TAX LAW CLASS NOTES

P the Don

TABLE OF CONTENTS
TABLE OF CONTENTS.................................................................................................................i

WHAT IS TAXATION...................................................................................................................7

THEORETICAL CONCEPTS FOR TAXATION..........................................................................8

1. The Basis of the Tax....................................................................................................................8

2. Incidence of a Tax.......................................................................................................................9

3. Nature of the Tax Levied...........................................................................................................10

OBJECTIVES OF TAXATION....................................................................................................10

CHARACTERISTICS OF A GOOD TAX...................................................................................11

THEORIES OF TAX DISTRIBUTION........................................................................................12

BASIC CONCEPTS IN TAXATION...........................................................................................13

1. TAX UNIT.................................................................................................................................13

(a) The Individual Tax Unit.....................................................................................................13

(b) The Married Couple Unit....................................................................................................13

(c) The Family Unit..................................................................................................................14

2. TAX BASE................................................................................................................................14

(i) The Income Tax Base.............................................................................................................14

(ii) Expenditure Tax Base.........................................................................................................15

(iii) The Wealth Tax Base..........................................................................................................15

INTERPRETATION OF TAX STATUTES.................................................................................16

SOURCES OF TAX LAW............................................................................................................16

1. Statutes...................................................................................................................................16

2. Case Law................................................................................................................................16

3. Departmental Practice............................................................................................................17

CONSTRUCTION (INTERPRETATION) OF TAX STATUTES..............................................17

GENERAL GUIDELINES IN CONSTRUING TAX STATUTES..............................................18

i) The Choice of Method of Interpretation.................................................................................18

ii) A Position of Collateral Literature...........................................................................................19

iii) Comparison with Foreign Law................................................................................................20

iv) Administrative Practices..........................................................................................................21

RULES FOR CONSTRUING TAX STATUTES.........................................................................21

1. The Strict Construction Rule.....................................................................................................21

2. Construction by Considering the Statute as a whole.................................................................24

3. Words of the Statutes must be Read in Their Context...............................................................25

4. Departure from the Literal Construction of Statutory Language...............................................25

5. Misconception of Existing Laws...............................................................................................25

6. Provisions Dealing with Tax Machinery...................................................................................25

7. Tax Acts must be considered as a whole...................................................................................25

8. Two Statutes Dealing with the Same Matter.............................................................................26

9. Consolidating Statutes...............................................................................................................26

TAX EVASION AND TAX AVOIDANCE.................................................................................26

TAX EVASION.............................................................................................................................26

TAX AVOIDANCE......................................................................................................................27

METHODS OF AVOIDING TAX................................................................................................28

1. Income Splitting.....................................................................................................................28

2. Capitalization of an Income...................................................................................................29

3. Income or Asset Shifting........................................................................................................29

4. Sheltering of Income..............................................................................................................30

5. Dividend Stripping.................................................................................................................30

CRITERIA (METHODS) USED TO DETERMINE TAX AVOIDANCE..................................31

1. Arm’s length concept.............................................................................................................31

2. Inadequate Consideration & Reasonable Allocation..............................................................31

3. Benefits...................................................................................................................................32

4. Employees..............................................................................................................................32

5. The Business Purpose Test.....................................................................................................32

THE CONCEPT OF INCOME.....................................................................................................32

Distinction between Income and Capital.......................................................................................32

INCOME TAXATION..................................................................................................................34

Basis of Taxation...........................................................................................................................34

1. CITIZENSHIP OR NATIOLAITY...........................................................................................35
2. DOMICILE................................................................................................................................35

3. COUNTRY OF SOURCE AND COUNTRY OF DESTINATION.........................................35

4. RESIDENCE.............................................................................................................................36

Meaning of Residence...................................................................................................................36

RESIDENCE OF A PARTERSHIP..............................................................................................37

RESIDENT TRUST......................................................................................................................37

RESINDENT OF A CORPORATION..........................................................................................38

RULES FOR COMPUTATION OF INCOME.............................................................................39

THE TOTAL INCOME CONCEPT.............................................................................................39

THE CHARGE TO TAX...............................................................................................................40

