One sad reality about tax interest is that it can exceed the principal debt and make a taxpayer insolvent. Over the past years we have witnessed instances where tax interest bills rise so astronomically that the taxpayer chokes financially.
Again, proponents of capitalism suggest that interest being a cost of finance cannot exceed the principal debt (i.e. the in duplum rule); otherwise it can be construed as extortion. On the other hand, Islamic finance has taken the world by storm and countless individuals are studying how it can be adopted in a free market economy. Proponents of this branch of finance argue that interest cannot be levied on money and that rather money must produce other money and the lender should benefit from a profit share.
To many of us, the operations of Islamic finance are desirable but the reality of the matter on this side of the world is that loans bear interest. Again, whether one ascribes to Islamic finance or not, the tax laws call interest by that name and not profit share. In light of this, the purpose of today’s article is to discuss how far interest on tax debts can go. In this article, words importing the masculine shall be deemed to include the feminine.
Enter in duplum rule
Under normal commercial arrangements, interest ceases to run when it equates to principal debts. Notice here that we said this applies under commercial arrangements, but then tax is not a commercial arrangement. It is a scenario where one hand takes from the other by law and we therefore cannot apply common law principles such as the in duplum rule.
The Income Tax Act in Botswana defines tax to include any penalty, interest, fee or other charge imposed under the Act. Moreover, Section 97(1) of the Act states that “any tax not paid within the time specified in Section 95 shall bear interest at the rate of one and a half percent for each month or part of a month during which it remains unpaid, compounded monthly”. The same principle of interest accrual applies even under the VAT Act and the Capital Transfer Tax Act.
It therefore means any unpaid principal tax will incur interest at the rate of 1.5 percent per month or part thereof, and the reality is that such interest certainly will exceed the principal tax debts if not paid in time. Interest will only stop to accrue once the principal debt has been paid in full. Thus, for tax purposes, the in duplum rule does not apply as interest can accrue and exceed the principal obligation, per the precepts of the tax laws. It is therefore of paramount importance to settle any outstanding obligations promptly so as to avoid the interest burden.
Conclusion
Given the background that interest can exceed the principal tax, it is highly advisable to clear one’s tax liabilities before they become onerous and unbearable. As we have stated, a taxpayer, whether a company or individual, may in fact become insolvent due to tax interest, hence the need to clear principal tax debts in time. The other hurdle taxpayers face is that BURS cannot waive significant amounts of interest, and once charged, taxpayers have to look for funds to pay the tax interest or at times file for insolvency.
Well, folks, we hope that was insightful. As we two Yours Trulies say goodbye, remember to pay to Caesar what belongs to Caesar. If you want to consult, join our free tax WhatsApp group or to know about our 9 tax e-books, send a text to +267 7181 5836. You can read more tax articles on our website, www.aupracontax.co.bw under the ‘Tax articles’ tab.
