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.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”