Lack of proper business records is one of the major hindrances to a successful tax administration in Tanzania. This problem is acute in the informal sector, but it is also a common occurrence in the formal sector. Lack of proper business records may be inadvertent or deliberate or both. The tax administration law in Tanzania (The Tax Administration Act, Cap. 438), requires taxpayers to keep records about their businesses in accordance with the generally accepted accounting principles and the requirement of a tax law. Broadly, the law requires taxpayers to maintain documents, either in paper or electronic form which contain information that can enable an accurate determination of tax liability under any tax law. Taxpayers are also obliged to retain such information for a period of at least five years.
The normal rules for determination of income tax liability are reliant on proper accounting records of a taxpayer. In the absence of taxpayer’s proper accounting records, an accurate determination of the income tax liability using the normal tax rules (of establishing a taxable profit) becomes a nightmare. However, the tax laws give Tanzania Revenue Authority (TRA) extensive powers to determine and collect tax on a presumptive basis. TRA may also penalize taxpayers who fail to keep proper documents.
Presumptive taxation involves the use of indirect means to ascertain tax liability, which differ from the usual rules based on the taxpayer's accounting records. The term "presumptive" is used to indicate that there is a legal presumption that the taxpayer's income is no less than the amount resulting from an application of the indirect method. There are various reasons a presumptive tax approach can be adopted. One is a simplification of both tax compliance and tax administration. A presumptive approach can also be used to curb tax evasion.
Resident individuals earning their incomes solely from business in Tanzania are, by default, taxed on their income under a presumptive income tax scheme provided their annual turnover is 100 million shillings or less. Presumptive income tax rates are based on a level of turnover and also whether the individual keeps proper records or not. The tax rates for individuals not keeping proper records are specific (i.e. the amount of tax is specified) whilst those keeping proper records the rates are ad valorem (a percentage of the turnover amount). The tax rates, whether proper records are kept or not, increases with turnover (progressive). But, generally, the income tax tends to be higher for those not keeping proper records.
In the absence of proper business records, apart from the presumptive income tax which may only apply to individuals with an annual turnover not exceeding 100 million shillings, the tax administration law empowers TRA to make "jeopardy assessments" based on the available information and "best judgment". Conceptually, this is another form of presumption except that the tax base is not prescribed which effectively gives TRA a wider scope to determine tax liability as long as it is based on the best judgment.
Once TRA issue a tax assessment to a taxpayer, the burden of proof as to the incorrectness of the assessment lies with the taxpayer. In the absence of proper records, a taxpayer may not be able to, successfully, challenge any tax assessment including the jeopardy assessments. Therefore, withholding of information that may assist TRA to determine proper tax liability may not be the best strategy to reduce income tax liability especially if the chances of a tax audit are higher. So, you can make proper record-keeping among your top-five resolutions for the year 2020.
By Shabu Maurus, Tax Partner, Auditax International.