Civil Reference No. 7 of 2004
Mbeya Cement Co. Ltd (the appellant), a registered taxable person, received imported technical and management services from foreign companies (including La Farge and ten others) between 1 January 2001 and March 2005. The appellant did not file VAT returns in respect of these imported services. Based on information available to it concerning payments made for these services, the Tanzania Revenue Authority (TRA) issued an additional VAT assessment of Tz Shs 1,017,656,665/= under section 43(1) of the Value Added Tax Act, Cap 148 R.E. 2002, read with the Value Added Tax (Imported Services) Regulations, 2001. The appellant objected, but TRA declined to withdraw the assessment. On appeal, the Tax Revenue Appeals Board held TRA lacked power under section 43(1) to make the assessment, but the Tax Revenue Appeals Tribunal reversed the Board, holding that TRA had such power under section 43(1) read with Regulations 5 and 6, and that the appellant's failure to comply with the Regulations amounted to a failure to account for the tax. The appellant appealed to the Court of Appeal.
(1) Whether the Commissioner General of TRA had power under section 43(1) of the VAT Act to make a tax assessment on imported services against a registered taxpayer who had not filed returns. (2) Whether the appellant's failure to comply with the mandatory provisions of the VAT (Imported Services) Regulations, 2001 (Regulations 5 and 6) amounted to a failure to account for, and thus pay, the demanded tax, justifying the assessment.
The appellant, through Dr. Nguluma, argued that section 43(1) requires a factual basis or evidence of actual non-payment of tax before an assessment can be made; mere failure to file returns does not automatically entitle the Commissioner General to assess tax, since this does not necessarily create taxable income. It further argued that under Regulations 5 and 6, the appellant was entitled to set off or counter-balance output tax on imported services against input tax on the same, meaning that, net of these adjustments, no additional tax was actually payable, so the non-accounting did not cause any real underpayment assessable under section 43(1). The Commissioner General, through Mr. Beleko, agreed section 43(1) must be read with Regulations 5 and 6 but argued that the key trigger was the appellant's admitted failure to file the mandatory VAT returns on imported services it had consumed, which raised a presumption that tax was due and payable, entitling the Commissioner General to invoke section 43(1). He submitted that a taxpayer cannot assume nil tax liability merely by failing to file returns, and that the assessment was properly based on information about payments made to foreign suppliers, not conjecture. In rejoinder, the appellant maintained that the Commissioner General is not a mere mechanical authority and that a failure to file returns cannot itself create taxable income for assessment purposes.
The Court of Appeal dismissed the appeal with costs, affirming the Tribunal's decision. It held that on a combined reading of section 43(1) of the VAT Act and Regulations 5 and 6, the Commissioner General was entitled to invoke section 43(1) because the appellant, a taxable person, had failed to pay tax payable on imported services by reason of its failure to make the returns required under the Act. The Court found that section 43(1)(b), by its legislative purpose and plain wording, vests in the Commissioner General discretion to assess tax due where, in his judgment, a taxable person has failed to pay tax owing to failure to file required returns. The assessment was not arbitrary but grounded in material available to the Commissioner General (records of payments to La Farge and ten other foreign companies during the relevant period), satisfying the factual foundation requirement. The Court further held that, absent proper filing of returns as required by law, the appellant could not validly claim shelter under Regulations 5 and 6 to argue no net tax was due, since there was admittedly no recording in the VAT account of output tax on imported services or of any corresponding input tax claim; therefore, it could not be said the net effect was nil tax payable. Both grounds of appeal were found to lack substance.
The judgment clarifies the interpretation and interplay of section 43(1) of the VAT Act with Regulations 5 and 6 of the VAT (Imported Services) Regulations, 2001, establishing that a taxpayer's failure to file mandatory VAT returns on imported services (the 'reverse charge' mechanism) can itself trigger the Commissioner General's discretionary power to assess tax due, provided there is a factual basis such as available payment records. It confirms that taxpayers cannot rely on the theoretical set-off mechanism in Regulations 5 and 6 to claim nil tax liability where they have not actually complied with the recording and return-filing obligations under the Act. The case thus reinforces the principle that non-compliance with statutory return-filing obligations cannot be used defensively to negate an assessment, and affirms the Commissioner General's assessment powers as a legislative tool to counter avoidance of VAT on imported technical and management services sourced from abroad.
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