IDIANA CONSULTANCY : NBAA PAST PAPERS (B4 – PUBLIC FINANCE AND TAXATION I : ( MAY 2017 ) The National Board of Accountants and Auditors,

MAY 2017
Q & A

©The National Board of Accountants and Auditors, 2017

EXAMINATION : INTERMEDIATE LEVEL

SUBJECT : PUBLIC FINANCE AND TAXATION I

CODE : B4

EXAMINATION DATE : THURSDAY, 4^TH MAY, 2017

TIME ALLOWED : THREE HOURS (2:00 P.M. – 5:00 P.M.)

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GENERAL INSTRUCTIONS

1. There are TWO Sections in this paper. Sections A and B which comprise

SIX questions.

2. Answer question ONE in Section A.

3. Answer ANY FOUR questions in Section B.

4. In total answer FIVE questions.

5. Marks are shown at the end of each question.

6. Calculate your answers to the nearest two decimal points where necessary.

7. Show clearly all your workings in respective answers where applicable.

8. This question paper comprises 8 printed pages.

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SECTION A

Compulsory Question

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QUESTION 1

(a) Sikinde is an employee of Kipunde Plc since the company’s registration way back in 2000. The company was originally a parastatal organization and was later privatized in early 2000’s. Both the company and Sikinde were resident persons for the year of income 2016. During the year of income 2016, Sikinde enjoyed the following emoluments:-

(i) Monthly Salary [net of social security deduction] of TZS. 1,200,000 for the months January to June and TZS. 1,400,000 from July to December. The new salaries announced in July were not paid immediately. The company continued paying old salaries to November, and the December salary [paid on 28^th December] was paid together with the arrears for the increment from July to November.

(ii) During the May Day of 2016, the company declared Sikinde as the best worker of the year 2015 [previous year]. Apart from certificate and testimonials from the company, he was awarded a TZS. 1,000,000 cheque by the workers’ Association. This was paid on the same day i.e. 1^st May 2016.

(iii) Owing to the fact that he lived far from office, Sikinde was given a company car to facilitate his movements. The car was a 2,800 cc Nissan double cabin. The car cost the company TZS. 18,000,000 when it was imported in 2012 and is considered to be currently worth TZS. 12,000,000 in the market. The tax written down value of this vehicle in the company records is currently TZS. 4,394,531.

(iv) During the year, the company organized a sports bonanza for the company staff and their families. Sikinde emerged the best in sack race and was awarded two crates of his favorite soda costing TZS. 72,000 from the company refreshments center. He had an option of converting the gift into cash or other drinks of equivalent value as the company could always use the drinks in future. However, he decided to offer the drinks to a family of his office mate Linda, for their wedding anniversary celebration on the same day.

(v) Sikinde took on 1^st July 2016, a 10% TZS. 30 million loan from the company to start a side business. According to the company policy, he was supposed to repay the loan after 3 years, making monthly accumulation of reserves from the business for the purpose. The interest is payable every 31^st December and 30^th June during the loan term.

(vi) Sikinde has a part-time job with Mapenzi Enterprises which knowing that they are his secondary employers, pays him on an hourly rate of TZS.20,000. During 2016, Sikinde recorded a total of 120 man hours with Mapenzi.

(vii) Other benefits enjoyed by Sikinde during the year are:

· Medical insurance for him and his family [spouse and two children] costing the company TZS. 200,000 per month. Actual hospital bill for Sikinde during the year was only TZS. 500,000 billed to the insurer.

· Meal allowance of TZS. 5,000 per working day, assuming a flat 22 working days per calendar month, excluding one (01) month of annual leave. This was non-discriminatory as it was paid to all employees.

REQUIRED:

(i) Calculate the taxable employment income of Sikinde for the year of income 2016. (9 marks)

(ii) Calculate the income tax suffered by Sikinde on the income calculated in (i) above. (3 marks)

(b) Mr. Kayemo has been contracted by Mollel and Prom Tanzania Ltd (M&PTL) from 2014 as Petrochemical Engineer for unspecified term and his contract did not provide provision for compensation upon the event of termination. Following the economic distress in petroleum industry and persistent decline in prices for petroleum products, Mr. Kayemo’s contract was terminated during the end of 2015 and he was offered TZS.120,000,000 instantly on 31^st December 2015 as a termination compensation after threatening to sue the company. During the year of income 2014, his annual emoluments amounted to TZS.20,000,000 and it was expected to remain steady for the next 5 years.

