BoB call for change
The central bank, Bank of Botswana (BoB) has insinuated that there is a need to enhance domestic resource mobilization, by broadening the tax base.
Speaking at a recent media briefing, the bank’s Governor, Moses Pelaelo stressed there is also a need to increase the progressivity of the personal income tax, streamlining, and rationalization of distortionary subsidies and VAT exemptions.
Pelaelo further noted there is considerable scope for an enhanced and more efficient domestic borrowing programme to tap into resources accumulated by the retirement funds, annuity providers, and other institutional funds for infrastructure financing and increasing the productive capacity of the economy.
Explaining his reasons, the Governor said that a key driver of economic and welfare prospects for Botswana, namely, the export potential, has faltered and shrunk as a proportion of GDP over the last few five years.
“Therefore, there is an urgent need for rejuvenation by redesigning the country’s industrial policies to promote exports and, given the size of the domestic market, to grow the private sector through better integration into regional and global value chains,” Pelaelo highlighted.
Additionally, the Governor said despite the large public investment in infrastructure and related social spending by government, as well as policy output dedicated to the economic diversification efforts, the narrow economic base persists, with limited success on economic diversification.
“This will require the development of the non-tradeable sector and address gaps in the quality of the regulatory frameworks, human capital and innovation to boost global competitiveness,” he said.
Another aspect highlighted by the Governor, which will make the current growth model unsustainable, relates to the prospective transition to structural fiscal and balance of payments deficits and the consequent decline of the official foreign exchange reserves.
“In this regard, and with an eye on slowing the depletion of external and fiscal buffers, there is a need to enhance domestic resource mobilisation, by broadening the tax base, increase the progressivity of the personal income tax,” noted the Governor.
The government has previously ruled out increasing tax, including VAT. However, tax experts have called for more favorable forms of tax such as the Financial Transactions Act (FFT).
This is because the increase in VAT will automatically translate into inflation which could erode the purchasing power of most consumers as employers do not always increase salaries in response to a VAT increase.
“This then leads us to suggest other non-inflationary ways of raising tax revenue,” a tax specialist at Aupracon, Jonathan Hore previously told Voice Money.
As an alternative to a VAT increase, Hore had suggested that the tax authorities could consider widening the tax base through non-inflationary means such as introducing a new tax commonly referred to as Financial Transactions Tax (FTT).
An FTT is a transactional tax that is charged whenever financial transactions are conducted. Its advantages, according to tax experts, is that unlike an increase in VAT, FTT is non-inflationary and would not hurt the pockets of the consumers. Secondly, this form of tax is only targeted at those who have the capability to pay tax.