Tanzanian Minister of Finance and Economic Planning, Hon. Mwigulu Nchemba presented the National Budget for 2022-2023, which received a mixed reception from different segments of the society except within the Islamic finance fraternity, where it was generally positively received. That is because, after a prolonged period of consultative meetings, the Ministry appreciated the argument for a tax neutrality approach for Islamic financial services in the country.
Tax Neutrality Measures
The Minister announced changes to various tax laws, some of which position Islamic financial products in competitive positions with their conventional counterparts. These changes are as follows:
- Value Added Tax
The Minister proposed to make amendments to the Value Added Tax Act, CAP 148 as follows:
“Amend the Value Added Tax Act, so as to recognise equivalent financing arrangement similar to conventional borrowing to enhance financial inclusion and accessibility of financial services. The objective of the measure is to treat financial products equally. In the Finance Bill of 2022, it is stated in clause 132, “The principal (VAT) Act is amended in section 94(2) by adding immediately after paragraph (g) the following: “(h) prescribing the manner and procedure of dealing in loans, including alternative financing products approved by the Bank of Tanzania.”
- Income Tax
The Minister proposed to make amendments to the Income Tax Act, CAP 332 as follows:
“Amend the Income Tax Act, Cap 332 to recognise alternative financing as approved by the Bank of Tanzania to be the same as conventional borrowing in order to enhance financial inclusion and access to finance. The measure is intended to promote the growth of these financial products and hence economic activities.”
In the Finance Bill of 2022, it is stated in clause 62, “For the purpose of this section, where an alternative financing arrangement approved by the Bank of Tanzania is payable as cost plus margin, the margin shall be treated in the same manner as interest.”
“Exempt withholding tax on Coupon for Corporate and Municipal Bond. This measure is in line with the Alternative Financing Strategy aimed at raising alternative financing for the implementation of Development Projects. Adopting the measure will increase investment products in the market.”
In the Finance Bill of 2022, it is stated in clause 66 that exempted withholding tax is on “(e) interest paid to a holder of corporate or municipal bonds issued and listed at the Dar es Salaam Stock Exchange with effect from July 1, 2022.”
Observations On Proposed Tax Amendments
- Alternative Financing
Islamic finance practitioners seem to interpret alternative financing to mean Islamic financing arrangements or Islamic financial products that are currently offered by several Islamic banking service providers. However, other entities such as KPMG and PWC based in Tanzania are of the view that the term “alternative financing” needs clarity.
In that regard, KPMG advises that “We expect that the Finance Bill of 2022 will provide more clarity on the implementation of this proposal and which financial products will be included.” Similar advice is reverberated by PWC Tanzania, “We expect the Finance Bill to provide further insight on what alternative financing is likely to cover.”
On a separate note, PKF Tanzania commented that, “We find this proposal may be to address the guidance gap in tax laws on transactions using Shari’a laws. The objective would be to treat financial products equally.”
Therefore, despite the Islamic finance practitioners’ insightful interpretations due to long-time involvement in tax reforms consultative meetings, there is a need for the Minister or Bank of Tanzania or a responsible organ to bring all parties on the same wavelength and avoid ambiguity or misinterpretations.
- Exempt on Withholding Tax on the Coupon of Corporate Bond and Municipal Bond
We celebrated the Minister’s words in his budget speech on this positive approach to exempt withholding tax on corporate bonds and municipal bonds that bring equal tax treatment to investors of government bonds. However, I am shocked to realise that the Finance Bill 2022 confines such exemption on “interest paid” to investors of such bonds only.
WE FIND THIS PROPOSAL MAY BE TO ADDRESS THE GUIDANCE GAP IN TAX LAWS ON TRANSACTIONS USING SHARI’A LAWS. THE OBJECTIVE WOULD BE TO TREAT FINANCIAL PRODUCTS EQUALLY.
Thus, the investors of Islamic corporate bonds or Corporate Sukuk or Municipal Sukuk listed at DSE, which earn returns other than interest may be subjected to withholding tax and hence brings unequal tax treatment among investors. Therefore, it is advised that, rather than using the word “interest”, the finance bill should use a generic term such as “returns.”
To conclude, I congratulate the Honorable Minister under the transformative leadership of Her Excellency President Samia Suluhu Hassan for the positive steps to introduce tax neutrality treatment of alternative financing products which may include Islamic financial products. This measure does not improve the competitiveness of the sector per se but is a strong factor to attract local and foreign domestic investment, create employment, and accelerate the fulfilment of the country’s financial inclusion agenda.
Indeed, the National Budget for 2022-2023 is a historic milestone and with the recommendations suggested above taken into account, more milestones shall be reached. The future looks bright.
