Executive summary

The Court of Appeal of Tanzania, on 22 May 2026, issued a landmark decision in Civil Appeal No. 212 of 2025 between Gulf Badr Group (Tanzania) Limited (the taxpayer) and the Commission General, Tanzania Revenue Authority (TRA), clarifying the applicability of value-added tax (VAT) on demurrage charges. The Court held that demurrage charges (i.e., penalties for breach of contract) do not constitute a taxable supply under the Value Added Tax Act, 2014 and are therefore not subject to VAT. (Note that the Court of Appeal is Tanzania's highest court.)

The decision overturns earlier determinations of the Tax Revenue Appeals Tribunal (the Tribunal) as well as the Tax Revenue Appeals Board (the Board), which had upheld the TRA's position that demurrage constitutes a taxable supply in the form of rent and therefore is subject to VAT at the standard rate of 18%.

The Court's ruling provides clarity to taxpayers operating in the shipping and transportation sectors.

Background

In 2023, following an audit and various discussions, TRA assessed the taxpayer with VAT on demurrage charges that the taxpayer had collected.

In the shipping industry, demurrage charges refer to the fees levied on importers or consignees when they fail to return shipping containers to the carrier or designated terminal within the agreed free period, known as laytime. These charges are intended to compensate the carrier for the loss of use of the container and to encourage timely return, ensuring efficient circulation of equipment within the supply chain.

The taxpayer asserted to the TRA that demurrage charges constitute a penalty rather than consideration for a supply and therefore not subject to VAT. The tax authority maintained its position and issued a VAT assessment on the alleged unpaid VAT on demurrage.

Following unsuccessful objection and appeals at the Board and the Tribunal, the taxpayer appealed to the Court of Appeal.

The key issues before the Court were:

1. Whether demurrage charges constitute a "taxable supply" under the VAT Act
2. Whether demurrage charges form part of a zero-rated international transport service

Analysis and Court of Appeal decision

Whether demurrage charges constitute a "taxable supply" under the VAT Act

In the arguments presented before the Court, the taxpayer challenged the Tribunal's finding that demurrage charges constituted a taxable supply under section 3(1) of the VAT Act because the charges represented consideration for continued access to shipping containers beyond the agreed free period and therefore formed part of taxable ancillary transport services.

The taxpayer argued that demurrage is properly characterized, both under Tanzanian law and internationally, as a penalty or liquidated damages for delay rather than consideration for any service. Demurrage is consistently defined as a compensatory charge arising from failure to return shipping equipment within the agreed timeframe. The charge is triggered by breach of contractual laytime obligations and is intended to compensate for loss, not to remunerate a service or grant continued rights of use.

The taxpayer emphasized that demurrage charges do not meet the statutory definition of a taxable supply under the VAT Act. VAT applies only if there is a supply of goods or services. In the case of demurrage, there is no voluntary or agreed supply; once the free period lapses, the consignee has no legal right to retain the container, and continued possession constitutes a breach of contract. The resulting payment is therefore compensatory in nature and lacks the essential element of reciprocal consideration required to trigger VAT, the taxpayer asserted.

On the other hand, the tax authority argued that demurrage charges are fees paid as rent for the continued use of a shipping container and therefore it is a "VATable" service at standard rate of 18%.

The Court agreed with the taxpayer and found that demurrage charges are compensatory payments arising from breach of contractual terms, specifically the failure to return shipping containers within the agreed time. Accordingly, the Court held that demurrage charges fall outside the scope of VAT, as they do not meet the statutory definition of a taxable supply.

In its deliberations, the Court stated that when dealing with the shipping business/industry, definitions of common shipping terms or vocabulary used in the industry "must be construed in line with the operations of the shipping industry itself to help streamline international shipping trade."

Whether demurrage charges form part of a zero-rated international transport service

As an alternative ground, the taxpayer argued that even if demurrage charges were to be regarded as consideration for a supply, the charges would still qualify as a zero-rated supply because they form part of international transport services.

The taxpayer argued that demurrage charges are not payment for an ancillary service, but rather are an integral component of international transport services, which are expressly zero-rated under the VAT Act. Because international transport includes the movement of goods from outside Tanzania into Mainland Tanzania, any charges arising directly from that transportation, including demurrage, fall within the same legal classification. Accordingly, demurrage linked to imported goods should inherit the zero-rated treatment applicable to international transport services.

The taxpayer highlighted that demurrage is not a separate domestic transaction, but a contingent liability embedded within the international transport contract. Therefore, demurrage cannot be disaggregated from the main international transport service.

The Court agreed with the taxpayer on this point, observing that demurrage does not constitute an ancillary international transport service as demurrage charges are penalties arising from international transport services.

Implications

This decision has significant implications for taxpayers, particularly in the shipping and transport sectors as well as other sectors through:

• Clarification of VAT scope on liquidated damages — The ruling reinforces the principle that VAT applies only to supplies for consideration, and not to penalties, compensation or liquidated damages.
• Certainty on demurrage treatment — Similarly situated taxpayers can now take the position that demurrage charges do not constitute consideration for a supply and are therefore not subject to VAT.
• Reduced exposure to historical assessments — Taxpayers previously assessed on similar grounds may reassess their exposure and consider pursuing appropriate remedies.

The Court of Appeal's decision represents a significant development in Tanzanian taxation framework in the shipping industry. By affirming that demurrage charges are compensatory in nature and fall outside the scope of VAT, the Court has provided clarity and certainty on a previously contentious issue. Further, the ruling underscores the importance of strictly interpreting tax statutes and ensuring that tax liabilities arise only if clearly provided for in law.

This welcome decision is in alignment with international principles on international transportation of goods. Entities that need assistance determining whether their particular circumstances are affected by the decision should contact a knowledgeable tax advisor.

(Note: EY Tanzania represented the taxpayer before the Court of Appeal.)