When the 2019 budget was delivered on 28 September 2018, the withdrawal of Value Added Tax and subsequent re-introduction of Sales Tax caught most tax experts, economists and independent policy analysts off guard. The removal of VAT, which was first introduced in 1995, would be superseded with a Sales Tax which would only be chargeable to the consumer at the end of the supply chain. The new tax implementation date is slated for 1 April 2019.
Sales Tax is chargeable on business houses in a given jurisdiction if it has a nexus there (which can a brick-and-mortar location), an employee, an affiliate or some other presence, depending on the laws of that jurisdiction. So what’s the difference between Sales tax and VAT? Why the uproar from the mining conglomerates operating in Zambia? The answer could be that fancy word nexus – which has it derivation from a Latin word, Necto meaning bind. Hence, the literal meaning of nexus, “the act of binding together”.
With more than 160 countries globally that favour VAT over sales tax, it is the most levied consumption tax charged at the end of the value chain. It is more standardized than a traditional sales tax, and has fewer compliance issues. The downside to VAT is that, it is essentially a regressive tax that places an increased economic strain on lower-income taxpayers and also adds bureaucratic burdens for businesses. So, for businesses houses to completely eliminate the bureaucratic burdens they obscure their nexus (oops that word again!). They create shadow nexus upon a shadow nexus.
Tim Harford, a British economist and author, puts it this way. ‘Would like to pay less tax? One way is to make a sandwich: specifically, a ‘double Irish with a Dutch sandwich.’ Suppose you are an American. You set up a company in Bermuda, and sell it your intellectual property; then it sets up a subsidiary in Ireland. Now start a company in the Netherlands. Have your second Irish company send money to your Dutch company, which immediately sends it back to your first Irish company. You know, the one headquartered in Bermuda. Are you bored and confused yet? If so, that’s part of the point.’
So far the VAT journey has been a precarious one. At one stage, the Government introduced SI 18, which was to track the copper output and sales, to determine where it was sold, at how much and what was actually paid. It had been realised then, the complex layering of nexus upon nexus had made VAT administration problematic.
In the 2018 tax charge year, the Zambia Revenue Authority paid out 4.2 billion kwacha ($338.7million) in VAT refunds, including 2.5 billion kwacha to the mining companies. The payment of refund by ZRA monthly averaged 800 million kwacha monthly which had become unsustainable. The replacement of VAT with a non-refundable sales tax will help government maximise on its domestic revenue mobilisation.
Despite, the limitations that come with sales tax, chiefly among them, is the tax-on-tax effect as well as the fact that sales tax is levied on goods not services its yet to be seen how the mechanics of implementation will circumvent those limitations.
In the end then, it is believed that in a capitalist economy Adam Smith’s ‘invisible hand’ should prevail, however, with the evolution of how business is handled especially by the savvy multinational corporations a ‘visible hand’ is necessary – enter the sales tax era.