service of a notice in writing, require a resident partnership or a resident
partner to pay on behalf of a non-resident partner tax due by the non-resident partner up to the amount of
tax due that is attributable to any amount included in calculating the non-resident partner's income under
section 50.
(4) Where a person makes a payment to the Commissioner pursuant to a notice under subsection (1) or (3) -
(a) the person may recover the payment from the tax debtor or non-resident partner;
(b) for the purposes of paragraph (a), the person may retain out of any assets (including money) of the tax
debtor or non-resident partner in or coming into the possession of the person an amount not exceeding the
payment; and
(c) the tax debtor, non-resident partner or any other person may not make a claim against the person with
respect to the retention.
87
Even though the Commissioner may delegate his powers, such delegation may be subject
to restrictions and limitations.

The persons to whom the Commissioner may delegate his powers are specified in
Regulation 32 of the Income Tax Regulations.

Under section 131,146 the Commissioner is empowered to issue private rulings. Such
rulings may specify how the Act may apply to the person, for example when an unproved
retirement fund wants to become approved.

Once the Commissioner issues a private ruling it becomes binding on him unless the law
has subsequently changed.

147
According to section 130, the Commissioner is empowered to issue Practice notice.
The purpose of Practice notice is started under section 130.

INVESTIGATIVE POWERS
They are contained under sections 138-140. The Commissioner and every officer
authorised in writing by the Commissioner may at all time between 9am and 6pm and

145
It provides that; 125.-(1) The Minister may, by order in the Gazette, remit any tax that is due by a
person.
(2) The Commissioner may remit in whole or in part any interest or penalty charged under Division I of
Part VIII where the person liable for the interest or penalty shows good cause.
146
131.-(1) The Commissioner may, on application in writing by a person, issue to the person, by notice in
writing served on the person, a private ruling setting out the Commissioner's position regarding the
application of this Act to the person with respect to an arrangement proposed or entered into by the person.
(2) Where prior to the issue of a ruling under subsection (1), the person makes -
(a) a full and true disclosure to the Commissioner of all aspects of the arrangement relevant to the ruling;
and
(b) the arrangement proceeds in all material respects as described in the person's application for the ruling,
the ruling shall be binding on the Commissioner with respect to the application of this Act to the person
with respect to the arrangement.
(3) A ruling shall not be binding on the Commissioner under subsection (2) to the extent to which the Act
as in force at the time the ruling is issued is changed.
147
130.-(1) To achieve consistency in the administration of this Act and to provide guidance to persons
affected by this Act, including officers of the Tanzania Revenue Authority, the Commissioner may issue in
writing practice notes setting out the Commissioner's interpretation of this Act.
(2) A practice note shall be binding on the Commissioner until revoked.
(3) A practice note shall be not binding on other persons affected by this Act.
(4) The Commissioner shall make practice notes available to the public at offices of the Tanzania Revenue
Authority and at such other locations or by such other medium as the Commissioner may determine.
88
without notice enter the premises of the tax payer and they make a copy of any document
or they may seize any document which is relevant in tax liability.

Once such officers have entered the premises, they will require to give them reasonable
facility an assistance in conducting exercise.

The documents or assets seized may be retained by the Commissioners for as long as it is
required to determine tax liability or for any proceedings.

In the course of accessing information, the Commissioner may seek police assistance.
Where the Commissioner wishes to conduct search between 9am and 6pm, he must do so
under a search warrant granted by a District or Resident Magistrates’ Court.

REMISSION AND REFUND OF TAX

To remit a tax is to cancel payment of such tax. Under section 125,148 the Minister may
order in the Gazette remit any tax due by a person.

Likewise, under section 125, the Commissioner may also remit in whole or in part any
interest or penalty charged where the person shows good cause.

Under section 125, the Minister is given discretional power to remit. However, the law
does not state how the discretion has to be exercised. But for the Commissioner to remit
the interest or penalties, the person charged with the tax must show good cause.

Where a person pay excess tax then the Commissioner may apply the excess in reducing
any tax due and the reminder must be refunded within 45 days.

The limitation period of claiming a refund is 3 years, where a refund is made, the
Commissioner is to pay tax payer interest at the statutory rate.

Under section 119,149 the Commissioner is empowered to compound officer under section
104-109 except offences under section 108 which has been committed by authorised and
unauthorized persons.

148
See note 143 above
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The compounding offences may be done at any time before the commencement of the
proceedings.

The power to compound offence may only be exercised where the person concern admits
in writing that he has committed the offence. Where the offence is compounded a person
concern shall not be liable for any penalty or prosecution and the tax payable shall be
final and not subject to any activity.

VALUE ADDED TAX (VAT)

Value Added Tax is a modern system of collecting indirect taxes. Is a tax which is levied
at every point of sale on the price of the commodity.

What is levied is the value added on the price of the commodity which is added from
time to time. The additional value may be due to two major reasons;

1) It is the passing of the product through various hands in the channel of

distribution.
2) It may be the value added in its price due to some activities or process undertaken
on the tax commodity.

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119.-(1) Subject to subsection (2), where any person commits an offence under Division II, other than of
a kind referred to in section 108, the Commissioner may, at any time prior to the commencement of court
proceedings -
(a) compound the offence; and
(b) order the person to pay a sum of money specified by the Commissioner but not exceeding the amount of
the fine prescribed for the offence.
(2) The Commissioner may compound an offence under this section only if the person concerned admits in
writing that the person has committed the offence.
(3) Where the Commissioner compounds an offence under this section, the order referred to in subsection
(1) -
(a) shall be in writing, specifying the offence committed, the sum of money to be paid and the date for
payment
and have attached the written admission referred to in subsection (2);
(b) shall be served on the person who committed the offence;
(c) shall be final and not subject to any appeal; and
(d) may be enforced in the same manner as an order of the High Court for the payment of the amount stated
in the order.
(4) Where the Commissioner compounds an offence under this section, the person concerned shall not be
liable for a penalty under Division I or prosecution under Division II of this part with respect to that
offence.

