DEPARTMENT OF ACCOUNTING AND FINANCE

BACHELOR OF ACCOUNTANCY (BA II)

TAXATION AND PUBLIC FINANCE

AFU 07422

ACADEMIC YEAR 2024/2025

_____________________________

TOPIC TWO: COMPUTATION OF BUSINESS INCOME

Learning Outcome
a) Explain the meaning of business
b) Calculate chargeable income from business
c) Explain presumptive income taxation and its application in Tanzania
d) Identify items of income included in calculating chargeable income from business
e) Identify items of income excluded in calculating chargeable income from business
f) Explain the general principle of deductions and identify the specifically allowable
deductions.

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A. The Explain the meaning of business
Business
‘Businesses includes a trade, concern in the nature of trade, manufacture, profession, vocation
or isolated arrangement with a business character; and a past, present or prospective business,
but excludes employment and any activity that, having regard to its nature and the principal
occupation of its owners or underlying owners, is not carried on with a view to deriving profits.

Badges of Business (Indications of Business):

a) Methods of acquisition; assets acquired through inheritance or gifts might indicate no
trade motive than those acquired through purchases (Taylor v Good [1974] 49TC277).

b) Length of the period of ownership; purchasing and selling an asset in hast might indicate
trading while holding the assets for long period may indicate investment (Marson v Morton
and Others [1986] 59TC381).

c) Frequency or number of similar transactions by the same person; too many similar
transactions might imply trade (CIR v Livingston and Others [1926] 11TC538).

d) Doing supplementary work on or in connection with the asset realised to increase

saleable condition might indicate trading (CIR v Livingston and Others [1926] 11TC538.

e) Circumstances that were responsible for the realisation; forced realisation for example
in emergency might indicate absence of trade (CIR v Livingston and Others 11TC538).

f) Profit motive; reason for transaction involved being gain profit from it rather than holding
it as an investment (Salt v Chamberlain [1979] 53TC143).

g) Nature of assets involved; if the nature of the assets involved is not always involved in
trade, it might not indicate trade. These assets include purchase of shares might highly
indicate investment than trading and purchasing of classic cars may be for person
consumption than trading while purchase of chemical for example might definitely indicate
trade (CIR v Fraser [1942] 24TC498).

h) Existence of similar trade transaction, the close the proximity of the transaction
undertaken to the existence trade transactions the more it can be taken to be a trade
transaction (Harvey v Caulcott [1952] 33TC159).

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B. Calculate chargeable income from business

Chargeability shall base in accordance with Section 4, 5, 6 and 8 of The Income Tax Act, 2004.
However, the business income of sole trade (individual) is can be computed on cash or accrual
basis unless specifically required by tax laws (Tax rates stipulate in Table 1.0 below), while
corporations compute their business income on accrual basis (CIT 30% of Taxable Income).
Additionally, all business persons prepare their accounting records using General Accepted
Accounting Practices (GAAPs). So, for tax purposes, we do not establish new financial statements.
But we adjust profit or losses shown by the accounting statements by adding items which are not
taken into accounting by GAAPs and deducting items which are not allowed by tax laws but
included by the GAAPs.
Table 1.0: Resident Individual Traders’ Income Tax Rates (Excluding Those Under the
Presumptive Tax Regime) “MONTHLY RATE”

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C. Explain presumptive income taxation and its application in Tanzania

Presumptive Tax System

Small traders, who operate have turnover below 100million during the year of income, are charged
income tax by presumptive tax system based on the annual turnover of their business. Presumptive
tax system involves the use of indirect means to ascertain tax liability, which differ from the usual
rules based on the taxpayer's accounts.
In Tanzania individuals are taxed based on their annual turnover. The taxpayers under this system
are not obligated to prepare and submit audited accounts to the TRA. However, they may opt not
to adopt the system and prepare audited accounts and pay tax based on profits.
Conditions which qualify for presumptive tax system;
i. The taxpayer must be a resident individual.

ii. The annual turnover of the business does not exceed the threshold of Tshs 100 million.

iii. The individual's income for a year of income consists exclusively of income from a
business having a source in the United Republic. If income is derived from other sources
such as employment and/or investment the presumptive scheme cannot be used.

iv. The individual does not elect to disapply this provision for the year of income.

