BUDGET NEWS LETTER 2004 - 05

	(Independent Member of Morison International)	Morison International
	Ø  Revenue Target Exceeded. Ø  Expenditure less than budgeted. Ø  45% of Government budget depend on foreign aid. Ø  GDP grew by 5.6% in real term. Ø  Inflation quantified at 4.6%. Ø  Foreign exchange reserve equal to 8 months of imports. Ø  Major Paris club creditors cancel their debts to Tanzania. Ø  VAT, Income Tax and Customs surpass collection targets. Ø  Income Tax Act 2004 applicable to all accounts starting from 1/7/2004. o    Self assessment introduced. o   Tax benefits of housing allowance and gratuity withdrawn. o   Withholding tax on rent reduced to 10% from 15%. o   Withholding tax on technical services to mining sector increased to 5% from 3%. Ø  VAT remains at 20%, threshold increased to 40million. Ø  Pharmaceuticals, veterinary drugs, mosquito nets and articles for blind and disabled person shifted from Schedule II (Exempt Supplies) to Schedule I (Zero rated Supplies) under VAT act. Ø  Stamp duty on SME abolished. Ø  Major relief and tax incentives under Income tax, VAT and Customs for agricultural sector. Ø  No more renewal of Business license. Ø  Business Visa Fees reduced from 200 USD to 50 USD. Ø  Pre-shipment inspection replaced by inspection at the port of destination.

BUDGET NEWS LETTER 2004/2005

INTRODUCTION

The Minister for Finance Hon. Basil P. Mramba introduced the estimates of the Government revenue and expenditure for the financial year 2004/2005 in the National Assembly on 102h June 2004. The following are the highlights, which essentially is our interpretation and is given without any obligation or liability on our part.

REVIEW OF IMPLEMENTATION OF THE BUDGET FOR 2003-2004.

• GDP grew by 5.6 % in year 2003 against target rate of 6.3 % (Previous year 6.2%)

• Inflation rate increased to 4.6 % at the end of March, 2004 from 4.0 % in July, 2003.

• Foreign Exchange Reserve at the end of March, 2004 had reached a level sufficient to cover imports of goods and services for period of 8 months above the target of 6 months.

• Domestic revenue collections for first 9 months (July,03 to March,04) of the fiscal year is T Shs 1,089,262 Million which exceeds the targets by 3.7 % or T shs.38,396 Million.

• Collection from VAT, Income tax & Customs surpassed the budget.

• VAT collection was projected at T Shs. 142,242 Million and the actual collection was T Shs 148,632 Million, an increase of 4.5%.

• Income tax collection was projected at T Shs 227,382 Million and the actual collection was T Shs. 256,888 Million, an increase of 13%.

• Import Duty collection was projected at T Shs 93,562 Million and the actual collection was T Shs. 95,239 Million, an increase of 1.8%.

• Non-tax revenue collections by ministries, departments and agencies fell short by 10% of the budget. 

• All Paris Club Creditors except Brazil has offered debt relief through partial (90%) or full cancellation.

• Major Outcomes of revenue enhancing measures of the government during the fiscal year were :

  • Changes in Custom Tariffs Structure yielded T Shs. 1,717 Million against target of T Shs.134 Million.

  • Changes to Excise Tariff Structure yielded additional T Shs.758 Million against target.

  • Reduction of Excise Duty rate on liquefied Petroleum Gas (LPG) increased gas usage by 52.6 %.

  • Measures to curb tax evasion in petroleum sector yielded a total increase of 18,031 Million against budget for the period July, 03 to April, 04. This is an increase of 25% of taxes collected on petroleum products in same period of previous year.

  • Export tax of 15 % imposed on raw hide in 2003/04 generated 413 Million against a target of 1,080 Million.

• Grants and concessions financing for budget support was T Shs. 490,253 Million against the estimate of T Shs. 405,047 million for the period July, 03 to May, 04, exceeding the target by 21%.

