Zambia’s foremost economic expert, Professor Oliver Saasa has said Sales Tax is a short-term response that will kill the mining industry.
In his interview with the renowned publication MiningforZambia, Prof Saasa bemoaned that Sales Tax will be a cascading [or compounding] effect, leading to a situation where, at every point in the chain, you see the same percentage being added as a Sales Tax — either 16% or 9%, for imports or locally produced goods, over and over again.
There has been vigorous debate about Zambia’s proposed migration from the Value Added Tax (VAT) system to a Sales Tax since it was first announced in September 2018. The private sector has since voiced many serious concerns about the change. That the Sales Tax has been postponed several times since January 2019 suggests that the government must also have concerns of their own.
Below is a full MiningforZambia interview with Prof.Saasa:
What has been the problem with VAT to date, and why has there been such an issue with paying VAT refunds?
The principles of the VAT system in Zambia are, of course, exactly the same as those that pertain elsewhere in the world. Because of the way the tax works, the payment of tax refunds is an integral part of a VAT regime. The biggest problem has been that the government has failed to ring-fence funds from which the refunds that are due can be paid.
For the government, whatever [VAT] gets into the kitty is like a profit, and they tend to consume it. When it comes to their obligation to pay VAT refunds, they have no other revenue source, unless they just go straight to the Treasury. When these refunds accumulate for such a long time, the amounts become atrocious. At the moment, we’re talking about approximately $5-600 million collectively owed just to the mining sector.
We hear a lot about the mining sector for the simple reason that they are the biggest taxpayers in Zambia — and so, in terms of refunds, they are owed proportionately much more than companies in other sectors. Secondly, because they’re such a prime player in the Zambian economy, the amounts that are due to them will have a ripple effect across the economy.
When the government realized that the refunds weren’t feasible, they just waited for the financial year to end, and then announced that they were canceling VAT to avoid paying the refunds.
What are the reasons for the postponement of a Sales Tax since January 2019?
The decision to migrate from VAT to Sales Tax was made in September last year. When 1 April came, there had been very little preparation on the part of the Ministry of Finance, so they pushed it to 1 July. Then, there was the change of Finance Minister, and it was pushed to September. However, the new Minister has now said that the 2019 tax regime — which includes the migration from VAT to Sales Tax — will be opened up for discussion with the private sector and all stakeholders, and it may now only come into force on 1 January 2020. So, the debate is still raging.
I think it’s important to understand what the main motivator is for abandoning the VAT that we adopted 25 years ago: It is all about how best the government can run away from meeting its obligations to refund VAT to the mines. There’s no economic reason whatsoever why we should migrate to Sales Tax.
What challenges does VAT pose?
VAT does have some complexities, and one of them is paying refunds. But refunds themselves are not the problem; the problem is how the government has managed them. Apart from the challenges with refunds, there are hardly any arguments that are convincing to experts as to why the government should migrate to the proposed Sales Tax. In fact, the last Minister of Finance came out openly and linked the migration to avoiding the refunding of VAT.
What challenges are associated with a Sales Tax?
One of the challenges with a Sales Tax is the cascading [or compounding] effect. You have a situation where, at every point in the chain, you see the same percentage being added as a Sales Tax — either 16% or 9%, for imports or locally produced goods, over and over again. The total Sales Tax cost to the mines, for example, could be as high as 37.8%. Of course, this will push up the cost of production — and this is not only for the mines but for almost everybody. This means that a number of the taxes that have been brought in will make reinvestment very problematic.
How so?
The whole idea of migrating from VAT to Sales Tax, from the government’s standpoint, is that they want to maximize tax collection and the amount that goes to the Treasury. But, while the cascading effect of Sales Tax would create a semblance of more money going to the treasury through tax collection in the short term, by introducing Sales Tax, you are going to discourage investment in the mining sector. The reason being: the cost of reinvestment becomes higher.
Investors come here in order to harvest returns on their investment. So, immediately when the tax regime is not sufficiently attractive, they’d rather move out and go elsewhere — or scale down.
Another terrible thing for the mines is that — if you look at the average mining company now, especially the new ones — the ore grade is very low. For example, First Quantum Minerals’ Kalumbila mine is an open-pit mine, and the [copper] ore grade is only around 0.5%. That means that they need to pull hundreds of tonnes out of the ground to get a very tiny fraction of copper. But unfortunately, some old mines are shaft mines and are very inefficient. They are nearing their lifespan. An unfavorable tax regime means they will bypass the lower grade ore and, once you’ve bypassed it [at a certain depth], you can’t go back. When the tax regime is not favorable, the mines’ production becomes very wasteful. And ore that has been forgone can never be recollected.
Some experts say that VAT’s major weakness is its (necessary) collection mechanism. What is your view on this?
