Container demurrage charges in Tanzania are not subject to value-added tax (VAT) where they arise as a contractual penalty for the late return of containers, the Court of Appeal of Tanzania has ruled in a decision that could affect shipping agents, carriers and cargo owners operating through the country’s ports.
The ruling sets aside a previous decision by the Tax Revenue Appeals Tribunal, which had upheld a Tanzania Revenue Authority (TRA) assessment on demurrage charges.
The legal dispute followed a tax audit of a shipping agent acting on behalf of a shipping line. Based on the audit, the TRA assessed VAT on container demurrage charges collected by the shipping agent.
Bowmans partner Edwin Prosper and tax advisor Fredrickson Maboko note in a recent analysis of the ruling that the TRA argued that the charges represented consideration for services supplied in Tanzania and therefore attracted VAT.
The tax authority contended that the fees amounted to rental income generated when a customer retained a container beyond the prescribed free-time period. On this basis, the TRA treated the demurrage charges as subject to standard-rate VAT and issued an assessment.
Prosper and Maboko note that the taxpayer initially challenged the assessment before the Tax Revenue Appeals Board and the Tax Revenue Appeals Tribunal, but was unsuccessful. The matter was then escalated to the Court of Appeal (CoA), Tanzania’s highest court, to determine the correct tax treatment under the country's VAT Act.
The court rejected the TRA’s arguments in the Gulf Badr Group (Tanzania) Limited vs Commissioner General, Tanzania Revenue Authority judgment.
Prosper and Maboko noted that the court held that “demurrage does not constitute a taxable supply for VAT purposes because it represents a penalty arising from contractual terms, rather than consideration for a service”.
The court also dismissed the Tribunal’s earlier finding that demurrage was analogous to rental income or payment for the continued use of shipping assets. Instead, it considered industry usage and the contractual frameworks from which demurrage arises.
The court clarified that demurrage is triggered when containers or equipment are retained beyond agreed periods. Under shipping industry practice and Tanzanian regulations, this is classified as a late-return or delay penalty rather than a separate charge for the use or rental of containers.
“The court further held that demurrage compensates a carrier for losses arising from delay rather than payment for a service voluntarily supplied,” Prosper and Maboko noted, adding that “penalties for breach of contractual obligations are distinct from consideration for the supply of services.”
