Looming salary slashes will affect tax returns

A report by a firm of tax experts is warning that the ubiquitous impact of Covid-19 will led to revenue contraction everywhere

Looming salary slashes will affect tax returns

The contraction of the economy will shed off sales, directly impacting collections of Value Added Tax (VAT) which are dependent on the volumes of sales made by VAT registrants, The Business Weekly & Review has established.
According to a report by Jonathan Hore of Aupracon Tax Specialists, Botswana will be directly impacted by the closure of borders and disruption of supply chains, among others. The report, which is titled “Covid-19’s Effects on Tax Revenues,” states that the corporate tax and Pay as You Earn (PAYE) depend on the performance of the economy and that anything that has the capability of reducing economic growth cuts corporates’ profits.
According to Hore, when corporates do not perform well, they are likely to cut employee salaries, and thus the share of PAYE that tax authorities can collect. While retrenchments may not be as high as previously anticipated, the tax specialist says before their suspension through Statutory Instrument 63 of 2020, financially constrained employers are likely to negotiate lower salaries with employees or make staff redundant without necessarily retrenching them. This, Hore notes, will in turn reduce the amount of PAYE that tax authorities can collect.

The situation is compounded by reduced revenues from the Southern African Customs Union (SACU) which are directly impacted when borders are closed and when economies are locked down, the report notes. The uncertainty in future economic prospects brought about by the pandemic is also likely to put projects on hold, which reduces imports and consequently SACU revenues. The International Monetary Fund (IMF) has also forecast that SACU member countries will decline by an average of 5.6 percent in 2020 in its April 2020 report, which directly feeds into a reduction in tax collections.

Another factor which may result in a reduction of domestic taxes is suspension of investments which could have been embarked on had COVID-19 not ravaged the economies, he adds. Further, when economy contracts, some tax payers’ ability to comply with taxes will be hampered by financial constraints, further worsening the tax collection capacity. “It is also important to note that a contraction in an economy will have further negative ripple effects, such as company closures and bankruptcies, which further slows down economic activity,” Hore explains. “It is evident that Covid-19 will continue to shed a significant portion of business revenues negatively impacting their cash flows,” Hore states.  

According to the tax specialist, the moment a business’ cash flows are impacted, its ability to pay creditors decreases, tax authorities included. He warns that the economic drought brought about by the pandemic will certainly result in an astronomical jump in tax debts way above the annual average of 22 percent recorded in past years.
According to the 2016/17 BURS annual report, taxpayers owed P2.2bn at the beginning of 2017 and by 31 March 2017, the bill had shot up by 22 percent to P2.7bn. By the end of the 2017/18 year, the debt put on another 22 percent, going up to P3.3bn.  Hore anticipates that the tax debt figure will hike by another 22 percent for the 2019/20 financial year. “However, considering the anticipated harsh economic conditions that are synonymous with COVID-19, the spike in tax debts for the 2020-2021 year could stand at a staggering P5.4bn, putting on a much higher 35 percent annual increase,” the report says.

Hore notes that the increase is likely as taxpayers who may have intended to reduce their present tax debts in the current year may be constrained by financial challenges, resulting in more interest charges. Further, he explains, many taxpayers who had all along managed to pay their tax bills may be drawn back by the economic contraction of 13.1 percent, which he says will push tax debts up.