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Heavy leakages in VAT collection - WB

Staff Writer
Government can potentially raise more than twice the P4.3 billion it collected in Value Added Tax (VAT) last year if proper measures are taken to plug leakages, the World Bank reckons.

Although the VAT rate is currently at 12 percent having been increased from 10 percent early this year, the World Bank estimates that the effective rate of VAT in Botswana is only around four percent due to leakages blamed on many factors, including non-compliance and a long list of exemptions.

This means government has the potential to multiply at least by two-and-half times the P4.3 billion in VAT revenue it raked in over last financial year.

Speaking during a Botswana Public Expenditure Review Workshop in Gaborone this week, World Bank officials said one of the consequences of having a lot of money from minerals over the past 20 years is that the government has not been very efficient in collecting VAT revenue, a disturbing situation in the face of dwindling diamond revenues.

The World Bank report under discussion - whose key findings were that the government should significantly cut public spending and simultaneously look for alternative sources of income - was drafted by the Bretton Woods institute under the auspices of the Ministry of Finance.A Senior Economist at the World Bank, Naoko Kojo, said in view of falling mineral revenues, that are projected to drop to about 25 percent of GDP in the medium-term, the government should find other revenue enhancement sources. "For the country to realise its full VAT revenue potential," she said, "it should consider cutting its list of exemptions and zero-rated products and services."

VAT, which was introduced in 2002 in Botswana, is an indirect tax levied

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on the supply of goods and services and is paid by the end consumer.

Zero-rated or exempt goods include basic foodstuffs like millet grain, millet meal, wheat grain, maize cobs, flour, sugar, maize meal and sorghum meal in their natural state.

Goods and services exported from Botswana, international transport services, paraffin, petrol and diesel are also zero-rated.

"One thing I cannot understand is why fuel, which contributes about 7.1 percent to our Consumer Price Index basket, is VAT zero-rated," said economist Keith Jefferis.

But other commentators hold that VAT has such a low contribution to total national income because mining, which is the country's lifeblood, is also exempt from VAT.

Said a BURS official: "A lot of revenue is generated from the mining sector, but we have had to lose a lot of money back to mining companies through refunds. At the same time, government is the biggest player in the economy and it does not pay taxes."We also tend to have some political pressure on exemptions and zero-rating of some goods. The burning issue is currently water. We suggested that every consumer of water should pay VAT, but we don't see it happening. Infact, I believe VAT on water is probably going to be scrapped."

The World Bank Public Expenditure Review was initiated in early 2008 as a way of helping Botswana transit smoothly from the high income earner era that prevailed over the past decades to the projected period of low mineral revenues in the medium- to long-term.



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