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VAT is the tax on the final point of sale and it is ultimately paid by the consumer. The
retailer in the distribution chain they merely acts as collecting agent and at the end of the
day they are required to remit such taxes to the Revenue Authority where they are given a
tax credit.

VAT IN TANZANIA
VAT became effective in mainland Tanzania on 1st July 1998. It was introduced by the
Value Added Tax Act, 1997 which was Act No 24/1997.

The scope of charging VAT and the imposition of tax is contained in section 3 of the
VAT Act [Cap 148 R.E 2008].

According to section 3,150 VAT is charged on supply of goods and services in Mainland
Tanzania on the importation of goods or services from any place outside Tanzania.

Where the VAT tax is paid in Zanzibar on the same rate applicable in Tanzania, then the
tax is deemed to have been paid and further tax is payable on the importation of the
goods or services to Mainland Tanzania. If the VAT tax is paid in Zanzibar at lower rate
than that applicable in Tanzania, then the difference is to be paid where the goods or
services are imported in Tanzania.

Under section 4,151 VAT is to be charged on the supply of any goods or services made in
Mainland Tanzania provided that; the supply of goods or services is made on taxable
supplies and it is made by a taxable person in the course or furtherance of any business
carried on by him.

150
Section 3.-(1) provides that; There shall be charged in accordance with the provisions of this Act, a tax
known as the Value Added Tax on the supply of goods and services in Mainland Tanzania and on the
importation of goods or services from any place outside Mainland Tanzania made on and after the 1st day
of July, 1998.
151
It provides that; 4.-(1) The VAT shall be charged on any supply of goods or services in Mainland
Tanzania where it is a taxable supply made by a taxable person in the course of or in furtherance of any
business carried on by him.
(2) The VAT on a taxable supply of goods or services shall be payable by a taxable person at the end of a
prescribed accounting period or at any time which the Commissioner may prescribe.
(3) The VAT on the importation of taxable goods or services from any place outside Mainland Tanzania
shall be charged and payable in accordance with this Act and the procedures applicable under the Customs
Laws for imported goods shall apply in respect of VAT imports.
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The VAT tax is to be paid at the end of prescribed accounting period and VAT returns
are to be filled every month.

VAT on importation of goods or services from outside Tanzania has to be charged and
payable in accordance to the VAT Act and the prevailing customs laws.

Under section 5, taxable supplies are defined. These includes; the making of gifts or loans
of goods or leasing or letting of goods on hire or the appropriation of goods for person
use or consumption by the taxable person. Even batter trade or exchange of goods
amount to taxable supplies and therefore attract VAT.

VAT REGISTRATION
Every taxable person is required to be registered for VAT. A person becomes a taxable
person required to register for VAT based on his annual or monthly turnover.

Where a person’s turnover exceeds or is likely to exceed 40 million shillings in a period

of twelve consecutive months or ten million shillings in a period of three consecutive
months, such person is termed to be taxable person. Where a person qualifies to be a
taxable person, such a person is required under section 19152 to register within 30 days.

Where a business does not make a tax supplies but it import services within a value
exceeding the threshold, then such a business is required to register for VAT.

However, under section 19 (4), the Commissioner is empowered to register any person on
the ground of national economic interest or for the protection of revenue. This provision
is used to register investors whose project have not yet commenced production.

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19.-(1) Any person whose taxable turnover exceeds, or the person has reason to believe will exceed, the
turnover prescribed in regulations made under this section, shall on and after the 1st day of January 1998,
make application to be registered within thirty days of becoming liable to make such application.
(2) An application for registration shall be made in the manner and form prescribed in the regulations.
(3) Subject to this part, the Commissioner shall register every applicant for registration who is eligible to be
registered under subsection (1).
(4) Where the Commissioner is satisfied there is good reason to do so, on grounds of national economic
interest or for the protection of the revenue, he may register any person, whether or not an application to be
registered has been made, regardless of the taxable turnover of the person.
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Once a person is registered, a certificate of a registration is issued under section 20.153

Failure to register when required to do so by law will attract the payment of the penalties
and an interest. If criminal prosecutions are persued, the person may be fined to pay two
hundred thousand shillings (200,000/=) or may be sentenced to prison for the period of
12 months or both under section 44. 154

Under section 21,155 a person may deregister for VAT where he ceases (stop) or his
turnover falls below the required threshold. Where either of the two occurs, the tax payer

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20.-(1) The Commissioner shall issue a taxable person registered under this Act with a Certificate of
Registration.
(2) A certificate of registration issued under this section shall state the name and principal place of business
of the taxable person, the date on which the registration takes effect and his Taxpayer Identification
Number and his VAT registration number.
(3) A taxable person shall show his Taxpayer Identification Number and his VAT registration number in
any return, notice of appeal or other documents used for the purposes of this Act; and display his certificate
of registration in a conspicuous position at his principal place of business.
(4) The Commissioner shall provide on request sufficient copies of the certificate of registration, clearly
marked “copy”, for a copy to be displayed at all premises which are part of the business for which the
taxable person is registered
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44.-(1) Any person who –
(a) being required to apply for registration under this Act fails to do so within thirty days after becoming
liable to apply; or
(b) contravenes any term or condition of his registration; or
(c) holds himself out as being a taxable person when he is not; commits an offence and upon conviction is
liable to a fine not exceeding two hundred thousand shillings or to imprisonment for a term not less than
two months but not exceeding twelve months, or to both the fine and imprisonment.
(2) Notwithstanding any penalties which may be imposed on a person failing to apply for registration, or on
any arrears of tax due to be paid, the person shall be liable to pay interest on the arrears in accordance with
section 28.
(3) A taxable person who fails to notify the Commissioner of any change in business circumstances under
section 23 of this Act within thirty days of becoming liable to do so commits an offence and upon
conviction is liable to a fine not exceeding one hundred thousand shillings.
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21.-(1) Any person who ceases to be liable to be registered under this Act shall notify the Commissioner
in writing within thirty days of ceasing to be liable, and a person failing to do so commits an offence and
upon conviction is liable to a fine not exceeding fifty thousand shillings.
(2) If the Commissioner is satisfied that a person is no longer required to be registered he shall, subject to
any other conditions prescribed in this Part or in regulations, including the payment of all VAT due under
this Act and on stock and assets, cancel the registration with effect from the date of the notification or from
any other date which may be determined by the Commissioner and the Commissioner shall notify the
person in writing of the date on which the cancellation of the registration takes effect.
(3) Where a person ceases to be taxable, any goods then part of the assets of a business carried on by him
shall be deemed to be supplied by him in the course or furtherance of his business immediately before he
ceases to be a taxable person, unless –
(a) the business is transferred as a going concern to another taxable
person; or
(b) the VAT on the deemed supply does not exceed five thousand shillings.
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has to notify the Commissioner within 30 days and has to make an application for
deregistration.

