Govt scrutinised on budget estimates

NEO SENOKO

MASERU – The Lesotho Chamber of Commerce and Industry (LCCI) has come out with guns blazing, slamming the government for budget estimates for the 2021/22 financial year.

The budget estimates were presented at the back of challenging economic conditions resulting from the ongoing COVID-19 pandemic, which led to collapse of some major economic sectors in the country.

LCCI has identified loopholes in the budget estimates, noting among others that while tax revenues have been declining in the past year, the budget speech did not indicate anything towards increasing taxes to cover the losses. There was no mention of possibilities of a tax credit for the coming financial year.

LCCI made reference to South Africa which has reduced tax rates for income tax. As a major economic hub in the SACU region, some major economic decisions in South Africa have a direct impact on Lesotho, which is completely surrounded by South Africa.

“It is worth noting that South Africa has actually reduced tax rates for income tax, also worth noting that South Africa intends to recover the tax losses through excessive increase on excise duties which have been increased by 8 percent, which is far way more than inflation. As part of SACU, Lesotho will have same increase on excisable products.

This means that Lesotho will benefit from the increase in taxes in these products, which will impact VAT and Income tax as well as SACU revenues on excisable products that Lesotho produces (alcohol and tobacco),” LCCI said in a letter demonstrating its input on the 2021/22 national budget.

The current proposed tobacco and alcohol levy, the LCCI revealed, will not assist government to increase revenue as it is not supported by any research or studies that could properly guide it.

The Ministry of Finance in collaboration with the Lesotho Revenue Authority (LRA) has since proposed the introduction of a 30 percent levy on tobacco and another 15 percent on alcohol.

“As it has been included in tax policy proposals, the government is advised to conduct consultations with the industries conducted and carry proper research that can clearly guide any policy proposals towards those products. These can also include research on cannabis industry as it is also a serious candidate for excise duty collection,” LCCI added.

Only last month speaking to the mulled levy hike the Maluti Mountain Brewery (MMB) forecast that annual revenue paid into state coffers by the brewery is anticipated to drop drastically if government goes through with its plan to increase alcohol to 15 percent.

MMB has paid to government M1.1 billion in taxes, M250 million in dividends and spent M150 million on local procurement which economic commentators also suggest cannot be guaranteed in future if the levy increment goes through.

The Lesotho government owns 61 percent shares in MMB and MMB and ABInBev owns 39 percent. The brewing company anticipates that the increment will also result in their sales volumes dropping by at least 19 percent, according to Managing Director, Sesupo Wagamang, in an earlier interview with this paper.

Wagamang argues that the in implementating a 15 percent alcohol levy in the hope of collecting M289m to supplement a budget deficit, Lesotho is doing itself a disservice as other African countries have already been down this road and have proven that higher levies result in less revenue for the state.

Wagamang, also AB InBev Lesotho representative, government will inadvertently leave itself and its people even more strapped for cash when it so desperately needs it.

“Lesotho is surrounded by South Africa, for which AB InBev or South African Breweries is a primary source for alcohol imports. But, with the imposition of an alcohol levy, massive losses in sales due to three alcohol bans and an 8 percent excise tax increase for 2021 severely affect – the profitability of the industry is left in tatters,” he said.

Wagamang believes that all these factors only serve to demolish alcohol sales in Lesotho and will cause its citizens to either turn to more affordable illicit alcohol and resort to smuggling due to porous borders – all of which will see Lesotho lose tax revenue instead of filling the gaps of its budget deficit.

To illustrate his point, Wagamang provides a case study where the negative impact of alcohol levies was felt not only felt by the industry, but by the very government that set it in motion.

“It was in 2008 when Botswana first introduced a 30 percent levy on alcohol products in 2008. By 2015, the levy had risen to 55 percent. This was devastating for the local alcohol industry, with heavy drops in volumes and revenue that the Botswana government expected to gain,” explains Wagamang.

He says this levy, on top of the excise taxes levied on other SACU countries, increased the price of beer as it was fully passed on to the consumer as the brewery could not absorb it into their cost structure.

“In the end, the loss of jobs and livelihoods in the brewery value chain were catastrophic and much opportunity was lost.”

According to Wagamang, Botswana’s own Kgalagadi Breweries could have doubled in size and provided much needed employment in the time that the alcohol levy was enforced. He says the government of Botswana could have earned 23 percent more in revenue had they not introduced the levy.

Even though there is a long line of Lesotho Ministers of Finance who have touted private sector growth through investor-friendly policies, the current finance minister, Thabo Sofonea, has gone so far as to refer to extending a red carpet treatment for real investors.

Wagamang argues that Lesotho-born MMB falls into the ‘real investor’ category having contributed almost M2 billion in taxes and dividends to the fiscus over the last six years.

This is over and above the direct employment of 350 Basotho and the support of 1 220 traders who also employ workers. He estimates that the entire value chain is valued at 25 510 direct and indirect employees.

“This poses a big risk for MMB. The 7 percent growth in sales volumes that we achieved in three years was due to stimulating demand by pricing below inflation.

The biggest challenge now is that if the levy increases to 15 percent as proposed by Minister of Finance, we will experience a drop in sales, a drop in revenue paid to the government and we will be forced to raise prices, resize the business and withdraw from projects were are doing to empower local businesses,” he said.

Wagamang said he presented this information to the government of Lesotho and other stakeholders including World Bank, IMF and Lesotho Champers of Commerce and parliament’s Economic Cluster Portfolio last year during the budget debates to show them that alcohol is price sensitive and even shared a number of case studies but government still pushes for the levy increment.

He said since the government is the majority shareholder, the only thing they can do as managers of the business on behalf of the government is to advice on what they think is realistic or is the right thing to do and the decision will always be made by the government.

Wagamang gave a number of case studies where increment of levy on alcohol backfired on the country. He said in Botswana the levy was increased by 30 percent and their sales volumes declined by 30 percent.

He said eSwatini also increased their alcohol levy and their sales declined with the same percent. He further noted that South Africa has gone to a rate of 4.4 percent Levi this year after experiencing a huge drop in sales in 2018 when the levy was at 10 percent.

At the current moment even when our prices are low than South Africa, Lesotho’s economy is losing at least M29 million revenue per annum through smuggling. You can now imagine what will happen if we price above South Africa,” Wagamang said.

He told this paper that because of the uncertainty in levy increase, they had to put on hold a project on expanding capacity at the brew house because they cannot put an investment of M50 million in to the plant when they are not sure that they will need the capacity if their volumes drop by 20 percent.

The LCCI has further identified that despite, prioritising agriculture in recent years, including the current financial year, it is hard to translate this prioritisation with actions on the ground to support.

This, according to chamber, is because there is no aligned tax policy on agriculture that supports the sector in a way that supports or encourages emerging farmers.

“The current tax rates are inconsistent. There has to be a clear government policy that supports farm input including machinery,” LCCI showed.