Rates of tax under presumptive taxation

Where a resident individual meets the above requirement for a year of income the individual's
income tax payable for the year of income shall be equal to the amount of presumptive income tax
provided in the below schedule;
Under this system, tax payable is established depending on the level of record keeping of the
taxpayer. Failure to keep complete records necessitates establishment of tax payable by estimation
settled between the TRA officers and taxpayers. The turnover bands and their tax rates are as
stipulated below:

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Table 1.0: Resident Individual Traders’ Income Tax Rates/Amounts (Those Under the
Presumptive Tax Regime)

D. The Identify items of income included in calculating chargeable income from business

Business income items which are chargeable Income in connection with businesses income
(contract for service) means:
a) service fees;
b) incomings for trading stock;
c) gains from the realisation of business assets or liabilities of the business
d) Gains from realisation of the person's depreciable assets of the business;
e) amounts derived as consideration for accepting a restriction on the capacity to conduct the
business;
f) gifts and other ex gratia payments received by the person in respect of the business;
g) amounts derived that are effectively connected with the business and that would otherwise
be included in calculating the person's income from an investment; and
h) other amounts including reverse of amounts as bad debts, bad debts writing off, discount
allowed, fluctuations in foreign exchanges and seizures of untaken deposits and advances
(Section 8(2)).

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E. Identify items of income excluded in calculating chargeable income from business
Excluded business income
According to Section 8(3) of the Income Tax Act 2004, the below income should be excluded
in computing business income;
i. exempt business income,
ii. final withholding payments and
iii. non-business income

F. Explain the general principle of deductions and identify the specifically allowable
deductions.

General Principle of deduction

Then after knowing elements which constitute business income the next step is to understand
deductible business expenses. In fact, it is very important to understand these allowable expenses
because they affect how much is left for business income taxes.
In general, all expenses incurred ‘wholly and exclusively’ in the production of income are
allowable expenses Section 11 of The Income Tax Act 2004, R.E 2019. Therefore, only
expenditure incurred for sole purposes of producing business income are allowable expenses and
expenditure incurred not wholly and exclusively for business/investment purposes are not
allowable.
However, deduction of expenditure of a capital nature, consumption expenditure and
excluded expenditures are not allowed (Section 11). Yet, the capital expenditures on depreciable
assets are deductible in form of depreciable annual allowance under the third schedule Income Tax
Act 2004. Therefore, depreciation charges calculated under taxpayers’ accounting policies are not
allowed too
Specific Allowable Deductions
i. Interest expense (Section 12)
ii. Trading stock (Section 13)
iii. Repair and maintenance expenditure (Section 14)
iv. Agriculture improvement, research development and environmental expenditure
(Section 15)
v. Gifts to public, charitable and religious institutions (Section 16)
vi. Depreciation allowances for depreciable assets (Section 17)
vii. Losses on realisation of business assets and liabilities (Section 18)
viii. Losses from business (Section 19)
ix. Foreign currency exchange gain (Section 40(2) (c))
x. Legal and accountancy charges (Smiths Potato Estates Ltd v Bolland1948 30 TC 267)
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 xi. Business entertainment and gifts to employees
xii. Pension scheme contributions and other employee benefits
xiii. Other losses and defalcations (Curtis v J & G Oldfield Ltd [1925] 9 TC 319)
xiv. Bad and doubtful debts (Section 25(4); Section 39)

REVIEW QUESTIONS

Question 1
Shamsa is a business lady in Arusha city. During the year ended 31/12/2023, her accountant
submitted the following information for income tax purpose:

Details TZS. “000” TZS. “000”

Revenues 250,000
Cost of sales (120,000)
Gross profit 130,000
Less: expenses
Salaries 35,000
Rent 10,000
Bad debt 2,000
Electricity 18,000
Advertising 6,000
Insurance 5,000
VAT 20,000
Telephone 6,000 (102,000)
Profit before Tax 28,000
=======

Additional information:
(i) Rent was paid on 1/1/2023
(ii) Of the bad debt expense, TZS.1,000,000 relates to a debtor who was declared bankrupt
(iii) Salaries of TZS.5,000,000 remained outstanding
(iv) A quarter of the insurance expenses has expired
(v) Telephone expenses relate to the airtime loaded on Shamsa’s mobile which she uses for
both private and business purposes.

