Criminal Appeals Nos. 212 and 213 of 1984
Sun Distribution Tanzania Limited entered into one-year fixed-term employment contracts with Shaban Juma, Amri Mgoye and Mohamed Jumanne on 1 June 2021.
On 20 August 2021, before expiry of the contracts, the employer terminated the employees' employment, citing economic hardship.
The employees challenged the termination before the Commission for Mediation and Arbitration (CMA), Ilala, claiming payment for the ten months remaining on their fixed-term contracts. The total claim was TZS 23,850,000, comprising:
Shaban Juma – TZS 7,750,000;
Amri Mgoye – TZS 9,000,000; and
Mohamed Jumanne – TZS 7,710,000.
The arbitrator found that the employer had breached the fixed-term contracts and awarded the employees the above amounts.
Sun Distribution was dissatisfied and filed a revision application before the High Court. Although several grounds were initially raised, counsel ultimately concentrated on whether the arbitrator had erred by awarding the employees the equivalent of the remaining contractual salaries without making deductions for PAYE and statutory contributions.
The decisive issue before the High Court was:
Whether the amounts awarded to the employees as compensation for the unexpired period of their fixed-term contracts were subject to PAYE deductions under the Income Tax Act.
The Court therefore had to determine the tax character of compensation arising from termination of employment, rather than reconsidering the employer's liability for breach of the fixed-term contracts.
The High Court upheld the substantive award of TZS 23,850,000, finding that the employees were entitled to compensation for the unexpired portion of their fixed-term contracts.
However, the Court held that the award was taxable income and therefore subject to PAYE.
The Court relied principally on section 7(1), section 7(2)(e), section 7(4), and section 7(5)(a)–(c) of the Income Tax Act, Cap. 332 R.E. 2019. In particular, section 7(2)(e) includes payments made in respect of redundancy or loss or termination of employment in employment income. Section 7(5)(a) is particularly relevant to a specified-term contract because it addresses compensation relating to the unexpired period of the contract.
The Court therefore ordered PAYE deductions of:
Shaban Juma: TZS 555,000;
Amri Mgoye: TZS 805,000;
Mohamed Jumanne: TZS 438,000.
The total PAYE was TZS 1,798,000, leaving:
Shaban Juma – TZS 7,195,000;
Amri Mgoye – TZS 8,195,000; and
Mohamed Jumanne – TZS 6,662,000.
Importantly, the Court directed that the PAYE should be remitted to the Commissioner General of TRA, rather than retained by Sun Distribution.
The case is important for Tanzanian employment practice for several reasons.
First, it confirms that compensation arising from termination of employment can have a tax consequence. An employer cannot simply treat an employment award as an ordinary damages payment and assume that it is outside the PAYE regime. The Court specifically applied section 7 of the Income Tax Act to compensation relating to termination.
Second, the decision is particularly significant for fixed-term contracts. Where an employer prematurely terminates a fixed-term contract in circumstances amounting to breach, the employee may obtain compensation representing the contractual period that remained. Sun Distribution demonstrates that the resulting award may nevertheless be treated as taxable employment income.
Third, the case distinguishes between the employee's entitlement to the award and the tax treatment of that award. The Court did not reduce the underlying contractual compensation because of the PAYE question. Instead, it maintained the award at TZS 23,850,000 but required the appropriate tax to be deducted and remitted to TRA.
Fourth, the case makes clear that PAYE is not the employer's money. The employer is essentially a collection/remittance mechanism. The Court expressly rejected the suggestion that Sun Distribution could retain the deducted amount. The TZS 1,798,000 belonged to the Government and had to be remitted to TRA.
Fifth, the decision illustrates the interaction between employment law and tax law. A successful labour claim does not operate in isolation from statutory taxation obligations. Practitioners dealing with employment awards should therefore consider the net amount actually payable after statutory deductions, rather than assuming that the nominal award represents the employee's final cash entitlement.
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