EXEMPTIONS AND ZERO RATING

These are contained under sections 9,156 10157 and 11158 together with First, Second and
Third Schedule.

The VAT Act exempts three types of supplies from being charged VAT.

1. Exempt supplies.
2. Zero-rated supplies.
3. Special Relief supplies.

Exempt supplies
Are those supplies listed in the First Schedule which are exempted from VAT. Such
supplies include; healthy supplies, water, education supplies, books and news papers,
finance and insurance, agricultural services and implements, crops and livestock,
pesticides, tourist services, funeral services, games of chance, computers etc.

Zero-Rated supplies
Are contained in the Second Schedule. These are those supplies whereby the supplier
may claim input deduction tax. An input deduction tax is the amount of tax which is paid
by the purchasing dealer to the selling dealer. According to section 16(1) of the VAT Act,

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9.-(1) A supply of goods or services is zero-rating by virtue of this subsection if the supply is of a
description specified in the First Schedule to this Act.
(2) Where a taxable person supplies goods or services and the supply is zero-rated no VAT shall be charged
on the supply, but it shall in all other respects be treated as a taxable supply.
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10.-(1) A supply of goods or services is an exempt supply if it is of a
description specified in the Second Schedule to this Act.
(2) The VAT is not chargeable on an exempt supply, and deduction or credit of input tax is not allowable
on purchases made in respect of the exempt supply.
158
It provides that; The persons and organisations listed in the Third Schedule to this Act shall be entitled
to relief from VAT within the limits and conditions prescribed in that Schedule subject to procedures which
may be determined by the Minister.

94
it is any amount of tax which is payable in respect of supply of goods or services supplied
by a taxable person during a prescribed accounting period.

Supplies which are zero-rated include; export of goods and certain taxable services. They
also includes; the supply of locally manufactured sacks, the supply of local manufacturer
of various agricultural implements, fertilizers or pesticides and supply of duty free goods
to be sold on ships and aircraft which go outside Tanzania.

Special relief supplies

These are contained in the Third Schedule. These are supplies to or imports by designated
categories of persons that are entitled to special relief from VAT that would otherwise be
charged. The relief is conditional on certain procedures to be followed.

The designated category of persons includes; Diplomats or Diplomatic Missions,

charities, non-profit organisations, or religious organisations, registered education
establishments, water drilling companies, The Bank of Tanzania, personal effects of
traveler or deceased persons, project funded under technical aid or by donors etc.

PLACE, TIME AND VALUE OF SUPPLIES

PLACE OF SUPPLIES
This is provided for under section 7 of the VAT Act. Goods are deemed to be supplied in
Tanzania if their supply does not involved their removal from or to Mainland Tanzania or
their supply involves installation or assembly at place in Mainland Tanzania in which
they are removed.

Where the supply of goods is outside Tanzania Mainland or their installation or assembly
is outside Mainland Tanzania such goods are deemed not to be supplied in Tanzania
Mainland.

Likewise, services are deemed to be supplied in Tanzania if the supplier of the service
has a place of business in Mainland Tanzania or no place of business but his usual place
of residence is in Mainland Tanzania.

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TIME OF SUPPLY
The time of supply is provided for under section 6 of the VAT Act. The time of supply of
goods or services it is deemed to be the date of which the tax on supply become
chargeable. The time of supply is also called the tax point.
The time of supply of goods is the earlier of the following;
Firstly, where the goods are to be removed then the date of removal.
Secondly, if the goods are not to be removed, then on the date they are made available to
the customer or the date tax invoice is issued or the date payment is received for all or
part of the supply.

In the case supply of services, the time of supply is the earlier of the following;

1. The date the service is performed or rendered or

2. The date a tax invoice is issued

3. The date payment is received

In case of importation of goods, VAT must be paid at the time custom duty is paid.

VALUE SUPPLY
It is contained under section 13 of the VAT Act. If the supply is for monetary value, then
the value of the supply is taken to be the taxable consideration. Where the consideration
is not monetary, or it is only partly monetary, then the value of the supply is open market
value.

The open market value is deemed to be the value of goods or services that would fetch in
the ordinary course of business.

VAT COMPLIANCE
VAT’s return has to be filled every month. A taxable person is required to record each
supply made and account for VAT. A taxable person will normally charge VAT at the
time of supply is made.
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It is now mandatory for every person registered for VAT to use Electronic Fiscal Devices
(EFDs). The EFDs keep a record of transactions for a period of five years.

VAT returns must be filled in the last business day of the month following the month in
which the relevant transactions have been incurred.

Failure to file returns within time attracts penalties and interests. The penalties and
interests are covered under section 45.159

OBJECTIONS AND APPEALS

Where a person is not satisfied by an assessment made by the Commissioner General,
such person must lodge an objection within 30 days from the date of an assessment.

