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Thursday, 2 October 2014

A Comment on Elias Chipmo's article on VAT refund.

It is refreshing to read Elias Chipimo's insightful contribution on the VAT refund - see the article VAT refunds to mining exporters . Our only observation is that what he has written is factually correct. And we would like to offer some additional points that perhaps he could have made more clearer.

First, the way VAT is applied is an issue of "international best practice" rather than international legality. Every country is entitled to apply VAT refunds in a way that is consistent with its domestic policy and laws. Whether you follow best practice is a question of knowledge and competition rather cast iron laws.

Secondly, the article could have more explicitly noted that ZRA is merely trying to enforce the law and regulations as it understands them today. The fact that previous Finance Ministers have coerced ZRA to act in a certain way is irrelevant to the discussion. We need to distinguish policy and best practice from the legal position of the actors involved. We felt that this distinction was not adequately addressed in the article.

Finally, we are skeptical with Elias Chipimo's suggestion that Zambia cannot remove zero rating of VAT on mining producers because it allegedly goes against "the principle of a consumption tax". It seems what Elias Chipimo means is that taxing an input does not make economic sense. But we must remember that governments around the world tax input costs in many areas.

All taxes on labour (e.g. income tax, pension contributions) are taxes on cost, as the Keynesian economist Robert Skildesky repeatedly reminds us. So there's nothing that stops Zambia from removing the zero rating VAT export tax. Indeed, there's nothing that would actually stop Zambia restructuring VAT in such a way that only mining companies are not zero rated. It would not be without wider economic precedent. Of course that would raise legitimate questions on whether that is the best approach to extract mining rents. 

These points do not take away from what is an excellent piece by Elias Chipimo. We should note that the attacks on him by FDD's Antonio Mwanza have been intellectually bankcrupt and not addressed the substance of the points Elias Chipimo has raised. We long that all politicians act deal with substance rather make ad hominem attacks. Elias Chipimo is to be praised in this regard.

AUTHOR 
Chola Mukanga 
Economist | Researcher 

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