Zambia introduced Withholding VAT (WVAT) on 1st January 2017. This is a method of collecting VAT which deviates from the traditional method, where the supplier of goods or services has the legal obligation to account for the VAT on their sales. With WVAT, the legal obligation of accounting for VAT is shifted to from the suppliers of the goods and services to the receivers. The WVAT method only applies when a VAT registered taxpayer is making supplies to an appointed WVAT Agents. When supplying to a non-appointed agent, VAT must be accounted for in the normal way.
Administrations that implement the WVAT method of collecting VAT target large organisations that make large volumes of purchases from multiple, relatively small taxpayers ,that have a tendency of eluding the tax administration. This substantially erodes the VAT revenue that governments should be collecting becausese the large organisations will deduct all the tax they incur on the purchases they make from these suppliers from the VAT they collect on their supplies yet only a few of their small suppliers will declare the VAT they collect from supplies to these large organisations to the tax administration.
By targeting the relatively few large organisations to be accounting for VAT, tax administrations are able to secure the tax revenue in the hands of the few mostly compliant and reachable taxpayers as opposed to the numerous, mostly evasive taxpayers.
Operation of the Zambian WVAT System
There are many variants of the WVAT mechanism. The one that the Zambian admistration adopted opertaes as follows.
- A supplier to a WVAT Agent declares all the VAT on sales and all the VAT on purchases and indicates the net liability on the face of the return, which is the difference between the VAT on sales and the VAT on purchases.
- The supplier files the return without making the payment for the liability indicated on the return. This is becausese the supplier did not receive the VAT, or the VAT did not accrue to the supplier.
- The suppliers VAT account ledger is debited with the liability that is indicated on the face of the return.
- The WVAT agent prepares a WVAT schedule, that lists all the withheld VAT, and files it with ZRA together with a full payment of the total amount on the schedule.
- The amount paid by the WVAT Agent on account of purchases from the agent is posted to the suppliers.
- Because the VAT that was withheld is greater than the actual liability for the supplier, the supplier’s period balance is in credit position.
- The supplier has to apply for a refund from ZRA.
See illustration below.
Advantages and Disadvantages
The advantage of the Zambian WVAT system, like all other is that the tax authority only has to follow-up the 445 (in the illustration) with one withholding agent as opposed to Supplier’s A, B, C etc to get the same amount. The administrative costs are therefore reduced while the revenue assurance is enhanced.
The disadvantages are the following.
- Creates cashflow stress for the supplier becausese the supplier is denied the VAT which would have normally been received and the supplier would only have to pay the difference between the VAT on sales and the VAT on purchases by the due date of payment for the accounting period.
- Delays in payment by the agent results in delays in crediting the suppliers account, thereby, resulting is erroneous late payment penalties and interest on the suppliers account. The suppliers are inconvenienced becausese they have to apply for the reversals of these penalties and interest becausese ZRA will not identify the penalties that accrue as a result of making supplies to WVAT agents, and thus cannot prevent them or automatically reverse them.
- Creates cashflow stress on the WVAT Agents becausese, in addition to their own VAT liabilities, they are required to pay the VAT that accrues to their suppliers’ sales even when payments for the purchases they make from them are not yet due.
- Creates non-value adding work for the tax administration becausese they have to process applications for erroneous penalties and interest, which can be avoided if a different approach is adopted. They also have to process the additional transactions that are filed on WVAT Schedules and continuously carryout reconciliations with suppliers becausese the suppliers’ records of tax due to them will always be different from the tax administration’s records of what is due to the suppliers for as long as the WVAT agents, inevitably, delay to declare and pay for the VAT withheld from the suppliers.
- Undue delays in payment of refunds to tax agents without paying them interest amounts to taxing of the suppliers’ capital, thus, imposing an unconstitutional tax on the suppliers.
- Increases the number of refund transactions that the tax administration has to deal with becausese taxpayers (the suppliers to WVAT Agents) that were previously required to make payments now have to claim refunds. Tax refunds, generally being a high-risk activity, demand substantial administrative resources on the part of the administration.
- Where appointed agents tend to be non-compliant like the case may be with most government ministries, departments and agencies, they measure may just shift non-compliance from the fragmented small businesses to the large appointed agents. They may even take away the revenue that may have been paid by some compliant suppliers.
- The impact of the risk of non compliance is greater that that of the risk of some of its suppliers.
Impact on the Tax System
While the WVAT system, in principle, has the impact of securing the revenue, that may have been at risk with multiple non-compliant suppliers, with a few compliant appointed agents it has the effect of increasing both the compliance and administration costs.
The financial stress and the additional tax on capital that the Zambian WVAT system introduces on suppliers has a distortionary effect on supplier choices. Other things held constant, a supplier would rather make a supply to an non-appointed organisation than to an appointed agent in order to enjoy more profits. This has the effect of setting an industry or the economy off-equilibrium, thereby, resulting in deadweight loss- a loss that is suffered by the whole society.
A Less Distortionery and Relatively more Economically Efficient WVAT Variant
A less distortionery and, relatively, more economically efficient WVAT method is where suppliers are allowed to claim the withheld VAT on their returns so that the WVAT is immidiately credited on their VAT account ledgers and paid. The suppliers refund would not depend on the compliance behaviour of the WVAT agent and the administration does not have to process individual transactions to credit suppliers accounts when the WVAT agent pays and neither does it have to engage in unproductive and avoidable penalty and interest reversals, thereby reducing the cost of administration. This method would reduce administration costs. This method is implemented by countries that implemented WVAT earlier than Zambia, such as Venezuela (implemented in 2003), Kenya (implemented in 2003) and Ethiopia (implemented in 2009).
WVAT, in principle has the potential of improving VAT revenue collection and reducing the cost of collection. However if not properly implemnted, and if WVAT Agents are not properly selected, there may be little or no real gain from implementation. Clearly, the variant that the Zambian tax administration has adopted is less economically efficient and comes at a relativly higher cost to the suppliers, withholding agents, the tax administration and the economy.