• Similarly against a projected expenditure of T.SHS. 1,889,207 Million for the nine months from July 2003 to March 2004, the actual expenditure for the first nine months has been T.SHS. 1,722,612 Million, hence a saving of T.SHS. 166,595 Million, 8.00% in percentage terms. Out of the T.SHS. 1,722,612 Million, T.Shs. 1,300,053 Million was for recurrent expenditure and T.Shs. 42,559 Million was for development expenditure.

• During the February 04 an additional supplementary budget of T Shs.176.78 Million on top of original budget was approved to cater adverse effects of drought. The additional budget was funded, firstly by domestic revenues amounting to T Shs.87.25 Million and balance by budget reallocation amounting to T Shs.89.53 Million. Majority of these resources were used for procurement & distribution of food grains in drought affected areas and assistance to TANESCO to enable it to generate thermal power.

• Credit to the private sector in domestic currency increased by 41.8 % between July 03 and March 04, this was basically due to large corporations switching from foreign borrowing to domestic borrowing.

• Margin between deposit and lending rates has narrowed from 10.6 % in June 03 to 9.4 % in March 04.

• Imports increased by 26.6 % compared to 2003, this was basically due to heavy imports of fuel & food grains.

• Gross international reserves reached to US Dollars 1,973 Million.

• The figures compare favourably to a certain extent with the previous year as depicted in the table below:

HIGHLIGHTS IN THE IMPLEMENTATION OF THE MACRO-ECONOMIC AND FISCAL POLICIES FOR 2003/2004

• 45 % of the Government’s budget is still dependent on foreign aid, however there is a marginal improvement of 2 % compared to the previous year.

• Despite focus on poverty reduction, resources to this sector remain insufficient.

• Capacity in accounting, information communication technology, healthy delivery etc remains limited.

BASIS POLICIES AND OBJECTIVES OF THE 2004/05 BUDGET

• Attaining a Real GDP growth rate of 6.3 percent in 2004 and 6.5 percent in 2005, to be driven by agriculture, manufacturing    and exports.

• Domestic Revenue is targeted to reach Tshs 1,739,288 million) equivalent to 13.8 percent of Gross Domestic Product.

• Inflation is targeted at 4 percent by end June 2005 and stabilizes at that level in the medium-term. 

• Maintaining gross international reserves at a level above six months of imports of goods and non-factor services. (Currently around 8 months)

• Reducing aid dependency ratio of government budget to 41 (from 45 %) percent in 2004/05.

• Monitoring implementation of the micro-finance policy and the credit guarantee scheme for small-medium enterprises to create conditions for economic development through bank credit.

• Major incentives given in Agricultural Sector, aimed at attracting investment in the Sector, including under the Income Tax Act 2004, Customs Tariff Act, Value Added Tax Act, Stamp Duty Act and Local Government Finance Act.

• Additional measures taken to empower Tanzanians to mobilise savings and investment are taken in 2004/05 including sale of units if the Unit Trust of Tanzania, establishment of collective investment schemes and active Government participation in the establishment of credit reference bureau.

REVENUE POLICIES

• Aims to collect T. Shs. 1,739,288 Million, which will be 13.8 % of GDP an increase of 20% compared to last year.

• Expects to receive grants and concessional loans totalling to T Shs 1,367, 025 Million which will be 41% of total Government expenditure. Out of this T Shs 509,140 Million will be budget support, and T Shs 857,885 will be for development projects.  This represents a 16 % increase compared to the previous year.

• Budgetary dependency on foreign aid to be reduced, accordingly following measures will be employed to achieve the revenue targets.

