Inside how Fong Kong dealers deny govt of millions through tax evasion
Innocent Selatlhwa | Friday December 21, 2018 14:29
They are used for personal travels, public transport, as well as in business. One would expect that as these cars increase on the roads, the country would get more money from business taxes. However, Mmegi investigations have revealed that even though the government cashes in, it receives less than what could be collected.
The Botswana Unified Revenue Services (BURS) has stated in its past annual reports that it was losing millions of Pula it could have gained from the importation of second-hand motor vehicles from Value Added Tax (VAT), customs duty and Value Added Duty. The organisation lamented that second-hand car dealers undervalue the cars to the disadvantage of the government.
According to past publications, this is done with the involvement of suppliers at the Durban bonded warehouses, South Africa, who issue false invoices of lesser values leading to the collection of lower taxes.
According to Transport and Infrastructure Statistics Report 2017 from Statistics Botswana, published in September 2018, the number of licensed vehicles in Botswana increased by 5.5 percent from 500,316 vehicles in 2016 to 527,901 vehicles in 2017. National vehicle stock increased at an annual rate of 9.7 percent from 2008 to 2017. The bulk of first registrations (83.9 percent) were used vehicles while 15.9 percent were brand new vehicles,” reads the report.
The report states that vehicles registered for the first time in 2017 were 53,202, an increase of 5.5 percent from 50,424 vehicles registered for the first time in 2016. The increase was attributed to import cars from Asia and the United Kingdom, which are proving to be more affordable to the low income market.
It has become the norm, when purchasing a vehicle at these garages, that one has to risk losing money in the transaction. A former employee of a second-hand car garage, who asked to be referred only as Johane, revealed this. “I have worked in three different garages as a sales agent for over four years. What usually happens is that once we agree on a sale price with a customer we go to the bank. Normally you have to make an order for large sums of money and get the money the following day, but the bank tellers know us and would make funds available immediately,” he said.
Johane said the money is then taken to the shop where the customer is given a receipt indicating the amount of money paid. He said the dealers then, at the end of the business day, prepare other receipts showing that the cars were bought for lesser amounts, depositing those sums instead into the company bank account. He said the money that is not deposited at the bank is instead taken to the homes of the dealership owners.
Another source who requested anonymity confirmed Johane’s observations. He told this publication that what was said by Johane is exactly what happens. “I work for one of the busiest dealerships here in Mogoditshane. We can sell up to 50 cars in a week making over P1 million and most of it will not be deposited into the bank account. When the customer insists that they want to make a bank transfer or use a cheque, we tell them that we will not accept the payment because if a problem arises we would have already registered the car in the customer’s names,” he said.
The grey imports market, initially only in Mogoditshane, has since started growing at a fast rate in the country’s second city, Francistown. The dealerships are said to be operating no differently from those in Mogoditshane. “I have worked for two dealerships in Gaborone before coming here. The BURS is not doing enough to inspect how we do business to enable them to collect due taxes as these guys are always sending out a lot of money through money transfer outlets and carry others when going to their home countries on regular basis,” a source working in a dealership in Francistown said.
He produced a copy of an invoice from one of his customers which showed that a customer paid P40,000 for a Toyota Runx. He also produced another invoice showing that the car was sold for P27,000 to the same customer. He said the receipts showing lesser amounts were kept as official copies, that some sales do not even make it onto the books, as there are no bank records.
Mpho Robert, who recently purchased a Honda Fit at one of the garages, said he was scared to carry the P29,000 he bought his car with. “I requested that I pay them online or issue them a cheque but they refused. They told me that it was risky because a mistake of transferring the money to a different account could occur. They then sent an employee to go with me to the bank where we got the money and headed to the dealership to conclude the sale,” he said.
Word from car dealers
One car dealer who preferred to stay anonymous blamed authorities for not cracking the whip on illegal dealers. “There are so many dealers who are not licensed, some have licenses for different businesses but they sell cars. These are the problems. The authorities need to deal with these as some of them even steal money from Batswana and it is not easy to trace them,” the source said.
