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No-one pays personal tax at 25%!

JONATHAN HORE

Well, I know the topic of today’s article may have got you confused a little bit but don’t worry, you will be settled by the time you finish reading. Most of you may know that individuals are taxed at sliding scales and any income above P12 000/month or P 144 000/annum is taxed at 25%. So, that alone gives people the impression that high income-earners pay tax at 25%. Well, that is not entirely true as there is something called effective tax rate, which I will analyse below.

And if you missed one of my earlier articles, I once wrote and demonstrated that Botswana has the 2nd lowest rate for high-income earning individuals in SADC, after Mauritius whose rate stands at 15%. I then emphasised in that article that Botswana is generally a low tax regime and that directly translates into higher disposable incomes for its citizens and residents. Count yourself better off with the current tax rates; otherwise any increase will drill holes into your pockets.

If you want to know how heavy personal tax can be, call high income earners in RSA and Zimbabwe and they will tell you that they pay tax at 45% and 50%, respectively. Now, that’s massive! Let me begin with a brief as to how personal tax works in Botswana, before I go to effective tax rate. In this article, words importing the masculine shall be deemed to include the feminine.

HOW PERSONAL TAX WORKS

Personal tax is tax that is levied on income earned by an individual whether from employment, investments, partnerships or from a business run by a sole trader. Technically, personal tax is a direct tax which is chargeable on a particular individual based on the income that they earn. Employees get PAYE deducted on a monthly basis by their employers but that is income tax in their hands. Individuals are taxed using the individual tax tables which exempts the first P36 000/annum from tax. This explains why employers don’t deduct PAYE from employees who earn not more than P 3 000/month. The next P36 000 above the exempt P 36 000 is taxed at 5%, followed by 12.5%, 18.75% and the excess above P 144 000 is taxed at 25%.

An individual who earns more than P 36 000/annum is required by the Income Tax Act to register with BURS for income tax and file income tax returns by 30 September of each year. Any tax that may be due is only payable within 30 days of receiving a notification from BURS that an assessment would have been issued. Individuals are not legally required to pay tax before an assessment is issued, although they may, for convenience, choose to do so.

And by the way, an employee may instruct his employer to deduct more PAYE to cover for tax from his other income such as rentals. The employer has nothing to lose by making these additional deductions as PAYE is money deducted from the employee. To close this paragraph, a partner cannot suffer PAYE from salaries drawn from a partnership as PAYE can only be deducted by an employer. A partner in a partnership is not technically employed by anyone; rather, partners are self-employed.

EFFECTIVE TAX IS BELOW 25%

There is something which we call the effective tax rate. This is not anything complicated but it is merely an expression of the total tax charge as a percentage of the total income earned by a taxpayer. I narrate below the reasons why non-one in this country ever pays personal tax at an effective tax rate of 25%:

1st P36 000 isn’t taxed: I stated above that the first P36 000 is exempt from personal tax. Now, that has the effect of pulling down the effective tax rate as not all your income is subject to tax. In other words, the first P 36 000 is taxed at 0%. Staggered rates: Any amount above the first P36 000 is taxable but again, the rates are much lower than 25%, being 5% for the next P36 000 above the non-taxable P 36 000, 12.5% for the next P36 000 above the 5% bracket, 18.75% on the next P36 000.

The last bracket, being anything above P12 000/month or P 144 000 per annum is then subject to tax at 25%. You don’t have to be a rocket scientist to understand the above; all I am saying is that there are layers of lower tax rates below the 25% threshold and the effect of that is a reduced effective tax rate.

CONCLUSION

By way of conclusion, let me use figures to show you the effective tax rates for different incomes. For example, a person who earns P 180 000/annum pays tax at an effective tax rate of 12.25% whilst the effective tax rate on income of P 360 000/annum is 18.625%. On the extreme side, someone who earns P10m/annum pays tax at an effective rate of 24.771%.

Ok, how many people do you know who earn more than P10m a year? Very few or none, I guess. But no matter how much one earns, they will never pay tax at an effective rate of 25% for the reasons stated above. Like I stated above, I did not write this article for any other purpose but to help you appreciate that the 25% tax rate is there on paper but no-one pays personal tax at an effective rate of 25%, no matter how much they earn.

Don’t ever think that I am advocating for individual tax rates to be increased. I can’t do that folk; I am tax consultant and not a taxman. I am on your side. Well folks, I hope that was insightful. As Yours Truly says goodbye, remember to pay to Caesar what belongs to him. If you want to join our Tax Whatsapp group, send me a text on the cell number below. Jonathan Hore is the Managing Tax Consultant of Aupracon Tax Specialists and feedback can be relayed to jhore@aupracontax.co.bw or 7181 5836. This article is of a general nature and is not meant to address particular matters of any person.

