Rwanda’s practice of exempting imported raw materials for industrial input from paying Value Added Tax (Vat) could be limiting the government’s ability to collect more revenues from its domestic resources, according to Suchir Bhatnagar, Managing Director of SRB Investments.

Under the current tax laws, government exempts VAT payments on imported raw materials to be used for industrial input by persons with an investment certificate. Instead taxation is done at the final stage of production when the manufactures sell their finished products.

For example, a manufacturer of beer will not have to pay VAT on imported sugar which is to be used as a raw material for making beer; instead, government waits and charges VAT on the manufacturer’s final product.

Rwanda’s counterparts Kenya and Uganda collect VAT on industrial raw materials a cost that manufacturers start factoring into their production cost early on and transfer it along the supply value chain from whole seller to retailers and finally, consumers.

However, Bhatnagar says although Rwanda’s model helps manufacturers to have cheaper inputs which reduce their cost of production, in reality, it’s a postponement of the VAT obligation which they have to pay at the point of sales of their final products.

The model also leaves Rwanda Revenue Authority (RRA) at the mercy of tax payers’ honesty and compliance; collecting VAT from sales means taxpayers have to declare their sales transactions for auditing and deduction of the taxes due.

However, Bhatnagar says where a taxpayer chooses to manipulate the sales reports or simply don’t issue receipts for all the sales transactions made, RRA is left in a position where it can’t calculate its VAT; this is a widespread practice.

The introduction of the Electronic Billing Machines (EBM) was meant to help RRA improve its auditing efficiency in collecting VAT from registered tax payers. Most Vat tax payers have since been made to acquire billing machines but very few actually use them in transactions.

The failure of Vat registered tax payers to use EBM in their sales transactions is costing government billions in tax revenues; Bhatnagar believes this can be overturned if government can start charging VAT on raw materials a cost that manufacturers can always offset in pricing.

Bhatnagar who says he has shared his views with RRA Commissioner General says he is waiting for a response and hopes that government can go the Kenya or Ugandan way and get VAT on raw materials.

"This will promote a more level ground for competition because currently, honest tax payers who remit their VAT collections are losing out to dishonest players who evade taxes by selling at lower prices without issuing receipts,” he said.

Reforms

Collecting VAT on raw materials is a reform that Bhatnagar believes can improve compliance among tax payers that currently evade their obligation. However, such a reform would require a long process that involves several arms of the governments including Parliament.

Also, Sunday Times understands that the idea of having VAT on imported raw materials was brought up for discussion during a meeting by the Rwanda Association of Manufacturers.

Bhatnagar believes VAT on raw materials wouldn’t be an extra charge at all as it would be off set in their pricing mechanism but those on the opposition see it as one.

An explanation to that attitude can possibly be found in remarks by Stephen Ruzibiza, the newly appointed chairman of the Private Sector Federation (PSF), who was speaking during the Deloitte after budget breakfast.Ruzibiza pointed out that there was need for a campaign to educate taxpayers that paying taxes was a constitutional obligation rather than a burden that they must avoid.

However, on VAT, the biggest challenge is for RRA to transform attitudes among tax payers who think the charge is an extra cost rather than money they simply collect on behalf of the tax body.

And since electronic billing machines are being dodged by registered tax payers, Bhatnagar’s idea to have it charged on raw materials could help government sidestep the challenge of going to extremes of policing traders to ensure they use the machines.

Negative attitudes to VAT have seen RRA miss its targets in the past; but as government pursues its ambition to become self-reliant, improving tax administration will become even more important.

Here’s why?

As the 2014/2015 financial year comes to an end, employees of the Rwanda Revenue Authority (RRA) are unlikely to get any annual bonuses because the tax collector doesn’t expect to meet its Rwf906.8 billion target for the period. Bonuses are given whenever targets are met or surpassed.

Inside estimates indicate that the tax body will be off target by at least Rwf20 billion or more, mainly because of poor performance in mobilizing Value Added Tax revenues collected on its behalf by registered tax payers.

The tax collector’s poor run in the year ending, many observers say, perhaps partly explains why government decided on a modest increase of just Rwf5.8 billion for its expenditure plans in the fiscal year 2015/2016 that starts on July 1.

Between July 2015 and June 2016, government plans to spend Rwf1.768 trillion compared to Rwf1.762 trillion that was allocated for the 2014/15 revised budget.

In the coming financial year, RRA will have a slightly lighter burden after its revenue collection target was reduced to Rwf894.8 billion from Rwf906.8 billion.

Consequently, domestic tax revenues that contributed 52 percent to the 2014/2015 budget will reduce to 51 percent, according to the budget speech delivered by Minister Claver Gatete.

The reduction is notwithstanding of government projections of stronger economic growth of 7.4 percent in 2015 and much more in 2016; normally, the argument is that when economic activity is stronger, government mobilizes more revenues in taxes. It looks like this won’t be the case.

Early this week, taxation and financial experts met in Kigali at a breakfast meeting organised by Deloitte to review East African budgets; the focus of the discussion was on how governments are going to mobilise local revenues to fund what appear to be ambitious expenditure plans.

As part of its plan to fund 66 percent of the budget using local revenues, Rwanda’s finance ministry intends to set RRA after at least 6000 co-operatives in the country a move that was reportedly criticized by experts at the Deloitte breakfast meeting, that it would hurt savings.

From a government perspective, by taxing cooperatives, it would be helping to widen RRA’s tax net but to many professionals, the debate should be about the tax collector’s efficiency.

So clearly, while there’s a need to expand Rwanda’s taxable net in order to reduce the pressure on the few large and compliant tax payers, there’s also a need to invest in capacity building to improve RRA’s efficiency.