One of the most discussed topics in both political and business fraternity in Zambia is the introduction of sales tax. Generally, Sales tax, as compared to VAT is the percentage of revenue imposed on the retail sale of goods. Unlike VAT, sales tax is levied on the total value of goods and services purchased. Taxation of economic activities is inevitable for formation and maintenance of national budgets. However, the level and payment structure of the taxes and reactions of taxpayers should be considered carefully in the scope of proper management of the taxation system.
Agriculture, being the first taxed sector, provides limited insight for assessment of taxation systems.
As Tufan (1988) Opined, one of the most important characteristics of taxes is that they are directly transferred from nationals of a country to the national economy, without awaiting a direct return on it. The conditions, measure, reason and timing of the tax transfers are determined by the authority that accepts the payments with regards to the financial law.
The social function of taxes appears however, during the collection and use of taxes for public interest. The income level correcting effect of taxes maintains its importance within the society. As an instance, tools to assure exemptions and deductions on tax base are used to arrange level of taxes respecting the economic strength of the target audience (Tufan, 1988).
With the current situation of rampant smuggling of some commodities that are imported and sold cheaply in Zambia, when compared to products that are locally processed from locally produced agricultural commodities, this paper aims at discussing the down side and the up side of the GST tax regime on any development effort that may be exerted through the agriculture sector despite the fact the no clear-cut description has been given of what form Sales Tax will take, neither has a departure from the VAT targeted amount been announced.
Surprisingly, the reintroduction of Sales Tax has happened at a point when VAT is out-performing other taxes and is currently the biggest source of revenue for the Government. The authorities withdrawal of VAT stems from the fact that the tax-type has not been without challenges. Until 2016, Zambias VAT history was poor with the tax recording negative intakes in certain years.
Sales Tax resolves the VAT refund challenge, because while VAT is charged at all levels of production with resellers paying tax to the vendor and reclaiming VAT paid on business inputs, Sales Tax is applicable to only final consumption sales at each level and not on goods to be used in production. Thus, Sales Tax can be considered less complex for Government’s revenue collection. Herein lays the attraction: with only a single collection point, at retail stage, all tax collected is non-refundable, settling the refund challenge.
Moreover, VAT and Sales Tax can supposedly yield equal amounts of revenue for the Government. Though resolving the refund issue, Sales Tax suffers other setbacks that may end up reducing revenues. Some experts have been consistent in highlighting these key issues worth the Government’s consideration in Sales Tax design.First, by disposition and in relation to agricultural-related products, Sales Tax does not have the sort of self-enforcing mechanism exhibited in VAT, where purchasers help enforce VAT as they insist on correct invoices from suppliers to claim input VAT. Thus, compliance levels under a Sales Tax are fragile. With taxes collected only at final point, the Government remains at the mercy of retailers who are responsible for remitting the tax collected from the consumer to the authorities.
Retailers of Agricultural support programs may not remit the full amount of the tax since there is no third party to confirm with, or may choose to not charge the tax entirely because of its tediousness, or in a bid to boost their sales. Withholding agents and fiscal devices can remedy this evasion, but will require more enforcement vigour.
Second, Sales Tax can lead to cascading or the “tax on tax” effect, stemming from the tax burden falling on Agricultural production inputs, which VAT avoids through refunds. Failure to address this “tax on tax effect” can result in sellers passing on the tax cost accrued, to consumers. This may lead to economy-wide inflationary pressures and jeopardize the macroeconomic objective of keeping inflation within 6 to 8 percent.
Additionally, price increases will impact industry’s costs of production, and in turn result into slower economic activity (maybe below the 4 percent growth target) hence lower revenues. Mitigating cascading will require a lower Sales Tax rate, combined with use of resale and exemption certificates. Third, and perhaps most importantly, Sales Tax is traditionally charged on goods not services. The Government has not explained how services will be taxed under the new system which can erode the tax base further.
Some, particularly those in conservative circles, have advocated for a sales tax as an alternative or complement to the national income tax. Knowing the advantages of the sales tax has benefits for those on any side of the issue Ahmad (1991). For proponents, knowing the advantages helps to present your case in a concise, reasoned fashion. Opponents will want to know the arguments of the program they oppose. Those who are undecided may find that familiarity with the advantages helps them make up their minds.
There are different rates at which people are taxed. A number of spending choices entitle the taxpayer to deductions that can be written off taxes at the end of the year. To claim these deductions, the taxpayer must keep receipts and other detailed records. A sales tax simplifies taxes. Everyone would pay the same rate on goods. While some items, such as food and clothing, may be exempted from the national sales tax, they would be exempted at the point of sale.
While some propose the sales tax as an alternative to the income tax, others propose it as a supplement to the income tax. A sales tax adopted in addition to an income tax would provide additional revenue for the government. A sales tax is a certain percentage of tax imposed by the government on the sales of goods and services. As per the law, a seller can collect some amount of sales tax from the consumers they are selling goods and services to. The sales tax does not produce any revenue to the seller. However, a seller is responsible to collect sales tax from consumers and pass it to the official authorities.
