Goods and Services Tax in Sierra Leone, A Decade On: Going Down Memory Lane.
At a critical point in my career, I have come to realise that it is crucial to reflect on some of the key moments that shaped my career, as this is vital for how I chart my work life forward, and a lesson for the younger generation of professionals and the country. As we move into a new decade, Sierra Leone has another opportunity to restart its drive towards economic transformation, which will improve the lives of its citizens. Coincidentally, the implementation of GST in 2010, which I led, coincided with a boom in the economy as a result of the growth of the mining sector from 2010-2013. However, as we match to the 2020s, we as a country need to think about how we can capitalise better on the next big windfall whether it is from extractives, taxes or another event.
As a young professional, I led a significant revenue mobilisation project that changed tax administration in Sierra Leone and has provided for the government billions of Leones used to improve the economy and the lives of Sierra Leoneans. For context, GST collections have grown from Le 246 Billion in 2010 to Le 1.03 Trillion in 2019 and is the second largest revenue source for the government after Income Taxes. Leading the implementation of Goods and Services Tax (GST) is the most exceptional service I have provided to my country and, I am proud of my contribution to national development.
This story reflects on my involvement in the introduction of GST, vital moments during implementation, GSTs has contributed in terms of revenue, and critical policy considerations of the tax.
The Beginning
I still remember how my GST journey started like it was yesterday. I had just passed my final ACCA exams to become a Chartered Accountant when on a hot March afternoon in 2006 the then Deputy Commissioner-General (DCG) of the National Revenue Authority (NRA), Ousman Barrie called me to his office to discuss my future. The NRA was a new organisation that the government formed in 2003 to reform tax administration, taking over from the ineffective and inefficient civil service, and I was part of the first intake of young graduates recruited. During the time I discussed with the DCG, the organisation was implementing its first big reform project supported by the United Kingdom's Department for International Development (DfID) and wanted younger, fresh thinking, and innovative staff to lead the various projects that were being implemented. In my short time at the tax authority, I had some experience in implementing a new project as I played a leading role when the NRA took over the collection of Non-Tax Revenues from Government Ministries, Departments and Agencies (MDAs). As a 26-year-old that had just finished a professional course and had been part of a project at the authority, I guess I fit the bill.
During our discussion, Ousman Barrie sketched on a piece of paper (wished I had kept that piece of paper as it was a significant part of my career journey) two different career routes for me -
taking charge of the implementation of Value Added Tax (VAT) - same as GST, or leading the new Capital Gains Tax/Rent Project. I jumped at the VAT Project for four reasons: (1) it was a new tax for Sierra Leone, (2) excited about learning a new concept, (3) the challenge of successfully implementing a tax project, and (4) being part of VAT history, as I will be a member of a unique club of persons that had been in charge of implementing the tax worldwide.
In the next week, I was transferred to lead the VAT project and to work closely with Crown Agents, an international consultancy firm that was chosen by DfID to assist the NRA on its reform agenda. I worked directly with Crown Agents' Team Leader, George Blankson (Ghana Revenue Authority's first Commissioner-General) on the project. George later became my mentor and had the most significant impact on my career.
Implementing GST
GST was replacing seven taxes - Restaurant & Food Tax, Entertainment Tax, Domestic Sales Tax, Professional Services Tax, Hotel Accommodation Tax, Import Sales Tax and Messages Tax. Working with Crown Agents (CA) in the first few months of the project, we had a few priority issues to address. Firstly, we needed to form an implementation team to work with all the short and long term CA consultants, build a governance structure that will oversee the implementation of the project, and design an implementation plan that will guide the implementation process. The aim was to keep the implementation team as small as possible, and when we recruited internally, we were lucky to have two great people to work with us on the project - James Tengbeh (now Assistant Commissioner of Audit at NRA) and Kenei Kangbai. James was the first person to join the team and, throughout the implementation, both of us worked closely with CA consultants, sometimes till late in the evenings in building systems, designing tax policy, drafting the GST law, designing the publicity plan and engaging stakeholders.
Regarding the governance structure, the project team decided to form a Project VAT Oversight Committee later renamed Project GST Oversight Committee (PGOC) to oversee the project. About that name change. At the start of the project, the tax was called Value Added Tax but was later changed to Goods and Services Tax when the then Minister of Finance, John Benjamin suggested we rename the tax GST as it will be easier for citizens to understand the new tax and aid communication in our local languages. The PGOC had five (5) thematic areas: Policy; Legislation; Publicity & Tax Education; Information, Communication & Technology; and Human Resource Management. The PGOC was chaired by the Commissioner-General Dr John Karimu and Co-Chaired by Ousman Barrie, the DCG and the Crown Agents Team Leader, George Blankson. The plan was to make the PGOC very inclusive as we recognised the importance of the private sector. Therefore, private sector players including the Chamber of Commerce, Sierra Leone Indigenous Business Association and the Institute of Chartered Accountants of Sierra Leone were members, and the public sector was represented by NRA, Ministry of Finance and Ministry of Trade. The PGOC's thematic areas reported to the main PGOC and were first tasked with designing an implementation plan for the project.
With the governance structure, implementation plan and project team in place, we were primed to move things forward. In subsequent years, the project engaged in the following activities:
⁃ Policy Decisions. A vital step in implementing a new tax is to get the policy decisions right. The policy decisions determine how the tax is structured and the impact the tax will have on citizens, businesses, the economy and tax revenue. The policy options eventually feed into the tax law. In the first few months of the GST Implementation Project, the PGOC had to decide on various aspects of the new tax, e.g. the tax rate, the type of exemptions, the GST threshold, the appeals process, the penalty structure etc. The PGOC decided on using a rigorous process of analysing each policy option in terms of its impact on the economy, the revenue yield, and its application in other African countries. The project team worked with the Revenue and Tax Policy Division of the Ministry of Finance to develop three policy papers for the Minister of Finance, which formed the basis of the Draft GST Bill.
