Taxman's bitter pill will be hard to swallow

Mbongeni Mguni | Friday November 6, 2020 14:42

SONA? What SONA?: Baoketseng Ngambe in Seronga says she has no clue the State of the Nation Address is on Monday. Her sole concern is the reopening of tourism borders COVID-19 has decimated incomes and tax increases will only make the situation worse PIC: THALEFANG CHARLES

Following months of signals from authorities such as the Bank of Botswana (BoB) and the Botswana Unified Revenue Service (BURS), the Finance and Economic Development ministry has confirmed that the dreaded increases in certain types of tax will take effect next year.

The Budget Strategy Paper, a Finance Ministry blueprint released as part of the budget process each year, indicates that government expects revenues of P58.8 billion in the 2021-2022 financial year, up from P52.3 billion in the current year, which ends on March 30, 2021.

The difference, or P6.5 billion, will come from, amongst others, potentially higher mineral revenues as the sector recovers, as well as strong receipts from the Southern African Customs Union (SACU).

The Strategy Paper however shows that stronger Value Added Tax (VAT) collections will contribute at least P2.4 billion to next year’s budget, while revenues from non-mining income tax, which include corporate and personal taxes, will increase by P1.7 billion.

While the overall improvement in the economy as sectors pick up from COVID-19 will help tax revenue receipts in the next financial year, the budget blueprint shows that authorities also intend to make good on the warnings that taxes have to inevitably increase to support recovery.

“The fiscal projections assume that there will be improved domestic resource mobilisation as a result of increased taxes, reduced tax rates and higher income from cost recovery through fees and charges,” the blueprint says.

“Any delay in implementing these changes would worsen fiscal outcomes.”

In fact, the Budget Strategy Paper is clear that in order to finance not only next year’s budget but future expenditure, more funds will have to come from within rather than outside.

“There is need to develop a robust domestic revenue mobilisation initiative, which will be key in the expansion of the revenue base, given the current high level of dependence on external revenues such as minerals and SACU revenues,” the paper says.

“This will involve raising some tax rates, reducing exemptions and allowances, improving tax compliance and revenue mobilisation efficiency.

“The 2021 Budget will include initiatives in all of these areas.”

The Strategy Paper repeats, nearly verbatim, proposals made in a draft of the mid-term NDP 11, which circulated in November 2019.

“Botswana firms and individuals are under-taxed relative to the value of the public service and benefits they receive,” the draft plan reads.

“Botswana has one of the lowest rates of VAT in the world and this may not be sustainable.

“Taxes on land and property are also low by international standards and yet these present an easily-taxable asset class that would mainly raise revenue from those that can afford to pay more.

“The tax base can be extended through more effective taxation of informal or cash-based activities, improving the efficiency of revenue collection, consideration of new taxes, increasing tax rates or reducing exemptions.”

The Economic Recovery and Transformation Plan (ERTP), the strategy government is banking on to guide the economy out of COVID-19 stress and lift it to a new level of sustainability, has proposed increasing VAT to 14% in the next two years, starting from 2021-2022, while also introducing new taxes such as sugar and carbon.

The ERTP, approved by Parliament in its winter sitting, estimates that should introduce carbon taxes be introduced at the levels recently done in South Africa, government could raise about P300 million from liquid fuels and P400m from electricity annually.

Again, if a sugar tax on sweet drinks was introduced in Botswana at the same rate as has been done in South Africa, the expected revenue raised would be around P150 million to P200 million annually.

The ERTP also proposes the raising of withholding tax from April 2021, while “electricity and water tariffs will be progressively raised to market levels”. Cost sharing and cost recovery “without compromising inclusivity,” will be implemented in sectors such as education and health care, impacting the subsidised costs citizens have been enjoying.

Finance ministry technocrats say in as much as the higher taxes, fewer subsidies and reduced tax exemptions are certain to squeeze Batswana at a time when many are struggling due to COVID-19, the changes are impossible to avoid given the funding requirements of the response to the pandemic.

“If revenues under-perform relative to the budget projections, it may be necessary to cut recurrent or capital spending in order to maintain fiscal stability,” the Budget Strategy Paper reads.

Government’s go-to budget buffer, the Government Investment Account (GIA) held as part of the foreign reserves by the BoB, has depleted to uncomfortable levels.

In 2009, government guided the economy through the then record recession by tapping into the GIA, but this time authorities say this is not an option.

External borrowings, meanwhile, carry the foreign exchange risk known as the Original Sin, while domestic borrowings are limited by both the size of the capital market and the need to avoid crowding out the private sector.

Meanwhile, analysts say the mounting needs in both recurrent expenditure such as healthcare and the development budget, which is required to anchor the economy’s recovery from the nightmare in 2020, mean there is no alternative but to swallow the bitter pill.