Inside Biz | OVERTAXING THE MIDDLE CLASS WILL NOT RESULT IN COUNTRY SUCCESS- BUSINESS ESWATINI

Business Eswatini opposes the introduction of Capital Gains Tax in the country
Welcomes government proposal to reduce Corporate Tax from 27.5 to 25%
Says failure by businesses to remit taxes should not lead to locking up of business premises by Eswatini Revenue Service

By Ntokozo Nkambule

Business Eswatini (BE) has come out to state that they do not believe that overtaxing the middle class will result in the success of the country. This assertion follows the government’s proposal to increase the taxation rate on middle-class earners, from 33% to 36%, for those earning above E250, 000.

This is contained in a document by BE where it invites business people and relevant stakeholders to provide comments on the Income Tax Amendment Bill of 2022. BE has made its initial observations about the Bill, one of them being that it does not believe that the middle class should be overtaxed. In its observation, the institution has also noted that it is totally against the introduction of Capital Gains Tax (CGT) in the country. “The private sector is against the introduction of CGT as it may lead to losses incurred in the sale of assets. CGT is also an extremely difficult tax to administer and if properly done CGT does not significantly raise extra revenue for government” notes BE.

Furthermore, on the issue of the Commissioner-General (CG) locking up business premises because of the failure to remit the tax to the CG. BE has vehemently opposed that stating that the punishment is detrimental and an impairment to the survival of businesses, particularly MSMEs, who are likely to miss certain compliance requirements due to a lack of capacity to comply. Concerning foreign taxable income for a resident who conducts business within and outside Eswatini, and when a resident company has income sourced both within and outside Eswatini; BE notes that the country is not ready for worldwide tax, as such will act as a scarecrow to foreign investors. Further, the institution notes that to avoid double taxation, vigilance in the administration associated with collecting foreign taxable income for residents and businesses will be costly, and the administration of the collection process might waste taxpayers’ money. On a positive note, BE has welcomed the government’s proposal of reducing corporate tax from 27.5 to 25%. BE believes this proposed change will encourage investment in the country.

Summary of Initial Observations by BE on Income Tax Amendment Bill of 2022

A presumptive tax based on turnover, payable by a person registered as a small business taxpayer and qualification criteria (Section 6, Third Schedule Part IV and Sixth Schedule in its entirety)	The E500,000 qualification criterion is too low. Businesses with a sales turnover of E1 million can still be considered small. We propose a review of this threshold with the view to increasing it. Moreover, the definition must be aligned to the MSME policy to avoid multiple definitions for what is considered to be a small business.
Tax concessions for a development enterprise – determined by the Minister of Finance, and nomination criteria – tax rate to be 10% for such for a period of 10 years (Section 69 and Seventh Schedule)	The concessions are welcome as long as they will improve the competitiveness of development industries that are important for economic growth and employment. To avoid arbitrarily, the term ‘enterprise’ must be replaced with ‘industry’ and the process for such must be defined so as to afford fairness.
Unilateral relief of double taxation for residents on income for a resident of Eswatini or person who accrues income from a foreign country (Section 8 bis)	This is a great initiative to avoid double taxation for residents who work outside the country.
An amount paid by a company to a shareholder for personal use by way of a loan will count as taxation included on the shareholder’s yearly taxable income (Section 11)	It seems unnecessary. The personal loan is not an income as the amount will be returned/paid back to the business.
Foreign taxable income for a resident person who conducts business within and outside Eswatini, and when a resident company has income sourced both within and outside Eswatini (Section 13 and 25)	To avoid double taxation, vigilance in the administration associated with collecting foreign taxable income for residents and businesses will be costly. Administration of the collection process might waste taxpayers’ money. Are our systems as a country mature enough? We believe this country is not ready for worldwide tax as such will act as a scarecrow to foreign investors.
The loss of business income of an individual taxpayer shall not be deducted against other income of the taxpayer, but shall be carried forward and deducted in determining the taxable business income in subsequent years of assessment; similar to property income, manufacturing income, and a company, and farming income; Assessed loss exhausted within three consecutive years of assessment. – assessed loss in the maintenance of a timber plantation shall be carried forward until such time as the timber reaches maturity; For an orchard, such assessed loss shall be carried forward until it becomes productive (Section 14 quin)	We request clarity from the Ministry on the rationale behind the inclusion of the specified two sectors of orchard and timber. The question is – what about the other sectors which also reach maturity or productivity years later?
Yearly taxation on Long-term contracts: this will be annually based on the percentage of the amount completed in that year (Section 20 tier)	What necessitates the collection from contracts?
The tax levy for persons considered ordinarily residents of Eswatini for interest derived from society shares from a financial institution, unit trust company, building society, or mutual loan society and obligation to withhold such lies with the paying person/institution (Section 32C	We are of the view that the obligation remains with the receiver/taxpayer that is when filing their returns, which is in line with voluntary compliance.
A penalty of up to E250,000 per day for withheld tax after failing to submit a return, electronically or alternatively in cases where the system is down (Section 33) Increased penalties for failure to comply with relevant sections of the Income Tax Order (Section 34 ter, 35, 37, 38, 40)	The penalties are too steep. Moreover, procedural application of the provisions on penalties must be implemented with caution as many businesses have been forced to incur huge losses and close as a result. Before any extreme and unilateral measures are taken in the form of penalties by ERS, the newly formed Tax Tribunal should have first meditated on the matter rather than resorting to measures that have caused domestic businesses to shut down.
Capital Gains Tax – levied on gains from the disposal of business assets (Section 32 G, Division X under Part III)	The private sector is against the introduction of capital gains tax, as it may lead to losses incurred in the sale of assets. CGT is an extremely difficult tax to administer and if properly done CGT does not raise significantly extra revenue for Government.
Duties of a receiver on payable tax levied on assets received by that person (Section 49 bis)	We seek clarity on the rationale behind this aspect.
Failure to remit the tax to the CG, the CG may lock up the business premises, after which the goods in the premises shall be attached to and at the disposal of the CG. The CG may sell the immovable or movable property to recover the tax. (Section 50 bis)	The punishment is detrimental and an impairment to the survival of businesses, particularly MSMEs who are most likely to ‘miss’ certain compliance requirements due to a lack of capacity to comply.
Dissatisfaction with the decisions of the CG may be appealed to the Revenue Appeals Tribunal (Section 54)	This provision is in alignment with the Revenue Appeals Tribunal Act 2019, it is welcome as it will fast-track resolution of issues.
Allowing the CG to issue a binding general ruling for a tax period, definitely or indefinitely (Section 66 quin)	We believe tax collection should be guided by law. However, in exceptional circumstances such as COVID-19, the CG may offer relief to taxpayers. The way in which this provision is stipulated poses danger to be used in an unfair manner which can result in unpredictability in the tax landscape for businesses, which may hamper investment.
Supremacy of the Income Tax Order in instances where it is inconsistent with other laws prescribing a tax rate or exemption. (Section 69 quin)	This gives too much power to the Commissioner-General.