Nothing simple about Botswana VAT exemptions
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.