Tsitsi Matope
THE Lesotho Revenue Authority (LRA) is on a campaign to educate stakeholders about the importance of complying with the country’s tax laws. The Authority’s Commissioner-General, Mr Thabo Khasipe (TK) explains how the drive is meant to improve revenue-collection and ultimately, benefit the nation, in this wide-ranging interview with the Lesotho Times (LT).
LT: Could you tell us why it is so important for the relevant stakeholders to pay tax?
TK: Governments the world over are financed by tax revenue. Tax is by and large, the most important source of financing for any government to discharge its role. Taxes are required to provide public services such as healthcare, social protection, education, security and ensuring that civil servants are paid for the work they do. Capital expenditure, which involves building public infrastructure, is also financed by tax revenue.
Although the Government of Lesotho has other sources of income such as donor-funding and loans from multilateral agencies, it is still very important for any government to have its own tax revenue pool. The logic is that even when donors support you, they look at your capacity to be self-financing. For example, before a multilateral agency such as the International Monetary Fund (IMF) gives our government a loan, they assess our capacity to generate our own revenue, and the more capacity we have, the more they are able to lend us money because they see our ability to service the loan. In this assessment, the ability and capacity of the revenue agency is key. If the capacity of the revenue collecting agency is not strong, our credit rating scores also become low, leading to higher cost of borrowing from all creditors.
Due to this huge responsibility and expectations from external financial partners, Lesotho has laws and institutional set-ups that enable the government to collect tax from its citizens. This makes contributing tax a key responsibility of all citizens earning an income above set thresholds, including employees and various categories of entrepreneurs who also happen to benefit from services provided by the government through revenue collection. As a revenue collection agency, we administer tax through equitable and fair mechanisms, so that those that are less-endowed economically, pay relative to their endowment and those who earn more as employees or through their businesses, also contribute in line with their earnings.
LT: You have highlighted in various forums the challenges you have faced in meeting your targets in the last two financial years. Could you highlight, once again, some of these challenges?
TK: We have identified various areas we need to work on to ensure we reduce the current projected deficit of M500 million of the M6.5 billion target. The reason, of course, is a reduction in compliance across the board by all tax types and taxpayers. What is emerging is that corporate income tax has been on the decline over the past few years. I am referring to profit tax paid by corporates or businesses. Indeed, quite recently, we analysed the figures for the distribution of our tax types, looking at the entire collection, saying how much comes from corporates, personal taxation (employees) and what comes from VAT and other taxes. When we looked at four of the five Southern African Customs Union (SACU) countries: South Africa, Swaziland, Lesotho and Botswana, we found that Botswana’s corporate tax contribution to the total cake of collections is 40 percent; in Swaziland and South Africa, the corporate tax was sitting at around 20 percent while in Lesotho we are sitting at a mere 15 percent.
Our personal tax contributors, meaning employees, contribute about 35 percent, which means our personal income earners are contributing more than twice what the corporates/businesses are contributing. Usually, corporates and personal tax are more or less equal, although personal income taxation tends to be a little more than the corporate tax. But in the case of Lesotho, the margins are huge. As we analyse the trend, it is telling us that businesses, whether small, medium or large, perhaps they are not contributing as much as their counterparts do in the other SACU countries.
Moreover, our corporate income tax revenue has been declining in recent years. Remember, we reached a peak of M1.2 billion in the 2014/15 financial year, I would say mainly due to significant contributions from the mining sector. Since then, we have seen a below-a- billion mark performance. Currently, we are projecting around M900 million. Mind you, when I am talking about corporate income tax, I am referring to the business world, which we expect to contribute notably. And failure to do so underlies the problem we have been seeing in us missing our targets in the last financial year by 6.7 percent.
Value Added Tax (VAT) on the other hand, sits at around M2 billion, and we are also seeing a decline in compliance, notably in sectors such as wholesale and retail where VAT collections have tended to struggle of late. In a nutshell, the level of compliance has not been good in the recent few years.
LT: What does this downward trend tell you and what strategies are the LRA rolling-out to remedy the situation?
TK: In my view, this is an indication of our failure as the LRA, to build a culture of tax compliance in the country. To some extent, we are not trusted by the tax-paying community and the relationship has soured a bit. I think this has to do with our approach, which has tended to be heavily leaning towards enforcement, while at the same time, that approach has not helped us meet our targets. To the contrary, our heavy handedness has reduced the levels of compliance, whether in the form of new people joining the tax net or those already in the tax net revealing fairly, completely and honestly, their various sources of income and declaring correctly the amounts to be taxed.
In view of the tax decline, we are now taking a strategic shift towards a “services and client approach” where now we act as a service provider and treat taxpayers as our clients. Rather than ‘push them towards compliance’, we plan to ‘pull them towards compliance’ by improving the quality of our services and making it easy and less costly for them to comply. Of course, part of this shift is the recognition that in as much as most people will seize this opportunity, there is a minority who will insist on being difficult and play the “catch me if you can” game. We believe that embedding tax morality as a national norm will give us not only the legal, but also the moral authority to act against such recalcitrant few.
As part of this strategic shift, on 6 February, we launched a Voluntary Disclosure Programme intended to basically encourage any business and person that wants to come forward voluntarily, to come and declare any new streams of income which they may have, for whatever reason, not disclosed in the past. We will waive all penalties and additional taxes that the clients would have paid. To encourage and incentivise this new culture of voluntarism, we further guarantee not to initiate criminal prosecution for information disclosed fully and honestly under the Program. Of course, a dishonest disclosure that is discovered at any time in the future will lead to the reinstatement of the penalties and possible further legal sanctions.
