First National Bank economist Martin Mwinga told The Namibian that Government plans for bringing back the luxury tax were aimed at generating more State revenue.

But, he said, economic realism dictated that consumer spending patterns could either shift or impose an extra burden on consumptive borrowing.

Mwinga said those with excess disposable income could find the going getting tougher and take their money elsewhere.

On the other hand, higher prices could result in money for other activities being used to finance the extra cost of luxuries.

The higher cost of luxury goods would inevitably trigger an inflation upturn, he said.

"There are fears that the reintroduction of VAT on luxury goods could lead to prices going up, hence pushing inflation up.

Certainly the consumer spending patterns can shift but studies to date have shown that they will not," said Mwinga.

In extreme cases, people are expected to borrow to finance luxury purchases because of the current low interest rates.

Given that most luxury goods in Namibia are imported, an outflow of capital is anticipated.

As a result foreign currency could be lost to other countries in a bid to meet the import bill.

Mwinga said some companies, notably those specialising in luxury cars and other high-end goods, could suffer reduced business, which might lead to staff layoffs.

VAT on luxury goods, scrapped in 2002, covered items such as vehicles costing more than N$200 000, audio and video equipment, cosmetics, leather products and jewellery.

While the rate stood at 30 per cent in 2002, this time Government intends to set it at 25 per cent.

The standard VAT rate in Namibia is 15 per cent.

In its analysis of the VAT impact, the Namibian Economic Policy and Research Unit (Nepru) said the efficiency of the reintroduction depended on how Government would use revenue raised from such activities.

"The other efficiency issue is how the tax will impact on prices and demand," Nepru said.

"Since those who use a share of their income to buy luxury products will have less to spend on other commodities, the tax will cause a reduction in demand from the same consumers in other sectors."

Nepru researchers said if the additional revenue was used for domestic consumption purposes, for example lowering the marginal tax on small individual incomes or contributing towards funding a basic income grant, the level of domestic demand could be sustained.

To ensure efficiency of taxation, Government was urged to levy taxes in a way that does not alter economic behaviour.

Therefore, the luxury VAT ought to be targeted at imported luxury goods with a price-independent demand to avoid negative effects on domestic industries.

Moreover, how Government spends the extra tax income should be checked so that the total demand for domestically produced goods was not reduced.

In that regard, said Nepru, it was vital that the luxury tax should be designed in a simple way to avoid the creation of loopholes and incentives for tax evasion.

Local News Headlines Of The Last 48 Hours

•  City Council takes back B1 City plot
•  Jacobs corruption probe not yet finished
•  Roessing pushing for 2030
•  Lawyer issue delays cop's trial
•  N$400m waterfront project to start soon
•  De-mining in Angola speeds up
•  Community service a viable alternative to prison: Minister
•  Gazza, The Dogg to share stage
•  Parastatal confirms financial squeeze
•  No action against cops in elephant case
•  SA police seize truck, impound cigarettes from Nam
•  SA heavyweights on bench for Teek appeal
•  Govt newspaper tender re-advertised
•  Damara chiefs to discuss differences
•  Murdered woman found at Rehoboth
•  Warden in court over fuel
•  Swakop is IT, says television producer
•  New conservancy launched in Caprivi
•  Rape, murder, robbery mark long weekend
•  Enviro magazine on way
•  By-election date announced
•  Insurers 'bleeding the common man'
•  TransNamib in dire straits