ECONOMICS ASSOCIATION OF ZAMBIA
STATEMENT ON VAT RULE 18
The Economics Association of Zambia is concerned about the controversy
that has developed over the application of section 18 (1)"Rule 18"1, which, until
recently, prescribed the manner in which Value Added Tax (VAT) is applied on
exports and on the basis of which refunds are given.
At issue is the amount of about US$600 million in VAT refunds which is
reported as being owed to some mining companies by the Government of the
Republic of Zambia through the Zambia Revenue Authority (ZRA). It should be
noted that the issue is disputed, and that several cases involving the issue are
before the courts. In addition, several other exporters, exporting goods other than
mining products, have been adversely affected by the application of Rule 18.
It is a matter of public concern that such a large amount, equal to about half
of all VAT collections in 2013 and some three percent of GDP, should be in dispute,
shedding doubt on the country's fiscal viability and the effectiveness of its tax
administration.
VAT is similar to sales tax, in that it is payable initially by the final consumer
at the point of sale. However, the tax is intended to apply to "value added", which
is the difference between the value of sales and the cost of inputs purchased. In
common with tax authorities the world over, ZRA administers VAT by collecting tax
on sales (output VAT) and then refunding tax paid on purchased inputs (input VAT).
Rule 18 as originally set out in 1997 required exporters seeking VAT refunds
to provide proof of export. In 2013, this was changed to include provisions which
require proof of sale, rather than just proof of export. ZRA never provided a reason
for this change, but we may assume that it arose from widespread concern that
some exporters were under-invoicing exports.
However, the change was problematic for commodity exporters, since a
contract of sale may not be available at the time of export. Commodities like
copper and other minerals are often deposited in inventories and sold later. An
analogy would be the position of a farmer who sells maize to the Food Reserve
Agency, but who has no control over the eventual sale of that maize, or indeed
whether it is sold at all. By contrast, manufactured goods are generally sold on the
basis of a tax invoice. EAZ's understanding is that accepted international practice is
that proof of export rather than proof of sale is required for VAT refunds.
It is also important to note that, by contrast with other taxes payable on
mining exports, such as mineral royalty and company income tax, sales value is not
Section 18 of Value Added Tax General Rules, 7 February 1997, issued in Government
Gazette Notice 86 of 1997, as amended in Gazette Notice 26 of 2013, dated 11 January
2013
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relevant either to the amount of the VAT refund, or to the exporters eligibility for
refund. This is because VAT is refundable on inputs which have been used in the
production of exports, irrespective of the value of those exports. For VAT refund
purposes, therefore, it is only necessary to establish that the goods concerned have
been exported. For mineral royalties and corporate income tax, which are the main
components of tax paid by the mines, the value of such exports is crucially
important.
EAZ is therefore of the view that, while there may be other issues at stake in
the cases that are currently before the courts, the requirement that proof of sale in
addition to proof of export be produced by exporters is not reasonable, and is not in
line with international practice; and that the Ministry of Finance is correct to provide
for the refunds concerned, subject to court rulings and any negotiations that may
take place between the parties concerned.
EAZ also considers it unfortunate that several commentators have chosen to
take sides on this issue, based on an incomplete view of the gains and losses to our
country. In contrast to the situation some years back, the mining industry is now
contributing some 15 percent of government revenue through mineral royalties and
corporate income tax, more than 25 percent if PAYE on employees' earnings is
included; and will probably contribute more in years to come. Zambia's mining tax
regime, (i.e. the rules governing taxation and the rates of tax) may be seen to be
relatively tough by international standards, but there is a general concern that
some companies are not paying the tax they should be paying, as a result of weak
inspection and enforcement systems, backed up by audits. These, we believe,
should be the focus of attention. General accusations of tax evasion and inadequate
contributions by the mining industry to tax revenue only serve to divert attention
from the painstaking detailed enforcement of well-crafted tax policies that should
be our aspiration - and which EAZ believes is the true calling of the ZRA.
The EAZ always encourages objective and fact based debate in all matters of
national interest.
Signed: Isaac Ngoma
PRESIDENT
12 September 2014
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