Capital gains tax on shares praised

Capital gains tax on shares praised

The measure, according to the Minister for Finance and Economic Affairs, Dr William Mgimwa, is intended to cap a tax loophole when assets change hands. For example, if you buy a house for one 1m/- and sell it for 2m/-, then you have made a capital gain of one 1m/-.

In other countries, this gain is usually taxed at 30 per cent rate, so you would have to give the taxman 300,000/-.  But as for the sale of shares relating to a local company by the parent company, it is the first time the government is moving to impose tax on such transactions.

Analysts praise the move as important to bolster shrinking sources of government revenue. This, analysts say, is because of the government’s desire to widen the tax base to get revenues to sustain projected expenditure. The government proposes to spend 15.1tri/- in 2012/13. 

An estimated 8.7trn /- would come from tax and non-tax revenues, equivalent to 18 per cent of Gross Domestic Product (GDP) and 3.6trn/-, equivalent to 0.7 per cent of the GDP, would be sourced from local governments. 

Some 3.1trn /- would come from Development Partners in the form of grants and concessionary loans, 842.5bn/- from General Budget Support (GBS) and 2.3trn /- from grants and loans meant for development projects, both the Basket Fund and Millennium Challenge Account funds integrated. 

In an interview with the ‘Daily News’, Mr Boniface Matambula, a tax expert with Zantel  says there are   plausible reasons to have Capital Gains Tax on  sale of shares relating to local company by the parent company.  A capital gains tax is charged on profit realised after the sale of a non-inventory assets bought at a lower price.

The most common capital gains are realised from sale of stocks, bonds, minerals and property. In an interview with the ‘Daily News’, Mr Matambula said such a   tax structure could substantially increase revenue yields. 

However, in a PriceWater House Coopers commentary, “Growing tomorrow’s economy”,  released over the weekend, it noted that the Minister’s  speech also included reference to the introduction of changes so as to redeem a tax charge where gains arise on share transactions overseas, which result in the change in effective control of local companies.  

“This area has been one that has generated significant political debate recently – particularly, as regards the mining and energy sectors. However, it is a change that has to be carefully managed and considered so as to ensure that it does not unintentionally make Tanzania an unattractive investor destination,” it noted  PWC notes that in many cases, the identity of the entity selling or being sold is driven not by tax considerations but by other factors –for example, where the ultimate parent was originally listed so as to raise funding, or where a group holding company is located if the sale is of a number of companies rather than just one.

  “The risk in terms of investment attractiveness arises in relation to the possibility of double taxation – as well as uncertainty, for example, how valuations will be arrived at where the underlying value of a transaction can be attributed to assets in a number of countries not just Tanzania.

To understand the ramifications of this significant change, reference will need to be made to the detailed legislative wording, which is not yet available. Welcoming the CGT clause from the Budget tabled by Dr Mgimwa on Thursday, the chairperson of the  Parliamentary Standing Committee on Parastatal Organisations Accounts (POAC), Mr Zitto Kabwe made reference  to the reported government loss of almost half a trillion shillings in tax revenue from the sale of Zain Africa assets in Tanzania to Bharti Airtel.

“Such a clause in the Capital Gains Tax will help the country not lose such huge revenues again,”said Zitto. The Kigoma North MP said the amount lost in the deal was equivalent to 30 per cent of the government’s capital which it deserved to gain after the sale of four million shares at USD 252 each. The government owns 40 per cent shares of  “airtel” while ‘Bharti Airtel’ company of India holds 60 per cent. “This amount has been lost due to bad financial structure,” said Kabwe at the time. 

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