The budget statement for the 2018 / 19 financial year was presented by the Minister of Finance on 7 March 2018.
The budget must be considered in the context placed by the Minister, in that he believes the Namibian economy has endured its most precarious phase since 1990. We believe that the use of the past tense by the Minister is optimistic and that the massive debt incurred by the private business sector to bridge cash flow shortages, caused in many instances by the State’s failure to pay service providers and VAT input claims, will put pressure on business in general for a long time to come.
All the commercial banks have significantly tightened their credit control and development capital and finance for expansion are severely limited.
According to the Minister, the main goals of the budget are to stimulate growth, relieving poverty and to create employment.
Whilst poverty is declining, unemployment remains at 34%, there exists a wide skills deficit (in our view directly related to the dysfunctional state education system), and inequality. The Minister is of the view that the economy is in need of diversification and transformation. He believes the current improvement in growth and strengthening economic fundamentals result from the fiscal consolidation policies implemented since 2016.
In line with the Harambee Prosperity Plan, five key priority areas will be focused on. Maintaining fiscal consolidation for macroeconomic stability, targeting support for fledgling economic growth and protecting core spending in social sectors of education, health, skills development and housing, improve domestic resource mobilization by fair tax policies, efficient tax administration and mobilizing domestic savings, and implementation of policies and structural reforms to enhance effectiveness and increase the competitiveness of the national economy.
Tax policy proposals involve the removal of ineffective preferential tax rates (this refers to inter alia manufacturer rates) and protecting the system from base erosion, which we believe specifically targets multi-nationals in mining and fishing remitting their profits to external holding structures.
Excise tax rates will be adjusted and administrative reforms implemented such as the Integrated Tax System and the establishment of the Namibian Revenue Agency. In our view, further levels of administration being inserted into an already inefficient and cumbersome Inland Revenue Directorate will not necessarily improve service delivery to the Taxpayers in Namibia.
Other tax reforms involve:
-repealing the EPZ Act,
- reduction of the minimum / base tax rate from 18% to 17%;
-introducing new rates of 39% and 40% for individuals earning over N$1.5 million and N$2.5 million respectively;
-a 10% dividends tax on dividends paid to residents;
-abolishing the conduit (flow through) principle applicable to trusts;
-subject income from business activities conducted by charitable institutions to normal tax rates (as an example the Roman Catholic Church’s hospital);
-moving towards a hybrid tax system (source and residence based), by taxing income earned from foreign sources;
-a 37% tax on betting and gaming entities;
-VAT on income of listed asset managers;
-VAT on the sale of shares or members’ interest in companies and CC’s owning commercial property.
As a general comment it is clear that the tax reforms are targeted at the more affluent sector of the economy. It is regrettable that the tax incentives for manufacturing activities will be removed. The country is in dire need of industries adding value to our commodities, thereby aiding job creation and stimulating exports.
Also, the taxation of income earned from foreign sources is problematic in the context of the avoidance of double tax agreements concluded by Namibia, which agreements cannot be amended by local legislative changes and supervenes local tax legislation.
The charities conducting business activities to subsidize their social services, provide an essential contribution to the social services in Namibia where the State’s service delivery has been lacking, of which education is a prime example. To tax these entities will put them under even more pressure to remain financially viable.
The excise levies and duties to be increased are an increase in the fuel levy by 25% for all fuel products , expansion of the export levy to include agricultural, forestry, game products and mining products not currently covered and a 5% sin tax to be introduced on alcohol and tobacco.
Government expenditure for the 2017 / 18 financial year stands at N$ 66.5 billion.
The budget deficit for 17 / 18 is estimated at 5.4 percent.
Total debt for 17/18 stand at N$74.5 billion, equivalent to 43.3 % of GDP, as compared to 42.6 % in 16/17.
Clearly, Government is under pressure to diversify and increase its sources of revenue, both to service debt and to fulfill its growth and social support targets.