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Increase To VAT Deemed Necessary In Botswana Budget

Monday, February 15, 2010

Due to the global economic crisis, with demand reducing sharply for luxury goods such as diamonds, Botswana has experienced an unprecedented loss of government revenue and needs to find additional sources, including an increase to value added tax (VAT).

Because of the expected negative effects of the economic crisis, the 2009/10 budget deficit is expected to reach BWP13.5bn (USD2bn), or 15.1% of forecast gross domestic product. It would not normally be considered prudent to have a deficit of that magnitude, O.K. Matambo, Minister of Finance and Development Planning, said in his budget speech, but it was allowed as a stimulus to mitigate the effects of the economic downturn.

The budget estimates for the 2010/11 financial year, however, it was said, return to the government commitment to restore sustainability to Botswana’s public finances over the medium term.

Matambo pointed out that the country’s largest revenue source is non-mineral income tax at 24.4% of the total. The second largest contributor is mineral revenue at 24%, while customs and excise revenue is third at nearly 19%.

However, while forecast mineral revenue for 2010/11 is greater than in the revised budget for 2009/10, it is still considerably less than in 2008/09 due to the slow recovery of the world diamond market. Mineral revenues are not now expected to return to pre-recession levels in real terms until 2012/13.

In addition, while non-mineral income taxes can be expected to grow, customs revenue for 2010/11 will be significantly less than in recent years because of the decline in the Southern African Customs Union (SACU) revenue pool, arising from a significant drop in high duty imports.

The government has therefore decided that, amongst other things, a number of tax adjustments will be required. For example, several fees and levies that have not kept up with the costs of providing the associated services will be adjusted, and the requirement that commercial public companies pay 25% of their profits to government will be strictly enforced.

It is also proposed to increase the VAT rate from 10% to 12%, with effect from April 1, 2010, while raising the threshold for VAT registration from BWP250,000 to BWPP500,000.

Matambo said that the current system of a company tax rate of 15%, plus a 10% additional company tax rate, is unnecessarily complicated as it requires companies to keep track of two types of taxes, as well as the amount of the additional company tax that has not been off-set against the 15% withholding tax on dividends.

He has therefore proposed to abolish the two-tier corporate tax system, with effect from July 1, 2010, to be replaced by a single company tax rate of 25%. Companies designated as manufacturing and International Financial Services Centre registered companies will continue to be taxed at a company rate of 15%.

He also proposed that the final withholding tax on dividends paid to residents and non-residents be reduced from 15% to 7.5%. The combined effect of these proposals, he calculated, will be an increase in non-mineral income tax revenue of about 5%.

The net result of the 2010/11 budget is a deficit amounting to over BWP12.1bn, which would still be 12.2% of forecast GDP. The government expects that further substantial adjustments will need to be made to reduce expenditure in 2011/12 and 2012/13, while revenues recover over those two years, if Botswana is to achieve a balanced budget in 2012/13.