THE SALES TAX MYSTICAL CONTINUES

TALK about the calming of the water with that last ridge, with the on and off baited tax lying in wait, and now side stepping the exemptions debate that was unfolding, for the last round of consultative nuances. Or is it?

The evidence in the last few months that kept this topic brewing, of the ensuing vigorous debates about the efficacy of this tax without the usual partisan rhetoric that almost always characterises most Zambian debates, has been admirable. If the Zambian population is becoming more rationally engaged, if this is a precursor to a renewed citizenry that is more focused, more productive, and that seek answers from itself rather than the elected politicians, if this is a sign that we are entering an era where the citizenry will seek to suggest without rage, then we are entering a period where Zambia can be more productive collectively.

In the last few months, since the budget presentation the level of discourse about taxes on social media, in newspaper, in newsletters, in “WhatsApp” groups

has shown

tha t more than anything, Zambians are worried and interested to know more about this tax.

Rightly so, because this tax has the potential to change the cost character for everyone including businesses.

Two weeks ago, we had a new Minister of Finance, and on August 2, 2019, the new minister moved a motion in parliament to defer the Sales Tax Bill from consideration in the current sitting. Immediately following announcement, various organisations welcomed the government decision to postpone the implementation of this tax. In previous articles, we have decried the potential loss of the self-enforcing mechanism embedded along the supply chain in the VAT system, which is the VAT system’s main compelling distinctive feature. This deficiency in Goods and Service Tax (GST) or proposed tax, we had previously noted, could have the effect of increasing non-compliance over time, consistent with our previous experiences in the past if there are not new enforcement mechanisms which are as compelling, that will be implemented. We are of the view that the initial performance in the short-term will likely be persuasive.

The other concern was the high potential cascading effect of this tax given the high tax rates that have been proposed, with its potential adverse impact on inflation and employment.

We will digress for one second to clarify, what cascading effect is. This is in laymen terms refers to the effect on cost of a tax charged on top of another tax that has already been charged for those same goods or service.

Broadly, the tax on tax effect is inherently present because tax is applied on the sale of a product or service without any credit for the tax paid or incurred at earlier stages production of supply or in other words, for input tax.

From the way the debates and official position has been, it became obvious that this potential issue was to be dealt with by providing a huge number of exemptions for certain products and services to account for Capital items, Inputs, designated basic and essential goods or services, designated suppliers to privileged persons and exports from time to time.

The essential effect of these exemptions, was to be similar to the role VAT refunds plays in the VAT system, which is that of mitigating against the effective tax rate cascading effect.

Similar to the culminating adverse effect of tax refunds on tax revenue collected, there is a risk that the number of exemptions proposed could also lead to the similar level of tax leakages as the case has been under VAT. This is leading a number of technocrats wanting to see the modelling statistics behind the decision to move to GST.

This also leads to another question about why the Ministry of Finance do not just propose a remodelled VAT system with features that retains the positives of this system and including the features that provides enhanced tax collection.

The response from the Zambia Revenue Authority (ZRA) is that this is essentially what they have done and the GST proposed is not the age old sales tax, but that in fact it combines the best of both.

The ZRA also contends that the VAT has failed not only in Zambia, but in most African countries with narrow manufacturing bases translating into minimum value additions negating the tax that can be collected from a tax based on the value addition.

Secondly, ZRA contends that as a consequence of a large informal sector, operating a VAT system for this sector fails with the consequence on both that refunds will continue to accumulate.

The ZRA’s point is well noted and it does make sense that a tax that does not add to the treasure deserves a relook and therefore the basis for looking at the efficacy of this tax appears sound.

One thing that needs to be addressed and communicated effectively is around the how the ZRA will introduce self-enforcing mechanisms that are as effective as those currently subsisting with the VAT system and how ZRA will address the cascading effect without indiscriminately providing exemptions that are broadly defined, and that may ultimately cause significant leakages in taxes.

Finally, as a strategic institution, the ZRA must cultivate its website to begin to provide as much information as possible showing collection statistics, tax change modelling information etc. to contain the various information needs of the citizenry.

If that can be done, the battle is half won.

About the author: Kelvin Chungu is a Partner at Nolands Advisory Services Limited. He is contactable on +260976-377484.