Renowned economist Professor Oliver Saasa says government’s determination to eventually implement the Goods and Services Tax (GST) on January 1, 2020, will eventually result in killing the mining sector because costs of production will drastically increase.
In a statement issued to Mining for Zambia, a Chamber of Mines initiative, Prof Saasa cautioned against rushing to implement the GST from next year, but instead maintain with the current existing Value Added Tax (VAT) system to avert a potentially disastrous situation where the major mining companies cease operations in the country.
In a detailed analysis between the two tax systems, Prof Saasa, the Premier Consult chief executive officer, explained that the GST would equally lead to less tax revenues being collected in the medium-term.
“If we had to compare both systems, they both collect [tax]. In certain sectors, as a government, you may collect a little bit more. But you have to look at the incentives — you can’t only focus on collection. If you negatively impact the goose that’s laying the golden egg, then you end up killing it. And then you discover that, in the medium to long-term, you will not collect anything,” Prof Saasa warned.
He pointed out that the GST implementation would result in reductions in tax collections in the medium-term.
“Whether or not Sales Tax will be implemented is still being debated, but if it’s passed in January, firstly, there will be a short-term increase in Treasury collections — but there will be a medium to long-term reduction in tax payments. That, for me, is a given,” he noted.
“Secondly, we will not see significant mining development in terms of expansion. And that would mean — because the tax regime is not good enough — Zambia slowly falling backwards on its projected growth in the mining sector, which is not good. You are talking about a sector that accounts for more than approximately 70 per cent of export receipts and revenue. That will disturb foreign exchange availability, interest rates, and it will disturb the value of the kwacha. We urgently need to address the issues with Sales Tax because a cough in the mining sector will give everybody in the country the Flu, so to speak.”
And he argued that part of government’s motivation to abandon VAT was to run away from their responsibility of paying off outstanding VAT refund claims, especially from mining companies.
“I think it’s important to understand what the main motivator is for abandoning the VAT that we adopted 25 years ago: It is all about how best the government can run away from meeting its obligations to refund VAT to the mines. There’s no economic reason whatsoever why we should migrate to Sales Tax,” he stated.
“For the government, whatever [VAT] gets into the kitty is like a profit, and they tend to consume it. When it comes to their obligation to pay VAT refunds, they have no other revenue source, unless they just go straight to the Treasury. When these refunds accumulate for such a long time, the amounts become atrocious. At the moment, we’re talking about approximately $5-600 million collectively owed just to the mining sector.”
On the challenges of the Sales Tax, Prof Saasa reiterated widespread concerns relating to its cascading effect on inflation, which remained on an upward trajectory.
“One of the challenges with a Sales Tax is the cascading [or compounding] effect. You have a situation where, at every point in the chain, you see the same percentage being added as a Sales Tax — either 16% or 9%, for imports or locally produced goods, over and over again. The total Sales Tax cost to the mines, for example, could be as high as 37.8%. Of course, this will push up the cost of production — and this is not only for the mines, but for almost everybody. This means that a number of the taxes that have been brought in will make reinvestment very problematic,” stated Prof Saasa.
“The whole idea of migrating from VAT to Sales Tax, from the government’s standpoint, is that they want to maximize tax collection, and the amount that goes to the Treasury. But, while the cascading effect of Sales Tax would create a semblance of more money going to the treasury through tax collection in the short term, by introducing Sales Tax, you are going to discourage investment in the mining sector. The reason being: the cost of reinvestment becomes higher.
Investors come here in order to harvest returns on their investment. So, immediately when the tax regime is not sufficiently attractive, they’d rather move out and go elsewhere — or scale down.”
Industry experts have consistently warned that government’s attempt to implement Sales Tax in its current form will trigger huge job losses along the supply chain owing to the threatening cascading effect of applying tax-on-tax, possibly forcing out distributors and rendering them obsolete.