REQUIRED:

Compute taxable employment benefit and state when the amount will be taxable. (4 marks)

(c) The Income Tax Act Cap 332 requires a taxpayer to file a final tax return to Tanzania Revenue Authority (TRA). Filing a return means making a statement to TRA’s Domestic Revenue Department of the income sources and the tax a person is supposed to pay under the law. Actually, all taxpayers are required to file a return on income unless the circumstance allow otherwise.

REQUIRED:

Identify clearly the situations or circumstances that might prevent a taxpayer from filling a return of income to TRA. (4 marks)

(Total: 20 marks)

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SECTION B

There are FIVE questions. Answer ANY FOUR questions

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QUESTION 2

(a) Describe the role of the Tax Administration Act, 2015. (5 marks)

(b) Mr. Chapakazi is employed by the German Embassy in Tanzania as an accountant with a monthly salary of TZS. 3,500,000. He owns a wholesale textile business registered as Chapakazi Enterprises at Kariakoo. The Business commenced in the year 2013. On 1^st January 2014, he purchased 1,000 shares from Kyaka Co. Ltd. The accounting date of Chapakazi ends on 31^st December. During the annual meeting of 2015, Kyaka Co. Ltd declared TZS. 1,000,000 dividends to each of its shareholders. On 15^th June 2015, Mr. Chapakazi received TZS. 3,000,000 as interest from Kwetu Bank Ltd from a fixed deposit account.

Chapakazi’s statement of estimated tax payable was submitted on 20^th March 2015 showing an income of TZS.52,000,000.

In September 2015, Mr. Chapakazi amended his estimated tax payable to TZS.70,000,000. The return of income submitted on 2^nd August 2016 showed an income of TZS. 90,000,000 and the tax was paid accordingly.

REQUIRED:

(i) Calculate the tax installment payments. (5 marks)

(ii) Assuming the rate of tax is 30%, calculate the amount paid on 2^nd August 2016. (5 marks)

(iii) Determine any penalties and interest arising from the above scenario.

(5 marks)

(Total : 20 marks)

QUESTION 3

(a) Mayasa supplies motor vehicles through a bonded warehouse. She imports the motor vehicles from Japan and enters them in Mainland Tanzania for warehousing. The motor vehicles after being released from customs are delivered to the bonded warehouse from where she sells the motor vehicles.

REQUIRED:

(i) Define what is a “place of supply”. Why is it necessary to determine the place of supply for VAT chargeability? (2 marks)

(ii) Determine the place of supply for motor vehicles imported by Mayasa.

(3 marks)

(b) Tigana wants to start a boutique store. On 1^st May, 2017 he entered into a contract to lease business premises at Mhasibu House, Dar es Salaam where he will locate his store. However, the business will start on 1^st September 2017. Tigana projects that the business sales will be around TZS. 9,000,000 per month.

REQUIRED:

State when, if at all, Tigana is liable to register for VAT. (2 marks)

(c) Zaramo Limited is a coconut oil processing company located at Kisarawe, and is registered for Value Added Tax (VAT). The company entered into the following transactions in the month of February 2016.

(i) Sold taxable supplies to customers as follows: Sales to VAT registered customers TZS.32,500,000 and TZS.6,750,000 to VAT unregistered customers.

(ii) Bought a brand new wagon car from Toyota at TZS.32,500,000.

(iii) Bought stationeries worth TZS.650,000 from suppliers who are not registered for VAT.

(iv) Entertained major customers at a local hotel at a cost of TZS.2,460,000.

(v) Bought coconuts from local farmers at a cost of TZS.12,500,000.

(vi) Paid for electricity and telephone at TZS. 321,400 and TZS.441,000, respectively.

(vii) A consultant on production processes was hired from South Africa. The consultant has no local office; as a result, he is not registered for VAT. He invoiced TZS. 16,500,000 for the services offered. The consultant did not charge any VAT as the supply falls outside the scope of South African VAT chargeability.

(viii) Wrote off TZS.1,758,000 in debtors as a bad debt. This amount was due from a customer who has been put into liquidation.

