What you need to know:
- To maintain the sector’s incentive and align with the initial intent of exempting agriculture, the government should revisit the definition of “agricultural business” in the Income Tax Act.
On November 13, 2023, a historic moment unfolded in the Tea Subsector with Dar es Salaam hosting the first in-country tea auction, marking a significant stride amid various strategic government initiatives. For context, Tanzanian tea has always traded in the Mombasa tea exchange.
This therefore is a significant development for the tea industry in Tanzania. These efforts aim to maximise the Agriculture Sector’s potential, a key player in our economy and the largest employer in the country.
Given its economic importance, the government routinely extends both tax and non-tax incentives to the sector to stimulate investment.
Notably, agricultural businesses enjoy an exemption from an obligation to pay Alternative Minimum Tax (“AMT”), a 0.5 percent turnover tax imposed on entities with perpetual unrelieved losses for a year of income and the previous two years i.e., three consecutive years of losses.
Section 19 of the Income Tax Act, 2004 defines agricultural business as “the practice of rearing of crops or animals including forestry, beekeeping, aqua-culture and farming with a view to deriving a profit but excludes processing of agricultural produce other than preparing such produce for the purpose of sale in its original form”.
From this definition, when your practice goes beyond the farming activities and involves changing the form of the produce, you are no longer a beneficiary of the exemption, and you will be required to pay Alternative Minimum Tax.
However, the definition overlooks some products that cannot reach markets in their original form, Tea being one of them. Most of the big tea producers in the Country own plantations where they grow tea plants, with the main immediate product from the tea trees/plants being the picked tea leaves which cannot be immediately transported to the markets in that form without being processed to preserve them.
Thus, most of the big tea producers have several factories that do preservation of green tea leaves through dying and fermentation processes, and, the processes are not aimed at changing the forms of the tea leaves to consumable states, but so that the output can be consumed. However, the producers do not sell them directly to the final consumers but rather to tea blenders overseas and within the Country.
In recent audits, we have witnessed the TRA assessing AMT at 0.5 percent on the turnovers of the Tea producers with a view that they do not qualify to be agricultural businesses, in line with the current definition, insisting that the processing done on the tea leaves changes their form to a consumable state hence disqualifying the Tea Producers from AMT exemption.
This approach disincentivises the sector against the initial motive to exempt the whole agriculture sector except for those doing massive processing, the processing done by the Tea producers is not a complex process and it is mainly aimed at preserving the leaves and not making them consumable. But the bigger challenge is that it actively disincentives value addition to the agricultural sector, which certainly cannot be the intention of either the law or national strategic priorities.
For some sub-sectors in agriculture, it is easy to ring-fence revenue solely earned from the agriculture business as per the definition and revenue from the processing part hence subjecting the “non-agricultural business” revenue to AMT.
This is not possible in tea sub-sector, determining the sales value of tea leaves picked before processing and grading is intricate, exposing the entire reported revenue to AMT.
To maintain the sector’s incentive and align with the initial intent of exempting agriculture, the government should revisit the definition of “agricultural business” in the Income Tax Act.
This adjustment would accommodate the unique circumstances of sub-sectors like tea, fostering equal incentives across the entire agriculture business landscape and encouraging more investors hence creation of more employment, exports and foreign exchange.
Waziri Jumanne is Manager at Deloitte Consulting Limited. The views expressed are his own and not necessarily those of Deloitte. He can be reached at [email protected]