If assessment is not resolved and Tanzania Revenue Authority (TRA) confirms the
assessment and taxpayer still not satisfied then he must lodge notice of intention to appeal
with the Tax Revenue Appeals Board (TRAB) within 30 days of the decision. He must
further lodge the statement of the grounds for appeal within 45 days from the date of the
notice of confirmation of the assessment.

The appeal process may also be used in cases where the taxpayer wishes to dispute
calculations of the amount due for refund.

Where a TRAB has issued a decision and taxpayer is still aggrieved, he may further
appeal to the Tax Revenue Appeals Tribunal (TRAT). The aggrieved taxpayer must
lodge a notice of intention to appeal against the Board’s ruling within 30 days of the
decision and statement for the grounds of appeal must be submitted within 15 days of
lodging the notice of intention to appeal.

Where a taxpayer is not satisfied with the TRAT decision then he may appeal to the
Court of Appeal (CA).

159
It provides that; Any taxable person who fails to submit a return or pay tax by the due date commits an
offence and upon conviction is liable to pay a fine not exceeding five hundred thousand shillings or to
imprisonment for a term not less than two months, but not more than twelve months, or to both the fine and
imprisonment.
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 RESOLUTION OF TAX DISPUTES: A BRIEF REVIEW OF THE LAW IN
TANZANIA

By Professor Luoga, F.D.A.M

[Prepared for submission by the Tax Revenue Appeals Tribunal to an East African
Conference]

1. Introduction
Disputes between tax authorities and taxpayers are inescapable. This is irrespective of
how well a tax system is developed. The mechanisms for resolving tax disputes are very
critical in ensuring that tax administration is not only efficient, but also respectable and
fosters public trust.

Tax administration easily portrays the nature of the system of governance that is in place.
It can be excessively coercive to reflect the undemocratic governance structures in the
polity. It can be haunting whereby taxpayers are looked upon as perpetual suspects to be
closely watched and monitored. Hence massive powers are to be vested unto tax
administration authorities which at times seek even to diverge from due process and basic
citizen rights.

Tax administration easily yields to pressures for revenue collection and often leads to
temptations to use powers to override complaints or resistance by taxpayers. This is often
the case in developing countries where the taxpayer base is narrow and tax infrastructure
is undeveloped. For example, it is not uncommon that the Governments and tax
authorities are unable to identify taxpayers because there are no national identity cards,
no social security numbers that facilitate the tracking of taxpayer activities and where
access to public services is not based on any well tailored identification process. Tax
authorities have to deal with a very restricted taxpayer base and consequently seek to
squeeze for revenue as much as possible. This situation fosters lawlessness in tax
administration and requires highly efficient dispute resolution mechanisms.

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 2. Policy Objectives of Tax Disputes Resolution System
Ideally, any tax disputes resolution system must aim at ensuring that the tax assessed is
correct. Taxpayers are vested with the right to pay only the correct amount in taxes, no
more, no less. Hence the mechanisms for resolving tax disputes must engender the
fostering of fairness in tax assessment and accountability by the officers concerned.

Tax disputes mechanisms must also seek to address the public interest of ensuring that
tax revenue is not tied down by endless and protracted proceedings. The Government
needs efficient flow of revenue.

Taxpayers also need to have certainty and finality in the discharge of their tax liabilities.
Thus tax disputes procedures require conclusiveness. Prolonged and inconclusive
procedures affect businesses and impair tax entities’ ability to effect forward planning.

It is also a policy objective that tax disputes mechanisms adhere to due process and do
not infringe rules of justice and other laws. Disputes systems that depart from known
norms of administration of justice easily give rise to taxpayer resistance and disrespect of
the tax laws. Thus balances have to be struck between the need for revenue and fairness
in dealing with taxpayers.

3. Requisites of an Effective Disputes System

3.1 Early Identification of Issues

Tax disputes arise when the tax authority and a taxpayer fail to reach an agreement on a
tax position in a taxpayer’s return. This often prompts the audit of the taxpayer. It is
desirable that at such an early stage issues that are contested are clearly identified so that
no time is wasted and an impasse created due to haphazard dealing with unfocused
matters. The objective is to foster a high level disclosure of relevant information that will
encourage an informed discussion between the parties. Mutual trust and an informed
discussion facilitate the parties to place “all cards on the table”. Suspicion of each other is
the first communication inhibitor and invites distortion of facts and obscures the real
issues that should be resolved. Often where such is the case an impasse develops and
complicates the dispute resolution process.
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3.2 Administrative Neutrality and Impartiality

One of the main hitches in resolving tax disputes is what has invariably been described as
the “audit mindset”. In principle a tax authority has to maintain appeals officers who will
review objections without having been involved in the assessments or reassessments.
Where appeals are reviewed by the same assessors experience show that they tend to be
suspicious and confrontational individuals who are bent to argue in favour of their
positions and not impartial application of the law. The audit mentality is the cause of
many objections finding their way to appellate organs.

In many developed tax systems it is now accepted that it is important to instill greater
public confidence in the objection resolution systems. Greater transparency is required in
order to secure the independence of appeals officers. In addition, wider access to legal
advice should be availed to appeals officers to help them identify and assess legal issues
that will ensure the collection of relevant and sufficient information for an accurate or
reasonable appeal decision.

3.3 Accountability Rules

Tax disputes can lead to serious financial implications to the tax authorities and taxpayers
alike. An arbitrary decision by a tax officer may cause the Government serious monetary
losses through orders for payment of costs to successful appellants. Similarly, an arbitrary
decision that cannot be efficiently challenged by a taxpayer can be very perilous. For
example, many importers are held at ransom by customs officers because there is no fast
and effective appeals system. Objections are handled through non-transparent procedures
and there is no time prescribed for making decision. Thus importers have to pay
arbitrarily demanded duties while waiting for decisions on their objections without the
law assuring them when such decision will be made.

