Lesotho's Honorable Minister of Finance, Dr Moeketsi Majoro, said in his budget speech of 28 February 2018 that the 2018/19 budget will move the country forward if all is implemented as planned. One of the major proposals is a Value Added Tax (VAT) rate increase to 15% to align with South Africa's proposed VAT rate increase.¹ Generally, after the budget has been presented to Parliament, it goes to the relevant parliamentary committees where it will be discussed in detail. This process is currently in progress and it is our understanding that the proposed VAT rate increase has been given two weeks to be discussed. If approved by Parliament, the proposed increase will be effective from 1 April 2018.

A VAT rate increase in Lesotho will likely create certain challenges for many vendors. In light of the short time frame before the rate increase, VAT vendors have a limited number of days to prepare.

Such a rate increase would have a major administrative impact and vendors would in the short term need to assess the impact and make the necessary changes. The most important changes that need to be considered are:

• Changes to:
  • Accounting systems, including considering new tax codes
  • Tax invoices, debit and credit notes
  • Product labelling and price lists
• Impact on:
  • Planned marketing campaigns
  • Internal processes (i.e., update internal tools)
  • Process to account for VAT on imported services and goods
  • Existing contracts
  • Fixed property transactions
  • VAT treatment of consignment stock and lay-buys
  • VAT treatment of vouchers
  • Connected party transactions
  • Agent-principal agreements
  • Self-invoicing arrangements
  • Change in use of goods or services
  • VAT rounding
• Treatment of:
  • Returns, discounts, rebates and bad debt in respect of pre-1 April 2018 transactions
  • Advance payments and invoicing
• Process and controls to ensure that:
  • Pre-1 April 2018 AP invoices are posted at correct VAT rate
  • Post-1 April 2018 AP invoices are posted at the correct VAT rate as displayed on the invoice
• VAT treatment of supplies that span the effective date of the increase, such as rental agreements, insurance contracts, cleaning contracts, building contracts, security services and subscription services. In certain cases an apportionment of services rendered pre- and post-1 April 2018 may be required
• Invoicing of goods or services delivered pre-1 April 2018 on or before 31 March 2018 to avoid adjustments after that date
• Retailers should consider displaying a notice that prices will be adjusted at point of payment
• Need for internal training

It is also proposed that VAT rates on telecommunications and electricity, which presently stand at 5% will gradually align to the unitary rate of 15%. The rates will be increased by 4% for telecommunications and 3% for electricity.

Furthermore, even small businesses not registered for VAT or businesses making exempt supplies such as financial institutions in Lesotho, would need to consider the impact of the rate increase on their expenses. These businesses may increase their prices to cover the additional costs that they will incur.

Other proposed amendments in the 2018 budget include:

• The Lesotho Revenue Authority (LRA) will introduce a reverse charge mechanism to tax imported services
• The Government is introducing the Voluntary Disclosure Program which is estimated to yield M225 million in additional revenue
• The LRA will also enhance tax administration measures, targeting improved compliance by major tax contributors. This is expected to yield an additional M350 million
• A small business taxation regime is being introduced to simplify and improve tax compliance
• A mining tax regime will be reviewed to address windfall taxation
• Fringe benefit taxation will be reviewed to expand its base and compliance
• All ministries, departments and agencies should review and set new rates for all non-tax revenues under their control
• The Government will, as soon as practicable, introduce the Government Lottery under the Lotteries Act 1975; the legislation will be modernized in tandem with the operation of the Lottery
• The Government will study the introduction of levies on alcohol and tobacco and will consider their introduction at a future time

The impact of these proposed amendments will have to be considered and hopefully the relevant institutions in Lesotho and the public will be provided an opportunity to comment on these proposed tax amendments prior to parliamentary action.

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ENDNOTE

¹ See EY Global Tax Alert, South Africa's VAT rate to increase from 1 April 2018, dated 26 February 2018.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young Advisory Services (Pty) Ltd, Bloemfontein

• Emile du Toit
  emile.dutoit@za.ey.com

Ernst & Young Advisory Services (Pty) Ltd., Africa ITS Leader, Johannesburg

• Marius Leivestad
  marius.leivestad@za.ey.com

Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London

• Rendani Neluvhalani
  rendani.mabel.neluvhalani@uk.ey.com
• Byron Thomas
  bthomas4@uk.ey.com

Ernst & Young LLP, Pan African Tax Desk, New York

• Silke Mattern
  silke.mattern@ey.com
• Dele A. Olaogun
  dele.olaogun@ey.com
• Jacob Shipalane
  jacob.shipalane1@ey.com

Ernst & Young LLP, Pan African Tax Desk, Houston

• Elvis Ngwa
  elvis.ngwa@ey.com

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ATTACHMENT

PDF version of this Tax Alert