Oftentimes when we think about the cost of tax compliance, we rely on tax rates and tax bases as the only determining factors.
However, these are not the only parameters of taxation that can be used to measure a country’s cost of compliance, since they do not always tell the full story. One other key consideration that should determine the cost of a tax system is the attendant cost of enforcing/implementing tax policies.
The Finance Bill 2023 brought with it numerous proposals. Among them is the proposal to reduce monthly rental withholding tax rate from 10 per cent to 7.5 per cent. On the surface, this sounds like a forward-looking amendment. However, the proposal comes with a requirement for landlords and withholding rent agents to remit the tax within 24 hours. This is a dramatic change from the current deadline of on or before 20th of the following month. Despite the lower tax rate, the cost of implementing the new regulation if passed, is going to negatively impact the appointed agents.
To put it into context, consider a bank that is an appointed rent agent with approximately 100 branches countrywide. This translates to about 100 lease agreements with different payment dates (on the assumption that the landlords are different). You can envisage the amount of administrative work that will go into ensuring that the 24-hour deadline is met and the number of hours that the bank will take to fulfill its tax obligations.
Further, the Finance Bill seeks to require appointed Withholding VAT agents to account for withholding of VAT (WHVAT) within three days. This in turn means that the agents have to keep track of payments made and remit the deductions after every three days. The misalignment between WHVAT and VAT which are the same tax heads but different submission dates speaks volumes about the flawed proposal.
Such stringent remittance timelines are punitive, they create complexity and increase the implementation costs of tax policies. Affected taxpayers will see increases in operational costs from a monetary and time perspective, eventually yielding a negative effect. Filing hours will skyrocket and businesses may be forced to commit more resources to the day-to-day filing, resulting in lower profitability and overall, government’s efforts will be neutralised. This also poses a challenge to the taxman when conducting reconciliations during their verification.
Simplicity is one of the canons of a sound tax system. A tax system should be easy to comply with and reduce complexities both on the taxpayers and the taxman. In addition, it should limit the cost of enforcement and not pass any additional burden to taxpayers.
Fortunately, the flaws can still be addressed as the bill is yet to be passed into law. One possible approach would be to spread the tax deadlines across the month to help the government efficiently manage its liquidity requirements. For instance, policymakers could consider earmarking withholding tax deadlines from 20th of the following month, to an earlier date, such as by 15th of the following month. That way, taxes will be accounted for uniformly and ensure regular cashflows, which will be a win-win for both taxpayers and the taxman.
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As lawmakers propose tax policies, they should consider the overall impact to the economy and not just the cash-flow perspective.
Tax consultant. [email protected]