Guide to Income Tax Act, 2004

Income from business

This page assists you to calculate your chargeable business income. Some issues have been simplified - for comprehensive and authoritative rules see the Income Tax Act, 2004.

Your income from business is

Amounts derived

Amounts derived is the total amount coming into the business for sales of goods and services (including sales of trading stock) and any other amounts derived in doing business.

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Payments subject to final withholding tax

Certain amounts which were received by your business may have been subject to a final withholding tax, whereby the payer withheld tax from the amount they paid you and sent it to TRA on your behalf. If so, you can exclude this from your income as your tax liability for this amount has already been satisfied. Final withholding taxes on payments to businesses are:

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Current expenses

Expenses (other than capital expenses) may be deducted only if they are incurred wholly and exclusively in the production of the income of the business. Capital expenses are expenses which derive benefit for the business of more than one year, and these are generally not deductible. For example cost of assets which last longer than one year, or trading stock which is kept for more than one year, are not immediately deductible. Examples of deductible expenses may include salaries and costs of benefits provided to employees, purchases of inputs or trading stock which are used or sold during the year, day-to-day running costs of the business, repairs and maintenance of depreciable assets, rent and interest.

However, there are some types of capital expenditure which may be deducted. These are:

You cannot deduct any expenses incurred in deriving final withholding payments or exempt amounts.

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Depreciation allowances

Depreciation allowances are allowed in respect of depreciable assets. A depreciable asset is an asset employed wholly and exclusively in the production of income of a business, which has a benefit to the business lasting more than one year, and which is likely to lose value because of wear and tear, obsolescence or the passing of time. Land, shares and trading stock are excluded. Examples include machinery, vehicles, equipment, buildings, farmworks and legal rights which expire (leases, franchises). When your business purchases and starts using a depreciable asset, or makes an improvement to a depreciable asset, it cannot deduct the full amount of the expenditure in the first year, but can deduct portions of the expenditure for a number of years until the full expenditure has been deducted. The deduction system can be straight line method or reducing balance method.

Below is an example of some machinery which costs Tsh 10,000,000 which is depreciated at 25% reducing balance method. Each year, the written down value is the original cost minus deductions already claimed. 25% of the written down value can be claimed each year. If the written down value for a pool of assets falls below Tsh 1,000,000, the entire amount can be deducted.
YearWritten down valueAllowance
110,000,0002,500,000
27,500,0001,875,000
35,625,0001,406,250
44,218,7501,054,688
53,164,063791,016
62,373,047593,262
71,779,785444,946
81,334,839333,710
91,001,129250,282
10750,847750,847

Below is an example of a farm building of Tsh 10,000,000 which is depreciated at 20% straight line method. 20% of the original cost can be claimed each year for five years.
YearWritten down valueAllowance
110,000,0002,000,000
28,000,0002,000,000
36,000,0002,000,000
44,000,0002,000,000
52,000,0002,000,000

Below is a table showing the different types of depreciable assets and the depreciation allowances they qualify for in the law:
Class numberDepreciable assetsDepreciation method and rate
1 Computers and data handling equipment together with peripheral devices; automobiles, buses and minibuses with a seating capacity of less than 30 passengers, goods vehicles with a load capacity of less than 7 tonnes; construction and earth-moving equipment 37.5% Reducing Balance
2 Buses with a seating capacity of 30 or more passengers, heavy general purpose or specialised trucks, trailers and trailer-mounted containers; railroad cars, locomotives, and equipment; vessels, barges, tugs, and similar water transportation equipment; aircraft; other self-propelling vehicles; plant and machinery (including windmills, electric generators and distribution equipment) used in manufacturing or mining operations; specialised public utility plant and equipment; and machinery or other irrigation installations and equipment. 25% Reducing Balance
3 Office furniture, fixtures and equipment; any asset not included in another Class 12.5% Reducing Balance
4 Natural resource exploration and production rights 20% Straight line
5 Buildings, structures and similar works of a permanent nature used in agriculture, livestock farming or fish farming, dams, reservoirs and fences 20% Straight line
6 Buildings, structures and similar works of a permanent nature other than those mentioned in Class 5 5% Straight line
7 Intangible assets other than those in Class 4 1 divided by the assetís useful life Straight line
8 Plant and machinery (including windmills, electric generators and distribution equipment) used in agriculture 100% straight line

A pooling system is used, so that instead of calculating depreciation for each asset seperately, all assets in a similar class can be calculated as a group. However, for class 7 assets, each asset is put in a seperate pool.

Special 50% first year allowance

Certain depreciable assets are allowed a special 50% first year allowance. This means that 50% of the cost of the asset is deducted in the first year. In the following years the remaining cost of the asset may be depreciated using the normal method according to which class the asset is in. This special allowance applies to plant and machinery that is

When a depreciable asset is sold or destroyed

If you sell a depreciable asset, you must subtract the amount you received for it from the written down value of the pool it was in. If the amount received is greater than the written down value, see "depreciation balancing adjustments" below.

If a depreciable asset is destroyed or put permanently out of use and you receive nothing for it, there is no subtraction from written down value. However, if you get insurance compensation, this should be subtracted from written down value.

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Depreciation balancing adjustments

If you sell a depreciable asset or assets, or they are destroyed and you receive insurance compensation, and the amount you receive from the sale or compensation is greater than the written down value of the pool they were in, then the written down value of the pool is reduced to zero and the difference between the written down value and the amount received is added to your income.

If you sell all the depreciable assets in a pool or they are all destroyed, and the amount you receive from the sale or compensation is less than the written down value of the pool, then you can deduct the difference between the amount you receive and the written down value of the pool from your income.

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Trading stock allowance

Trading stock means inventories of materials which are intended to be made into a product and sold as part of normal business (e.g. input materials used for manufacturing), or goods which are intended to be re-sold as they are as part of normal business (e.g. stocks of goods in a shop). Businesses are entitled to a trading stock allowance, which is designed to reflect the cost of goods sold during the year. In other words, you cannot claim a deduction when you are building up your trading stock, but you can claim a deduction when that stock is sold. The deduction is calculated as follows:

The opening value of trading stock of a business for a year of income is equal to the closing value of trading stock of the business at the end of the previous year of income.

The closing value of trading stock of a business for a year of income is the lower of -

If the closing value of trading stock is valued at the market value, the cost of the trading stock is reset to that value.

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Capital gains and losses

Capital gains and losses are calculated for other "business assets". Other "business assets" are assets which are used as part of your business but are not trading stock and they are not depreciable assets (see above). An example is land used in your business. The following assets are excluded from business assets and are therefore not liable for inclusion in capital gains calculations or capital loss calculations:

Capital gains or losses are calculated when you realise (sell) an asset. The capital gain or loss is usually the market value at sale minus the total cost (including purchase/production costs and maintenance and repair costs if not deducted elsewhere). This may be positive or negative. If it is positive, you add the capital gain to your income from business. If it is negative, you deduct the loss from your income from business.

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Carry forward of losses

If you made a loss from your business in the previous year, the loss can be carried forward and deducted from this year's business income. Losses can be carried forward in this way from year to year indefinitely. For limitations on this, however, refer to the loss page.

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Donations

You may deduct donations to charities or social development projects, but only up to a maximum of 2% of your business income (as calculated without this deduction).

You may also deduct donations to the Tanzania Education Fund up to an unlimited amount.

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