IN recent years, the Tanzania Revenue Authority (TRA) intensified efforts to maximize revenue collection from the banking and financial sectors. One of the most contentious issues has been the taxation of bad debts written off by banks and financial institutions.

This article provides an overview of the current practices employed by TRA in taxing these bad debts, the legal and regulatory framework governing this issue, and the potential implications for banks in Tanzania.

What is a bad debt in banking?

In the banking and financial sectors, bad debts refer to loans and advances that are considered uncollectible due to the borrower’s failure to repay. These debts typically fall under non-performing loans (NPLs), which negatively impact a bank’s balance sheet, profitability, and overall financial stability. 

Banks must make provisions for bad debts to manage the risk of default, as required by international accounting standards. Once all reasonable recovery efforts have been exhausted, the debt is written off, meaning it is removed from the bank’s books.

Bad debt write-offs are crucial for banks to meet international financial reporting standards and maintain capital adequacy ratios. For accounting purposes, once written off, the debt is no longer treated as an asset. However, the TRA views this process with skepticism, considering it a potential method for banks to avoid paying taxes.

Legal and regulatory framework

The Income Tax Act, 2004 governs taxation in Tanzania, including taxation of bad debts. Under this law, businesses—banks included—must report their taxable incomes, which are subject to taxes. Business income tax is imposed on the profit margin, calculated as gross income minus allowable expenses.

Section 25 of the Income Tax Act allows banks and financial institutions to deduct provisions for bad debts as allowable expenses. Therefore, once a bank determines that a debt is irrecoverable, it is entitled to remove it from its books.

However, the TRA challenges this approach, arguing that written-off debts may still be recoverable in the future, which makes them potential assets subjected to taxation. According to TRA, unless specific conditions are met, these written-off debts should not be fully removed from the tax calculation. This interpretation has led to significant disagreements between banks and the TRA.

The controversy

Banks argue that once a debt is written off, it should no longer be classified as an asset and, therefore, should not be taxed. They claim that by removing uncollectible debts from their books, they are simply adhering to standard accounting practices. 

However, TRA maintains that these debts might still be recoverable and should remain taxable until certain conditions—such as the expiration of the statutory period for recovery—are met.

This difference in interpretation has created an ongoing dispute between banks and the TRA, with far-reaching implications for the financial sector in Tanzania. For banks, it raises concerns about increased tax liabilities on assets that are no longer viable, while for the TRA, it represents a potential revenue source that should not be ignored.

Conclusion

Taxation of bad debts remains a growing controversy in Tanzania’s banking sector. While banks view the write-off process as a necessary step for financial transparency and stability, TRA sees potential revenue being lost. 

Resolving this issue will require clear legal guidelines and a balanced approach that protects both the integrity of the financial sector and the government’s revenue needs. As it stands, the debate continues to impact the banking industry’s operations and the broader financial environment in Tanzania.