Required:
Compute the taxable income and the tax liability of Shamsa for the year of Income 2023.

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Question 2
Mr. Mwambo Kimweri is a Tanzanian self-employed, managing a health shop. His profit or loss
account for the year ended 31st March 2023 is as follows:

TZS TZS
‘000’ ‘000’
Sales (note 2) 338,050
Opening stocks 20,000
Purchases 110,500
130,500
Closing stock (note 3) (27,500) (103,000)

Gross profit 235,050

Loss on sale of fixed assets 5,000

Loss on sales of land 10,000
Depreciation of equipment 8,900
Wages and salaries (note 4) 61,575
Light and heat (note 1) 3,650
Telephone (note 5) 5,700
Repairs and renewals (note 6) 20,360
Bad debts expenses (note 7) 4,780
Professional fees (note 8) 11,400
Relocation expenses (note 9) 3,250
Other expenses (note 11) 4,400
Motor vehicle expenses (note 10) 1,690
(140,705)
Net Profit 94,345
=======

NOTES TO ACCOUNTS
Note 1 – Private Accommodation
Mr. Kimweri and his family live in an apartment situated above the business premises. It is his
policy to treat two-fifth (2/5) of the expenditure on the premises occupied as private expenditure
unless it can be specifically allocated.

Note 2
Mr. Kimweri took product from the store at a sale price of TZS.1,000,000. This drawing was
recorded in sales figure at the cost price of TZS.700,000.

Note 3
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Closing stock included a contingency reserve of TZS.9,000,000 for loss of stock by fire.

Note 4 – Wages and Salaries

Self – Drawings 18,000,000

Mrs. Kimweri – Secretarial services 7,500,000
Other staff 28,000,000
Mr. Kimweri’s daughter – casual work 8,075,000
61,575,000
========
Note 5 - Telephone
One-third (1/3) of the amount charged as telephone cost was for private use

Note 6 – Repairs and Renewals

Decorating the apartment 950,000
Purchased a price of small equipment to be used in a shop 3,350,000
Major restoration of the building 15,000,000
General maintenance 1,060,000
20,360,000
========
Note 7 – Bad debts
Trade debts written off 1,000,000
Increase in general provision 3,780,000
4,780,000
========
Note 8 – Professional fees
Accountancy 1,500,000
Legal fee in connection with purchase of a used fixed assets 3,800,000
Computer services 2,500,000
Legal fee incurred in defending Mr. Kimweri from speeding 1,700,000
offence
Trade subscriptions 800,000
Subscription to sundry Lane Golf Club 1,100,000
11,400,000
========
Note 9 – Relocation expenses
This expenditure was incurred in transferring the business to new larger premises.

Note 10 – Motor vehicle Expenses

One forth (1/4) of motor car running expenses was for Mr. Kimweri private mileage. Included
in charge is TZS.150,000 for speeding fine incurred by Mr. Kimweri whilst delivering goods to a
customer.

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Note 11 – Other expenses
Training course for Mr. Kimweri to enhance managerial skills 1,900,000
Fine for a traffic offence 450,000
Misappropriation of company funds by an employee 550,000
Donation to a political party 1,500,000
4,400,000
=======

Note 12
Depreciation allowance for depreciable assets as estimated by Mr. Kimweri’s tax consultant
amounted to TZS.33,250,000.

Note 13 – Other information

Mr. Kimweri had a tax loss brought forward of TZS.4,000,000 as at the previous financial year.
He has 4 children under the age of 15 and savings account balance of TZS.7,800,000.

Required:
Calculate Mr. Kimweri’s adjusted profit, after capital allowances, and tax liability for the year ended
31st March 2023.

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