KPMG warns against Sales Tax implementation

KPMG, the globally-renowned audit, tax and advisory services firm, has warned that government’s insistence to introduce Sales Tax next April will create uncertainty in the Zambian economy, which would be very injurious to business.

And KPMG says government should not have introduced the scheme three months into a financial year as its implementation and administration will be a huge challenge as well as a nightmare to companies.

Meanwhile, Consumer Trust Unity Society (CUTS) coordinator Chennai Mukumba noted that the Sales Tax roll out would have a negative impact on lower-income consumers.

Last month, Mwanakatwe told Parliament that government intends to abolish the Value Added Tax (VAT) and replace it with a non-refundable Sales Tax, which, according to her, is simpler to implement.

Government proposes to introduce the sales tax on April 1, 2019, in a bid to avoid paying VAT refunds, especially to mining companies, who demanded close to US $1 billion, thereby straining government coffers.

Speaking during an Economics Association of Zambia (EAZ)-British Chamber of Commerce-organized public discussion in Lusaka, KPMG tax partner Michael Phiri cautioned government against rolling out Sales Tax next year because it will bring uncertainty in the local economy, which would be “very injurious” to business.

“My first remark would be, uncertainty is very injurious to business; tax systems need to create certainty if we are to promote investment as a country. And to have measures announced, the rate not known, the scope not known…all we know is that, it is going to take effect on 1st April [2019]. Essentially, it stalls business activity until certainty is created,” Phiri told a packed auditorium at Pamodzi Hotel in his concluding remarks, Tuesday evening.

“No investor would want to invest and put money in an uncertain environment; so, the quicker we create certainty, the better.”

He stressed on the need for government to dialogue with all stakeholders before they rush to implement the controversial Sales Tax.

“My second intimation would be that, dialogue doesn’t mean that you lose your final authority; it doesn’t demean anybody if they dialogue, you don’t lose your ministerial portfolio if you engage and listen to people. It’s important that we dialogue and hear what the complaints of the people are and be able to listen,” Phiri advised.

“I would regret to be a Minister of Finance who passes a bill today and only have to reverse it six months down the line.”

Earlier, during a keynote presentation, Phiri said the Sales Tax was a trial and error scheme by government, adding that the scheme could backfire terribly and cause the economy to collapse completely.

“But the [Finance] Minister [Margaret Mwanakatwe] has indicated that Sales Tax is coming whether we like it or not. It reminded me of another meeting that was held here where the then Minister of Finance, ABC (Alexander Bwalya Chikwanda), and I was making an indication to him that the proposal to increase MRT (Mineral Royalty Tax) to 20 per cent wasn’t just going to work because the mines will not continue to operate. And then I was labelled a ‘Trojan Horse,’ but I was vindicated six months later,” Phiri recalled.

He outlined that Sales Tax was a mistake by government because it would cause a cascading effect, which would force an increase in the tax rate and the cost of production.

“We have had Sales Tax before and it had problems, which were cured by VAT. And, essentially, we are going back to where we were. And so, why it matters is that this tax gets directly to the consumer on purchase on non-exempt goods. The problem is that, it grows with time and it can increase the cost of doing business and we know that they are trying to exempt some institutions,” Phiri said.

“This is really another trial and error that could back fire and cause the economy to collapse! The other thing they should consider is the increased cost of doing business across sectors. Because I’m sure that they have not considered the impact that this sales tax can have on companies that are currently contributing cooperation tax at 35 per cent. Because when you have all your costs, including Sales Tax and if your level is high enough, then you cannot expect that companies that are making any profits will continue to make any profit. So, they need to consider the increased cost that this will have across all sectors. The other thing they should consider is that, Sales Tax will only address that VAT problem; it will not address tax compliance. I do think that they need to make their recent measures in terms of CCTV’s, TPIN’s, just all those things that we want them to do to broaden the tax base.”

And Phiri said government should not have introduced the scheme three months into a financial year as its implementation and administration would be a huge challenge as well as a nightmare to companies.

“In a nutshell, the problem with Sales Tax is that if you are a wheat farmer, and those who administer VAT know that wheat is standard-rated, and so, the intimation now is that all standard-rated products will be subject to Sales Tax. And so where we have a problem is that, if you are a wheat farmer, they will expect you to pay sales tax on that wheat. And primarily, you will be selling your wheat to a miller, and that miller, too, is expected to charge Sales Tax. And that miller will not consume the milled wheat, they will look to add value added to that milled wheat and sell it to a bakery; and the bakery when they are selling that bread and buns they are expected to charge Sales Tax. And then, you move from the bakery and you know they will not sell to individuals. They will redistribute these through supermarkets; they, too, will be expected to charge Sales Tax. And then, now, you have the people who are selling in the retail shops also charging Sales Tax on the consumer,” narrated Phiri.

“So, when you look at that cascading effect, and the impact it will have on the consumer, like you and me, it just goes towards increasing that cost significantly. So, we had a problem with this proposed sae tax because of its potential to cascade the Sales Tax rate to much higher rates as a result of its non-exemption mechanism. Maybe they will allow for some exemption, some certificates, but going by the way they had challenges in administering issues like withholding VAT, which provides for those certificates, it doesn’t inspire much hope that the Sales Tax system will be able to work. It’s a bigger cost, it causes tax on tax, it increases costs, it neglects investment in a country. VAT remains the best tax system in the country, but since the Minister is hell-bent on introducing Sales Tax, what we are proposing to them is that they must consider, you cannot change such a significant tax midstream three months into a financial year because we know that system implementation is a challenge and I am sure that it is even for the Zambia Revenue Authority. And to have it happen in the middle of the year creates a nightmare for business because not all businesses trade in two, three goods, some have several lines.”

Meanwhile, Mukumba noted that the Sales Tax would have a negative impact on businesses and low-income consumers.

“What we would see is this cascading effect, which would have some of the most direct impacts on consumers. Given some of the issues that we are dealing with; the poverty, inflation, [it] would have negative effects, particularly lower-income consumers,” said Mukumba.

While the EAZ sent out an invitation to government, no official was present to speak on behalf of the Ministry of Finance and to answer and explain the pending Sales Tax proposal.

         

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