Tax Revenues To Decline By P7.6bn

The impact of lockdowns for control of COVID-19 and a host of other factors have come together to spell doom for tax revenues at BURS, especially collections from domestic sources and the SACU revenue pool. When delayed investments and under-declaration of tax are added to the mix, a loss of P7.6 billion for 2020/21 emerges, Staff Writer KEABETSWE NEWEL reports

Botswana’s domestic taxes and collections from the Southern African Customs Union (SACU) are expected to shed off a staggering P7.6 billion in the 2020/21 financial year, approximately 14.5 percent of the previously estimated tax revenue, Jonathan Hore, Managing Director at Aupracon Tax Specialists, has said.

In a new report titled “COVID-19’s Effects on Tax Revenues: – a Bias Towards Tax Collection Efficiency,” Hore and his crew caution that the devastating effects of COVID-19 will reduce tax revenues expected by the government.

Botswana’s tax of revenues mainly comprise domestic taxes and SACU customs revenues, which are collected by the BURS. BURS also collects taxes on behalf of other bodies, including levies on alcohol and tobacco. The country also earns significant income from mineral revenues.

According to the experts at tax consultancy firm Aupracon, before COVID-19 spread to Botswana, domestic and SACU revenue collections for the 2020/21 year were expected to be P44.4 billion. However, as the pandemic hit the country in the first quarter of 2020, the Minister of Finance and Economic Development Dr. Thapelo Matsheka was compelled to reduce the revenue targets, mainly due to an anticipated economic slowdown triggered by lockdowns, closure of borders, travel restrictions and cancellation of social and business events, among other things. On 24 April 2020, Minister Matsheka noted that the economy was expected to contract by 13.1 percent, adding that VAT collections would reduce from the budgeted P8.55 billion to P7.6 billion.

In the report, Hore says the contraction of the economy will shed off sales, directly impacting VAT collections which are dependent on volumes of sales made by VAT registrants. “VAT will also be directly impacted by the closure of borders (and) disruption of supply chains, among other reasons,” the tax specialists point out. “Further, corporate tax and Pay As You Earn (PAYE) depend on the performance of the economy and anything that has the capability of reducing economic growth cuts corporates’ profits.”

When corporates do not perform well, the tax consultancy notes, they are likely to pay lower salaries to employees, thus cutting the share of PAYE that tax authorities can collect. “ Whilst retrenchments may not be as high as previously anticipated before their suspension through Statutory Instrument 63 of 2020, financially constrained employers are likely to negotiate lower salaries with employees or make staff redundant (without necessarily retrenching them),” the report observes. “This will in turn reduce the amount of PAYE that tax authorities can collect.”

Significantly, the report says SACU revenues are directly impacted when borders are closed and economies are locked down. Moreover, the uncertainty in future economic prospects brought about by the Coronavirus pandemic is also likely to put projects on hold, which reduces imports and consequently SACU revenues, Aupracon notes.

In its April report, the International Monetary Fund (IMF) has also forecast that SACU member countries will decline by an average of 5.6 percent in 2020, which directly feeds into a reduction in tax collections. Given these factors, in particular the expected contraction of the economy by 13.1 to 14.5 percent (the government and Aupracon respectively), coupled with economic shrinkage in SACU member states, the domestic economy will take a considerable hit.

According to Aupracon, another factor that may result in a reduction in domestic taxes and SACU revenues is suspension of investments that could have been embarked on had COVID-19 not ravaged economies. The tax consultancy firm says the impact of delayed projects may impact taxes. “Further, when an economy contracts, some taxpayers’ ability to comply with taxes will be hampered by financial constraints, further worsening the tax collection capacity. It is also important to note that a contraction in an economy will have further negative ripple effects such as company closures and bankruptcies, which further slow down economic activity,” says Aupracon.

“On the basis of the above, we anticipate that the slowdown in the Botswana economy of 13.1 percent and the 5.2 percent SACU economies’ contraction will shed off around 14.5 percent of previously anticipated domestic and SACU revenues of P44.4billion,” the report warns.

Aupracon points to the magnitude of tax debts owed to BURS, saying they are “quite significant” because they have growing at the rate of around 22 percent per annum over the years. The experts say they expect the tax debts to rise as a result of late payments and under-declaration of­­­­ tax, among other factors.