GUIDELINE ON THE DEDUCTION OF BUSINESS EXPENSIVE.........................................42

PRINCIPLES USED IN DETERMING WHETHER EXPENDITURE HAS BEEN WHOLLY

AND EXCLUSIVELY INCURRED FOR PRODUCTION OF INCOME..................................44

1. THE ASSESSEE’S CAPACITY............................................................................................44

2. COMMERCIAL EXPEDIENCY...........................................................................................44

3. REASONABLENESS OF THE EXPENDITURE................................................................44

4. THE BUSINESS PURPOSE TEST.......................................................................................45

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

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

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

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.....................................................................................................60

MEANING OF GAINS OR CAPITAL.........................................................................................61

BADGES OF TRADE...................................................................................................................62

1. THE SUBJECT MATTER OF REALISATION...................................................................62

2. LENGTH OF THE PERIOD OF OWNERSHIP...................................................................62

3. THE FREQUENCY OF SIMILAR TRANSACTION..........................................................62

4. METHODS AND CIRCUMSTANCES OF SALE...............................................................63

5. SUPLEMENTARY WORK ON OR IN CONNECTION WITH THE PROPERTY

REALISED....................................................................................................................................65

6. MOTIVES..............................................................................................................................65

COMPUTING INCOME FROM BUSINESS...............................................................................65

INCOME FROM INVESTMENT.................................................................................................66

EQUITY INVESTMENTS UNDER SECTION...........................................................................67

1. INTEREST.............................................................................................................................67

2. NATURAL RESOURCES PAYMENTS..............................................................................67

3. RENT......................................................................................................................................67

4. ROYALTIES..........................................................................................................................68

5. DIVIDENDS..........................................................................................................................68

CAPITAL GAINS.........................................................................................................................69

RULES FOR COMPUTATION OF GAINS FOR THE REALISATION OF INVESTMENT

ASSET...........................................................................................................................................69

WHEN IS AN ASSET REALISED..............................................................................................69

TAXATION OF CORPORATION...............................................................................................70

PRINCIPLE SYSTEM OF CORPORATE TAXATION..............................................................71

1 .CLASSICAL SYSTEM.............................................................................................................71

2. IMPUTATION SYSTEM..........................................................................................................72

3. THE TWO-RATE SYSTEM.....................................................................................................72

TAX PAYMENT PROCEDURES, ENFORCEMENT AND REFUND......................................72

TIME FOR PAYMENT OF TAXES............................................................................................73

PAYMENT BY ASSESSMENT...................................................................................................74

ASSESSMENT..............................................................................................................................75

TYPES OF ASSESSMENTS........................................................................................................75

1. SELF ASSESSMENTS..........................................................................................................75
2. BEST JUDGMENT ASSESSMENT.....................................................................................77

3. JEOPADLY ASSESSMENTS...............................................................................................77

SUNCTIONS FOR NON-COMPLIANCE...................................................................................78

TAX RECOVERY MEASURES..................................................................................................80

METHODS....................................................................................................................................80

1. By suit.....................................................................................................................................80

2. Security...................................................................................................................................80

3. Creating a charge over the assets of tax debtor......................................................................81

4. Sale of charged assets.............................................................................................................81

5. Departure Prohibition Order...................................................................................................82

6. Recovery from the officers of entities....................................................................................82

7. Recovery from the receiver....................................................................................................83

8. Recovery from person owing money to the tax debtor..........................................................83

9. Recovery from an agent of a non-resident.............................................................................85

TAX ADMINISTRATION POWERS..........................................................................................85

INVESTIGATIVE POWERS........................................................................................................86

REMISSION AND REFUND OF TAX........................................................................................87

VALUE ADDED TAX (VAT)......................................................................................................88

VAT IN TANZANIA....................................................................................................................88

VAT REGISTRATION.................................................................................................................90

EXEMPTIONS AND ZERO RATING.........................................................................................91

Exempt supplies.............................................................................................................................92

Zero-Rated supplies.......................................................................................................................92

Special relief supplies....................................................................................................................92

PLACE, TIME AND VALUE OF SUPPLIES..............................................................................93

TIME OF SUPPLY........................................................................................................................93

VALUE SUPPLY..........................................................................................................................94

VAT COMPLIANCE....................................................................................................................94

OBJECTIONS AND APPEALS...................................................................................................94

 TUMAINI UNIVERSITY MAKUMIRA
FACULTY OF LAW

TAX LAW

LECTURE NOTES LL.B III 2011/2012

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 of 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. eg. 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. eg. 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 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
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
is income tax it is a tax of income of the individual/ corporation, or it may 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 taxpayer 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 taxpayer. eg. Income tax. And the incidence of indirect tax is not on the initial payer but it
is on someone else who ultimately pays. eg. 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 eg. 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. 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 taxpayer. eg. According
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)
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 taxpayer.