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DIS Parley Committee selection disingenuous 

25th November 2020

Intelligence and Security Service Act, which is a law that establishes the Directorate of Intelligence and Security Service (DIS), provides for establishment of a Parliamentary Committee. Recently, the President announced nine names of Members of Parliament he had appointed to the Committee.

This announcement was preceded by a meeting the President held with the Speaker and the Leader of Opposition. Following the announcement of Committee MPs by the President, the opposition, through its leader, made it clear that it will not participate in the Committee unless certain conditions that would ensure effective oversight are met. The opposition acted on the non-participation threat through resignation of its three MPs from the Committee.

The Act at Section 38 provides for the establishment of the Committee to examine the expenditure, administration and policy of the Directorate. The law provides that the Parliamentary Committee shall have the same powers and privileges set out under the National Assembly (Powers and Privileges) Act.

On composition, the Committee shall consist of nine members who shall not be members of Cabinet and its quorum shall be five members.  The MPs in the Committee elect a chairperson from among their number at their first meeting.

The Members of the Committee are appointed by the President after consultation with the Speaker of the National Assembly and Leader of the Opposition in the National Assembly. It is the provision of the law that the Committee, relative to its size, reflect the numerical strengths of the political parties represented in the National Assembly.

The Act provides that that a member of the Committee holds office for the duration of the Parliament in which he or she is appointed.  The Committee is mandated to make an annual report on the discharge of their functions to the President and may at any time report to him or her on any matter relating to the discharge of those functions.

The Minister responsible for intelligence and security is obliged to lay before the National Assembly a copy of each annual report made by the Committee together with a statement as to whether any matter has been excluded from that copy in pursuance of the provision of the Act.

If it appears to the Minister, after consultation with the Parliamentary Committee, that the publication of any matter in a report would be prejudicial to the continued discharge of the functions of the Directorate, the Minister may exclude that matter from the copy of the report as laid before the National Assembly.

So, what are the specific demands of the Opposition and why are they not participating in the Committee? What should happen as a way forward? The Opposition demanded that there be a forensic audit of the Directorate. The DIS has never been audited since it was set up in 2008, more than a decade ago.

The institution has been a law unto itself for a longtime, feared by all oversight bodies. The Auditor General, who had no security of tenure, could not audit the DIS. The Directorate’s personnel, especially at a high level, have been implicated in corruption.  Some of its operatives are in courts of law defending corruption charges preferred against them. Some of the corruption cases which appeared in the media have not made it to the courts.

The DIS has been accused of non-accountability and unethical practices as well as of being a burden on the fiscus.  So, the Opposition demanded, from the President, a forensic audit for the purpose of cleaning up the DIS.  They demand a start from a clean slate.

The second demand by the Opposition is that the law be reviewed to ensure greater accountability of the DIS to Parliament. What are some of the issues that the opposition think should be reviewed? The contention is that the executive cannot appoint a Committee of Parliament to scrutinize an executive institution.

Already, it is argued, Parliament is less independent and it is dominated by the executive. It is contended that the Committee should be established by the Standing Orders and be appointed by a Select Committee of Parliament. There is also an argument that the Committee should report to Parliament and not to the President and that the Minister should not have any role in the Committee.

Democratic and Parliamentary oversight of the intelligence is relatively a new phenomenon across the World. Even developed democracies are still grappling with some of these issues. However, there are acceptable standards or what might be called international best practices which have evolved over the past two or so decades.

In the UK for instance, MPs of the Intelligence and Security Committee are appointed by the Houses of Parliament, having been nominated by the Prime Minister in consultation with the Leader of the Opposition. This is a good balancing exercise of involvement of both the executive and the legislature. Consultation is taken for granted in Botswana context in the sense that it has been reduced to just informing the Leader of Opposition without much regard to his or her ideas; they are never taken seriously.

Furthermore, the current Committee in the UK has four Members of the ruling party and five MPs from the opposition. It is a fairly balanced Committee in terms of Parliamentary representation. However, as said above, the President of Botswana appointed six ruling party MPs and three from the opposition.

The imbalance is preposterous and more pronounced with clear intentions of getting the executive way through the ruling party representatives in the Committee. The intention to avoid scrutiny is clear from the numbers of the ruling party MPs in the Committee.

There is also an international standard of removing sensitive parts which may harm national security from the report before it is tabled in the legislature. The previous and current reluctance of the executive arms to open up on Defence and Security matters emanate from this very reason of preserving and protecting national security.

But national security should be balanced with public interest and other democratic principles. The decision to expunge certain information which may be prejudicial to national security should not be an arbitrary and exclusive decision of the executive but a collective decision of a well fairly balanced Committee in consultation with the Speaker and the minister responsible.

There is no doubt that the DIS has been a rogue institution. The reluctance by the President to commit to democratic-parliamentary oversight reforms presupposes a lack of commitment to democratization. The President has no interest in seeing a reformed DIS with effective oversight of the agency.

