Former finance minister Felix Mutati says government should postpone the implementation of the Sales and Goods tax to allow for more consultation, warning that the new tax regime might cause more problems than the Value Added Tax (VAT) that government wants to do away with effective 1st April, 2019.
And Mutati says government must implement austerity measures in order to avoid the possible failure to balance the 2019 national budget due to debt servicing.
In a statement, Thursday, Mutati further expressed concern that the debt servicing was growing greater than the country’s reserves.
“As you know there was a pronouncement that from the 1st of April, we are going to migrate from VAT to sales and goods tax. Now, from where we sit, there has been no consultation particularly with the private sector as to a framework that we are going to use as of the 1st of April. So you have a lot of questions that remain unanswered. Number one critical question is that one of the central features of sales tax is that; you as manufacturers, you as private sector, will pass on the cost to the final consumer who will pay a lot more and that invaluably feeds into inflation. And when it feeds into the inflation, you will have a critical impact on your monetary policy because monetary policy controls inflation. So this will be inflation that will be induced through a revenue measure. So that question remains totally unanswered, how are we going to ensure that the inflation impact of the sales tax are managed?” Mutati wondered.
“It is not clear how you are going to address some of those items which you have zero rated and exempted; for example, mealie meal, flour and other basic commodities. Are you going to put a sales tax there or not? If you do, it will have an impact on an ordinary person. So all these things are actually totally unclear. So for me the next steps will be that let’s address the leakages that are there in the VAT refunds, there are certain leakages. Let’s have a consultative space, particularly with the private sector so that they understand the framework that they are going to use because it will require even the alteration of accounting systems. And given the limitation of time, the implementation must be deferred because if we don’t do that, we are going to endanger the revenue potential that will be raised from what was VAT, now sales tax and more so that sales tax is much more vulnerable to leakages. So our revenue targets may be compromised. So what government should think about is ‘let’s defer, so that we think through this new regime properly.’ Otherwise, we are going to have a new regime that will be more problematic than what we have, VAT.”
And Mutati said sales and goods tax had many risks such as compromising the competitive ability of goods that are exported.
“When the private sector buys something, they are going to claim it, input and output. So that is self-enforcing. Sales tax has no self-enforcing and therefore the potential for leakages are a lot higher in sales tax compared to VAT, so what frame works are going to be put in place to ensure that these leakages are minimised? And the other challenge is the competitiveness of products, particularly the exports, if you are going to have exports that have a content of sales tax, you are distorting your competitive ability, your goods externally will be less competitive and therefore it will hurt the economy. So whilst you want to generate tax revenue, you are eroding that generation because you have eroded competitiveness,” Mutati said.
And Mutati urged government to implement austerity measures in order to avoid the possible failure to balance the 2019 national budget due to debt servicing.
“For this year, the amount that is required for debt servicing is colossal, now debt servicing takes a primary chunk from the budget and therefore you have to deal with the debt servicing which unfortunately is growing greater than the reserves. So you get a situation where unless you do certain practical measures, you will fail to balance the 2019 budget. Now, what options are available? The first option that is available is for you to drastically curtail expenditure, is for you to implement those austerity measures that have already been pronounced, particularly those measures that are around the energy sector,” Mutati said.
And Mutati said government should re-engage the IMF in order to build the confidence of foreign investors to invest in the country.
“There must be a reverted effort to re-engage the IMF, to build confidence, particularly foreign investors’ confidence, particularly as a mechanism to boost international reserves. We need those practical actions in order to enable ourselves finance the 2019 budget,” Mutati said.