If you are a VAT registered business in the extractive, construction, manufacturing sectors or any other sector that requires significant investment in capital items, you are likely to be familiar with the concept of VAT deferment on capital goods. Given the high cost of machinery and equipment in these industries, adding an 18% VAT on such high values capital items (whether imported or locally produced) is likely to become a significant financial burden to those businesses.
To ease this challenge, the Value Added Tax Act, 2014 (VAT Act) allows qualifying taxpayers to defer the 18% VAT that would otherwise be payable on purchase or importation of certain capital goods.
Conditions for VAT deferment to be approved include carrying on an economic activity with at least 90% of the supplies being taxable and being compliant with obligations under the VAT law and any other tax law. Upon application and approval by the TRA, businesses must follow a procedure of declaring the deferred VAT as both input and output in the VAT return. Once approved, the VAT liability is deferred and shall be waived once the deferment period (10 years) lapses.
When the VAT Act became effective on 1 July 2015, the VAT deferment applied to all imported capital goods, provided that the VAT payable in respect of each unit of the capital goods is at least TZS 20 million (reduced to TZS 10 million in 2018) . However, in 2021, the Finance Act (FA 2021) introduced the first major shift in this scheme by restricting the VAT deferment of capital goods to certain chapters of the Custom Classification. This change had a huge impact on various businesses that initially enjoyed the cash flow benefits brought by VAT deferment. For instance, businesses in the logistics sector which had previously benefited from VAT deferment on trucks were no longer able to get this relief and had to incur significant cash outflow in terms of import VAT paid at time of importation only for the amount to be claimed as input tax in the VAT return for the same period. For transporters, currently the VAT deferment only covers trailers offering very little relief since the trucks typically represent a far greater cost than trailers.
As per the Finance Bill of 2021, this change was intended to “curb abuse of incentives due to lack of clarity” in other words “to prevent loss of Government revenue”. The rationale for this change remains unclear as businesses are entitled to claim VAT they incur on purchases or importation of capital items resulting in a nil position to the Government in terms of collections.
Nevertheless, the scheme, though narrowed down, has remained a valuable incentive, aimed at reducing cash flow constraints and resulting in financing costs, and in turn spurring growth in capital-intensive sectors.
The Finance Act 2023 (FA 2023) has introduced an even more significant shift to the scheme by also covering locally manufactured capital goods. Furthermore, according to the 2023 changes, the VAT deferral scheme on imported capital goods will cease on the 30 June 2026 (i.e. by the end of the next financial year, FY25/26). This move aims to protect and encourage local manufacturers of capital goods.
While the intent behind this policy shift is commendable, the reality is more complex. Are local manufacturers ready to produce enough capital goods to meet the demand for capital goods?
If we go by sectors and take the extractive sector as an example, it is a major contributor to Tanzania’s economy and requires sophisticated and expensive machinery. Despite the sector’s robust growth, there are currently few, if any, local manufacturers with the capacity to produce equipment used in mining, manufacturing and other heavy industries. Consequently, it is unlikely for the local producers to make enough (if any) of these heavy machineries that will meet the sector’s needs for capital goods in the short time to July 2026. The shift would compel investors to pay VAT on importation (as the deferral will only apply to locally made capital goods) thus tying up capital that could otherwise be invested in operations or expansion. The resulting cash flow constraints is likely to make Tanzania less attractive to investors due to increased investment and operational costs and even uncertainty on availability of these capital items.
In the absence of VAT deferment on imported capital goods, businesses will face a sharp increase in input tax credits, yet many will struggle to recover these amounts due to administrative delays in payment of VAT refunds. The extractive sector again, as an example, primarily exports its supplies, making them zero-rated for VAT purposes. This means there will be minimal to no output VAT to offset against incurred input VAT, leading to substantial refund claims. If the Revenue Authority cannot efficiently process and reimburse excess input VAT credits on time, businesses will bear the financial strain—undermining the key principle of VAT neutrality, which requires that businesses do not bear the VAT cost.
Considering the above, this is a call for the Government to consider amending the VAT Act, 2014 to extend the cessation period for the VAT deferment of the imported capital goods to when the existing local manufactures can meet the capital goods demand. Doing so would provide local manufacturers with more time to scale up production, while ensuring that businesses continue to access essential machinery without disrupting operations. At the same time, a thorough assessment of local manufacturing capacity remains crucial before phasing out VAT deferment on imported capital goods to avoid slowing down economic development.
In addition, the Government should consider expanding the scope of VAT deferment by either: (i) reverting to allowing VAT deferment for all capital goods (i.e. goods with useful economic life of at least one year), or (ii) engaging with the business community to identify key capital goods like machinery, heavy vehicles, etc., to be included in the deferment regime. This will also give the Revenue Authority more time to strengthen the VAT refund system and ensure timely reimbursements of VAT refunds to prevent cashflow constraints for businesses.
The question remains: Is Tanzania ready for the shift or is it moving too soon at the expense of importers of capital goods? Our country has made considerable progress in creating a business-friendly environment, but sudden policy shifts can have unintended consequences. The government must weigh the long-term impact of this decision—ensuring that investment, business growth and economic stability are not compromised in the process.
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