IMF urges Botswana to broaden tax base

Government is working on a number of options that will ensure the country’s tax base is broadened, Finance and Development Planning Minister has revealed.

Kenneth Matambo was speaking to Botswana Guardian days after International Monetary Fund (IMF) suggested that the country must ‘broaden’ its tax base through rationalising the large number of discretionary tax incentives. It is not the first time that the Bretton-Woods institution urged the mineral-rich country to diversify its tax base, on the backdrop of declining mining revenues.

“Broadening tax base is okay, but this does not necessarily mean we have to increase tax rates,” said Matambo. “We are very cautious when dealing with tax matters,” In a separate interview, Secretary of Economic Affairs Dr. Taufila Nyamadzabo, who is also chairman of Botswana Unified Revenue Services (BURS) board of directors disagreed with IMF that the country has a number of discretionary taxes. “If you talk about discretionary it means we keep on coming with new taxes and changing them every now and then which is not the case,” said Nyamadzabo.

IMF team, which was led by Lamin Leigh, said it welcomes government continued efforts to simplify tax system  ‘with high compliance and low cost of administration’. Matambo told parliament in February that the Income Tax Act has been amended to enable the country to effectively exchange tax information with other tax jurisdictions. “In the same vein, the banking secrecy provisions in the Banking Act will be amended, to allow disclosure of banking information by a relevant bank or person upon request by Botswana Revenue Services,” said Matambo during the 2013/14 budget presentation.

A tax consultant at KPMG, a leading audit and tax advisory company said  ‘changing tax is not necessarily’ the solution to diversification of tax base.  “The tax regime is broad but the question is, is it being properly implemented?” Leonard Musa asked rhetorically. He cited capital transfer tax as one of the areas which government has to work on. According to BURS, Capital Transfer Tax is levied under the Capital Transfer Tax Act, 1985. (Chapter 53:02) It is tax on transfer of property (tangible, intangible movable or immovable), by way of gift or inheritance. “A lot of these rich guys who inherit assets will lose big if government starts implementing capital transfer tax more seriously,” explained Musa. Musa, who has regional tax administration experience, added that government is also failing to implement tax laws especially for assets in rural areas. “For example, a lot of people who own cattle are rarely taxed on their transactions or income,” he pointed out.

Tax holidays, which the country implements on certain industries, also have its own challenges, which expose the tax regime. “From my experiences these (holiday taxes) don’t work. Firms simply wind up business when the holiday period is over and go to other countries, added Musa. The Finance Minister admitted that there are challenges relating to ability of relevant authorities to implement tax laws that provide a recipe for loopholes. BURS collects various taxes on behalf of government.

Taxes continue to contribute significantly to national budgets. In the current financial year, customs and excise is expected to contribute P13, 9 billion of the total P44 billion. Non-mineral Income Tax will add P8, 9 billion to the current budget.
IMF, which concluded its call to the country early this month, has also raised economic concerns especially in the banking industry.
Household needs close monitoring
The team said high concentration of bank loans to household and the acceleration of the growth of unsecured lending warrants close monitoring. Bank of Botswana (BoB), said IMF, needs to be commended for establishing a financial stability division, which will keep watch on debt developments. According to BoB figures, from the P21 billion that households owed commercial banks, 70 percent was in the form of unsecured loans while P6 billion was in the form of fenced products such as mortgages and vehicle loans. 

Knowledge based economy critical
The landlocked country has also been advised to  ‘leverage Botswana’s strong physical capital and quality of its institutions and improve the skill base of the labour force to explore knowledge-based service sectors as additional drivers of growth’. IMF has also welcomed Botswana’s recent mid-term review of the National Development Plan (NDP 10), which stresses the government’s intention to reinvigorate the implementation of reforms to lay the foundations of greater private sector development in Botswana and enhance economic diversification.

The wide-ranging vision for inclusive growth and jobs includes many proposals to improve productivity and competitiveness. Matambo also agrees with IMF that skilled labour force is critical if the country is to achieve enhanced economic growth and diversification. To this end, Matambo said government is establishing the Botswana Qualification Authority, which will address issues of relevance, accreditation, articulation and coordination and management of skills development programmes.