Perhaps you have heard about Value Added Tax, abbreviated as VAT. If not, worry not. We’ve got you covered. VAT is a consumption tax, particularly on goods and services, collected at each stage of the supply chain where value is added, from when a good or service is produced to when it is sold to the ultimate consumer. In Mainland Tanzania, the standard VAT rate is 18%, whereas the rate in Zanzibar is a bit lower at 15% (with a few exceptions at 18%).
VAT is not as ancient as other types of taxes, and its origins date back to around the 1910s. Germany was facing challenges with its cascading turnover tax, and to address this, Wilhelm Von Siemens proposed VAT as the way forward. Nonetheless, it was not until the 1950s when the modern VAT system started to be implemented, with France being the pioneer. In Tanzania, VAT came into force in 1998, replacing the single-stage sales tax, which only taxed manufacturers and importers, leaving most goods and services untaxed.
At face value, VAT appears straightforward, levied at a standard rate. However, the VAT system is complex, and we will not dive into its technical aspects. Instead, we will focus on how it mirrors some of the fundamental principles of our existence and life.
To start with, it is crucial to understand the rationale behind VAT. For this purpose, the saying goes, “Always, the trees that bear fruit are stoned.” It is commonplace for matters with promising potential to be the ones that attract the interest of many. In this specific case, the ‘value addition' concept is the fruit to be stoned.
For many areas of life, be it politics, economics, academia and even in families, value addition is the force that gets the wheel turning. It takes many forms, ranging from knowledge sharing, mentorship, financial empowerment, words of encouragement, and showing up all the way to constructive criticism. There's just no limit to value addition. Life in itself is a matter of adding value to people and whatever we encounter along the journey. With this background in mind, governments found it worthwhile to ‘throw stones’ and tax ‘value addition’ in the supply chain of various goods and services.
Another critical element in VAT is the steadily ascending nature of VAT at every stage of the supply chain. The increase in VAT is not haphazard, it's one step at a time. No matter how small the value addition is, it contributes to an increment in the VAT levied at the next stage. From growing of maize on the farm, through harvest and milling, all the way to packaging, distribution, cooking and ultimately serving the delicious ugali for lunch - it's value addition in every simple and single step.
How is this reflected in life though? Maybe it's reading a book page each day, one kilometer of jogging every day, a single comment of constructive feedback, one box of pens to an orphanage or just a remark of appreciation and acknowledgement. VAT teaches us that it's always a steady rise to the top through each stage. Every single step counts and there is nothing that does not matter.
The third interesting thing about VAT relates to exemptions. The VAT legislation usually exempts certain goods and services from VAT - means no VAT is charged on the supply of these goods and services. The expected outcome is that the price of these goods or services stays low and affordable to the ultimate consumer. This reminds us that for life to be bearable and livable, there have to be exemptions, it's almost impossible to accommodate everything, be everywhere, and have an infinite impact. Exemptions remind us that life is a give and take experience where we leave some matters out so that we can accommodate others.
Another crucial lesson from VAT is to be careful when deriving conclusions from first impressions. We came across a VAT regime for a country in West Africa whose VAT rate was as low as 7.5%. The first thought that crossed our minds was, ‘’this is fantastic!” bearing in mind that the VAT rate in Tanzania is a staggering 18%. However, after deep diving into the mechanics behind the 7.5%, we learnt that there's a considerable limitation to the extent that a company can claim the input VAT. For example, one could not claim input VAT for services or on capital items. This means businesses that heavily relied on procurement of services or capital intensive businesses are in dire trouble. However, how could we appreciate this had we been victims of first impressions and couldn't see beyond the appealing 7.5%?
The dynamics of VAT continue to impress anyone who approaches this interesting tax with a curious mind. The technical and philosophical marvels of VAT are perhaps unmatched and will continue to teach human civilization of itself for generations to come. The next time you see that ‘Price inclusive of VAT’ label on a product, just pause and take a moment to reflect on the lessons from this fascinating tax. Thereafter, you can proceed to make that purchase and contribute a little bit of value to the vendor’s microeconomy and overall value to the national macroeconomics.
By Edina Meela, Senior Associate, Tax Services - PwC Tanzania and Lukundo Manase, Senior Associate, Tax Services - PwC Rwanda