Economically speaking, sales tax is an excise tax. This is because sales tax is collected from the end users rather than from the seller. Quite similar like transportation and consumption tax, sales tax is also an indirect tax because it is directly embedded into the purchasing price of the goods and services. Sales tax is only charged by the end user of goods and services because a product passes through several manufacturing stages which are operated by different entities and it will require a huge amount of documentation to prove who should be responsible for paying sales tax Karim, M., & Ebrahimi, A. E. (2013). For example, a sunflower farmer sells animal feeds obtained from sunflower to a company which fabricates feed. The feed maker should get a resale certificate from the government that proves that he is not the end user to avoid sales tax and the feed is further sold to a livestock farmer who should also get a resale certificate from the government.
At the end of the process, the livestock farmer will sell his products to a retailer who will charge the sales tax on the animal sold along with the price Ebrahimi (2013). Different sales tax is levied by different jurisdictions, which usually overlap to increase the final price of the goods because of states, countries, and municipalities each levy their own different sales tax. Sale tax has quite a lot of similarities with the use of taxes, which is applicable to the purchaser when he buys a product outside his jurisdiction. Use taxes have quite same rates as sales tax but they are difficult to enforce, hence, they are applied on a large purchase of the product.
Instead of having progressive taxes on the amount of money that is being earned, a national sales tax would charge the same amount nationally to everyone for the goods and services that qualify. This would mean that equality would hit the system of taxation so that no matter what someone’s socioeconomic status happens to be, they are all putting equal skin into the game Karim (2013).
Because a sales tax is consumption based, it would allow households to avoid being taxed if they don’t consume items. For example: if a household wanted to grow their own foods, they could purchase seeds and equipment and be charged the national sales tax. Those one-time charges would be it because they could then eat the food grown without being taxed for it.
Whether someone is in the country illegally or they are purchasing items to turn into black market products, the point of sale is still going to happen in some way, shape, or form. This means there are future opportunities to avoid taxation because there is no need to file an annual tax form. Everyone pays their fair share based on the amount of purchasing that they do every month (lbid).
In theory, businesses would have more money to spend because their tax rates would be lower with a national sales tax in place Nelson (1997). This could be used to create more jobs, invest into research and development, or reduce the prices of goods that are on the market. The end result could be an economic benefit that has rarely been seen in the US or anywhere else in the world.
Because more people would be affected by a national sales tax, the end result would be additional funds being raised to meet the needs of the people. More money coming into the budget with the potential for households to be spending less in taxes every year. That potential provides a lot of hope for those who are struggling with their incomes right now (lbid).
In his book called “Taxing Agricultural Land in Developing Countries”, Bird (1974), opined in the first section of the book the relationship between agriculture and taxes are analyzed, which is followed by evaluation of varieties and advantages and disadvantages of taxes. Bird had suggested that intensive taxation of agriculture is not correct and the taxes should be land-based rather than quantity-based, after having analyzed the tax regimes and implementations. In other words, Bird considered taxation of the main input, land, rather than taxing production which is translated into de-coupled taxation of today.
Khan (2001) had analyzed agricultural taxation regimes in developing countries with respect to structures and effects of taxes. It was found out that the income from direct taxes did not increase after reduction of agricultural export taxes in most of the Latin American and Asian countries. Accordingly, it was claimed that the main reason behind the problems was measurement of agricultural taxes. Even there observed rise on income levels in some countries due to differences in measurement errors, the taxes were restricted due to political and administrative reasons.
Rajaraman (2004) had suggested that agriculture was one of the hardest taxation fields for developing countries. Shaping taxation policies with regards to efficiency, effectiveness and equity principles was suggested. It was also proposed that the product specific taxation in agriculture could only be implemented by central organisations departing from the example of India.
With the nature of the Sales Tax and Zambia’s current economy, Sales Tax may not be favorable considering the fact that it may impact negatively on Zambian Agricultural Systems. The effects of amount and ratio based taxes if compared, it is evident that out of the amount taxes affects consumption, while ratio based taxes affected both consumption, investment input and final product amount. It was concluded that agricultural taxes had negative impact on agricultural production.
This is in line with what Casamatta et al. (2001) had suggested that effective resource allocation in agriculture can be achieved by imposing taxes on agricultural products and inputs like land and labor. They emphasized that the role of subsidies was to reallocate income from consumers to producers.
The progressive system of taxation in place puts a greater burden on those who earn more money. A national sales tax that does not have some system of refunds rebates, or subsidies would create a regressive taxation system. Although the same percentage would be paid at the register, low income families would wind up paying a greater percentage of their income to taxes than those in the wealthier brackets.
Because the national sales tax would be based on consumption of new goods and services, many households would turn to used products to avoid paying the tax. This would create scarcity in the used market, raising the prices for everything used because there is more demand for it. In effect, this would create a secondary tax on household incomes because one either pays more for used goods without taxes or pays more for new goods because of the taxes.
A sales tax would eliminate all of the advantages that come with homeownership under the current system. There is a good chance that this could cause home prices to drop dramatically because there would no longer be a market for a home. With existing mortgages, this could create a lot of underwater homes and high levels of debt that would replicate the same crisis.
The national sales tax pros and cons show that there is some potential for this idea, but there are some problems that need to get worked out as well. Generally, Sales tax, as compared to VAT is the percentage of revenue imposed on the retail sale of goods. Unlike VAT, sales tax is levied on the total value of goods and services purchased. With the nature of the Sales Tax and Zambia’s current economy, Sales Tax may not be favorable considering the fact that it may impact negatively on Zambian Agricultural Systems. The effects of amount and ratio based taxes if compared, it is evident that out of the amount taxes affects consumption, while ratio based taxes affected both consumption, investment input and final product amount.