ActionAid Zambia says it may not be possible to implement the newly introduced Sales Tax to replace the Value Added Tax because there seems to be no resources for it in the 2019 budget.
Making a submission before a parliamentary committee, Monday, ActionAid country director Nalucha Ziba wondered whether the sales tax regulations would be considered on the floor of the House in readiness for implementation in April, 2019.
ActionAid noted that even though the Minister of Finance, in the her 2019 budget presentation was quoted saying the new tax changes would be implemented in April, 2019, there seemed to be no resources in the 2019 budget for the development of requisite infrastructure that would support the administration of this tax.
“A rather surprising tax measure proposed in the 2019 budget is the abolishment of the Value Added Tax (VAT) system, which is to be replaced by Sales Tax. The main objective according to the honourable Minister of Finance is to enhance the contribution of consumption taxes to government revenue. However, the budget address does not specify the rate at which the sales tax will be introduced, nor does it tell us what the administrative regime will be, who will charge sales tax on their goods and services, if there will be any goods to be exempt and how the ultimate users will be determined. Further, there are no estimated revenues to be raised from this sales tax. The resources being estimated in the budget are for VAT,” ActionAid observed.
“As at now, there will no bill to introduce although the Hon. Minister of Finance is quoted as having said it will be introduced in April, 2019. ActionAid doubts the regulations for this tax type will be read for consideration in Parliament in readiness for implementation in April, 2019. In addition, there seem to be no resources in the 2019 budget for the development of requisite infrastructure that will support the administration of this tax. This move is somewhat inconsistent with the general global trend whereby most countries across the globe have moved from sales tax to VAT. We know that during times as sales tax, many countries attempted to implement national retail sales taxes or variations such as wholesale-level taxes or ‘ring’ taxes but this was not for long. We also know that by 1995, almost all the countries had converted to Value Added Tax (VATs) that collect revenue at each stage of production. Almost all developing countries have also largely abandoned retail sales in favour of VATs.”
Ziba highlighted some of the reasons why most developing countries abandoned the sales tax.
“One of the reasons was cascading. Cascading which occurs when taxed inputs are used to produce taxed outputs, [Tax on Tax] so that the total tax on the goods compounds beyond what was intended. However, we know that this effect can be avoided by exempting all business purchases from taxation but separating business purchases from consumer is difficult. Moving to VAT solves the problem since businesses receive credits for the taxes paid on their input purchases. The second is evasion, which actually is higher under a retail sales tax than a VAT for several reasons. First, the retail level is the weakest link in the enforcement chain, because there is no cross reporting; the government has no record of the transaction and the retailer responsible for sending the check to the government for the tax they collect knows this. As a result, compliance rates can be low,” Ziba said.
“In VAT, the chain of crediting creates a natural audit trail. In a transaction between two businesses, the seller knows the buyer is reporting the transaction to claim a credit. So the seller has more incentive to report the transaction and pay tax. There’s no similar incentive under a retail sales tax. In fact, most countries have found that, as a practical matter, retail sales tax rates of 10 per cent or higher aren’t enforceable – buyers have greater incentives to avoid the tax and retailers have greater incentive not to send in the revenues. Not coincidentally, all state sales tax rates are below 10 per cent for countries still implementing sales tax. Then if a retailer evades sales tax, the full tax on the sale is lost. But with a VAT, successful evasion by retailers only costs the government the tax on the retailer’s value added’; and thirdly, with sales taxes, there is no paper trail that enforcers can easily follow. It is our belief that the government will take these challenges on board as they design the sales tax that is envisaged to be implemented in April 2019.”
Ziba said there were a number of challenges in the collection of revenue and recommended that a full tax reform programme was undertaken to redesign both the tax policy and administration with a view to increasing domestic revenues to about 25 % of GDP.
“The ultimate objective of a mining taxation regime is to maximize the benefits that a country receives from the mineral resources. In this regard, ActionAid recommends that the government undertakes a major tax policy and adminstration reform that will bring various stakeholders on board to design a good tax policy and administration system with broad policy consideration and that will stand the best of time. These broad policy considerations sometimes referred to as principles of taxation include; neutrality, meaning tax must be neutral and equitable between reforms of business activities; Certainty, where tax rules should clearly specify when and how a tax is to be paid and how the amount will be determined. Effectiveness and Fairness, meaning that taxation should produce the right amount of tax at the right time, while avoiding both double taxation and unintentional non-taxation,” said Ziba.