VAT needs to go, mines have been swindling govt for 17 years – Chanda

Zambia Revenue Authority (ZRA) Commissioner General Kingsley Chanda says the Value Added Tax (VAT) system has made it easy for companies to declare losses and swindle government for 17 years, hence denying the country a fair share of taxes.

Speaking when he appeared on ZNBC’s Sunday Interview, Chanda revealed that the VAT system made it easy for companies to declare losses for 17 years and allowed them to swindle government through transfer pricing, with mining companies being the chief culprits.

He also argued that VAT was not a good tax system for a country like Zambia with law value addition.

“VAT gives an incentive for transfer pricing, especially on capital goods, those who are honest will agree with me that suppliers of our major tax payers in our country are actually related companies where the parent company is actually the supplier of goods and services to the subsidiaries in the country. So, where, for example, capital equipment is supposed to cost US $100,000, it is declared at US $1 million, US $900,000 is siphoned to that parent company. Now, that company does not mind even if they pay VAT on US $1 million, government will still refund them, but they would have taken US $900,000 out of the economy! But that does not end there, the US $1 million is declared as capital injection in their capital, when the real value is US $100,000 and on that, they will start claiming capital allowances. The effect of claiming capital allowances is to reduce the profitability of those countries, and that is why in this country, and the only country, for the last 16 to 17 years, companies have been declaring losses, mines mostly! And this why we have to take these steps,” Chanda explained.

He reiterated that VAT refunds had also been growing at an unsustainable rate beyond government’s ability to afford.

“Ideally, any tax must grow as the economy is growing, but the tax has been going up and down, but the refund has been growing! As a result, the contribution of the tax to GDP has been stagnant and in some cases it has been very low; it started from about 7 per cent going down to 5 per cent. It is at 7 per cent and going to 8 per cent now because government introduced radical measures in 2017; there was an introduction of withholding VAT at sources, meaning ZRA was empowered to appoint tax agents and a lot of companies were appointed as tax agents, and the tax in 2017 grew by 6,000 per cent, that does not happen in a normal economy, we sealed the tax leakages. But what was shocking also was that even refunds started increasing, they increased from an average of 550 to K774 million every month in 2017. And when the Minister announced in October, 2018, that we are going to abolish VAT, the refund claims jumped from K774 million per month to K1.4billion per month as of today,” Chanda said.

“That is one of the reasons why we must modify our VAT. For me, I am calling this introduction of Sales Tax largely as the modification of our VAT to ensure that it conforms to current economic realities. Fraud, we have been doing audits, we also hired a UK-based company to come and help us with forensic audits, the discoveries there are alarming! We have even multinational companies, we have situations of double claims of VAT in millions of dollars and, of course, government paid. We have taken a very hard line on these issues, in the early days of the discoveries, we were penalizing them, but I think we need to take a different tangent by ensuring that those that did this and where established that it was deliberate, they have to be prosecuted, and we will pursue some of these.”

He explained that the proposed Sales Tax was a hybrid of the VAT system and Sales Tax itself, adding that that those opposed to the tax had not read the proposed Bill.

“It actually pains me when I hear such sentiments made by people who have been to school and those who have been in business for a long time. And immediately you hear anyone saying that, just know that they have not read the Sales Tax Bill that has been proposed, it is not the Sales Tax that existed 23 years ago. In fact, the correct description of this Bill is the Goods and Services Tax (GST); the detail is in the Act. And when you look at Act Number 7 of 2019, it is very clear that what we have is a hybrid of Sales Tax and Value Added Tax. The current Sales Tax that has been proposed has all the zero ratings that were in the VAT, it has all the exemption orders, it has all the deferment schedules that was never the case with the traditional Sales Tax. So, you will see all the good things that currently exist under the VAT, being migrated to the Sales Tax Bill,” argued Chanda.

“Zambia is not the only country that will be implementing the Sales Tax; there are many states, in the United States of America that are under Sales Tax; Canada is on Sales Tax; Australia is on Sales Tax. What we have done and what people must be proud of is that government has looked at how our economy is operating and decided to come up with tax system that will accommodate those unique characteristics of our economy. For example, our economy is characterised with high consumption and low production, we have a very lean manufacturing base. And it is documented that VAT works well in an economy where there is value addition, in this economy, there is very limited value addition.”

         

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