CIVIL APPEAL NO. 370/2021
Analysis of the Court of Appeal’s treatment of non-deposit-taking microfinance institutions and excise duty in Tanzania
BRAC Tanzania Finance Limited (“BRAC”) was licensed by the Bank of Tanzania as a Tier 2, non-deposit-taking microfinance service provider under the Microfinance Act, 2018. It therefore did not receive deposits from the public and was regulated under the Microfinance Act rather than the Banking and Financial Institutions Act (BAFIA).
Following a comprehensive assessment for the year 2021, the Commissioner General of the Tanzania Revenue Authority (TRA) assessed BRAC TZS 1,259,705,687 in excise duty and interest. TRA treated BRAC as a financial institution liable to excise duty under section 124(6A)(a) of the Excise (Management and Tariff) Act, Cap. 147. Commissioner General Tanzania R…
BRAC challenged the assessment. The Tax Revenue Appeals Board (TRAB) found in BRAC's favour, and the Tax Revenue Appeals Tribunal (TRAT) upheld that decision.
TRA appealed to the Court of Appeal, arguing principally that BRAC's activities and its regulatory status placed it within the meaning of a financial institution for purposes of excise duty. Commissioner General TRA.
The central issue was:
Whether BRAC Tanzania Finance Limited, as a Tier 2 non-deposit-taking microfinance service provider, was a “financial institution” liable to pay excise duty under section 124(6A)(a) of the Excise (Management and Tariff) Act.
The appeal also raised subsidiary questions concerning:
The proper interpretation of “financial institution” where the Excise Act did not itself define the term.
Whether the Court could rely on definitions contained in the Bank of Tanzania Act, BAFIA and Income Tax Act.
Whether BRAC's classification as a Tier 2 non-deposit-taking microfinance provider excluded it from the category of financial institutions.
Whether the Microfinance Act could be used to determine BRAC's tax liability. Commissioner General TRA.
The Court of Appeal allowed TRA's appeal, holding that BRAC was a financial institution for purposes of the excise duty provision and was therefore liable to excise duty.
The Court consequently:
allowed the appeal;
reversed the decision of TRAT;
upheld TRA's assessment and imposition of excise duty; and
awarded costs to TRA. Commissioner General Tanzania R…
The Court began with the established principle that taxing statutes must be strictly construed. It relied on earlier Tanzanian decisions, including Commissioner General (TRA) v Mamujee Products Ltd & Others and Commissioner General, TRA v Ecolab East Africa (Tanzania) Limited. The Court emphasised that a tax cannot be imposed merely because such an intention appears desirable; the liability must be supported by the language of the taxing statute. Commissioner General Tanzania R…
However, strict construction did not mean that the term “financial institution” had to be understood only through the Microfinance Act.
The Court considered the definitions in the Bank of Tanzania Act and the Income Tax Act, noting that the Bank of Tanzania Act connects a financial institution with an entity engaged in banking business, while “banking business” includes receiving funds from the public through deposits and using those funds for loans or investments. Commissioner General Tanzania R…
The Court then considered the Microfinance Act's classification of providers into four tiers. BRAC was a Tier 2 non-deposit-taking provider, whereas Tier 1 consists of deposit-taking microfinance institutions regulated under BAFIA. Commissioner General Tanzania R…
Importantly, however, the Court held that the Microfinance Act's categorisation could not be used as the decisive test for determining taxability. The TRAB and TRAT had erred by focusing on BRAC's licence, regulatory framework, business activities and microfinance tier. Commissioner General Tanzania R…
The Court concluded that the distinction between deposit-taking and non-deposit-taking microfinance providers did not prevent BRAC from being classified as a financial institution for excise-duty purposes. Commissioner General TRA,
The most important point is that being a non-deposit-taking microfinance provider does not, by itself, immunise an entity from excise duty applicable to financial institutions.
The Court treated “financial institution” as a legal category that may have consequences under different statutes, rather than simply adopting the regulatory classification under the Microfinance Act. Commissioner General Tanzania R…
The Court accepted TRA's argument that, although other statutes may assist in understanding a statutory term, the question of tax liability must ultimately be connected to the tax-imposing legislation.
This is particularly significant where a taxing statute uses a term but does not expressly define it.
The decision does not abandon the rule of strict construction of tax legislation. Rather, it demonstrates that strict construction does not necessarily mean adopting the narrowest possible interpretation of a term.
The Court maintained that the words of the taxing law must be applied according to their legal meaning, while allowing relevant legislation to illuminate the meaning of an undefined term. Commissioner General Tanzania R…
A particularly important jurisprudential point is the Court's recognition that an entity's classification under a regulatory statute may not necessarily determine its classification for tax purposes.
Thus, “Tier 2 non-deposit-taking microfinance service provider” under the Microfinance Act did not conclusively mean “not a financial institution” for purposes of excise duty.
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