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. eg. 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 taxpayers
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 behaviors such as the consumption of an 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.

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?
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.
 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 taxpayer gives up parts of his income, which would 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 eg. 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 Act 8 the total
income of each person is to be determined separately. Under The Income 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 eg. 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 Act9 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.
7
Goode, R., (ed), (1976), Individual Income Tax Revenue, The Books Institute: Washington, p.17.
8
Act No 11 of 2004
9
( Act No. 11 of 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 defined in terms of
sources. According to Section 610 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

10
Of The Income Tax Act, 2004, ( Act No. 11 of 2004)
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.

(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 a mass 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. 11 These are three main sources of tax law, namely,
statutes, case law and departmental practices.

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

11
Victor, T., (2003), Comparative Tax Law, Kluwer Law Int: The Hague, London & New York, p. 62
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.
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 138.12

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.13

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

12
Of the Constitution of the United Republic of Tanzania, 1977 [Cap. 2Revised Edition, 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.

13
(1936) AC 1
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. CIT14 the appeal emanated from an order of the Commissioner of the
Income tax that 60% of undistributed company income be deemed to have been 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 364 th 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.15 (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.”
14
Vol. 3 EATC 328
15
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.
In the case of X v. CIT16 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.

In Mandavia v. CIT17 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).18 In the case of CIT v. BG19
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
16
Vol. 2 EATC 39
17
2EATC 39
18
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
19
EATC 165
interpretation used in the foreign provision may provide guidance in the construction subject to
the differences. Eg. In the case of Ralli Estate Ltd v. CIT20 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. CIT21 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. Ltd 22 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

23
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.

20
2EATC 203
21
3 EATC 263
22
2 EATC 414
23
Vol. 3 EATC 102
 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. Pensel 24 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.
Winkworth25 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 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

24
1891 AC 431 at 590-91
25
(1933) 17 TC 569
Commissioner General and Another v. Mc Arthur. 26
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 31 st
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 on five further payments to MBI affected between 2 October 1997 and 19 th 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.

26
(2000) Vol. 1 EA 33 (Court Appeal DSM), Before Makame, Kisanga and Rugakingira JJA
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 25 th 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).

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. Jail27 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 said 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 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

27
Vol. 1 EATC 80
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.28 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.

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.29

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 eg. (Ejusdem generis) and aids to statutory interpretation
(eg. Marginal notes, long title, short title) may also be used in the interpretation of tax statutes
and other statutes. Eg. Interpretation of Laws Act,

28
IRC (Inland Revenue Commissioner)
29
Refer the case of Peney General Investment Trust Ltd vs. IRC (1943) AC 486
 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. Branch30 the accused who was a dentist
live in the city of Calgary in Canada and he admittedly had not filled his tax 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.
30
(1976) CTC 193
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 Westminster31 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.

According to the case of IRC v. Willoughby32 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.

31
(1936)
32
[1997] STC 995 at 1003
In interpreting anti-avoidance provisions the court gave a liberal interpretation which suppressed
tax avoidance.

METHODS OF AVOIDING TAX

1. Income Splitting
Section 34 of the Income Tax Act 33 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. FCT34 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. FCT35 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 Act 36 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 converted into
capital which may be remained untaxed or taxed at a laser rate. For instance the non declaration
33
( Act No. 11 of 2004)
34
(1962) 10CLR 336
35
(1966) 4C ALJR 155
36
( Act No. 11 of 2004)
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,37 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,38 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.

37
Vol. 2 EATC 89
38
( Act No. 11 of 2004)
 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. CIT39 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:

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

39
3EATC 41
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.

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 340 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 Council41 “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,42 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. IRC43 receivability without receipt is not sufficient to
constitute income although some types of income are specifically exempt or not deemed to be
income.