He added that another problem is that some Batswana buy cars from Durban on behalf of some dealers as if they are buying individually so to avoid paying taxes. “There is a need for BURS to introduce an import permit system. Only dealerships that comply with regulations should be allowed to import cars in relation to their capacities. For individuals buying cars from Durban, they should be limited to maybe cars and register companies and pay tax if they want to pay more,” he said.
Contacted for a comment, Botswana Used Motor Dealers Association (BUMDA) president Arshad Niyaz said their members are not implicated. “We hear of such cases, but I can assure you that none of our 35 members is implicated. Our association strives to encourage disciplined and ethical dealings. Our members are legally licensed, have proper dealerships and also pay taxes,” he said. Niyaz said their members mostly do bank transfers for payments and where cash is used proper channels are followed to deposit the money into banks. However, two of the names mentioned by sources are BUMDA members.
Authorities concerned
Directorate on Corruption and Economic Crime (DCEC) Director General Victor Paledi said they have, over the years, been handling cases with other crime busting agencies. “We have done work in collaboration with the police, the Financial Intelligence Agency and BURS. It is not easy to go after individual garages and see how they operate. There is free trade in Botswana and people do not want us as the DCEC to take action as the cars have helped them. But a lot is wrong as these garages just accept cash when someone buys a car. They are a hub for money laundering as well. Most of these dealerships are owned by foreigners and the bulk of the money then leaves the country with only small amounts paid to sales people,” Paledi said
General manager of communications at BURS, Mable Bolele, said undervaluation across sectors and not limited to the motor industry is still a challenge to BURS. She said it is one of the compliance risks identified through the risk management process in the organization.
“As part of the anti-money laundering and terrorism framework, BURS is concerned by car dealers or any other business that prefer dealing in large sums of cash over other less risky methods of payment,” she said. “Cash as a mode of payment poses money laundering risks. The same applies to where tax is concerned.”
Word from a tax expert
According to Dr. Bernd Schlenther, Technical Advisor at the African Tax Administration Forum (ATAF), cash transactions play a fundamental role in African economies because of convenience and ease of handling. Cash also ensures anonymity, facilitating illicit activity such as evasion of taxes and money laundering.
“Large informal economies are present in most African countries and in sub-Saharan Africa the average size amounts to 41% of GDP. From a tax compliance perspective this is concerning since the size of the informal economy (which includes legal activities, such as the sale of goods and services, that are kept hidden for tax evasion purposes) is directly related to tax compliance levels. Dealing in cash is therefore not restricted to the motor vehicle industry,” he said.
Schlenther added that unaccounted for cash payments enable tax evasion, and where they become a feature of a business this may translate into other areas of non-compliance. “For example, where workers are routinely underpaid in the form of off-the-books cash wages. Temporary visa holders or individuals without work permits, can be exploited because they may fear potential implications for their visa or employment status if they speak out about unfair wages being paid,” he said.
“From a tax administration perspective, cash deals are mostly found in second-hand motor vehicle dealerships who may not be bound by customer due diligence reporting requirements (under an anti-money laundering regime) or in transactions between private parties. Franchisees are usually dealt with by large business offices of tax administrations and cash sales is not a predominate feature in such businesses,” Schlenther added.
He said that global policy makers are now discouraging the use of cash (by restricting supply and placing enforcing thresholds for cash transactions) and through technological developments and financial apps. “There has been a significant uptake in e-payments in both developed and developing countries. Since the cash economy is likely to remain a key part of the business environment, it requires an approach that will include policy interventions by governments to broaden the tax base, but also innovative approaches by tax authorities to detect and to tax cash transactions appropriately,” he added.
Experts maintain that while it is not an offence for car dealers to accept cash, it is a risk indicator. Limiting business transactions to cash only breeds opportunities for concealing business profits, theft and other malpractices, and those are punishable by law. Under the Customs Act, a person who does not declare goods faces a fine of as much as P1million or imprisonment for up to 10 years.
This story was produced by Mmegi Newspaper. It was written as part of Wealth of Nations, a media skills development programme run by the Thomson Reuters Foundation. More information at www.wealth-of-nations.org. The content is the sole responsibility of the author and the publisher.