(ix) Received a deposit on sale to a customer amounting to TZS.4,650,000.

Unless specifically stated, all the above persons are registered for VAT and the transactions are stated exclusive of VAT.

REQUIRED:

Calculate the VAT payable or any excess carried forward for the period ended 28^th February 2017. (13 marks)

(Total: 20 marks)

QUESTION 4

Zakaria is contemplating starting a business which will be engaged in the selling and repairing of computers and related equipments. He will be working on full time basis in this business. He will be preparing his financial statements to 31^st December each year.

The following are his expected results for his first year of trading to 31^st December, 2016:

	TZS.	TZS.
Turnover		105,000,000
Cost of sales		(45,005,000)
		59,995,000
Bank interest	550,000
Less: Other expenditure
Salaries	24,555,000
Motor vehicle expenses	1,750,000
School fees for child	2,350,000
Depreciation allowances	3,550,000
Rent and rates	6,500,000
Utilities	365,000	(39,620,000)
Profit		20,375,000 ========

Additional Information:

(i) Included in salaries is a salary of TZS. 18,000,000 payable to Zakaria.

(ii) He has used the motor vehicle (3,000cc), 100 percent for private purposes. The vehicle, which is second-hand, costed TZS. 15,000,000.

(iii) School fees are payable for his son at Bwaila Private School.

(iv) The projected rent and rates include the cost of renting a house for himself at TZS. 3,600,000 per annum. The balance of the rent is for business premises.

Zakaria has not decided whether he should operate as a sole trader or incorporate a limited company. He has approached you for advice.

Assume that Zakaria has no other sources of income and that in case a company is incorporated, Zakaria will be treated as an employee of the company whose earnings will be subjected to appropriate income taxation including withholding taxes.

REQUIRED:

Advise Zakaria whether to operate as a sole trader or to incorporate a limited liability company. Your advice should take into account both the taxes payable and the earnings available to Zakaria. Support your answer with detailed calculations. (20 marks)

HINT: TAX RATES

1: Taxation of total income of a resident individual

Total Income (TZS)	Tax Payable
Up to 2,040,000	NIL
2,040,001 to 4,320,000	9% of the amount in excess of TZS.2,040,000
4,320,001 to 6,480,000	TZS.205,200 + 20% on excess of TZS.4,320,000
6,480,001 to 8,640,000	TZS.637,200 + 25% on excess of TZS.6,480,000
Over 8,640,000	TZS.1,177,200 + 30% on excess of TZS.8,640,000

2: Corporation income tax rate

Corporation income tax rate is 30%

QUESTION 5

(a) Explain the effects of protectionist trade policies in Tanzania and the strategies that can be used to protect the economy against those effects. (8 marks)

(b) Explain the differences between ‘public debt’ and ‘government budget’ deficit.

(6 marks)

(Total: 20 marks)

QUESTION 6

(a) The term customs is used synonymously with customs areas and customs departments.

REQUIRED:

With the help of examples, briefly explain the meaning of the term ‘customs area’ as applied in the East African Community Customs Management (EACCM) Act, 2004. (4 marks)

(b) Customs are used by countries all over the world to control the flow of goods to and from the territories.

REQUIRED:

Explain two reasons as to why goods are subjected to customs control. (4 marks)

REQUIRED:

(i) Explain briefly the meaning of the term customs entry. (2 marks)

(ii) Mention four purposes of entry of goods. (4 marks)

(d) Imported goods may be entered for warehousing.

REQUIRED:

(i) Mention two types of warehouses within which goods have been entered for warehousing may be deposited. (2 marks)

(ii) Mention four (4) activities that may be performed on the goods entered to warehousing while still in the warehouses. (4 marks)

(Total: 20 marks)

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SUGGESTED SOLUTIONS

B4 – PUBLIC FINANCE AND TAXATION

MAY 2017

ANSWER 1

(a) (i) Calculation of taxable employment income of Sikinde

Status: Resident

Year of Income: 2016

Item	Amount
Monthly salary [January – June]	7,200,000
Monthly salary [July – December]	8,400,000
Workers association payment – best worker	1,000,000
Car benefit	1,000,000
Bonanza gift	-
Loan benefit [TZS30,000,0005%6/12] (i.e. statutory 15% - 10% = 5%)	750,000
Part-time income [TZS 20,000*120]	2,400,000
Medical insurance (12 x 200,000)	2,400,000
Meal allowance [TZS 50002211]	1,210,000
Total taxable income	24,360,000

NB: It has been assumed that the statutory rate was 15% although it was given

and so any rate assumed by candidate was accepted.

