SEAN Tembo has warned finance minister Margaret Mwanakatwe that substituting Value Added Tax with Sales Tax simply entails jumping from the frying pan into the fire.
Tembo said to address the issue of VAT refunds, the government simply has to abolish the policy of Tax Agents and “allow our VAT regime to work the way it works in 200 plus other countries across the globe, including the entire SADC region.”
He also doubts the Zambia Revenue Authority has the capacity to administer a sales tax regime with hundreds of different rates for each stage of the value-chain and for each sector.
“As indicated in the past, substituting the current VAT regime for a Sales Tax regime will create bigger problems to the economy, and actually has the potential to collapse the entire Zambian economy. The mess which a sales tax regime will bring about will make the current K1.4 billion monthly headaches for the minister to pale in comparison,” Tembo says. “For starters, the input-output principle of VAT is the cornerstone of the entire tax framework, not only for VAT but for Income Tax, withholding tax, property transfer tax etc. A Sales Tax regime does not have the input-output principle. Without this inbuilt integrity that is brought about by the input-output principle, the entire tax system risks collapsing and ZRA will be overwhelmed by the high levels of tax evasion that will follow due to the inherently porous nature of a sales tax system. The bottom will simply not hold and the minister’s simplistic approach to tax policy will be laid bare, but to the detriment of the Zambian people.”
Tembo said he did not believe that VAT was truly giving Mwanakatwe sleepless nights.
He challenged Mwanakatwe to state the real reasons she replaced VAT with Sales Tax.
“We further took special note of the assertion made by the minister that the main reason for her motivation to replace Value Added Tax with Sales Tax is because VAT refunds were giving her sleepless nights as they have risen to as high as K1.4 billion per month. Our view is that based on the above statements by the minister, it is evident that the minister is motivated by the wrong reasons in her policy decision to substitute a VAT regime for a Sales Tax regime,” he said.
“The first question which the Minister should have asked herself is why is it that for the past 25 years or so since we as a nation adopted a VAT regime, the issue of VAT refunds has never arisen until now under the PF administration? Why didn’t this country have VAT refund issues under previous administrations and previous Finance Ministers? What policy changes did the PF make to the tax framework that brought about VAT refunds all of a sudden? Why is it that other countries in the entire SADC region that currently utilize a VAT regime do not have issues with VAT refunds, and Zambia is the only country in the region that has VAT refund issues?”
Tembo accused Mwanakatwe of using a simplistic approach to the matter.
He wondered why such a matter had never arisen in the past.
“But the minister did not objectively seek to address this matter, but instead, adopted a simplistic solution of substituting the current VAT regime for a Sales Tax regime,” Tembo explained.
“The reason why we have a problem of large VAT refunds that are currently averaging K1.4 billion per month, and the reason why this problem of VAT refunds only arose during the current PF administration and never existed before in the 25 plus years that Zambia has utilised a VAT regime, and the reason why none of our neighbours in the SADC region have a problem of VAT refunds and we are the only country in the world out of all 200 plus countries that utilise a VAT regime to have a problem of VAT refunds is because of a policy change in the tax framework which the PF made about four years ago in their quest to increase tax compliance among VAT registered suppliers, which policy we are on record of having strongly objected to.”
Tembo recalled that around 2015, for one reason or the other, the PF government decided that they were going to make a fundamental change to the VAT regime and change the way VAT works in all other countries, “to make our VAT regime ‘better’.” He said ideally, the VAT system is pretty simple and straightforward in that at the end of each tax period such as a month, the taxpayer compares the VAT charged to customers against the VAT that has been charged by his suppliers, and remits the net amount to ZRA.
“However, the government decided that instead of waiting for the taxpayer to remit the net amount, they’ll just appoint what are known as “Tax Agents” who will collect or withhold the gross VAT amount and remit it to ZRA. These Tax Agents currently include almost all parastatals such as ZESCO, ZAMTEL etc, all banks, mining houses etc. In short, all key players in the economy have been appointed as Tax Agents, and they are withholding the gross VAT from taxpayers and remitting it to ZRA, then the taxpayer is expected to make a claim from ZRA for the input VAT,” he explained. “This mediocre approach to the administration of VAT does not exist in any other country except Zambia, and that’s why the minister has a headache of having to pay an excess of K1.4 billion in VAT refunds every month.”
Tembo said what added a final nail in the coffin of that policy of withholding the gross VAT “is that most of the parastatal Tax Agents like ZESCO, ZAMTEL etc., are cash-strapped so when they withhold the gross VAT from a VAT registered supplier, they do not remit that gross VAT to ZRA.”
“So when the taxpayer submits his claim for the input VAT for the month to ZRA, ZRA has no money to process the refund for the taxpayer because ZESCO did not remit the gross VAT which they withheld! And since ZESCO is a parastatal, ZRA cannot garnish their bank accounts,” he said. “So ZRA has to look for money from other sources to try and liquidate the taxpayer’s VAT refund. These amounts combined are what have now accumulated to a monthly bill of about K1.4 billion and are the source of the minister’s headache. Therefore, in order to address the issue of VAT refunds, the government simply has to abolish this policy of Tax Agents and allow our VAT regime to work the way it works in 200 plus other countries across the globe, including the entire SADC region.”
Tembo maintained that substituting the current VAT regime for a Sales Tax regime will create bigger problems to the economy.
“Additionally, the absence of the input-output principle in a sales tax system will mean that sales tax will be a cost at every stage of the value chain. This will collapse certain low-margin sectors such as the petroleum and FMCG sectors where average margins are as low as three per cent. This will also bring about uncontrolled inflation that may degenerate into hyperinflation and subsequently collapse the entire economy,” explained Tembo. “It is worth noting that for countries that currently utilize a sales tax regime, they have multiple rates tailored for each stage of the value-chain and for each sector. However, when you have multiple rates for a given tax type, it because exceedingly difficult to administer and we doubt if ZRA would have the capacity to administer a sales tax regime with hundreds of different rates for each stage of the value-chain and for each sector. As a nation, we are better off proceeding with the current VAT regime and making some amendments to make it work better, than to engage on a wild-goose-chase by thinking that a Sales Tax regime will sort out our problems. We are simply jumping from the frying pan to the fire.”