APPLICATION OF VAT IN TANZANIA

1. LESSON 9
PARTIAL EXEMPTION

2. PARTIAL EXEMPTION
INTRODUCTION
If a trader makes only exempts supplies he is not
liable to register for VAT.
if he makes a mixture of exempt and taxable
supplies, he must register if the value of taxable
supplies exceeds the registration threshold.
Such a trader is a partially exempt.
The major disadvantage for traders making
exempt supplies is that they cannot register and
therefore they can not reclaim the tax they are
charged by their suppliers if it relates to their
exempt supplies.

3. OBJECTIVE
At the end of a lesson, the trainees will be
able to accurately calculate the deductible
Input tax of a partially exempt trader by
using method I and method II as provided
for under the VAT Act, 1997.

4. LESSON DEVELOPMENT
What attributes to partially exempt trader

5. Types of Supplies
Standard rated
zero rated
Exempt
special relief

6. Input tax
What makes exempt supplies different from the
others Input tax incurred in making exempt
supplies cannot be reclaimed
What is registration position of trader who
makes only exempt supplies? Cannot register
What about traders who make a mixture of
taxable and exempt supplies? Must register if
taxable supplies exceed the threshold
Trader is then faced with problem of
apportioning the input tax between exempt
supplies (not claimable) and taxable supplies.

7. LESSON DEVELOPMENT
What attributes to partially exempt trader

8. Types of Supplies
Standard rated
zero rated
Exempt
special relief

9. Input tax
What makes exempt supplies different from the
others Input tax incurred in making exempt
supplies cannot be reclaimed
What is registration position of trader who
makes only exempt supplies? Cannot register
What about traders who make a mixture of
taxable and exempt supplies? Must register if
taxable supplies exceed the threshold
Trader is then faced with problem of
apportioning the input tax between exempt
supplies (not claimable) and taxable supplies.

10. Methods
How is this required to be carried out ?
2 methods available for trader to choose from.
It is for the trader to choose which method to
use apportionment of input tax in ratio of
taxable: exempt outputs (method 1) Attribution
of input tax
Then apportionment of non-attributable in ratio
of ‘taxable’ : ‘exempt’ input tax (method 2)

11. Method1
Advantages
– simple to operate
– No complicated bookkeeping required
Disadvantages
– Crude method
– Recovery of input tax not related to use -
may be significant amount of input tax not
recovered.

12. Method 1 cont’d
More suitable for smaller traders where
books are simple, amount of tax not
significant;
Traders where taxable outputs are low
compared to exempt outputs.

13. Method 2
Advantages
– Better recovery of input tax
– Recovery related to use (attribution)
Disadvantages
– Need better records (to analyze input tax into the
three categories)
– More difficult calculation
– Suitable for use by larger traders with better
bookkeeping systems.
The trader is entitled to choose whichever
method he/she wishes.

14. First Method
Step 1: Calculate the value of taxable supplies made in
the prescribed accounting period.
Step 2: Calculate the value of all supplies made in that
period.
Step 3: Calculate the amount of tax payable on supplies
made to the registered person in that period. (Total
input tax)
Step 4: Divide the amount obtained in step 1 for the period
by the amount obtained in step 2 ( the value of all
total supplies made in the period)
Step 5: The amount of input tax to be claimed as a
deduction or credit in the prescribed accounting
period is the product obtained by multiplying the
amount obtained in step 3 by the amount obtained in
step 4.

15. METHOD 1: FORMULAR
Taxable supplies x Total Input Tax
Total supplies
= Deductible Input Tax

16. Second Method
Step 1: Divide input tax for the prescribed accounting period into
categories :-
Category A: input tax that is directly attributable to taxable supplies
Category B: Input tax that is directly attributable to exempt supplies
Category C: Input tax that is paid for the purposes of the
business but is not directly attributable to either taxable supplies
or exempt supplies.
Step 2: Calculate the value of taxable supplies made in the
prescribed accounting period.
Step 3: Calculate the value of all supplies made in that period.
Step 4: Divide the amount obtained in step 2 for the period by
the amount obtained in step 3 ( the value of all total
supplies made in the period)
Step 5: The amount of input tax to be claimed as deduction or credit in the
prescribed accounting period is the product obtained by
multiplying the amount obtained in step 4 by the amount obtained
in category C( found in step 1) and then add the input tax
attributable to taxable supplies ( category A found under step 1)

17. Second Method
Taxable Supplies
_______________ x C + A
Total Supplies
Deductible Input Tax=

18. Summary
The input tax to traders dealing with both
taxable and exempt supplies will be
apportioned
There are two methods for apportionment
of the input tax
The trader can choose either method
which he/she can adopt in the accounting
period.