By Hilary Mare
GOVERNMENT intends to introduce new taxes and well as to eliminate various categories of tax exemption over the next MTEF as fiscal consolidations take centre stage in the state’s bid to revive the ailing economy and improve its revenue base.
Finance Minister Calle Schlettwein last week expressed his intention during the next annual budget to table a tax proposal for the introduction of the presumptive tax on informal businesses, a proposals to eliminate various categories of tax exemptions, both of VAT and income taxes, as well as tax deductibility of some of items not related to cost of production, redesigned proposals for the Solidarity Wealth Tax as a high income-based Wealth Tax, and further expansion and strengthening the provisions of Capital Gains Tax.
During the current fiscal year Government already introduced a number of new tax measures, including environmental taxes, an export levy to promote value addition, and a fuel levy increase.
“Fiscal consolidation should be supported by tax policy and tax administration measures to enhance the contribution of revenue to the fiscal adjustment path,” explained Schlettwein. The mid-term revenue collected amounted to N$24.7 billion, equivalent to 42.7 percent of the budgeted revenue of N$57.9 billion, compared to 44.2 percent collection rate achieved in the previous corresponding period. The budget execution rate by the end of September 2016 stood at 40.4 percent, compared to 42.3 percent execution rate for the corresponding period. Government revenues were therefore adjusted downward by N$6.23billion.
“We expected the Minister to mention his plans to implement a presumptive tax on SMEs and to comment on the previously communicated Wealth tax. What was a surprise to us was that certain exemptions in the Income Tax Act and VAT Act will be repealed. It is unclear as to how much additional taxes can be collected through these measures at this stage,” Purvance Heuer, director of research and securities at Simonis and Storm securities said in view of the imminent tax reforms and the midterm budget review presented last week by the Finance Minister.
Essentially the minister announced that regulation 28 will be amended to lift the threshold for local asset requirement from the current 35 percent of total assets to about 50 percent, through a phased process. This will be undertaken in line with initiatives in the Financial Sector Strategy to enhance domestic resource mobilisation. In the budget review, Government spending was reduced by N$5.5 billion, bringing the budget deficit as percentage of GDP below the national target of five percent, from 8.3 percent to 4.3 percent. However, the minister cautioned that this could worsen to 7.6 percent if no timely action is taken to contain current expenditure. This is well below the national target of five percent. Of interest, however, was the further downward revision of the benchmark in respect of the budget deficit to GDP ratio from five percent to three percent for the rest of the MTEF period. This, in our opinion, is very positive in ensuring that the fiscal position is improved over the MTEF period. In fact, the maximum celling for the indicative expenditure for FY2017/18 was revised down from N$69.9 billion to N$59.9 billion.
“In light of the bleaker global, regional and local economic climate, we believe that the continued effort to cut unproductive spending while optimising on domestic revenue collection was a reasonable response to the negative report issued on Namibia by Fitch in August 2016. We also believe that the Minister gave a reassuring speech of a continued commitment to foster a stable financial and macroeconomic environment despite the global economic headwinds.
“Of great interest to us was the fact that the Minister mentioned his intention to increase the local 35 percent requirement for regulated funds to be in Namibia to 50 percent. Our view is that if the additional allocation adjustment does not have specific focus to identified projects that are of national interest such as water and energy independence that it will just serve to further support the banking system and result in capital leaving the country.
“At last count the large four banks reported profits of N$2.9 billion of which more than N$1.4 billion is vested in foreign shareholders. We believe that Regulation 28 is a big reason for these profits as it partly served to fuel a property boom in the country. We further found it interesting that the Minister has highlighted the fact that Pension Funds represent around 120 percent of GDP and that there is significant scope to mobilise capital domestically to fund the development needs of the country.
“Overall, we see that lowering Government spending is necessary, but it will eventually feed into lower GDP and even lower tax collections,” Heuer further explained.
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