Section 10 of Income Tax Act44 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).

40
Of The Income Tax Act, 2004, ( Act No. 11 of 2004)
41
[1901] AC 26
42
[1956] vol. 1 All ER 83
43
[1935] 2 kb 351
44
( Act No. 11 of 2004)
According to Justice Pitney in the case of Eisney v. Macomber,45 “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. Cooper46, 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 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,47 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.

45
(1919) 252 Us 189
46
20 TC 273 or [1936] 2 ALL ER 742
47
1995 of EATC pg. 50
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=payment of similar…….) 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

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 6 of Income Tax Act,48 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.49 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.
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) 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

48
Act No 11 of 2004
49
Act No 11 of 2004
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), 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 business purpose in 2009 and stayed from the 1 st 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) 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.
50
3 EATC 473
 RESIDENCE OF A PARTERSHIP
This is contained under section 66 (2) of the Income Tax Act, 2004.
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. Howe 51, 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.

51
(1906) AC 455
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 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
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 31 st 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.
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 -
“net cost of assets” of a domestic permanent establishment -
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 1 st 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.

GUIDELINE ON THE DEDUCTION OF BUSINESS EXPENSIVE

And the general rule for deduction is contained in section 11(2) of the same Act.

(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.
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 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.

59
(1941)1 KB 202.
60
(1981)The Times, 19th Feb 1981.
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.

61
(1975)2 All E.R 412.
 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. Atherton 62 , 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
 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 Taxes64 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 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.

64
(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.
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,65 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, Atherton66, 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

65
5TC 529
66
Supra 1
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)67 in the light of what is written above.

THE END OF FIRST SEMISTER

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?

67
It provides that; For the purposes of this section -
“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.
 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.

(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)68 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)69 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)70 of the Income Tax

68
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.
69
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.
70
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.
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 9171 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)72 of Income Tax Act, 2004 unless required by the Commissioner of
income tax.

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)73 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.

71
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]
72
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
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;
73
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.
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 2074 of Income Tax Act, 2004.

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.

74
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.
(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.
 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.

In the case of Isaac v. MNR,75 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,76 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
75
70 DTC 1285
76
(1976) CTC 462
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.

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. 77

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 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.78

COMPUTATION OF EMPLOYMENT INCOME

Taxable income from employment is widely defined under section 7(2) (a) of the Income Tax
Act 2004.79 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

77
Refer the case of Hauser v. MNR 78 DTC 1532
78
Refer the case of Lafleur & Pohs v. MNR 84 DTC 1478
79
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;
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)80 and section 7(4) 81& (5)82 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.

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. CIT83

[COURT OF APPEAL AT NAIROBI]

80
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
81
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.
82
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.
83
[1963] EA 695
(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, 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
 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. Seymour84 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.

84
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…”
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 2785 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.

85
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.
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)86 and these
exclusions must be read together with section 1087 and 2nd Schedule as amended by the Finance
Act No 5/2011 under part VI section 17 (a) & (b).

86
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.

87
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.
(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.
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 1288 of the 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.

88
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–

(a)where the Certificate of Educational Appreciation has not yet been utilized, it shall be forthwith cancelled;
 INCOME FROM BUSSINESS
It is provided under section 889of 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.
According to case of Trustee of AB Charitable Business Trust v. CIT, 90 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

(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.
89
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.
90
2 EATC 89
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,91 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.

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.

91
(1942) 1 All ER 678
In the case of Grainger & Sons v. Gough,92it 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,93 it was stated that, trading implies some
continuity, and repeated act of buying and selling in the same or other lines of business.

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,94 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,95 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

92
(1896) 3 RTC 462
93
1 EATC 65
94
13 TC 251
95
(1927) AC 312
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,96 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,97 there was a forced realisation of shares after the
death of a person. The suggestion that the original purchase was made with the view 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,98 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
96
3 EATC 417
97
31 TC
98
2 EATC
In the case of Rutledge v. IRC,99 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,100 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.

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,101 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.

99
14 TC 490
100
(1956) AC 14
101
24 TC 498
 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.

INCOME FROM INVESTMENT

Under section 9 (1)102 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
102
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.
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.
(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.
103
According to the case of Riches v. Westminister Bank, 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 I 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.