Where there are no rules of accountability by tax officers it becomes easier to fetter the
dispute resolution mechanisms by simply ignoring the objections by refraining from
making any decision for as long as it takes. Accountability rules are not intended to be
handcuffs on the tax officers, rather they are intended to ensure quality delivery of

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services and control divergent behaviour. The rules also lend respectability to the system
by the general public.

Accountability rules are critical where wide extra-judicial discretionary powers are
conferred upon the revenue commissioners. It has been cautioned that state coercion is
more visible in taxing powers than anywhere else.

3.4 Expediency
Tax disputes mechanisms require the highest degree of expediency. This virtue can easily
be impaired where the law permits tax authorities to abstain from decision making. The
attitude by tax officers where taxes have already been enforced is to leave objections
undecided until such time opportunity arises to justify the retention of the wrongfully
collected taxes through escrow claims. This malpractice has invariably earned tax officers
names like “tax raiders” or “tax robbers” and eroded public trust and confidence in the
dispute resolution systems. A respectable adjudication system demands predictability in
getting a decision. Without proscribing the decision making processes tax disputes at
times take up to 6 or 8 years to be resolved.

3.5 Expedited Procedures

Tax disputes have to be resolved expeditiously. This necessity has often called for special
tax courts or adjudication bodies to be established for tax matters. Expedited procedures
need to be varied depending on the incidence of the taxes. For example, customs duties
have to be paid before goods are cleared from the port of entry. A procedure that
envisages a resolution process that may last for more than seven days may not be ideal.

Tax disputes may be on questions of law or of facts or mixed law and facts. Where the
dispute is purely on a question of law it would be more efficient to have expedited
resolution by reference of the specific question to the adjudication body rather than drag
the dispute through lengthy appeals procedures. The parties should be able to agree on
the specific question that should be decided and state a case for decision by the appellate
organ. A good example is where the dispute hinge on the definition of the word
“corporation” in order to resolve whether a partnership firm that has incurred capital
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expenditure qualifies as a corporation for a deduction under the previous Income Tax Act
1973. Neither the revenue commissioner nor the taxpayer has competence to provide an
authoritative definition. In such a case it appears wasteful for the parties to indulge into
further dialogue instead of referring the matter to the appellate authority.

Expedited procedures require the use of very clear and precise objections, appeals, as
well as, case stated pleadings. Always the pleadings must show the points of law
disputed, or where points of fact are disputed the same be precisely stated. Inefficient
framing of complaints or disputes is a cause of delays in resolving them. For example in
Canada, pleadings in tax disputes are initiated by the issuance of a Notice of Proposed
Adjustment (NOPA) and the taxpayer must promptly give a Notice of Response (NOR)
and then the parties will issue their respective Statements of Position (SOP). Before the
SOP is issued the Inland Revenue may serve the taxpayer with a Disclosure Notice. This
happens where the Inland Revenue rejects the NOR. The disclosure Notice requires both
the Inland Revenue and the taxpayer to detail in writing their respective Statements of
Position. The Disclosure Notice is an important document because it triggers the
application of the evidence exclusion rule which limits any challenge by the taxpayer and
the Inland Revenue to the facts, evidence, issues and propositions of law disclosed in
their respective SOPs. The NOR issued by the taxpayer must

• Specify the items in the NOPA that the taxpayer considers to be in error;
• Specify the tax laws that are relied on;
• Outline the facts contained in the NOPA that the recipient considers to be in error;
• Outline any further facts on which the taxpayer relies;
• Outline any additional legal issues that the taxpayer considers arise in respect of
the NOPA; and
• State the propositions of law relied upon in respect of the response notice
The SOP by each party must

• Give an outline of the facts on which the party intends to rely;

• Give an outline of the evidence on which the party intends to rely;
• Give an outline of the issues that the party considers will arise; and
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 • Specify the propositions of law on which the party intends to rely.

3.6 Time Limit

Tax disputes need to be subject to strict time limits. This is in the interest of both the tax
authority and taxpayers. Unresolved disputes tie down tax revenue and are perilous to
businesses. It is one of the important rights to taxpayers that disputes are determined as
expeditiously as possible. The laws should set clear time limitations in respect of
objections and appeals.

4. The Context of the Review

The purpose of this discussion paper is to highlight the deficiencies that have been
experienced in the tax disputes procedures in Tanzania. The objective is to make
propositions that will make the dispute resolution procedure fairer, faster and more
efficient. The propositions should also impact of effecting developments in tax
administration that aim to do away with the imbedded practice of amending the laws to
cocoon tax authorities instead of aligning them with good and efficient tax administration
practices.

5. The Tax Dispute Resolution Process

A Brief Overview of the Pre-TRAA Procedures

Before the enactment of the Tax Revenue Appeals Act 2000 (TRAA) each tax legislation
prescribed for its own procedures for handling tax disputes. The Income Tax Act 1973
provided for the objection procedure followed by appeals to the Income Tax Appeals
Board and a further appeal to the Tax Appeals Tribunal. The appellate bodies were not in
continuous existence. For example since 1973 the Tax Appeals Board was not established
until 1989. It functioned for hardly three years and ceased to function when its then
chairperson Honourable Madam Judge Bubeshi was appointed to be a judge of the High
Court of Tanzania. It resumed functioning sometime in 1999.

In the case of sales tax, the then Sales Tax Act 1976 envisaged the creation of a Tax
Appeals Tribunal. The same was never created until the legislation and the tax were

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repealed in 1995 with the introduction of the value added tax that replaced the sales tax.
The legislation provided for sales tax appeals to be handled by the High Court until such
time the tribunal was established. There were no special procedures and hence appeals
were preferred using ordinary court pleadings.

