MASERU – While most Basotho-owned companies are struggling to comply with near-crippling tax obligations, some foreign-owned manufacturing firms seem to have it easy.
Foreign-owned manufacturing companies, in particular textile factories, are benefiting from a raft of tax relief measures which leave them ultimately contributing a trivial proportion – around five percent – of the country’s overall tax receipts.
Between 2012 and 2017, according to the Lesotho Revenue Authority (LRA), the manufacturing sector contributed an average of M320 million per year to total revenue.
In the 2016/2017 financial year, the LRA remitted M5,9 billion to the government against a targeted M6,4 billion. This means in that year, the manufacturing sector contributed around 5.4 percent to the fiscus.
Manufacturing firms pay income tax at the rate of 10 percent, while a corporate tax rate of 25 percent is imposed on profits of other companies.
The LRA said this was the law.
“The Income Tax Act 1993 as amended, provides for a reduced income tax rate of 10 percent for companies participating in the manufacturing industry.”
It added: “Another industry that enjoys this kind of tax incentive as per the provisions of the law is the farming industry; income derived from subsistence farming is exempt from tax, while income derived from commercial farming attracts tax at the rate of 10 percent.”
Some commentators have argued that charging large factories an income tax at 10 percent, 15 percentage points lower that other businesses, costs Lesotho taxpayers hundreds of millions of maloti a year in lost revenue, a considerable leakage, especially in light of the fact that LRA has failed to meet its revenue targets in the past two consecutive financial years.
The gulf on tax revenues left by tax relief for manufacturing companies not only debilitates efforts to fight poverty but also weakened the fiscal base needed for sustainable economic development, according to Thabo Qhesi, the Private Sector Foundation of Lesotho’s chief executive officer.
As of 2017, domestic taxes covered public wages and salaries – currently the highest in sub-Saharan Africa as a percentage of Gross Domestic Product (GDP) – with the balance of government spending funded by the less reliable revenue sources, including income from the Southern African Customs Union (SACU), among them.
This fiscal position, finance minister Dr Moeketsi Majoro said, “was clearly unsustainable”.
Dr Majoro has since announced that government intended to implement a raft of domestic revenue mobilisation initiatives.
These initiatives included raising Value Added Tax (VAT) from 14 percent to 15 percent “to align with that of South Africa to prevent smuggling”, introduce a reverse charge mechanism to tax imported services and introduce the Voluntary Disclosure Programme (VDP) which was estimated to yield M225 million in additional revenues.
Under VDP, LRA committed to grant amnesty on “additional taxes and penalties” for people who would voluntarily “make full and honest disclosure of their tax transgressions”.
VDP is intended to provide an opportunity for businesses and individuals to voluntarily knock on LRA’s door to regularise their tax affairs under Income Tax and VAT laws.
Dr Majoro also announced that a small business taxation was being introduced to simplify and improve tax compliance.
He said a mining tax regime would also be reviewed to cater for “windfall taxation”.
He told parliament in February during his budget speech presentation that: “Fringe Benefit Taxation will be reviewed to expand its base and compliance”.
He also indicated that the LRA would also enhance tax administration measures, targeting improved compliance by major tax contributors.
That was expected to yield an additional M350 million.
These domestic revenue mobilisation initiatives turned the attention to how much tax was generally contributed by the manufacturing industry and the contribution it made to the economy of Lesotho, as some commentators argued that as a tax base, the manufacturing sector remained untapped due to a litany of tax incentives the sector enjoys because of its proclaimed role as the main springboard for development.
Dr Majoro and Mohato Seleke – Chief Executive Officer of the Lesotho National Development Corporation (LNDC) – did not respond to detailed questions sent to them last week.
LNDC is Lesotho’s main parastatal charged with the implementation of the country’s industrial development policies.
It falls under the ministry of trade and industry which is responsible for providing overall policy direction on industrialisation.
The ministry of trade and industry has maintained that the contribution of the manufacturing sector to Lesotho’s economy “goes beyond the sector itself”, arguing there were “important employment and economic multipliers”.
According to the ministry of trade’s synopsis publication of Lesotho’s textiles, apparel and footwear manufacturing industry, “a range of formal and informal sector activities occur that feed into or off the industry”.
The synopsis publication said the activities included a small packaging industry, road freight transporters, courier services, clearing agents, security, passenger transport, traders that sell food to workers, and residential accommodation, among others.
It is estimated the manufacturing sector’s production workers alone could collectively earn basic wages of about over M600 million a year.
“The wages earned by employees engaged in Lesotho’s textiles, apparel and footwear industry are of vital importance to Lesotho’s economy,” reads the synopsis.
The manufacturing companies not only enjoy the reduced tax rate of 10 percent on their profits, they also benefit from zero percent Withholding Tax LRA charges on dividends derived from manufacturing activities.
LRA also said this was a matter of law.
“No withholding tax is charged on dividends distributed by manufacturing companies while for all other industries there is withholding tax on dividends distributed to non-resident shareholders. This is also an issue of law,” LRA said in an email response to questions send by this paper.
The response added: “Withholding tax is not charged on dividends distributed by resident companies to local shareholders. This is a general rule that applies to all, not only to manufacturing companies as implied. When it comes to foreign (non-resident) shareholders, there is a tax incentive for manufacturing.”
Manufacturers are also allowed to import raw materials from outside the Southern African Customs Union (Sacu) duty-free, then in return they have to export final products made out of those imported materials outside the Sacu region.
This was so because, according to the LRA, Sacu instituted a rebate regime to exempt imports from non-member states intended for manufacturing for export purposes, from payment of duties.
“The AGOA (African Growth and Opportunity Act) arrangement allows Lesotho-based manufacturers to source inputs for manufacturing from anywhere.
“But for the final products to qualify for duty-free entry into the intended market, the USA (United States of America) in this case, the manufacturing process follows specified rules (rules of origin) established in the agreement,” LRA said.
“If these products were to enter the SACU market, duties are payable because SACU as a trade pact between its members has a common external tariff that applies duties to all imports from 3rd countries (non-members),” it added.
The long-standing public opinion that big manufacturing firms did not pay as much tax as other companies, especially small indigenous enterprises, was resuscitated by the recent violent wages strikes that rocked the textile and apparel sectors which currently dominate Lesotho’s manufacturing activity.
Government proposed to increase entry level salaries for factory workers to M2,000 from M1,200 but the move was resisted by factory owners who argued the M2,000 minimum wage would be unsustainable and could collapse the industry altogether.
Government then backtracked and announced M1,696 as the entry-level wage.
This has triggered a wide ranging debate about how Lesotho can take advantage of the envisaged multi-sectoral reforms to reform the tax system to stop leakages of hundreds of millions in tax revenue which could be spent on healthcare, education and infrastructure.