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Concerns about new luxury tax

Concerns about new luxury tax

THE Namibian Economic Policy and Research Unit (Nepru) has expressed reservations about plans by Government to reintroduce Value Added Tax (VAT) on luxury goods.

In its latest Quarterly Economic Review, Nepru says it is critical that the reintroduction of such a tax should not negatively affect economic growth. 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 around Government intends to set it at 25 per cent for yet to be specified items.The standard VAT rate in Namibia is 15 per cent.Nepru says taxation inefficiencies normally stem from the effects of taxes altering people’s economic decisions.”A tax on capital, for example, discourages productive investments since the return needs to be higher to be able to secure an acceptable rent in addition to paying the share in tax.”Hence this tax is inefficient since it encourages the use of funds for consumption purposes and hence lowers economic growth,” the research house explains.On another hand, tax levied on the top segment of accommodation tends to be very efficient since most of the people who can afford such housing will always buy the same property types irrespective of such a tax.Usually the demand for luxury products purchased by the rich is little affected by price changes.For example, if the luxury tax were to target such items as diamond necklaces, Rolex watches and BMW cars, efficiency would be maximised.But there is a fear that the reintroduction of luxury tax could impact negatively on demand for other commodities, not necessarily luxury products.”The other efficiency issue is how the tax will impact on prices and demand,” Nepru says.”Since those who use a share of our 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.”The total effect on consumer demand depends on how Government spends the extra tax income, the report states.If the additional revenue is 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 secure efficiency of taxation, Nepru researchers urged the Government 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 is 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.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 around Government intends to set it at 25 per cent for yet to be specified items.The standard VAT rate in Namibia is 15 per cent.Nepru says taxation inefficiencies normally stem from the effects of taxes altering people’s economic decisions.”A tax on capital, for example, discourages productive investments since the return needs to be higher to be able to secure an acceptable rent in addition to paying the share in tax.”Hence this tax is inefficient since it encourages the use of funds for consumption purposes and hence lowers economic growth,” the research house explains.On another hand, tax levied on the top segment of accommodation tends to be very efficient since most of the people who can afford such housing will always buy the same property types irrespective of such a tax. Usually the demand for luxury products purchased by the rich is little affected by price changes.For example, if the luxury tax were to target such items as diamond necklaces, Rolex watches and BMW cars, efficiency would be maximised.But there is a fear that the reintroduction of luxury tax could impact negatively on demand for other commodities, not necessarily luxury products.”The other efficiency issue is how the tax will impact on prices and demand,” Nepru says.”Since those who use a share of our 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.”The total effect on consumer demand depends on how Government spends the extra tax income, the report states.If the additional revenue is 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 secure efficiency of taxation, Nepru researchers urged the Government 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 is 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.

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