He is insincere. This is because the President loathes the idea losing an iota of power and sharing it with any other democratic institution. He sees the agency as his power lever to sustain his stay in the high office. He thought he could sanitize himself with an ineffective DIS Committee that would dance to his tune.

The non-participation of the opposition MPs renders the Committee dysfunctional; it cannot function as this would be unlawful. Participation of the opposition is a legal requirement. Even if it can meet, it would lack legitimacy; it cannot be taken seriously. The President should therefore act on the oversight demands and reform the DIS if he is to be taken seriously.

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The Maccabean Uprising

25th November 2020
Jewish freedom fighters

 Jews drive away occupying power under the command of guerrilla leader Judas Maccabees but only just

Although it was the Desolation Sacrilege act, General Atiku, that officially sparked the Maccabean revolt, it in truth simply stoked the fires of an already simmering revolution. How so General?

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Atomic (CON)Fusion

25th November 2020

For years I have trained people about paradigm shifts – those light-bulb-switch-on moments – where there is a seismic change from the usual way of thinking about something to a newer, better way. 

I like to refer to them as ‘aha’ moments because of the sudden understanding of something which was previously incomprehensible. However,  the topic of today’s article is the complete antithesis of ‘aha’.  Though I’d love to tell you I’d had a ‘eureka ‘, ‘problem solved’ moment, I am faced with the complete opposite – an ‘oh-no’ moment or Lost Leader Syndrome.

No matter how well prepared or capable a leader is. they often find themselves facing perplexing events, confounding information, or puzzling situations. Confused by developments of which they can’t make sense and by challenges that they don’t know how to solve they become confused, sometimes lost and completely clueless about what to do.

I am told by Jentz and Murphy (JM) in ‘What leaders do when they don’t know what to do’ that this is normal, and that rapid change is making confusion a defining feature of management in the 21st century.  Now doesn’t that sound like the story of 2020 summed up in a single sentence?

The basic premise of their writing is that “confusion is not a weakness to be ashamed of but a regular and inevitable condition of leadership. By learning to embrace their confusion, managers are able to set in motion a constructive process for addressing baffling issues.

In fact, confusion turns out to be a fruitful environment in which the best managers thrive by using the instability around them to open up better lines of communication, test their old assumptions and values against changing realities, and develop more creative approaches to problem solving.”

The problem with this ideology however is that it doesn’t help my overwhelming feelings of fear and panic which is exacerbated by a tape playing on a loop in my head saying  ‘you’re supposed to know what to do, do something’. My angst is compounded by annoying motivational phrases also unhelpfully playing in my head like.

  • Nothing happens until something moves
  • The secret of getting ahead is getting started

and

  • Act or be acted upon

All these platitudes are urging me to pull something out of the bag, but I know that this is a trap. This need to forge ahead is nothing but a coping mechanism and disguise. Instead of owning the fact that I haven’t got a foggy about what to do, part of me worries that I’ll lose authority if I acknowledge that I can’t provide direction – I’m supposed to know the answers, I’m the MD!  This feeling of not being in control is common for managers in ‘oh no’ situations and as a result they often start reflexively and unilaterally attempting to impose quick fixes to restore equilibrium because, lets be honest, sometimes we find it hard to resist hiding our confusion.

To admit that I am lost in an “Oh, No!” moment opens the door not only to the fear of losing authority but also to a plethora of other troubling emotions and thoughts:  *Shame and loss of face: “You’ll look like a fool!” * Panic and loss of control: “You’ve let this get out of hand!” * Incompetence and incapacitation: “You don’t know what you’re doing!”

As if by saying “I’m at a loss here” is tantamount to declaring “I am not fit to lead.” Of course the real problem for me and any other leader is if they don’t admit when they are disoriented, it sends a signal to others in the organisation stating it’s not cool to be lost and that, by its very nature encourages them to hide.  What’s the saying about ‘a real man never asks for direction. ..so they end up driving around in circles’.

As managers we need to embrace the confusion, show vulnerability (remember that’s not a bad word) and accept that leadership is not about pretending to have all the answers but about having the courage to search with others to discover a solution.

JM point out that “being confused, however, does not mean being incapacitated.  Indeed, one of the most liberating truths of leadership is that confusion is not quicksand from which to escape but rather the potter’s clay of leadership – the very stuff with which managers can work.”

2020 has certainly been a year to remember and all indications are that the confusion which has characterised this year will still follow us into the New Year, thereby making confusion a defining characteristic of the new normal and how managers need to manage. Our competence as leaders will then surely be measured not only by ‘what I know’ but increasingly by ‘how I behave when I accept, I don’t know, lose my sense of direction and become confused.

.I guess the message for all organizational cultures going forward is that sticking with the belief that we need all-knowing, omni-competent executives will cost them dearly and send a message to managers that it is better to hide their confusion than to address it openly and constructively.

Take comfort in these wise words ‘Confusion is a word we have invented for an order not yet understood’!

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