Noth­ing sim­ple about Botswana VAT ex­emp­tions

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - GER­HARD BADEN­HORST

BOTSWANA’s Min­is­ter of Fi­nance and De­vel­op­ment Plan­ning, OK Matambo, de­liv­ered his 2014 budget speech to the Na­tional As­sem­bly in Fe­bru­ary, in which he pro­posed fun­da­men­tal VAT changes with re­gard to the sup­ply of ba­sic food items and all farm­ing equip­ment.

Matambo pro­posed the VAT Act would be amended to ex­empt all farm­ing equip­ment and all ba­sic food­stuffs which are cur­rently zero-rated, and that the list of ba­sic food items would be ex­panded to in­clude rice, veg­eta­bles and milk. It is also pro­posed the VAT reg­is­tra­tion thresh­old be in­creased from 500,000 pula to P1m.

Matambo stated that these pro­posed amend­ments are geared to­wards the sim­pli­fi­ca­tion of the VAT laws and the ad­min­is­tra­tion thereof, and to en­cour­age com­pli­ance. How­ever, the pro­posed amend­ments will have quite the op­po­site ef­fect.

The zero-rat­ing of items is a mech­a­nism by which any VAT in­cluded in the cost of an item can be re­moved to make it more af­ford­able for the con­sumer. This is achieved by the seller levy­ing VAT on the sales price at the rate of 0%, but the seller may claim any VAT in­curred on the ac­qui­si­tion or man­u­fac­ture of the prod­uct and re­lated over­head costs as an in­put tax de­duc­tion. It is for this rea­son that many coun­tries ap­ply VAT at the zero rate to ba­sic food items.

How­ever, where goods are ex­empted from VAT, it means that the sup­plier does not charge VAT on the goods but may also not claim the VAT in­curred on ac­quir­ing, pro­duc­ing or man­u­fac­tur­ing the goods as in­put tax, be­cause one can only claim VAT when mak­ing tax­able sup­plies. The VAT in­cluded in such costs is then passed on to the con­sumer, thereby ac­tu­ally in­creas­ing the cost of the goods con­cerned.

There­fore, by ex­empt­ing farm­ing equip­ment and ba­sic food items, the VAT cost in­curred on the im­por­ta­tion, pro­duc­tion or man­u­fac­ture of these goods may not be claimed as an in­put tax de­duc­tion and will form part of the cost of the sup­plier which will be passed on to the con­sumer, thereby in­creas­ing the cost of these goods.

In ad­di­tion, sup­pli­ers of farm­ing equip­ment and ba­sic food items which will be ex­empted from VAT will be re­quired to ap­por­tion the VAT which they in­cur on their gen­eral over­head costs be­cause they will gen­er­ally be sup­ply­ing goods which are both tax­able and ex­empt from VAT, and they can only claim VAT to the ex­tent that they make tax­able (stan­dard rated and ze­rorated) sup­plies.

Where ex­cep­tions for cer­tain goods are made for VAT pur­poses, it is al­ways a chal­lenge to specif­i­cally de­fine the goods which are to be ex­empted. The Botswana VAT leg­is­la­tion will there­fore have to be amended to spec­ify clearly as to what goods com­prise “farm­ing equip­ment” and the ba­sic food items which are to be ex­empted. These ex­emp­tions are also likely to cause dis­tor­tions and in­flu­ence con­sumer pref­er­ences.

This additional ad­min­is­tra­tive bur­den that sup­pli­ers of farm­ing equip­ment and food re­tail­ers (and pos­si­bly also whole­salers) will be re­quired to con­tend with can hardly be con­sid­ered to be sim­pli­fi­ca­tion of ad­min­is­tra­tion.

The ex­emp­tion of ba­sic food items — as op­posed to the zero-rat­ing thereof — is con­trary to in­ter­na­tional trends where coun­tries ap­ply the zero-rated mech­a­nism in or­der to achieve re­lief for con­sumers.

If one wants to achieve sim­pli­fi­ca­tion of the VAT Act and the ad­min­is­tra­tion thereof, the ex­emp­tion of the goods con­cerned is cer­tainly not an op­tion to con­sider.

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