Since its introduction in July 2002, the Botswana Value Added Tax (VAT) system has gone through several reforms.
These include: an increase in the VAT rate from its introductory rate of 10 per cent to the current 12 per cent in 2010; two increases in the registration threshold from the initial Pula 250,000 (AUD 32,000) to Pula 500,000 (AUD 64,000) in 2010, and from Pula 500,000 (AUD 64,000) to the current Pula 1,000,000 (AUD 128,000) in 2015 and; an increase in the number of zero-rated and exempted goods and services.
It is well documented that frequent reforms complicate VAT systems and increase compliance costs, especially for small businesses.
This post explores possible VAT simplification measures for small businesses in Botswana, using the New Zealand Goods and Services Tax (GST) system as a benchmark for a simplified VAT system. The New Zealand GST system is globally known as a model system, which has influenced GST designs in many countries. We reviewed the literature in our recent journal article in order to identify the key elements of an optimal VAT design.
VAT in Botswana
The VAT system in Botswana is perceived to be burdensome and unreasonably complicated. Small businesses have to file VAT returns every two months and use an accrual method of accounting for VAT. Additionally, certain goods and services are VAT exempt.
A complex VAT system makes compliance burdensome and elevates VAT compliance costs, particularly for small businesses. Recent VAT compliance costs studies in Botswana reveal that the VAT system in Botswana is costly, burdensome and falls with disproportionate severity on small firms.
It is hoped that the simplification measures recommendations presented here will enlighten the Botswana Government (and potentially those of similarly placed countries) on possible ways in through which the burden of VAT compliance on small businesses can be reduced.
1. Cash accounting for small businesses
The system of cash accounting is seen as a measure that can simplify the VAT system. Cash accounting allows businesses to account for VAT only when they receive cash for taxable supplies or when they make payment for goods and services bought. This system has been used in some countries such as the United Kingdom, where it was reported to lead to cost savings and benefits for businesses.
In Australia, the cash accounting system was introduced as part of the simplified tax system. Small businesses with an aggregated turnover of less than AUD 10 million can account for GST on a cash basis. Such businesses account for GST on the Business Activity Statement (BAS) covering the period during which they received (made) payment for sales (purchases). The payments (or cash) basis method has been available in New Zealand from the commencement of its GST in 1986, with the hybrid basis available since 1991. The hybrid method allows a business to account for GST on its sales (and other income) using the accruals basis and to account for its GST on purchases and expenses using the cash basis.
A recent study on the cash flow and managerial benefits of VAT in Botswana found that Small and Medium Enterprises (SMEs) (Groups A and B businesses), which had settlement periods of three months, incurred cash flow costs of Pula 9 million in 2010/2011. An introduction of the cash accounting system will eliminate this cost for businesses.
2. Reducing filing frequency
The frequency of VAT returns filing in Botswana is a major concern, especially for small businesses. Small and medium-sized businesses file their VAT returns every two months, while larger businesses file VAT returns monthly.
A reduction of VAT filing frequency, from bimonthly to six monthly, will reduce the burden and magnitude of VAT compliance costs for small businesses. Eligible small businesses in New Zealand are able to file GST returns every six months. In addition to a reduction of VAT compliance costs, administrative costs incurred by the Botswana Unified Revenue Service will also reduce, allowing the revenue authority to focus resources on large taxpayers that contribute the larger share of the VAT revenue.
The Botswana Government should consider reducing the VAT returns filing frequency to semi-annually if the revenue losses resulting from such a policy change do not outweigh the overall compliance costs savings.
3. Broadening (and altering) the tax base
The presence of zero-rated and exempt goods and services complicates a VAT system.
A recent study by Makara and Rametse reports that 77 per cent of businesses that trade in VAT exempt and zero-rated goods and services find the Botswana VAT system to be unreasonably complicated and, as such, have concerns when undertaking their VAT work.
The Botswana Unified Revenue Services should adopt a broad-based VAT system, similar to the New Zealand GST system, which has minimal exempt and zero-rated goods and services. This advice is consistent with the trend in recent international VAT literature recommending broader bases.
Given the economic circumstances of Botswana, the threshold for VAT registration should also be increased. With regard to the foods consumed by the poor, the Botswana Government can consider introducing income supplements and welfare payments in order to simplify the VAT.
New Zealand more recently included online services within the scope of its GST and proposes to include online services in the GST tax base with effect from late 2019. In contrast, certain land transactions have been made zero rated for GST purposes in order to simplify the operation of GST with respect to land transactions. The Compulsory Zero Rating rules were introduced in 2011 and require a transaction that would normally attract GST at 15 per cent to be zero-rated if:
- The transaction involves land (any interest in land will be sufficient);
- The vendor is GST-registered; and
- The purchaser (or recipient, such as a nominee) acquires the property to carry on a taxable activity and not as a principal place of residence. The residence exception covers associates of the purchaser.
Conclusion
This post has investigated optimal design features of a VAT. Specifically, the paper has discussed the design features of the Botswana VAT and the New Zealand GST in order to identify possible policy measures that can help simplify the VAT system in Botswana. Policy recommendations are cautiously made owing to the size, economic, political and governance differences in the two countries.
Further Reading:
Makara, T., & Sawyer, A. (2019). Towards Simplification of Value Added Tax Compliance for Small Businesses in Botswana – Lessons from New Zealand. Journal of the Australasian Tax Teachers Association 14(1), pp. 77-95.
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