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Why consumers may not benefit from tax relief

Traders could hike prices of affected products

The recent changes on the Value Added Tax (VAT) Act come as good news to the consumer as the zero-rating of basic foodstuffs is expected to make the goods more affordable as the 12% VAT component charged by suppliers has been done away with.


Good news as it may seem Tax experts are of the view that the benefits may not cascade down to the ordinary consumer due to a number of factors.


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 zero per cent, 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.


Presenting the national budget last year, the Minister of Finance and Development Planning Kenneth Matambo said the objective of amending the VAT Act is to allow the intake of balanced meals for families.


With this new amendment a loaf of bread that was costing P9.00 should now cost P8.04.


The food stuff that have been zero-rated from VAT include Brown bread, Fresh vegetables (in natural state), Fresh fruits (in natural state), Rice (husked, milled, polished, glazed, parboiled or broken), Samp (not further prepared/ processed), Milk (cattle, sheep or goat milk not concentrated, condensed, evaporated ,sweetened, flavoured or cultured),Bread flour (white, brown or whole wheat).


Similarly, all businesses that are registered but have an annual turnover of less than P1, 000,000 should arrange with BURS for the necessary deregistration in compliance with the new amendments.


Tax experts have welcomed the amendment saying they make basic foodstuffs more affordable and this will also make VAT administration easier as the number of VAT registrants will decrease, allowing BURS to strategically channel its resources. However they highlighted that these benefits may likely not reach the consumer due to other factors.


Max Marinelli the Country Managing Partner with Deloitte & Touche  welcomed this move by the government saying the VAT  amendment brings Botswana into line with other countries that zero-rate VAT on basic foodstuffs.


“The zero rating of basic food stuffs is good news to the consumer however he said what’s more worrisome is that, apparently the milling companies have put their prices up plus the recent devaluation of the Pula may negate this benefit,” said Marinelli.


Matambo recently changed the weights in the Pula basket to 50 percent South African rand and 50 percent IMF’s Special Drawing Rights (SDR). The basket previously comprised 55 percent rand and 45 percent SDR. For 2015, the rate of crawl of the Pula against the basket will be zero.


Tax Manager with BDO an Accounting and Tax Advisory firm Watson Masikati said generally, the spirit behind the amendments is good however the benefit to the consumer is a debatable issue because other factors may come into pay.


“It remains to be seen though if the business people’s behavior will be in line with the intention behind these changes. Like in this case retailers can simply take away the benefit from ordinary consumers by increasing the prices of the affected products then they pocket the profit,” said Masikati.


 Furthermore, he said there is definitely a time lag between effective date of the law which is 23 January 2015 and practical implementation especially with these changes which are so immediate it’s not guaranteed that the benefits will filter to the consumer.


He added that the timing of the effective date of these changes is a headache to business people because they were not given enough time to change their systems in compliance with the amendments.


 “Some companies have sub-contracted maintenance of their systems to third parties who need time to appreciate the products affected and some of these systems people are not in Botswana which further complicates the implementation of the changes,” he said.


 Masikati also noted that there is a downside of deregistration though for those who may want to. He said the VAT that an unregistered vendor pays on the goods she sells becomes a cost to him/her because he got nowhere to claim the VAT charged by his/her suppliers. 

“Practically it follows that such a vendor upon de-registering their merchandise become more expensive compared to registered vendors who claim the VAT charged by suppliers against VAT they charge their customers,” said Masikati.


Generally, revenue to the government will definitely be reduced because consumers are no longer contributing the 12% VAT on these goods which have been zero-rated.


 “The biggest question though is to what extend does the government lose revenue which is difficult to quantify. We wait to see if there will be no unfavorable tax proposals when the Minister makes his budget speech in a few weeks hopefully,” said Masikati.


 The experts say from BURS side the increase in VAT registration thresholds will definitely reduce the burden of chasing after small enterprises whose contribution to the national revenue is small as such they can focus on major contributors.

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