Excise Duty: 1954 legislation, telecoms - change overdue!

Search “1954 events in Tanganyika” and you will see reference to the formation (on 7 July (“Saba Saba”)) of the Tanganyika African National Union (TANU) with Julius Nyerere as its first president (and which in 1977 merged with the Afro-Shirazi Party (ASP) of Zanzibar to become Chama Cha Mapinduzi (“CCM”)).  What such a search is unlikely to reveal is that this was also the year of the coming into force of the Excise (Management and Tariff) Act, CAP 147 (“the Act”).

This Act still remains in force but with significant amendments. By contrast other tax legislation has been revamped - for example, new legislation for customs (in 2004), income tax (in 2004) and VAT (2014).  Taking a glance at other neighbouring jurisdictions one will realise that new excise duty legislation has been adopted in Uganda (2014), Kenya (2015) and Zanzibar (2017). Why make the change? Well the challenge is in making the excise legislation fit for purpose bearing in mind changes in the economy but in particular in the scope of coverage of excise.

This Act was originally designed to administer locally manufactured goods. In recent years, amendments were made to extend the scope of the Act to cover services including banking and telecommunication services, however as the Act was not originally designed to deal with services it results in various challenges of application and interpretation.

In principle excise duty should not be levied at different stages within the same supply chain but rather should be a one-time duty charged on a specific final service or goods. The above understanding on how excise duty should apply is easier said than done when it comes to its practical application to services sometimes with the consequence of differences in interpretation between taxpayers and the revenue authority and with that resulting disputes between the two. Ideally, the relevant legislation should minimise the risk of misalignment on interpretation and so ensure that tax compliance should not be rocket science to the taxpayer. However, at present the service sectors subject to excise duty do have challenges of uncertainty when it comes to application of the excise duty in some of their day to day transactions.

One such sector is the telecommunication sector which is subject to excise duty at the rate of 17% on “electronic communication services” (as defined). One category of such services is the selling of data which can be done in stages (i.e. selling data bandwidth in bulk to other service providers who would then sell retail data to final consumers), and another is interconnection charges between telecommunication companies. In both cases the question arises as to whether excise duty should be triggered at each point of sale. But if this was the case it would then result in compounding of the tax unlike VAT which allows for input tax credits, and effective double taxation. Another area of challenge relates to the treatment of exported services (where the customer is based overseas), which under the VAT legislation are expressly zero-rated - and the understanding is that the same principle (though not expressly stated in the Act) should also apply to excise duty. The complexity in understanding these matters is a result of lack of sufficient clarity in the law.

Aside from the question of the legislation, there are concerns as to the level of the excise duty rates on services - particularly when considering other taxes that are also levied. For example, the excise duty on telecommunication services which was first introduced at a rate of 5% (in 2002) eventually increased to 17% (in 2013), and this in addition to other turnover based levies including VAT (18%), service levy (0.3%), TCRA (1.1%) and UCSAF (0.9%). Given this level of the various taxes and levies, a lower excise duty rate (say 10%) would be more ideal so as to increase affordability of the services - and with that generate more consumption of such services and with that ultimately more tax revenue.

A January 2023 GSMA report titled “Tanzania’s Digitalisation Journey: Opportunities for value creation” described Tanzania’s tax regime on digital and mobile services as “unconducive” and “resulting in higher transaction costs and constituting an adoption barrier”. The report further highlighted that excessive sector-specific taxes are imposed on the mobile sector in Tanzania when compared with the average for Sub-Saharan Africa (“SSA”) and with other regional averages; for example, as a percentage of mobile sector revenue in Tanzania taxes and fees are 34% (comprising sector-specific taxes and fees of 18%, and general taxes and fees of 16%) as compared to 26% for SSA (which has a much lower level of sector specific taxes and fees (10%)). The report states that “the comparatively high tax burden is mainly driven by high excise duties on mobile services”.

So, in summary let’s relook at the need for (i) new legislation and (ii) reduced rates for excisable services.  As regards the legislation the question is why should we continue to hold on to the 1954 legislation when the world in general has moved on? Indeed, if not replaced then 2024 will mark the 70th birthday of the Act, so the time to act is now!

By Raphael Mujuamungu and Edina Meela - Senior Associate and Associate, respectively, specialising in Indirect Tax Services at PwC Tanzania.