• Strengthen the supervision and administration of the Tanzania Revenue Authority, especially by expanding the Large Tax Payers Department;

• Implement the new Income Tax Act, 2004 and to complete the review of all tax-related legislature with a view to improving them;

• Commence implementation of the East Africa Customs Union Protocol;

• Realize revenue from the sale of gas from the Songo Songo project. Gas is expected to begin flowing from July 2004;

• Continue rationalization of the tax structure so as to improve tax efficiency as well as to create incentives for select sectors in order to accelerate GDP growth;

• Strengthen revenue collection in Ministries and Departments, particularly those under the retention scheme;

• Closely monitor trading of petroleum products including the introduction of Flow Meters at the port in order to thwart tax evaders. Flow meters are expected to be installed in July 2004;

• Continue the Treasury Voucher/Cheque System and to examine the possibility of including goods imported under donor-funded projects;

• Improve TRA’s performance by increasing technology usage, improving staff incentives, training and good service delivery to taxpayers;

• Beginning July 2004 inspection of imported goods will be conducted at the point of destination rather than the current practice of pre-shipment inspection. This approach will make the business environment more conducive, will eliminate the harassment faced by importers and will improve the investment climate;

• Increase working hours for Customs so as to reduce the backlog of goods in the port. All organs that provide customs related services will be required to collaborate closely with the Customs Department to ensure that this change is successful;

• The exercise of rationalizing the provisions of the 1997 Investment Act which require amendments to close tax loopholes has begun;

• A Committee has been created to review the policy, legal, and fiscal regime governing investments in the mining sector with a view to recommending measures that will ensure that the government gets its rightful share of revenue.

EXPENDITURE

• Total estimated expenditure is T Shs. 3,347,538 Million during the year.

• Total projected grants and concessional loans is T Shs. 1,367,025 Million.

• There will be a shortfall of T Shs. 231,110 Million. This gap will be met by drawing down reserves from Bank of Tanzania and through issuance of government securities in the domestic financial market.

• The Government to increase efficiency in tax collection and curb tax evasion.

 FEATURES OF THE BUDGET 2004/05

• More attention to priority sectors in line with the Poverty Reduction Strategy.

• Allocation for defraying transport cost for fertilizer to the selected regions has been maintained in 2004/05 budget.

• The cash budget system will be maintained and improved.

• Additional allocation has been made to the Export Credit Guarantee Scheme (ECGS) and the Credit Guarantee Scheme for Small and Medium Sized Enterprises (CGS-SME);

• Agricultural development initiatives at district level targeting at least one food crop and one cash crop will continue to be supported through budget allocation.

• In recent years Government has moved to allocate own funds for construction of major roads considered strategic for development.

• The Government will continue to implement its pay reform policy for civil servants, so as to reach 4.8 percent of GDP targeted under the policy. The Government’s policy is to implement large projects in phases depending on availability of funds. First priority is placed on projects that have legal agreements or agreements with development partners.

• The budget continues to allocate 4.5 percent of proceeds from non-project grants to the Government of Zanzibar.

• During 2004/05, the Government will restore to the Pension registry those retirees who had received their pensions in lump-sum.  These retirees are expected to begin receiving pension payments from January 2005 so as to allow for amendment of the relevant law.

• In view of the recent increase in incidences of crime and other offences, and in preparation for forthcoming general elections the budget for 2004/05 has enhanced allocation for national security agencies.

• During 2004/05, additional resources have been allocated for emergency food supply in the event of adverse weather conditions and for Strategic Grain Reserve.

• The budget for 2004/05 has allocated funds to meet emergency power supply requirements of TANESCO, as well as in support of TANESCO in meeting contractual capacity charge payments in respect of IPTL and Songas.

• In light of the anticipated increase in the number of Parliamentarians after the General Elections next year, Social Security Funds have agreed on their own accord to construct Parliament Chamber under a Build-Lease-Transfer (BLT) model.  For this reason, this project is not in the budget for 2004/05.  The Government is considering applying this model to other large projects including road construction.

• Cognisant of the importance of sports, the budget for 2004/05 has allocated funds for the construction of a modern sports complex.  The bulk of the project cost will be covered by Chinese Government grant.