(ii) Income tax suffered by Sikinde for the Year of Income 2016

Tax on Primary employment	Amount
Taxable income (24,360,000 – 2,400,000)	21,960,000
Tax suffered i.e. TZS 1,177,200 + 30% (21,960,000 – 8,640,000) [A]	5,173,200

Tax on secondary employment=TZS 2,400,000*30% [B]	720,000
Total tax suffered [A + B]	5,893,200

(b) Calculation of taxable employment benefit of Mr. Kayemo

	Amount
Compensation received	120,000,000
Maximum termination benefit to be included (20 million x 3)	60,000,000
Taxable employment termination benefits	60,000,000

Therefore, the employment termination benefit of TZS 60,000,000 will be taxable in the period immediately following such termination i.e. Year of Income 2016.

1. A resident individual who has no income tax payable or whose income for the year of income consists exclusively from (either or both sources):

a) Income from any employment where the employer withholds ‘Pay As You

Earn’ tax or

b) Gains from realization of assets where taxes are paid in the form of a

single installment (Section 92).

2. Also, a non-resident person without a domestic permanent establishment who has no income tax payable for the year of income or whose income tax payable for the year of income consists exclusively of gains from realization of assets where taxes are paid in the form of a single installment is not required to submit a return on income (Section 92).

ANSWER 2

(a) Administration aspects of taxation includes:

(1) Harmonise the tax Administration in the country.

(2) Registration

(3) Return filing

(4) Payment

(5) Non-compliance

Resident Person

(b) Tax = 1,177,200 + 30%(52m-86m) = 14,185,200

(i) I =

1^st Installment =

2^nd Installment =

3^rd Installment =

4^th Installment = 70M – (3,546,300 x 2) - 31,453,700 = 31,453,700

(ii) tax paid on 2^nd August 2016

Tax credit

Income Tax per return = 90M x 30% = 27M

Tax paid by instalment = 70M

Tax credit = 27M – 70M = (-43M)

(iii) No interest for understatement of interest neither interest for failure to pay

tax on time.

- 578 of Tax Administration.

- Penalty for later submission of tax return.

- Due date 30/6/2016.

- Date of submission = 02/08/2016

- Time of failure = 2 months

The penalty is the higher of:

(a) 2.5% on tax due on return

(b) 5 currency points (5x15,000)

(75,000x2) = 150,000 TZS.

(b) Estimated Income = 52M

Tax (30% x 52M) = 15,600,000

1^st Installment =

2^nd Installment =

In September, Estimated Tax Payable was raised to Tshs.70M

\ = 3^rd Installment =

4^thInstallment

(ii) Amount paid = Annual tax liability – Tax paid.

= 90M x 30% - 70M = 43,000,000

A Refund of TZS. 43M

ANSWER 3

(a) Mayasa

(i) A place of supply is a country, state or any tax jurisdiction within which a particular supply is subject to VAT chargeability.

It is important to determine the place of supply in order to know the country, state or jurisdiction which has the taxing right over a particular supply.

(ii) The motor vehicles are supplied outside the Mainland Tanzania because they were entered for warehousing. Importation entered for warehousing is considered to be a supply outside Mainland Tanzania.

(b) Will be required to apply for registration on any time because there is reasonable reason to believe that cumulative turnover for 12 months period starting 1 September 2017 will exceed TZS.