Stamp duty procedures were slightly different. The Stamp Duty Act 1972 adopted the
reference mechanism. Impugned decisions by the proper officers were first subject to
adjudication by the same proper officer who assessed the duty. Thereafter the dispute was
supposed to be referred to Commissioners for stamp duty disputes. These were the
Attorney General, Commissioner for Lands and the Commissioner for Customs. The
legislation required the Minister to make rules to guide the discharge of functions by the
Commissioners but the same have not been made to date.

The pre-TRAA disputes procedures show that for a long time Tanzania has not had any
effective tax dispute resolution system. Invariably taxpayers resorted to prerogative
proceedings to restrain offending decisions by the revenue commissioners. Since such
proceedings are often cumbersome and expensive not many tax disputes found a day in
the courts. It is likely that many taxpayers developed the habit of using subterfuge in
dealing with tax matters and there have been allegations that corruption became endemic
with tax officers who operated as assessors, accusers, prosecutors and judges all rolled in
one.

The Tax Revenue Appeals Act 2000

5.2.1 A Brief Background to the TRAA

The TRAA caters for disputes resolution in respect of all the taxes administered by the
Tanzania Revenue Authority (TRA).The benefit of time indicates that the TRAA was
drafted from a tax administration vantage point. While it adopts all the main provisions of
the previous income tax disputes resolution under the repealed Income Tax Act 1973, it
introduces some variations that aim at consolidating the powers of revenue
commissioners in enforcing collection of assessed taxes even where the same are
disputed.

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A number of cases handled by the Tax Revenue Appeals Board (TRAB) and at times the
High Court show that the exercise of taxing powers by tax officers is often high handed.
For example, there have been instances where astronomical assessments have been
issued; then an immediate demand for payment served upon the taxpayer. The latter
urgently lodges a notice of objection and finds that the demand for payment was in fact a
ruse for him or her to file an objection so that it becomes legitimate for the tax officer to
make a demand for payment of half the assessed tax and promptly resort to extra-judicial
collection measures by issuing a notice of agency to the taxpayer’s banker or issuing a
distress warrant. With hindsight it becomes apparent that the measures taken by the tax
officers are not intended to initiate an orderly procedure for ascertaining tax liability and
to facilitate amicable dispute resolution process, but rather to subject the taxpayer to
extra-judicial collection measures before the dispute process is on course. This is a
frequent problem which places the TRAB and the Tax Appeals Tribunal (TRAT) in a
rather awkward situation.

5.2.2 The Dispute Process

The dispute process commences immediately after an assessment to tax has been issued
and served upon a taxpayer and the latter contests the same. The process commences with
objection procedures, followed by the first appeal to TRAB, then a second appeal to
TRAT, and finally a further appeal to the Court of Appeal of Tanzania.

5.2.3 A Critical Overview of the Objection Procedures

1. Notice of Objection
Section 12 (1) of TRAA requires a taxpayer who seeks to contest an assessment to tax to
serve a notice in writing to the Commissioner General objecting the assessment. This is
referred to as the Notice of Objection. The law does not prescribe for any format for the
Notice of Objection. Section 12 (4) simply requires that the notice shall contain a
statement in a precise form, of the grounds in respect of which the objection is made.

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The experience so far is that the taxpayer or his/her tax consultant is at liberty to adopt
the manner of presenting the objection. Some taxpayers simply state that the assessment
is contested for being excessive and append an explanatory statement intended to convey
the taxpayer’s arguments.

2. Procedure after Notice of Objection

Before the amendments effected by the Finance Act 2004 (FA 2004) what followed after
admission of a notice of objection was completely under the control of the tax officer
handling the objection. Often the responsible officer would embark upon an endless
requisitioning of records and documents. At times the queries to the taxpayer may not
relate to the objection or the documents demanded may not be applicable to the objection.
There have been times when taxpayers have been required to submit a landing certificate
or a certificate of origin where no such certificates are issued. The point emphasized is
that what the officer may demand is totally discretionary.

3. Observed Deficiencies
Several deficiencies have been encountered in the course of adjudicating tax disputes.
The first and which has been observed above is that there is no time limitation for
disposing objections and before the amendments effected by FA 2004 the Commissioner
was not under any obligation to state his position on the admitted objection. The practice
was for the Commissioner to notify the taxpayer that the objection has been rejected and
issue a confirming notice.

Perhaps this is one of the deficiencies in the tax dispute settlement procedures because
the process was not facilitative for the parties to place “all the cards on the table”. The
consequence is that it became difficult for the parties to identify the real issues to be
addressed in resolving the dispute.

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The above deficiency was further exacerbated by the fact that the same assessor who
raised the assessment had the mandate to handle the objection. The audit mindset often
led to impasse and impelled resort to the appeals procedure.

4. TRAB Interventions

The TRAB has over the years demanded compliance with due process. Specifically it has
in the past ordered that the Commissioner furnish reasons for his decisions. This has now
been legislatively addressed by the amendment to section 12 by the FA 2004. Section 13
(2) (as amended) now requires that where the Commissioner proposes to amend the
assessment in accordance with the objection and any further evidence, or proposes to
refuse to amend the objection he shall serve the objector with a notice setting out the
reasons for the proposal. This is a very welcome improvement to the dispute resolution
procedures. It entitles the objector to make submissions within 30 days upon receipt of
the Commissioner’s proposal on his/her agreement or disagreement with the proposed
amended assessment or the proposed refusal. The amendment means that the
Commissioner is now not allowed to determine the objection before his position is
communicated to the objecting taxpayer so that the latter is accorded the right to be
effectively heard.

5. Unaddressed Deficiencies
Four things are still marring the objection procedures. The first is the omission to set a
time limit for determining objections. The omission has cultivated laxity on the party of
TRA in improving administrative arrangements to enable efficient disposal of objections.
For example, one would expect that ongoing administrative reforms should have entailed
the appointment of objection officers who do not handle assessments and are trained to
deal with objections impartially. This is the practice in a number of other jurisdictions. It
is unlikely that TRA would have continued the current practice if the law were specific
that objections must be fully disposed within a prescribed time limit.

