Business wary of new tax amendments

 

The business community has started lobbying government to revise the new Income Tax Act, which has potential to cripple companies’ operations and limit investments in the country. Under the new law passed end of last year, interest expenses are no longer hundred percent tax deductible, meaning tax bills for various companies will rise.

The insurance and the banking industry are the only sectors that have been exempted from this development. Indications on the ground are that most companies have been operating on thin capitalisation concept - so much debt which reduced their profits due interest earning charged on the loans from either directors or financing institutions.

The low profits eventually meant taxes paid to government are low and now heavy interest bills translate into heavy tax bills. However, with effect from beginning of July, the net interest expense is limited to 30 percent of Tax EBITDA (Earnings before interest, taxes, depreciation, and amortization). Commenting on the development, tax expert, Jonathan Hore of Aupracon Tax Specialist said most companies will opt to cut on interest bills or find other alternatives to cushion from heavy tax bills.

“Companies will now consider whether or not to keep large stakeholders’ loans, increasing loan repayments and carefully consider whether to acquire new debt and how to reduce interest expenses,” said Hore. He warned that the new tax regulation could dent the mining and property industries which heavily rely on debt financing for their projects. He said companies are likely to shift their focus on reducing tax expenses which will result in reduced growth and retrenchments. The tax specialist further said the financial institutions can also be affected by this development, companies will shun loans from the bank, and there will be capital flight and low foreign direct investment (FDI).

“If any amendment could be done, this could surely save the sectors,” said Hore citing that the amendments will make it difficult for mining and construction sectors to attract investors. The new income tax act encourages businesses to inject more capital into their business to avoid loan interest, which increases tax bills. “Self financing through selling excess assets may assist but first consider tax implications,” warned Hore.

Meanwhile, government is of the opinion that revising the country’s tax laws will help the country collect more revenue to boost its coffers, and avoid negative budget outturns that were recorded during the last fiscal year due to low tax collections. “Efforts will therefore be intensified to ensure efficiency in the collection of tax revenues by the Botswana Unified Revenue Service (BURS) through continuous review of tax laws and leveraging on the use of ICT to enhance compliance,” said Finance and Economic Development Minister, Kenneth Matambo when presenting the 2019/ 2020 budget speech in February.