• Transfers (grant) to the District Councils during 2004/05 are based on a new formula that has been developed following broad consultation with stakeholders.

REFORM OF TAX STRUCTURE AND NEW TAX MEASURES

Proposed areas of reforms

• The Customs Tariff Structure

• The Income Tax Structure

• The Value Added Tax Structure

• The Excise Tariff Structure

• The Stamp Duty Structure

• Levies and Fees collected by the Local Government

• Business Licensing Act

• Other Acts

CUSTOMS TARIFF STRUCTURE

• Agricultural implements and inputs such as tractors, pesticides and fertilizers are exempted from customs duties and any remaining duties in this area are abolished.

• Pre-shipment inspection of imported goods to be replaced by inspection at the point of destination

• Increase working hours for customs so as to clear backlog of goods in the port.

• Elimination of customs tariffs on goods originating from the partner states of the East African Customs Union Protocol.

• Introduction of Common External Tariff on goods originating outside the East African Community.

• Customs Union to be operational with effect from 1st January, 2005.

• Abolishing of suspended duty on imported products except for goods that have been agreed by the partner states in the context of the Protocol.

• Exemption of import duty for eligible beneficiaries to include vehicles under HS Codes 8703, 8702.10.20 and 8702.90.20 having engine capacity of cc 3,000 and above.

INCOME TAX STRUCTURE 

• The current Income Tax Act No.33 of 1973 to be repealed and enact a new Income Tax Act.  The new Act to be operational from 1st of July 2004. The major impacts of the New Act are the following:

  • Introduction of self assessment system (Ref. Sec. 94 and Sec 106 of the New Act).

  • Provisions of the old act to apply for businesses whose accounting year beginning prior to 1st July 2004.

  • Withdrawal of exemption of 15% Housing benefit and 50% Gratuity benefit to employees.

  • Wear and Tear allowance for heavy duty vehicles and industrial machinery to be reduced from 37.5% to 25%

  • Wear and Tear allowance for light duty vehicles and buses of capacity of less than 30 passengers increased from 25% to 37.5%.

  • Withdrawal of investment deduction of 20% on industrial buildings and machinery.

  • Building allowance of 5% on industrial buildings extended to Building, structures, dams, water reservoirs, fences and similar works of permanent nature.

  • Withholding tax rate on technical services to mining operations increased from 3% to 5%.

  • Provisions of Income Tax Act 1973 in relation to the holders of Certificate of Incentive by TIC will continue to apply even after the new Act coming to effect, mainly to 100% capital deduction.

  • Withholding tax on rent reduced to 10%, but available as a one time tax only to rent received by individuals who are not in business.

  • Abolishing of withholding tax on rental charges on aircraft leased by a person engaged in air transport business.

  • Charitable organisation to be liable for tax if less than 75% of their income is spent on charitable activities.

  • No adjustment or indexation of the cost is allowed for the purpose of calculating Capital Gain Tax.

• 100% capital allowance for costs relating to cleaning of land, irrigation systems, planting of permanent crops, and environmental preservation or control of land degradation on agricultural land.

• Research and development costs for agricultural farms and livestock will be deducted for the purpose of Income Tax.

• Irrigation equipments to be allowed a capital depreciation rate of 25% per annum.

• Tractors and other plants for agriculture, livestock farming and fishing to be allowed a capital depreciation of 50% in first year, and 25% per annum in subsequent years.

• Business community dealing with agricultural products are not required to pay tax on equal quarterly instalments, but at the end of the year after harvest.

• Employment in agricultural farming will be exempt from Skills and Development Levy.

• Abolish stamp duty on receipt for Small and Medium sized Enterprise with sales turnover of less than T Shs. 20 million per annum and increase the presumptive income tax rates as follows:

THE VALUE ADDED TAX

• Shifting of pharmaceuticals, veterinary drugs, mosquito nets and articles for blind and disabled persons from Schedule II (Exempt VAT) to Schedule I (Zero rated VAT).

