Botswana’s central bank has urged the government to overhaul the southern African nation’s tax regime and prepare the economy for declining contributions from diamonds.
Botswana relies on the gemstones for almost a fifth of its gross domestic product and used the revenue generated from sales to transform the nation from an economic backwater into one of the continent’s wealthiest societies. However, their role is set to diminish over the next 20 years and successive governments have struggled to diversify the economy.
Although the government has been able to finance most investment projects from diamond sales, “there is recognition that growth in diamond revenues has plateaued and might recede in the future,” the Bank of Botswana said in a study published Friday as part of its annual report. “It is thus important to explore alternative and sustainable sources of financing for public infrastructure.”
Specific tax reforms include removing widespread exemptions on value-added tax and investor concessions, the bank said. “We have recommended the expansion of the tax base through, among others, reducing the number of VAT-exempted items and replacing these with targeted social transfers,” said Tshokologo Kganetsano, director of research and financial stability.
Botswana has VAT exemptions on a range of items including agriculture inputs, basic food items and medicine. It also has several long-standing tax concessions for investors, including the International Financial Services framework that provides for a 15 percent corporate tax rate, rather than the standard 22 percent, and conditional exemptions on capital gains tax, withholding tax and other rates.
“Research on investment incentives suggests that tax concessions are often of little value in attracting genuine long-term investment,” the bank said. “Investment tax credits or accelerated depreciation allowances are preferable and more effective.”