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The second is the lack of format or requirements as to contents of the notice of objection.
The Canadian example given earlier is very illuminative. For example the notice of
objection could adopt the requirements for the NOR; Whilst the proposal by the
Commissioner could adopt the requirements for the NOPA. In order to ensure that the
parties do not conceal information or do not intentionally mislead the other party, before
the Commissioner determines the objection each party should certify the correctness and
truthfulness of what has been conveyed to each other. This would operate the same way a
Notice of Disclosure operates to bar a part from bringing in new evidence or arguments
on appeal. The prescriptions will definitely impel the parties to handle all preliminaries
within a prescribed time and the objections officers to make decisions within such
prescribed time.

The third is the continued practice of letting tax assessors handle objections against their
own assessments. This not only diverges from rules governing due process, but creates a
fertile ground for corruption and coercive handling of objectors. There have been
instances where some assessors have written to objectors inviting them to interviews
without their consultants or legal counsels and then proceeded to intimidate them with
threats of immediate enforcement of collection through bank accounts and distress. It is
an accepted fact around the world that a good tax system should strive to ensure that tax
assessors do not meet with assessed taxpayers after issuance of the notice of assessment.
Many appeals emanate from the audit mindset of these assessors and at times
unnecessarily.

The fourth is the exercise of powers in dealing with objections. These include the powers
to admit or refuse to admit an objection and the power to grant or refuse to grant waiver
pending the determination of the objection. The experience at TRAB was that previously
the tax officers wantonly exercised these statutory powers even where they were not
delegated with such functions. TRAB has on a number of occasions declared exercise of
powers by officers to whom no such powers have been delegated to be incompetent.
Further, the powers have previously been exercised without furnishing reasons to the
affected taxpayers. Again TRAB found this to be inimical to natural justice and basic

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rights of the taxpayer, as well as to due process. In a number of appeals TRAB found it
compelling to nullify the decisions given without reasons.

Perhaps it is high time the objection procedures are re-examined in the light of fairness,
efficiency and due process. Consequently there is need to revise the attendant rules and
address the deficiencies pointed out above.

5.2.4 A Critical Overview of the Appeals Procedure

1. The Jurisdiction of TRAB

The jurisdiction of the TRAB is in respect of appeals and other proceedings. In respect of
appeals, these may either arise from objections, that is, appeals emanating from tax
assessments (section 16), or from other decisions of the Commissioner General made in
the course of the discharge of any function conferred upon him under the tax laws that are
administered by the TRA (section 40), or in respect of further appeals that may be lodged
with TRAB under section 14 (1) in respect of calculation of amounts for refund,
drawback or repayment, refusal of refund or repayment and decisions to register or
refusal to register a person for VAT purposes.

In respect of other proceedings TRAB is vested with sole jurisdiction to entertain all
proceedings of a civil nature in respect of disputes arising from revenue laws
administered by TRA (section 7). In addition TRAB can also determine objections
referred to it under section 14 (2).

2. Appeals
TRAA does not lay down separate procedures for appeals emanating from assessments
and those that do not arise from assessments. In the case of the further appeals under
section 14 (1) TRAA specifically treats such appeals as if they were appeals against
assessments.

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The Tax Revenue Appeals Board Rules 2001 lay down procedures for lodging appeals
with TRAB. These apply to the further appeals under section 14. In practice and in
accordance with the requisites under Rule 7 (2) the Rules also apply to appeals emanating
from acts and omissions or decisions of the Commissioner General.

The procedures on appeal assume that the parties clearly identified the real issues before
recourse is had to TRAB and were thus capable to address the issues. It also assumes that
“all cards were on the table” and each party had opportunity to address and submit on the
information exchanged. Both assumptions tend to be wrong in many instances and the
TRAB is not in a position to ascertain what had been previously agreed or a non-issue
during the preceding stage. Hearing of the appeals addresses all grounds raised in the
statement of appeal.

One problem that has marred appeals procedures is the fact that TRA have on several
occasions failed to observe the proper exercise of powers. For example, confirming
notices have been issued by incompetent officers or before other prescribed steps have
been taken. Similarly on the part of taxpayers at times appeals are lodged before a
decision has properly been made. Sometimes the aggrieved taxpayers are not at faulty.
Decisions are communicated to them vide letters which advise them of their respective
rights of appeal. The contested question that often ensues is whether a decision has been
made. Perhaps TRAB will need to develop rules akin to the “final decision rule” when
disputes are brought for adjudication after a series of exchange of communication.

3. Procedures

(a) Appeals from Assessments

Where an appeal emanates from assessments to tax the appellant taxpayer has to file a
notice of intention to appeal with TRAB within 15 days after being served with the
decision of the Commissioner General and thereafter lodge a statement of appeal within
30 days from the date the decision of the Commissioner General is served upon him/her.

The documents of appeal are in prescribed format and they aim at ensuring that parties
provide all requisite information and grounds to the TRAB before hearing commences.
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However, perhaps the prescribed statement of appeal needs a bit of improvement
particularly in respect of the statement of facts and reasons in support of the appeal.
Currently this part of the statement of appeal allows appellant to formulate the statement
as they deem efficient. The experience suffered so far show that where the statement is
prepared by a person who is not conversant with the art of drafting pleadings irrelevant
matters which at times are prejudicial to the party concerned are included. The flow of
facts tends to be haphazard and make the identification of issues a difficult task. At times
the statements contain arguments instead of stating facts or grounds with clarity. Some of
the improvements needed are to reorganize the part of the statement that gives facts and
reasons into sub-parts as follows-

• Facts relating to the dispute (material facts)

• Facts contested by the appellant (issues of fact)
• Grounds or reasons for contesting the facts
• Evidence intended to be relied upon in proof of facts
• Points of law in support of the appeal (issues of law)
• Proposition of law intended to be relied upon

As explained earlier, the objective is to ensure that the parties place all their cards before
the TRAB. This will make it possible for TRAB to identify which issues are triable in
disposing off the appeal. Irrelevant matters can be purged to save time and keep the
proceedings focused. An efficient statement of appeal is very valuable in assisting TRAB
to prepare for the appeal and at times identify the need (if any) to call for further
clarifications and possibly issue a witness summons to an expert. Focused proceedings
take short time to last and enable TRAB to deal with more appeals in a single sitting than
is currently the case.

