An Analysis of Bad Debts Deductibility for Financial Institutions Under Tanzania Income Tax Act

Abstract

This paper examines the deductibility of bad debt by Financial Institutions (FIs) under section 25(5) (a) of the Income Tax Act Cap. 332 [R.E. 2023]. The study adopts qualitative approach, combining doctrinal analysis of statutes, case law, and regulation with empirical data from interviews and questionnaires administered to 100 respondents, including tax officials, regulators, bankers, and practitioners. The sample was determined using the Cochran formula to ensure representativeness at a 95% confidence level and a 10% margin of error, addressing potential selection bias. The findings revealed that the Income Tax Act allows deduction only after all reasonable steps are taken to recover a debt, it fails to define these steps. This ambiguity causes inconsistency interpretations and frequent dispute between Tanzania Revenue Authority and FIs. Evidence shows that Bank of Tanzania (BOT) supervised recovery policies already embedded reasonable steps through documented procedure and board approvals. This study recommends legislative reforms to codify qualitative factors and harmonize tax law with prudential standards. Such alignment will enhance clarity, reduce disputes, and balance fiscal and prudential objectives, thereby promoting compliance and financial sector stability.

Keywords: Bad debt, Deductibility, Financial Institutions, Income Tax Act, Reasonable steps, Tanzania.

DOI: 10.7176/JESD/17-2-05

Publication date: March 28^th 2026