2% agriculture withholding tax: Widening the tax net or shooting the industry in the foot?

 The circumstances of her ascent to office notwithstanding, the President of Tanzania has made sure there is continuity in government and has not shied away from the opportunity to better the tax system. From the day she was sworn in as the sixth President of the United Republic of Tanzania, H.E. Samia Suluhu Hassan vowed to widen the tax base and reduce the burden on the few taxpayers currently in the tax net.

It is no surprise that the government budget speech presented by Hon. Dr. Mwigulu Nchemba, followed by the Finance Bill proposed a 2% withholding tax on payments made by resident corporations in respect of agricultural, livestock and fishery products supplied by resident persons. Not much was spoken about this proposal at the time, but it was just a matter of time. The proposal was passed by the legislature and assented to law effectively on 1st July 2021.

Withholding tax (“WHT”) is a mechanism that creates statutory tax agents ("withholders") out of entities that are not subject to tax but deal with the targeted taxpayers. These agents are required to collect tax on the government’s behalf when making certain payments to other persons ("withholdees").

In a withholding tax mechanism, a payer of income, i.e. withholder/withholding agent must withhold tax from the income of the recipient at the time of payment and remit it to the revenue authority. Withholding tax can either be final or non-final. Final withholding tax is the one whereby the withholdee does not get a credit when calculating the income tax liability for the year. With the non-final withholding tax, the withholdee is granted a tax credit equal to the amount withheld.

The introduction of the 2% withholding tax on agricultural products was initially welcomed by many taxpayers and policy enthusiasts as it was perceived as a bold move to bring more people into the tax net and somehow lessen the tax burden to the few currently contributing to the preset tax targets. Post the first month of the tax being effected, the perception on this amendment has changed. Public perception has considered that it might not necessarily mean a widened tax base, but rather the fewer taxpayers already in the tax net might have to dig even deeper into their pockets.

Entities that procure agricultural, livestock and fishery products, and are withholding agents of the 2% tax, are currently experiencing pushback from farmers, fishermen, and livestock keepers. These players seem to be caught off guard and are unwilling to participate in the new deduction. There are a few questions to be asked in that regard. Was the 2% WHT introduced prematurely? Should the tax administrator, prior to the introduction of this change, have carried out tax workshops to the targeted players ranging from small to large scale farmers, livestock keepers and those in fishery industry to ensure that they are well aware of the change?

Considering that the 2% tax is a non-final withholding tax and the witholdees can claim tax credit when making year-end tax payments, this was not supposed to impact their cost of production, provided that they are registered taxpayers. But it may be the case that perhaps most of the targeted are not registered and may fail to claim the credit of tax withheld.

In reaction to the above, the purchasers who are mainly producers of various human and animal food products and others who are purchasing for local resale and export have ended up bearing the 2% WHT cost which potentially increases the cost of production. I foresee that these purchasers will eventually pass on this cost to their customers which will eventually have a multiplier effect on prices of all food products which was not the intended outcome.Could the timing of the change be better timed? For example, the change has come at a time when there has been slow movement of various products including agricultural products due to COVID-19. Also, there has been increased cost of agricultural inputs such as fertilizers due to changes made in government subsidy policies.

What can be done? Firstly, the government should re-consider the decision to remove the subsidies on fertilizers and work on the challenges experienced by the introduction of the fertilizer bulk procurement system in order to reduce the fertilizer prices. Secondly, the Taxpayer Services and Education department of the TRA has some field work to do; they need to arrange workshops imparting knowledge to the affected groups to reduce rejection of the deduction due to ignorance.

Thirdly, there is a need for the TRA to clarify on who are the main targets of this deduction as the budget speech exempted small-scale farmers and those selling to the Agricultural Marketing Cooperative Societies (“AMCOS”). The Finance Act, however, made changes on the Income Tax Act to only exempt sales made to AMCOS and Cooperative Unions.

Potentially, this measure may increase registration for those persons seeking to claim their withholding tax credits. It has always been a plea of the tax community to widen the tax base. With this change, there is some educating and impact assessments to be done regarding whether the introduction of the new tax has achieved its intended objective.