In addition, we are also going to launch the Small Business Taxation Regime pilot as one of the initiatives aimed at making it easy for small taxable businesses to fulfill their tax obligations. The pilot starts first with the transport industry and will soon move to the wholesale and retail sector. Following the roll-out, we will be drawing lessons and expanding the regime to all small and informal businesses who, according to the Law, earn income above the income tax threshold which is around M30,000 per year. As you will note, this will exclude ‘Baitsokoli’ but certainly include a lot of income that currently sits outside the tax net.
However, we are putting in place all these mechanisms to create a tax compliant society and for us to be able to use the law to manage cases of evasion and deliberate avoidance to pay tax. Our tax auditors are always ready to get into amicable discussions with companies to check the veracity of their declarations, if at all we suspect them of under-declaring their income. It is important for the LRA to understand how companies that have been declaring nil returns year after year, are surviving without making any profit.
We are also going to act on companies with subsidiaries that are not declaring all their incomes. By this I speak mainly of some medium to large corporates. They too devise certain tax- avoidance mechanisms, which our auditors can pick. There could be some cases of profit-shifting and we are seeing actions by countries now signing international bilateral agreements on sharing information to avoid, for example, a company headquartered in another country but with a subsidiary in Lesotho, not paying tax in Lesotho. This is as good as stealing from the Lesotho government. We are developing capacity to manage and prevent bad business practices that are made to appear complex only for corporates to avoid declaring all their profits. This is the whole essence of our Voluntary Disclosure Programme. We want our clients to come clean with us and declare those undeclared streams of income to set up on a new path.
LT: The issue of small businesses paying tax is quite controversial. Could you explain how this is going to work, particularly when it comes to some businesses that historically thought they were outside the tax net.
TK: There is confusion we have picked since we started talking about collecting tax from small businesses. We are not referring to street vendors, the people we commonly refer to as ‘Baitsokoli’. In our operations, we are interested in the level of income you generate annually because the Income Tax Act stipulates levels of income that are not taxable (exempted), therefore, if you fall beneath a certain threshold, no tax is expected from you.
But you could have somebody with a taxi business, or running a small real estate company, which we call flats or malaene, or a bricklaying enterprise out in the village, a salon, or a restaurant, earning annual income that is above the threshold. Those should pay tax. In other words, your business model should incorporate the tax requirement from the word go. In most cases, we have noticed that it’s the incapacity to keep detailed records that see some businesses filing a nil return or not filing a tax return at all.
In this case, we have devised a conduit for small businesses where they can come and pay a fixed amount of money. They can also spread the annual amount to pay, either monthly or quarterly, in order to reduce the cash flow burden.
As you might have seen, the current design of our tax system is made in such a way that it makes it easy for the big corporates, who have no problem paying profit tax now on last year profit because of their cash flow continuity, accounting sophistication and record keeping. They are strong in terms of cash-flow and are more organised. But for a small business, if it gets a tender from government once in the beginning of the year, there might not be money to file and pay at the end of the year. It is therefore incumbent upon the LRA to design unique systems that can work in the context of smaller businesses.
The Small Business Taxation regime asks, “why treat the small businesses like the big corporates?” We need to standardise this so that we do not make it difficult for them.
LT: Would you say there are some pockets within the economy you have overlooked in your operations and you are looking at also targeting them in your tax compliance drive?
TK: We do have some businesses which, for many years, thought they were immune from paying tax. According to the Income Tax Act, income is income, as long as it’s above the legal threshold, such income should be taxed. We do not tax types of income, we tax all income as long as it falls above the annual threshold. For example, if you have malaene (rental flats) and you are generating M10,000 per month, you should be paying tax because someone working in the government and earning M9,000 per month is also paying tax. It’s all income. Besides, as a business of rental flats, you have the advantage of being allowed deductions on your M10,000 so that you are taxed on profit after expenses. Employees are not allowed by law to deduct expenses for transport, meals, medical and entertainment before paying tax. The whole amount is taxed. Imagine then, the unfairness to the employees when the business owner, who is taxed only on profits, insists that his/her malaene should be let alone.
On the other hand, we have also tended to overlook Capital Gains Tax, which should be paid when, for example, one builds a house and spends M1,500,000 and then decides to sell year later for M2 million. That means you have generated a capital gain of M500,000 which is taxable. Similarly, if you also do an investment with your bank or cooperative and the investment grows in value, such value appreciation is a capital gain and is taxable.
LT: Could you tell us more on the enforcement mechanisms that are currently in place?
TK: The thing is we don’t want to chase anybody, we want to educate people to know their obligation. In the SACU region, the LRA has the highest relative cost of collection. In South Africa, they spend a cent to collect one rand; in Botswana they spend one cent to collect one pula while in Swaziland they spend 4 cents to collect one Lilangeni. The global standard is one cent to collect one unit of currency. In Lesotho, we are sitting at around six cents to collect one Loti, meaning the LRA is spending way too much of the money it collects on its own collection operations rather than forwarding it to the Treasury. This is because our business model has relied on chasing taxpayers rather than attracting them. We have invested in a fleet of vehicles for audit and enforcement collection efforts, a lot of staff to support the approach, and we prosecute and pay huge legal fees for many cases that could have been dealt with differently and more profitably, for the fiscus.
We are putting in place all these ‘carrot’ measures for us to fulfil our mandate and to partner with all our clients. But we are aware that we will still have difficult clients, which I believe are a minority, and for them we will use the ‘stick’. When we come across them, we will have the moral authority to take the full force of the law against them. We will even enjoy the support of the great majority who will say “yes, we are also paying tax, why should others not pay”. We want to minimise the number of the deliberately non-compliers and rally everybody behind the LRA in our mandate.
