By BUUMBA CHIMBULU
REFUND abuse is problematic especially when implementing the Value-Added Tax (VAT). Just like any other tax, the VAT is vulnerable to evasion and fraud.
In the last few years, a number of legal or administrative measures aimed at combating VAT fraud have significantly increased in various African countries, including Zambia.
Zambia, just like other African countries, has continued to deal with fraud characterised by VAT.
For example, in May this year, the Zambia Revenue Authority (ZRA) announced that it has continued to record VAT fraud, with taxpayers using fake import certificates.
The ZRA as at May 2023, handled 175 cases related VAT fraud, indicating that this tax type remains a major problem for the organisation.
VAT fraud is going on at a very large scale and has remained the biggest challenge for ZRA, according to its Commissioner General Dingani Banda.
Mr Banda, however, announced that they have taken VAT fraud aggressively to make sure that it is dealt with.
ZRA has commenced the software-based Electronic Invoicing System Project for fiscalisation as one of the ways to deal with the vice.
Combatting VAT fraud is therefore crucial from a revenue gathering perspective.
It is also fundamental, however, to ensure a level playing field amongst economic operators, increase tax morale, and, limit opportunities for the financing of organised crime.
To effectively combat VAT fraud, a holistic approach must be adopted; one that recognises the interdependence between tax policy and tax administration.
In making efforts to help find solutions on how to seal VAT fraud in Zambia, several papers and reports have been done by experts.
One of the most recent report has been done by the Tax Justice Network (TJN) Africa which highlights Zambia’s urgent need to prepare a strategy to combat VAT refund fraud, including automating risk analysis procedures for assessing claims in real time.
The report titled “Taxing Zambia’s Mining Sector for the Energy Transition: Opportunities and Challenges” is collaboratively produced by TJN Africa and Publish What You Pay Zambia.
TJN Africa in the report emphasised the need for the Zambian government to urgently manage the VAT refunds challenges, more especially with the mines.
“This can be done by firstly reviewing the legal framework to ensure that VAT refunds requirements, procedures and documentation are as simple as possible.
“Secondly, there is need to prepare a strategy to combat VAT refund fraud, including automated risk analysis procedures for assessing claims in real time and information exchange among relevant institutions to establish profiles of high-risk taxpayers,” TJN Africa stated.
It also recommended that the treasury should maintain a zero-balance subaccount within the Treasury Single Account, where the amounts needed to pay the VAT refunds were transferred based on tax administration information.
According to the report, the VAT refund system was marred by delays in paying VAT refund claims, resulting in large VAT refund arrears problem.
This challenge prompted the government to reintroduce the “VAT Rule 18” in 2014 requiring the VAT taxpayer to submit documentation that a supply is an export of goods to claim this as a zero-rated supply.
The VAT generally applies to transactions in the mining sector. Mining production is predominantly exported, and therefore, based on the destination principle of VAT, zero-rated.
Despite its intrinsic self-enforcement capacity, ZRA has found it challenging to refund excess input credits, which is critical to a well-functioning VAT system.
Significant and persistent weaknesses in VAT refund management often lead revenue authorities to resort to altering VAT design rather than addressing the underlying causes of the refund mechanism’s ineffectiveness.
It also reported that limiting the demand for VAT refunds then becomes a primary objective.
Typical strategies aimed at limiting the amount of input VAT include import exemptions, zero-rating of domestic transactions, deferral of import VAT, deemed VAT liability schemes, and VAT grouping.
These may be designed either as “objective” reliefs, where policymakers select certain types of goods and services believed to be largely capital goods or are otherwise predominantly used as business inputs, or “subjective” reliefs available to certain taxpayer categories, usually investors, exporters, or businesses in certain sectors, such as mining, petroleum, textiles, and so on).
While granting VAT relief on inputs may reduce the value of VAT refunds claimed, it may, and often does, exacerbate the underlying problem by inflating the overall claim volumes, albeit at lower values.
This is especially true with zero-rated domestic transactions or deemed VAT liability schemes which push the problem up the value chain, where a supplier to, say, an exporter, has little or no output VAT and finds themselves in a refund position.
This forces the tax administration to deal with a larger number of businesses seeking VAT refunds.
Furthermore, rather than processing a few refunds from large taxpayers, it must process numerous smaller claims.
This is particularly burdensome for tax administrations with limited capacity.
There are several strategies implored by revenue authorities by countries to manage the VAT fraud and claims.
These are based on a predicable financing mechanism (that is, withholding the required funds from gross VAT in a special VAT refund treasury single account subaccount), as is the practice in Australia and Zambia.
This is the recommended practice, as it preserves the VAT’s nature and ensures that sufficient funds are available to meet all refund claims.
Ends.