103
(1947) AC 390
 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.

3. RENT
Is defined under section 3 of the Act, it is any payment 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,104
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 kwon-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,105 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

104
(1944) 69 CLR 235
105
(1938) 2 KB 482
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.

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 realization 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,106 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.

106
5 TC 159
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.

WHEN IS AN ASSET REALISED?

The circumstances under which an asset is realised are contained under section 39.107
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 realization
amounts. Others are 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 f the gain. This is
per section 90(1)(a)&(b).108
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.

107
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).
108
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.
 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 le
gal 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)109
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)110 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)111 of the First Schedule which read together with section 82
(1)(a)&(b),112 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% .

PRINCIPLE SYSTEM OF CORPORATE TAXATION

These refer to the approaches in taxing corporations. There are three principles system of
corporation taxation.
109
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..
110
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.

111
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.
112
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.
 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.
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)113 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 realization.
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.

113
It provides that; Tax shall be paid to the Commissioner in the form and at the place is may be prescribed
The content of an estimate of tax payable are found in section 89(2).114 Once a person filled an
estimate of the tax payable, he may later on revise his estimate under section 88.
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)115 for the previous
year of income.
A singe installment payer is covered under section 90.116 The quarterly installment payer is
provided under section 88.

PAYMENT BY ASSESSMENT
117
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.

114
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.
115
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;
116
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.
117
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.
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.
Filling a return is a precondition for assessment of the tax payable. Not everybody is required to
file a return.
Under section 92,118 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.
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;

118
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).
 1. Self assessments, provided under section 94 (a) &(b).
2. Best judgment assessments, provided under section 94(4)
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,119 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.120 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.

119
(1939) 71 TR 21

120
2EATC 64
 CIT v. Gian Singh121 .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 exclusive 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.
122
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.

121
3 EATC 24
122
2EATC 426
 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).123
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).124

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.

123
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.

124
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.
For example under section 80(2),125 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)126 failure to file a return also attracts interest and penalties
calculated in accordance with section 98.127
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;128 failure to pay tax under section 105;129 and
making false or misleading statement under section 106;130 impending tax administration;

125
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.
126
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.
127
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.

128
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.

129
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.

130
Section 106.-(1) A person who –
(a) makes a statement to the Commissioner that is false or misleading in a material particular; or
offence of authorised unauthorised person under section 108;131 offence of aiding or abetting
under section 109.132

TAX RECOVERY MEASURES

METHODS

1. By suit
It is covered under section 110.133 A suit may be instituted in a court of competent jurisdiction.

(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).
131
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.

132
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.

133
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.
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 111.134 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.

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.

134
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.
 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)135 and the duties or powers of the
Commissioner are contained in sub section 3.136
Before sale may be effected, the Commissioner is required to give public notice under subsection
4.137

5. Departure Prohibition Order

Under section 114,138 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.

135
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.
136
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.
137
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.
138
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).
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 section115.139 Where the tax debtor is an entity, then the debt may be
recovered from the officer of the entity.

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.

139
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.
(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.
 7. Recovery from the receiver
It is provided under section 116.140 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.

140
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.
 8. Recovery from person owing money to the tax debtor
This is provided under section 117.141 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).

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).

141
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.”
 9. Recovery from an agent of a non-resident
It is provided under section 118.142 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. 143
142
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.
143
It provides that; 125.-(1) The Minister may, by order in the Gazette, remit any tax that is due by a person.
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 131,144 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.

145
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 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.

(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.
144
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.
145
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.
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 125,146 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.

146
See note 143 above
Under section 119,147 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.

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.

147
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.
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 1 st 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 3,148 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 4,149 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.

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.
148
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.
149
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.
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 19150 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.

Once a person is registered, a certificate of a registration is issued under section 20.151

150
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.
151
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.
Failure to by law 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. 152

Under section 21,153 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 has to notify the
Commissioner within 30 days and has to make an application for deregistration.

(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
152
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.
153
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.
EXEMPTIONS AND ZERO RATING
These are contained under sections 9,154 10155 and 11156 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, 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.

154
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.
155
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.
156
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.
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.
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.
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 45.157

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).

157
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.