This is a problem of mismanagement, in my view. Zambia used to have a Sales Tax system, but we migrated away from it because it’s inferior. Many countries in the world have moved from Sales Tax to VAT. It’s a more modern way of doing things.
If we had to compare both systems, they both collect [tax]. In certain sectors, as a government, you may collect a little bit more. But you have to look at the incentives — you can’t only focus on collection. If you negatively impact the goose that’s laying the golden egg, then you end up killing it. And then you discover that in the medium to long term, you will not collect anything.
A good tax must do two things. Firstly, it must benefit the country that is hosting the investment. These are resources belonging to the country, of course, so there’s no question about whether or not mining companies should be taxed. But secondly, while you are taxing, you must allow those mining companies to invest. In fact, there must be an incentive to invest. And the incentive to invest usually is influenced by the nature of the tax regime. If you are over-taxing them, the incentive to invest will not be there — nor will the ability to invest.
In other words, the government must grow the pie, rather than trying to squeeze out more from a tiny pie. In the medium to long term, as a government, you must build in a mechanism whereby you do not eat the so-called “seed” because you want that seed to multiply, so that in the future you see an expansion.
What are the most likely consequences of the proposed Sales Tax for the mining industry and the wider economy in Zambia?
Whether or not Sales Tax will be implemented is still being debated, but if it’s passed in January, firstly, there will be a short term increase in Treasury collections — but there will be a medium to long term reduction in tax payments. That, for me, is a given.
Secondly, we will not see significant mining development in terms of expansion. And that would mean — because the tax regime is not good enough — Zambia slowly falling backwards on its projected growth in the mining sector, which is not good. You are talking about a sector that accounts for more than approximately 70% of export receipts and revenue. That will disturb foreign exchange availability, interest rates, and it will disturb the value of the Kwacha.
The mines also are a major employer, both in terms of direct employment and also mine contractors. The manufacturing sector, whether it is linked upstream or downstream, will be impacted too, including suppliers. All of those areas will be affected negatively if the mining sector dips.
The more you focus on maximizing tax and the less you pay attention to the incentives that are required to allow mining companies to produce more, the less you support the growth of that sector. And that is really the biggest problem that we have in Zambia at the moment.
We urgently need to address the issues with Sales Tax because a cough in the mining sector will give everybody in the country the Flu, so to speak.
See link for original publication: https://miningforzambia.com/sales-tax-will-shrink-zambias-economy-says-prof-oliver-saasa/
How has any of what this “expert” says never happened in other countries that have the same tax?
So what is your workable proposal, “Zambia’s foremost economic expert”??? True patriots criticise, offer alternatives and engage. Sasa(rotten), you are just a blabber mouth and an alarmist with a known agenda. Shut up and sit down, mumbwe iwe!!
Both at individual and national decision making level we’re faced at crossroads. The ability to make a right decision depends on how well we analyse all the pros and cons. But alas we have to the price of either good or bad results. In this case the country has been advised the cost benefit analysis of both VAT and GST. The clock is ticking.
Prof saasa the vat idea is good ,but in our case in zambia we have not benefited much has a country.The mines 1. have not added much value to the minerals mined in zambia .2. some mines have been cheating on the production figures of minerals mined and exported .3. Our capacity to monitor the correct vat refunds is very limited.My suggestions as a lay man are .1.continue with vat but stop vat refunds especially to the mines because no value is added to the minerals.2. introduce sales tax at lower percentages,give tax waivers/incentives to companies processing local products to encourage growth and job creation.
Prof.You have not mentioned the value added by the mines to the base metals exported out of Zambia.Sales tax must not be wholesale but only applicable to mines with the penchant to exporting raw base metals as opposed to adding value.This infact will be an incentive for value addition to base metals by the mining owners unlike the current arrangement.Those mining owners exporting raw base metals:SalesTax and those adding value to our minerals thus creating the much needed backward and forward linkages to Zambia’s economy:VAT, because as it stands,exportation of base metals is a disincentive for value addition and creates jobs in other countries.In this way,we will maximise revenue from our mineral wealth bwana Prof via rational taxation.
Are we talking about sales tax or corporate tax?
A corporate tax, also called corporation tax or company tax, is a direct tax imposed by a jurisdiction on the income or capital of corporations or analogous legal entities. Many countries impose such taxes at the national level, and a similar tax may be imposed at state or local levels.”
“A sales tax is a consumption tax imposed by the government on the sale of goods and services. A conventional sales tax is levied at the point of sale, collected by the retailer, and passed on to the government.”
These fools and the love of titles – he is no longer at university and he still uses Professor. Sadly, when one puts his name on google scholar – he has not written so much to be called a professor.
He should also explain why the Rhodes scholarship is always given to people of his chiefdom. Anyway, it’s low class to access Rhodes scholarship given who Cecil Rhodes was. It’s like Jews fighting for Hitler scholarships.