BUSINESS INCOME
S. 8 OF ITA 2004 R.E 2019 CAP 332
Meaning of Business S. 3
Business’ 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 trade
Trade’ is an act of providing goods or services to others in exchange for a
reward
There is no definition of trade is given in the Act. However, cases laws
have provided indicators “ badges of trade” which can be used to tell
whether a trade is being conducted.
I. Methods of acquisition
II. Length of the period of ownership;
III. Frequency or number of similar transactions by the same person;
IV. Doing supplementary work on or in connection with the asset realised
to increase saleable condition might indicate trading
V. Profit motive
Items Of Income Included In Calculating
Chargeable Income From Business S. 8(2)
Income in connection with businesses income (contract for service) means:
a) service fees;
b) incomings for trading stock;
c) gains from the realization of business assets or liabilities of the business
d) Gains from realization 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
Items Of Income Excluded In Calculating
Chargeable Income From Business S. 8(3)
The following are excluded in calculating a person's gains or profits
from conducting a business-
a) Exempt amounts(2nd Schedule, Pg 131) and final withholding
payments (S.86); and
b) Amounts that are included in calculating the person's income from
any employment.
In addition receipt from realisation of capital assets should be
excluded as well because they are used in computing gain from
realisation of assets.
Chargeable business income
Chargeable business income’ of resident person, includes all his or her
income for the year of income irrespective of the source of the income,
while
chargeable income of non-resident persons income only to the extent that
the income has a source in the United Republic.
Finally, chargeable income of a resident corporation which has perpetual
unrelieved loses for the last consecutive two years is the turnover of such
corporation for a year of income, expect those in agriculture, health or
education businesses
However, 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
Computation of Chargeable Business Income
Items TZS TZS
Profit or loss as per accounts XXX
Add: Non allowable expenses
Consumption expenditure XXX
Excluded expenditure XXX
Capital expenditure XXX XXX
Add: Business income not included
Compensation XXX
Loss on realization of business
assets/liabilities XXX XXX
Less: Non-taxable business income
Final withholding payments XXX
Gain on disposal of fixed assets XXX (XXX)
Less: Business expenses not deducted
Capital allowances (XXX)
Taxable business income XXX
Presumptive Income Taxation And Its Application In Tanzania
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.
Presumptive methods of taxation are thought to be effective in
reducing tax avoidance as well as equalizing the distribution of the tax
burden.
Conditions which qualify for presumptive tax system
1) The taxpayer must be a resident individual
2) The annual turnover of the business does not exceed the threshold
of Tshs100 million.
3) 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.
4) The individual does not elect to dis-apply this provision for the year
of income
Rates of tax under presumptive tax
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 tax
Presumptive tax rates for both individual and Entities (First Schedule
pg 127-129)
The general principle of deductions and identify
the specifically allowable deductions S. 11
consumption expenditure
excluded expenditure
expenditure of a capital nature
Specific Allowable Deductions
Interest S. 12
Interests bearing external financing activities are normal in any business or investment
venture.
Therefore, Interest incurred by a person during a year of income under a debt obligation
shall be considered to have been incurred wholly and exclusively in the production of
income from a business or investment if the debt obligation was incurred wholly and
exclusively in the production of income from the business or investment.
Likewise, interest incurred on non-monetary debts is also deductible when the debt
obligation was incurred wholly and exclusively in the production of income from the
business or investment (Section 12(1)(b)).
However, when interest incurred on foreign currency debt obligation is deductible only
when they are actually paid (S. 39(g)).
Exempt-controlled resident entity
An exempt-controlled resident entity’ for a year of income if it is resident and at any
time during the year of income 25% or more of the underlying ownership of the entity
is held by entities exempt under the Second Schedule, approved retirement funds,
charitable organisations, non-resident persons or associates of such entities or
persons.
Interest expenses incurred wholly and exclusive in production of business or
investment income for exempt controlled resident entity are restricted.
In fact, interest expenses deducted by an exempt-controlled resident entity must not
exceed sum of interest equivalent to debt-to-equity ratio of 7 to 3 (Section 12(2).
In case of changes in debt or equity amounts; the amount of the equity or debt
should be the average of balances of amount of debt or equity at the end of each
period (Section 12(4))
Other specific deductions
Trading stock allowance S.13
Repair and maintenance expenditure S. 14
Agriculture improvement, research development and environmental
expenditure S.15
Contribution and donations S. 16
Depreciation allowances for depreciable assets S. 17
Losses on realisation of business assets and liabilities S. 18
Losses from a business or investment S.19
Foreign currency exchange gain S. 40(2)
Bad and doubtful debts S. 24
Business entertainment and gifts- related to employees only
Pension scheme contributions and other employee benefits
Legal and other expense
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