The current hearing procedures are fairly relaxed and rigidity of due process procedures
removed in order to enable a more serene environment for the proceedings. The pace in

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disposing off appeals within the current framework has been very satisfactory and
commendable. However, this does not mean that the procedures meet the ends of justice
in every case. For instance, the current procedures are highly unsuitable for appeals
emanating from assessments to customs duties. In all fairness, an aggrieved importer
cannot efficiently access TRAB and obtain timely relief. Redress must be sought after
one has been forced to suffer the wrong first. This situation is clearly an affront to justice.
As pointed out earlier, it is desirable that procedures for settling tax disputes are tailored
to reflect the special processes in the administration of each tax. Where the administration
of the tax entail special circumstances that are uncommon in the case of other taxes
special procedures need to be devised. This is typical of customs disputes which demand
fast tracked disposal procedures. It is desirable that an objection against a customs
assessment be disposed of in not more than a fortnight. Ordinarily many objections arise
either from classification of goods in order to select the rate applicable, or valuation of
goods. Usually all the documents relating to the goods are available and in the course of
customs clearance the goods ultimately can be physically inspected. If the objections are
well stated they should clearly indicate whether they are based on points of law or points
of fact. Where points of law are at issue it would be preferable to refer them to TRAB for
immediate direction by way of stating a case rather than engage in an endless contention.

One dilemma in dealing with appeals from tax assessments is how to deal with instances
of illegal or otherwise invalid assessments. Ideally, a taxpayer has a right of objecting an
assessment and subsequently lodging an appeal. An assessment must be an assessment
that has been issued according to law. Where an assessment has not been issued
according to law it means that in the eyes of the law there is no assessment in existence
and which is capable of being objected to, or appealed from. For example, in one instance
an assessment was issued against a taxpayer who duly lodged a notice of objection. A
Regional Manager within TRA entertained the objection and notified the taxpayer that his
objection has been refused. Instead of issuing a proposal as required by section 13 (3) of
TRAA (as amended) the manager proceeded to issue a confirming notice. Clearly the
confirming notice is invalid but the aggrieved taxpayer invariably will file a notice of
appeal. This is because there is no clear procedure for striking out invalid notices of
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assessments. It is left to creative tax practitioners to convince TRAB of its jurisdiction
under section 7 to entertain complaints of non-conformity with the law as a civil
proceeding. Again this is one of the matters which need to be clearly addressed in the law
governing the resolution of tax disputes.

(b) Non-Assessment Appeals

Increasingly appeals are lodged against decisions of the Commissioner General that do
not emanate from objection proceedings. TRA has on many occasions sought to convince
TRAB that all disputes with the Commissioner General should be treated as disputes
from assessments and therefore one should not access TRAB before exhausting the
objection procedure. For example, recently there has been a complaint on the wrongful
application of tax collection procedures. The distraint procedure under the repealed
Income Tax Act 1973 is no longer part of the income tax law. There is no substantive
provision in the current law on levying distress although the Distraint Regulations 1975
were saved. While the Commissioner General purported to exercise powers to levy extra-
judicial distress, the taxpayer contested that there were no such powers under the law. If
TRA’s position on non-assessment appeals is correct it would be very absurd for the
taxpayer to file a notice of objection to the wrongful distress while it is being levied. The
current procedures do not address such a situation. TRAB has developed the practice of
dealing with such cases by way of applications by chamber summons. It would be
necessary that the law is revised to provide for clear procedures in respect of all the
proceedings likely to be taken with TRAB.

(c) Procedures in Respect of Other Matters

Perhaps one of the matters that beg for the setting of procedures is the process of
referring objections to TRAB for determination. Section 14 (2) of TRAA permits an
aggrieved taxpayer to refer an objection to TRAB but there are no rules to guide how
such reference is to be made. It is understandable that there may be instances of
indecision by the Commissioner General or a direct abstention from making a decision.
In any case, non-determination of objections is always injurious to taxpayers.

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It is desirable that a time limit be fixed for the determination of an objection. Upon lapse
of the prescribed time the taxpayer should be given the option to refer the objection to the
TRAB. Similarly, where an impasse arises and the Commissioner abstains from
determining an objection the aggrieved taxpayer should be allowed to refer the objection
to TRAB. The procedure should entail the giving of a notice to the Commissioner of the
intention to refer the objection to the Board. The notice should set forth the reasons why
the reference is resorted to. A 3 months notice may be sufficient to enable the
Commissioner determine the objection. The assumption is that either all information has
been provided or the dispute is purely on a point of law and the Commissioner is failing
to make a decision on account of lack of conversance. Parties who have reached a limit in
understanding the legalities involved in the issues disputed should not be left to grapple
without intervention. The tax dispute resolution procedures should therefore also adopt
rescue measures.

6. Conclusions and Recommendations

The discussion paper has endeavoured to review the tax disputes procedures and explain
the existing deficiencies. It has also made suggestions for improvements. However, it is
important that the subject of tax disputes resolution is examined in a much broader sense
in the context of tax administration and taxpayers’ rights. In this context it can be
observed that tax disputes can be minimized if a re-appraisal of the attendant laws
includes the need of enacting a law on tax administration that will provide clear rules on
how assessments and other processes must be dealt with. It may not suffice to review
appeals procedures while tax administration practices remain insufficiently guided.

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