On 6 September 2024, the Court of Appeal of Tanzania (the Court) rendered its long-awaited decision on the dispute between Aggreko International Projects Limited (the Appellant) and the Tanzania Revenue Authority (the Respondent or TRA) on input tax credit. The primary point of contention was whether the Appellant was entitled to claim input VAT on imported generators that were intended for a project which ultimately did not materialise. The TRA had disallowed the Appellant's input tax credit on the basis that such input VAT was not incurred in furtherance of the Appellant's business as required by Section 16 of the VAT Act, 1997. Although the VAT Act, 1997 was repealed and replaced by the VAT Act, 2015 (the VAT Act), the furtherance of business as a condition for claiming input VAT still stands. 

Background of the case

The Appellant operates in Tanzania primarily to provide emergency power generation to the Tanzania Electric Supply Company Limited (TANESCO), its sole customer in Tanzania. In 2011, the Appellant successfully completed a 100MW power generation project for TANESCO and subsequently entered into negotiations for an additional 50MW project. During the negotiations, the Appellant proceeded to import generators for the purpose of carrying out the contemplated project. However, the negotiations did not materialise and the Appellant did not proceed with implementation of the additional 50MW project.

In 2014, the TRA conducted an audit of the Appellant's tax affairs, for the years 2011 and 2012, and noted that the Appellant had claimed input VAT on the imported generators intended for the 50MW project, which never materialised. The TRA disallowed the Appellant's input VAT claim, asserting that the generators were not used for business purposes as required under Section 16(1)(b) of the VAT Act.

The Appellant, being aggrieved by TRA's position, filed an appeal at the Tax Revenue Appeals Board (TRAB) where it was decided that the imported generators were not intended to generate income and therefore were not for business purposes, and so the TRA was correct to disallow the input VAT. The Appellant further appealed to the Tax Revenue Appeals Tribunal (TRAT) which upheld the TRAB's decision, hence the appeal to the Court.

Key legal issues

The primary legal issue before the Court was whether the imported generators were indeed for business purposes, thereby entitling the Appellant to claim input VAT credit under Section 16(1)(b) of the VAT Act. This provision stipulates that input VAT can only be deducted on goods imported for business purposes carried on or to be carried on by the taxpayer.

The Appellant's argument centred on the notion that the generators were imported in furtherance of business activities since its main business activity was emergency power generation and, hence, the generators could not have been imported for any other activity. The Appellant maintained that, even though TANESCO had cancelled the 50MW project, the importation of the generators was a legitimate business expense based on the expectation of concluding the agreement with TANESCO. The Appellant further argued that the nature of its business providing emergency power required rapid mobilisation of resources, including importing generators in anticipation of agreements, without the need for a finalised contract.

The TRA contended that not all input VAT is allowable for deduction and only input VAT that is related to the furtherance of business can be entitled to an input VAT claim, and not any claim that is in respect of personal or own consumption. The TRA further submitted that the Appellant paid input VAT as a legal requirement because the imported generators were for its own consumption and not in the furtherance of business which would entitle it to benefit from the exceptions under Section 16(1)(b) of the VAT Act. The TRA called for dismissal of the appeal based on the argument that there was no business or prospects of business between the Appellant and TANESCO following the abortive negotiations for the 50MW project and therefore the Appellant was not entitled to the input VAT claim.

The Court’s analysis

The Court scrutinised Section 16(1)(b) of the VAT Act, 1997 and emphasised that, for VAT to be deductible, the goods or services in question must have been used or intended for use in the furtherance of the taxpayer's business. The Court examined whether the generators were imported for business purposes, considering the fact that the negotiations were cancelled before the equipment could be utilised and found that, at the time of the importation, there was no agreement between the Appellant and TANESCO for the additional 50MW project. Although the Appellant had acted on the expectation of concluding a contract, TANESCO's eventual decision to cancel the project meant that the generators were never used or intended to be used for business purposes. On this basis, the Court concluded that the generators did not meet the statutory requirements for input VAT credit.

Moreover, the court emphasised that Section 16(1)(b) of the VAT Act, 1997 (Section 68 of the VAT Act) cannot apply in claims of input VAT where imported goods are not used or intended to be used for purpose of business carried on, or to be carried on, in Tanzania.

The Court upheld the decisions of the TRAB and TRAT, thus dismissing the appeal on the basis that Section 16(1)(b) of the VAT Act could not be applied to provide input VAT credit to the Appellant because the imported generators were not used or intended to be used for business purposes.

Implications of the judgment

This case highlights the importance of finalising business arrangements before making substantial financial commitments that may impact tax liabilities. The judgment underscores that input VAT refunds are contingent upon the actual use of goods for business purposes, not merely on the anticipation of business which may not materialise. 

For businesses operating in Tanzania, particularly in industries where rapid mobilisation of resources is required, this case serves as a cautionary tale. Companies should ensure that they have concrete and finalised agreements in place before importing goods for large-scale projects to avoid costly disputes with tax authorities.

Conclusion

This case is a significant decision in Tanzanian tax law, as it offers clarity on the interpretation of Section 16(1)(b) of the VAT Act, 1997 (which resembles the provision under Section 68 of the VAT Act) regarding input VAT credit. It shores up the principle that goods which are imported for personal or home consumption do not qualify for input VAT deductions. This judgment serves as a critical precedent for taxpayers and tax practitioners, as it emphasises the need for prudence in tax planning.