Covid-19 impact on VAT system

The financial support measures implemented to assist the vulnerable, businesses to alleviate the impact on the economy, enforcing travel bans, both internationally and locally, emphasising social distancing, quarantine and self-isolation are noteworthy measures being implemented by governments to support economies to recover post pandemic and control the spread of the Covid-19 virus.

Namibia followed suit by introducing policies immediately following the declaration of a state of emergency.

These policies are classified into direct financial support (such as payments to the vulnerable, enhanced budgetary assistance to the ministry of health and social services) and indirect support (such as regulations issued by the Bank of Namibia to allow for debt holidays by commercial banks).

This article aims to highlight what the pandemic and its impact means to businesses from a value-added tax (VAT) perspective.

The impact on the VAT system in Namibia can be grouped into the following categories:

Reduction in turnover

Businesses that reflected positive sales prior to the crisis, may record fewer sales, which means lower output tax payable to Inland Revenue, resulting in a reduction in tax revenue for government.

Notwithstanding this, business fixed expenses remain the same, like rental expense, implying input tax will be claimed as before; meaning that government will receive less revenue while VAT refund claims accumulate.

With the current strict audit of all VAT refunds by Inland Revenue, the cash-flow of businesses was already and will further be put under severe strain.

Default by customers

VAT must be accounted for in the tax period a supply was made, i.e. at the earliest of when a tax invoice is issued or when payment received. Where payment terms have been agreed, payment will only follow after the invoice was issued.

Should a customer default as a result of Covid-19 related reasons, payment will either be made much later or following legal action that enforces payment. This puts payment of output tax by the business under strain as businesses will have to carry the cost of the output tax whilst awaiting payment terms to be adhered to, creating a further impact on the cash-flow of the business.

VAT return filing, payment due dates

Businesses having a high or aged debtor book result in the need to have extended VAT return payment due dates whereas the filing due dates can remain the same.

At present no pandemic related VAT relief to this sort has been announced. Taxpayers are however encouraged to engage Inland Revenue on down payment arrangements where the need arise and to make use of the current ITAS tax incentive scheme expiring 30 September 2020.

VAT audits

Although communication and transactions are easier through electronic means, some practical issues arise with the legislation not being effective as well as the social distancing regulations of the pandemic that impact business operations and VAT audit procedures, such as selections to be made and the attendance of audits for selections.

Careful consideration must be given before changing purpose and professional assistance will be wise to address cash-flow issues to mitigate the exposure of the pandemic.

• Chantell Husselmann is the tax leader at PwC Namibia. This series on tax is published bi-monthly on a Monday in Market Watch.