Shebo Nalishebo

Zambia Institute for Policy Analysis and Research (ZIPAR) Rsearcher Shebo Nalishebo

By Shebo Nalishebo

Following the Government’s laudable decision to maintain the Value Added Tax (VAT) in the 2020 Budget, attention has shifted to addressing compliance and administrative challenges of the VAT collection system. A number of measures have been proposed in the 2020 Budget to strengthen enforcement and efficiency of VAT, which currently accounts for about 26% of domestic revenues. These include interfacing the TaxOnline system for domestic taxes with the Customs system in order to validate claims of refunds; mandatory use of electronic fiscal devices; mandatory tax payer identification number (TPIN) requirement for business-to-business transactions; use of third-party information; and timely audit of VAT claims.

Clearly, most of these measures are targeted at business-to-business transactions as, seemingly, that is where most of the tax evasion takes place. But we do not think business-to-business transactions is the main problem since firms can usually reclaim any VAT they pay if they keep proper records. But when selling directly to consumers, it is tempting to accept cash without recording the sale. Without the VAT receipt, the tax authorities cannot carry out proper controls. The retailer would probably offer a lower price which does not include the VAT charge. Alternatively, the retailer would collect the full price but will not remit the VAT to the tax authorities. Consequently, a tax-evading retailer can undercut law-abiding rivals or pocket a higher margin.

To further enhance VAT compliance and revenue collections, we need to start a conversation and create awareness among consumers of how they can assist in ensuring that transactions are reported, the Zambia Revenue Authority receives the taxes due to it, and enables the Government to meet its revenue requirements.

However, traditional methods of tax compliance enforcement through fines and penalties alone may no longer be optimal. It is not enough to issue threats and increase penalties for non-compliance or simply encourage consumers to demand receipts whenever they make a purchase. Employing behavioural economics and cognizant of the mushrooming betting outlets in the country, the Government can make tax compliance become fun. In an effort to improve tax compliance, governments around the world are encouraging consumers to ask for receipts by turning them into lottery tickets which give consumers opportunities to win prizes or tax rebates. 

Taiwan was the first country in 1951 to introduce such a lottery. The amount of money collected by the tax office during the first year the lottery was in operation increased by an astonishing 76 percent. In 1989, China introduced the VAT lottery in selected areas as an experiment and yielded 17 percent higher revenues in those areas. Faced with a growing VAT gap, the authorities in Slovakia launched a similar lottery in 2013. Slovakian officials report that they collected about US$512 million more in 2013 than in 2012, but it was not immediately clear how much of that new money was due to the lottery. Further, the number of traders being reported for refusing to give out receipts had also gone up. Starting in 2007, consumers in Sao Paulo, Brazil were given the opportunity to record their TPIN on receipts which the retailer was required to send to the tax authorities. In four years, this programme increased the revenue reported by at least 23 percent.

As with every system, the VAT lottery comes with its own pitfalls, such as the possibility of collusion between the consumer and the firm since the reward the Government offers may be lower than the tax paid by the firm, so the firm could potentially propose a discount for consumers that forgo receipts. Further, this system will not address VAT fraud largely committed through business-to-business transactions. It should also be borne in mind that individuals are more inclined to ‘play ball’ and increase compliance when the Government operates in a way that is viewed as efficient in terms of its expenditure.

These challenges notwithstanding, the Zambian authorities should consider implementing a VAT lottery. Actually, about a decade ago, the Zambia Revenue Authority conducted a kind of lottery in which cash-register-issued receipts were entered into a raffle whose grand prize was a Nissan Navara. The VAT lottery will be a means of not only increasing revenue, but also a way of educating citizens on their responsibility to be tax compliant, and reduce the dependency on high-cost external borrowing to meet the financing gap for the national budget. This can initially be run as a limited-coverage experiment in order to determine its effectiveness in terms of costs and benefits. It should be carefully designed using techniques that will specifically isolate the impact of the lottery and have provisions for the consumer to include their TPIN in order to take part, a move likely to increase the on-going TPIN registration. The system should also have a mechanism for consumers to report merchants who will not give receipts.

The author is a researcher at the Zambia Institute for Policy Analysis and Research (ZIPAR).

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ZIPAR sales tax vat