By Kelvin Chungu
The buzz is in and tax is topical again. Since the budget presentation in September 2018, a number of business houses have been pensive, unclear about the new proposed tax effect on their businesses and dial back two week ago, most businesses were resigned to the sales tax coming into effect on 1 April, grappling about what all that meant. But, there was a reprieve for a few more months when the Finance Minister Mrs Margaret Mwanakatwe announced on 1st April 2019 that the implementation of the goods and service tax (GST) will only become effective on 1st July 2019. As part of this announcement, the Minster noted that the first reading of the draft bill would be on 2nd April 2019, with the second and final reading scheduled for the June session of parliament.
It may be worth pointing out, why we are here. Whereas VAT has worked effectively well in a number of countries where it has been implemented, in Zambia, VAT has historically performed poorly including recording negatives in some fiscal years. To rectify these historical misnomers, the Zambia Revenue Authority introduced a numbers of measures which included a requirement for pre-refund audits, appointment of withholding agents and the lagging one, the introduction of electronic fiscal devices. These measures saw an improvement in tax revenue collections from VAT for the past two fiscal years, however the issue of VAT refunds gobbling a substantial part of those takings continues to bring headaches.
GST in a way resolves the VAT refund challenge going forward, because there is no recovering of VAT paid on business inputs. And so the attractive part at least for the Authorities is that if an assumption can be made that GST will yield revenues at least at the level of the current VAT, but without the tax refunds inherent with VAT, this would be a net plus for the government.
In the previous article, in this column, it was acknowledged that it is certainly convincing that in the short-term, the likelihood of tax revenue from this source rising in the short-term is real, but it is difficult to assert whether this can be for more than short-term because of the tax type lack of the self-enforcing mechanism that are embedded along the supply chain such as in the VAT system. This has been the main distinctive feature that is compelling with the VAT system. This deficiency in GST could have the effect of increasing non-compliance over time, consistent with our previous experiences in the past. It will therefore be interesting to see the new enforcement mechanisms which is as compelling, that will be implemented to strengthen the GST at least for the future, particularly with what can be expected to be the initial compelling performance of this tax.
So what are the highlights in this bill?
Firstly, the tax rate, the bill provides for a 9% tax rate for locally supplied goods and services and 16% tax rate for imported goods and services. Further, the bill has given power to the Minister of Finance to issue through a statutory instrument, adjustments as may be necessary to the taxable supplies rates. The bill has also given the minister powers to provide for specific tax exemptions for some production inputs, which could mitigate the central criticism of the GST of its potential for tax on tax effect or as it popularly known, the cascading effect, which could ultimately be passed on to consumers resulting in an upshot in costs and ultimately inflation. VAT avoided that pitfall by its mechanism of refunds.
The bill has also reduced the tax threshold for registration from K800, 000 applicable with VAT to K500, 000, which means the net is wider enough to capture a large of number of SMEs. This will likely mean that the training needs for the new set of tax payers in the informal sector is much more necessary than before.
Having noted the above, there is a singular advantage that must be noted for the GST. Although the GST collection administration aspect may tend to be more cumbersome than VAT for the Authority, this tax type is easier to manage for the tax payer for various reasons and so for this reason it may prove popular over time.
A few months ago, this column noted that GST was not a new tax in Zambia, having been abandoned in line with the trends of that past era, as it was seen at that time, to be generally difficult to administer, lending itself to increasing non-compliance, however, we had also acknowledged that it is possible, that the new administrative measures that will continue to be in place, such as tax PIN identifications, Withholding agents and electronic cash registers could make today’s narrative different. It is also convincing that revenue will go up at least in the short-term, but what is cardinal are measures that will be put in place to address compliance in the long-term and to deal with the potential cascading effect of the GST.
Finally, legacy VAT tax refunds will continue at least in the medium term, which will negate the potential immediate upward short-term improvements in tax revenue. There is also significant transitional costs for the government and the business players to be faced, such as system changes and training costs, but not withstanding that, it is dawn on 1st July.
About the Author
Kelvin Chungu is a Partner at Nolands Advisory Services Limited. He is contactable on +260976-377484.