Tax Payer: Zaramo Ltd

Accounting Period: February 2016

Supplies	Value (TZS)	Rate	Output Tax (TZS)
Sales to VAT registered customers	32,500,000	0.18	5,850,000
Sales to non-VAT registered customers	6,750,000	0.18	1,215,000
Deposit	4,650,000	0.18	837,000
Consultancy service – reverse charge	16,500,000	0.18	2,970,000
Total output tax			10,872,000

Expenditure	TZS		Input Tax (TZS)
Acquisition of Wagon car	32,500,000	0.18	NIL (Not Deductible)
Stationery	650,000	NIL	NIL (Not chargeable)
Entertainment	2,460,000	0.18	NIL (Not Deductible)
Coconuts	12,500,000	NIL	NIL (Exempt)
Electricity	321,400	0.18	57,852
Telephone	441,000	0.18	79,380
Consultancy services	16,500,000	0.18	2,970,000
Bad debts	1,758,000	0.18	316,440
Total input tax			3,423,672
VAT payable			7,448,328

ANSWER 4

Business Chargeable Income for the two alternatives is as shown below:

	Company	Sole Trader
Profit	20,375,000.00	20,375,000.00
Add back:
School fees	-	2,350,000.00
Salary	-	18,000,000.00
Rent	-	3,600,000.00
Motor Vehicle	-	1,750,000.00
Chargeable Income	20,375,000.00	46,075,000.00
Income Tax	6,112,500.00	12,407,700.00
Earning after tax	14,262,500.00	33,667,300.00

Employment chargeable Income

	TZS
School fees	2,350,000.00
Salary	18,000,000.00
Rent	3,600,000.00
Motor Vehicle	1,000,000.00
Chargeable income	24,950,000.00
Income Tax	6,070,200.00
Earning after tax	18,879,800.00

Conclusion:

· Tax suffered in a company and on employment amounts to Tshs.12,182,700 while on a sole proprietorship is Tshs.12,407,700. Therefore, incorporation is beneficial.

· Again, Earning after tax for corporation is Tshs.33,892,300 while that of sole proprietorship is Tshs.33,667,300, again it is beneficial for a limited company.

NOTE: That Earning after tax for a corporation is 14,262,500 + 18,879,800 – 1,000,000 +

1,750,000 = 33,892,300

ANSWER 5

(a) Effects of protectionist trade policies in Tanzania and the strategies that can be used to protect the economy.

Trade protectionism is a type of policy that limits unfair competition from foreign industries. It’s a politically motivated defensive measure. In the short run, it works. But it is very destructive in the long term. It makes the country and its industries less competitive in international commerce.

Countries use a variety of strategies to protect their trade. One way is to enact tariffs that tax imports.

That immediately raises the price of the imported goods. They become less competitive when compared to local goods. This method works the best for countries with a lot of imports.

A second way of protecting trade is when the government subsidizes local industries. Subsidies come in the form of tax credits or even direct payments. That allows producers to lower the price of local goods and services. This makes the products cheaper even when shipped overseas.

That means subsides work even better than tariffs. This method works best for countries that rely mainly on exports.

A third method is to impose quotas on imported goods. This method is more effective than the first two. No matter how low a foreign country sets the price through subsidies, it can’t ship more goods.

(b) Differences between the public debt and the government budget deficit.

Public debt, which is also sometimes referred to as government debt, is all of the money owed at any given time by any branch of the government. It encompasses debt owed by the federal government, the state government, and even the municipal and local government. Public debt accrues over time when the government spends more money than it collects in taxation. As a government engages in more deficit spending, the amount of debt increases.

Budget deficit is basically the excess of government’s total expenditure over total revenue. Total expenditure can be of two types, capital expenditure and revenue expenditure. These are financed out of revenue receipts and capital receipts.

Creating additional debt has two negative consequences aside from any intergenerational equity concerns.

First, increasing taxes to pay the interest adds to the scale of tax distortions in the economy.

Second, it seems likely that additional government debt will to some extent crowd out investment in productive capital, and this is a cost if, as also seems likely, we currently have less than the optimum amount of productive capital.

ANSWER 6

(a) Customs area refers to any place appointed by the Commissioner by notice in writing for the deposit of goods subject to customs control.

Custom areas include ports, airports, sufferance wharves, border points, roads, routes, transit sheds, and internal container depots.

(b) Goods are placed under customs control to ensure two things:

- Only permissible goods are imported or exported.

- Appropriate duties or taxes are paid in respect of the goods.

(ii) Purpose of entry of goods:

· Home consumption;

· Warehousing

· Transshipment

· Transit; or

· Export processing zones

(d) Warehousing

(i) Types of warehouses for depositing goods entered for warehousing:

· Bonded warehouse

· Government warehouse

(ii) Warehoused good may be:

· Repacked

· Sorted

· Bulked

· Used to assemble or manufacture any article

· sold

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