• Agricultural and livestock products are exempted from VAT and include all types of unprocessed edible meat, livestock products, fish products and agricultural products.

• Zero rated VAT on agricultural and fishing inputs such as pesticides, fertilizers, veterinary drugs and equipment, tractors, hoes, spades harrows, shovels, fishnets, machinery and fishing accessories.

• Exempt VAT on black tea and packaged tea.

• The threshold for compulsory VAT registration to be increased from T. Shs. 20 million to T. Shs. 40 million per annum.

• In case of reduction of administrative costs for TRA on collection of VAT, the Government may in future lower the current rate of VAT by two percentage points.

• Tax exemption on vehicles to include vehicles, which are in HS Code 8703, 8702.10.20 and 8702.90.20 having engine capacity of cc 3,000 or above.

EXCISE TARIFF

The specific excise duty rates to be adjusted on the following products:-

• Wine and brandy produced from locally grown grapes exempted from excise duty.

• Wine produced with less than 75% content of locally grown grapes from the current rates of T. Shs. 743.40 per litre to T. Shs. 780.00 per litre.

• Carbonated soft drinks, from the current rate of T. Shs. 37.50 per litre to T. Shs. 40.00 per litre.

• Beer, from the current rate of T. Shs. 232.00 per litre to T. Shs. 243.00 per litre.

• Spirits from the current rate of T. Shs. 1,102.50 per litre to T. Shs. 1,158 per litre.

• Cigarettes of length not exceeding 70 mm, with domestic tobacco content exceeding 75%, from the current rate of T. Shs. 3,781.05 per 1,000 cigarettes to T. Shs. 3,970 per 1,000 cigarettes.

• Cigarettes of length equal to 70 mm or more, with domestic tobacco content exceeding 75%, from the current rate of T. Shs. 8,920.30 per 1,000 cigarettes to T. Shs. 9,367.00 per 1,000 cigarettes.

• Other cigarettes containing tobacco not mentioned above from T. Shs. 16,206.75 per 1,000 cigarettes to T. Shs. 17,017 per 1,000 cigarettes.

• Cut rag/filler from the current rate of T. Shs. 8,183.70 per kg. to T. Shs. 8,593 per kg.

• Satellite Television broadcasting to attract an excise duty of 5% of retail selling price on provision of such services.

• Exemption of excise duty on vehicles for eligible beneficiaries to include vehicles, under HS Codes 8703, 8702.10.20 and 8702.90.20  having engine capacity of cc 3,000 or above.

STAMP DUTY

• No stamp duty for agricultural, livestock and fishery products.

• A flat amount of T. Shs. 500 will be charged on conveyance of agricultural land.

• Abolish stamp duty on receipt for Small and Medium sized Enterprise with sales turnover of less than T Shs. 20 million per annum whose presumptive income tax has been increased.

LOCAL GOVERNMENT FEES AND LEVIES

• Local Government prohibited from charging crop cess at more than 5% of the farm-gate price.

• Taxes and fees to be charged are only those listed in the Local Government Finances Act, 1982 and Finance Act of 2003.

• Authorise local authorities to collect royalty on gypsum, pozolana and lime used as raw materials in industries.

BUSINESS LICENSING ACT

• Business license to be issued only once upon establishment of business and not every year.

• Abolish business licence fees for hospitals, dispensaries and health centres operated by religious organisations.

• Abolish business license fees for businesses with a turnover of less than T. Shs. 20 million per year.

• A license fee of T. Shs. 20,000 only for businesses with a turnover exceeding T. Shs. 20 million.

• Abolish license fees for businesses regulated by another law in a specific sector (for eg: banking, insurance, hotels, etc.).

OTHER ACTS

• Business Visa fee to be reduced from USD 200 to USD 50.

• Visa stickers to replace stamping of passports.

BUDGET FRAMEWORK 2004-2005

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