Zambian small-scale businesses are all going to shut down following the implementation of the controversial Sales Tax after next month, former Finance Minister Felix Mutati has warned.
And Mutati has called on government to defer the proposed Goods and Services Tax (GST) by at least another six months, or ideally by 18 months, to allow for a thorough economic analysis and avoid huge business disruption.
Appearing before the National Economy, Trade, Labour and Budget Committee in Lusaka, Thursday, Mutati warned of the disastrous effect implementing the GST Bill from July 1, 2019, would have on the SME sector, which largely comprise of distributors that employed in excess of 100,000 workers, due to the cascading effect Sales Tax will have.
The GST Bill No. 7 of 2019 is expected to be enacted from July 1, this year, with the rate pegged at 16 per cent on all imported goods into Zambia, while the rate on domestic services supplied within the country proposed to be at nine per cent.
“We have to think of those small businesses in Kalingalinga (Township), in Lumumba (area), who are going to go down because of the cascading effect of Sales Tax. The whole distribution, warehousing business, which employs thousands and thousands of ordinary Zambians, is going to be no more,” Mutati warned in his submission received by parliamentarians.
“Travel agents are going to be no more! Hardware shops will import directly. In the end, we shall have created a new problem where we are suffocating the SMEs; putting them out of business, and for what purpose? To bring in a tax that doesn’t answer to the problem that we have defined? And this is an impartial matter; it’s about the economy affecting all of us. On the challenges that we’ve got, let’s not add an additional problem.”
And Mutati, who is also the immediate past Works and Supply Minister, suggested that the GST be deferred for at least another six months, or ideally by 18 months, to allow for a thorough economic analysis and avoid huge business disruption.
“My submission to you is that, we need to defer the migration of Sales Tax. What we need to do is to fix the administrative challenges that are surrounding VAT first, and there is no evidence that we have failed to fix the problem. As we defer, we also need to carry out an economic analysis to see the impact of the migration, particularly reflecting on some of the fundamentals of the Seventh National Development Plan (7NDP),” he said.
“And we must remain alive to the fact that, any fundamental change, particularly in taxation, creates massive business disruption. You have to give space for business to be able to adjust to the new change. And when you are in a race, you’re on a horse, you don’t change midstream until you get to the touchline; and for us, the touchline is the end of the year at the very minimum.”
He cautioned that changing from VAT to Sales Tax would equally disrupt government’s revenue-generation agenda.
“You can’t begin a new system mid-year; it’s going to create disruption, even to the collection of revenue that you want. So, as a principle of tax, don’t change mid-stream,” he advised.
But Mkushi South PF member of parliament Davies Chisopa queried Mutati to elaborate precisely on how small businesses would be negatively impacted once the Sales Tax takes effect after next month.
He also asked whether Mutati believed there should be a dual-type system where Sales Tax should only be applicable to the mining sector, while VAT apply to the rest of the economy.
Mutati, however, responded by citing practical examples of how existing companies along the supply chain would be impacted.
“Take a cement company locally in Zambia; at the moment they’ve got distributors. So, Lafarge would sell to a distributor, charge: nine per cent; the distributor would sell to a trader in Kalinglinga and charge another nine per cent, and that would have the effect of increasing the price of cement and that will impact on demand. So, what does Lafarge do? They will go and sell to the final consumer in order to protect the price so they will cut off this middle person, and those are the effects,” he explained.
“South African Airways (SAA), instead of selling to the travel agent, charging nine per cent, the travel agent selling to me who wants to go to South Africa, another nine per cent; they (SAA) will ask me to go to their office so that the cost of the ticket is lower and improve their loads. So, the effect is that, this middle person, because of the nine per cent that they are charging, is going to make the final product more expensive. Therefore, manufacturers, to keep their price down and increase their volumes, will eliminate the middle people.”
He added that having the VAT system and Sales Tax working simultaneously would not work.
“Second question is, can you have a dual system or Sales Tax and VAT with reference to the mines? You are going to increase their production cost, and once you increase their production cost, where are they going to recover that extra amount from being competitive? The idea of having a dual system is not solving the problem; solve the problem, which is administration – it is not a structural problem. So, a dual system is creating a structural solution to a problem that doesn’t exist,” explained Mutati.
The GST Bill No. 7 of 2019 has made provisions for exemptions from tax on the following: a) Capital goods; b) inputs as prescribed in the exemption schedule; c) Designated basic and essential goods and services; d) Designated supply to privileged persons; and e) exports.