⁃ Creating the GST Administration Unit. The new tax needed a home as the PGOC decided that it will be a separate unit until the tax stabilised. Since GST was a new tax, we followed international trends in structuring the new unit. The new GST Administration Unit was structured along operational functional lines of Tax Registration & Services, Returns & Payments Processing, Audit and Enforcement; with a separate policy unit. The two other tax departments of Income Tax and Customs & Excise were structured differently along tax types lines but eventually changed to functional lines to reflect international best practice.
After getting Board approval to form the GST Administration Unit, we then proceeded in recruiting a brilliant group of staff that continue to make a positive impact on the organisation. These staff were trained in collaboration with Crown Agents.
⁃ Nationwide Publicity and Tax Education. Lessons learnt from other countries that had implemented VAT/GST including Ghana, made it imperative to execute a very robust publicity campaign to ensure that all the relevant stakeholders including the government, private sector and citizens understood the complexities of the new tax. As we embarked on the nationwide publicity exercise, we made presentations to the cabinet with the President, Ernest Bai Koroma present, Parliamentarians, Government MDAs and Local Councils. We also organised workshops for universities and colleges, holding engaging discussions on the campuses of Njala University, Fourah Bay College and the Institute of Public Administration and Management.
VAT/ GST had been implemented in over one hundred (100) countries before Sierra Leone implemented its own GST. Implementations had failed when the education of taxpayers was not made a priority; therefore, we were determined not to make that mistake. Registered taxpayers are critical stakeholders in the GST administration process as they charge the tax on behalf of the government and remit monthly. To ensure businesses were ready for the tax, we implemented two approaches – workshops with business groups and one-on-one education of all taxpayers that we registered for the tax. Those
interactions were exciting as it was the first time the tax authority had actively engaged taxpayers for a tax handle. I still remember an interaction with a business group up in a high building at their headquarter in the central business district of Freetown when the discussions got so heated that James Tengbeh and I joked after that we thought they were about to throw us off the roof.
In addition to the interactions with all the relevant players, we were present in the media all the time having discussions on radio and TV, and up to this day, I cherish those discussions which were sometimes held at night. We also designed and distributed tax information leaflets and brochures, erected billboards and regularly engaged taxpayers at roadside tax clinics in business districts.
⁃ Enactment of the GST Act 2009. The story of enacting the GST Bill into law is one of the most excellent shows of political harmony I have seen in Sierra Leone. The Tejan-Kabbah government started the implementation of GST in 2006, but the implementation didn’t take place until after a new government was in power. When Parliament was debating the new law, both sides of the political aisle were very supportive of the new tax law. During informal interactions with Members of Parliament, I found it very encouraging that all the MPs interacted very well and friendly, including eating together. Honourable Chernor Bah, Head of the Legislative Committee at the time, was very instrumental in assisting the implementation team in navigating the legislative process in Parliament.
The enactment of the GST law is an excellent example of how leaders from both sides of the political divide can come together for national development, more of which is needed now.
⁃ Registering taxpayers and stock takes. For the tax to operate appropriately, we had to register businesses that had met the GST registration threshold of Le200 Million (approximately US$50,000 at the time). We deployed teams nationwide to undertake the registration of taxpayers. I still remember that we had to revise our registration strategy several times to tackle the challenges we met on the ground.
In addition to registering taxpayers, GST staff also verified the stock of goods for all goods resellers. The objective of the stocktake was to determine the amount of tax credit taxpayers were eligible for when the tax became operational.
⁃ Implementing an Automation System. Tax administration in Sierra Leone had purely been manual, as the tax authority kept taxpayers’ information in files. We wanted to change that as the tax world was moving digital. To support this initiative, Crown Agents allowed us to use the VAT Information Processing System (VIPS) they had developed and used in several African countries. VIPS which is still in use, enables the tax authority to record tax return and payment information.
The First Days of the New Tax
The start date for the tax was slated for 1st September 2009. However, in July 2009, the business community complained to top government that they were not ready for the new tax regarding the operation of the tax and how it will affect their businesses. To ensure the smooth implementation of the tax as the business community is a vital stakeholder, the government agreed to postpone the tax to the new year.
By November 2009, we were thick into the implementation of the tax and the rigours of the job was having a toll on my health. I had to be admitted to the hospital for a week as I was drained from all the travelling nationwide, engagement with the business community and managing the whole project. The lesson learnt from that episode was that no matter how challenging the job is, you must find time to rest, unwind and take care of your health.
In the first weekend of 2010, we were thick into the Christmas and New Year celebrations which are usually very entertaining and hectic in Sierra Leone, when we were summoned to the house of the then Financial Secretary - Edmund Koroma, to discuss the imminent start of the tax on the 4th of January 2010 (the first working day of the year). There were rumours that the business community would strike and prices for goods and services will increase by 15% (the GST rate). We needed a strategy as the government was determined for the tax to go ahead.
It was Monday 4th January 2010, and there was chaos on the streets of Freetown as the business community closed their shops and business houses were protesting the new tax. Most businesses had increased their prices by 15% as rumoured, and that wasn't the plan. In the transitional provisions of the new GST Act 2009, businesses could claim Sales Tax on all the goods they had in stock (the reason for the stocktake). But the problem was that businesses hadn't paid Sales Tax for most of the goods they had in stock.
We needed to find a solution and had to involve top government. The President, Ernest Bai Koroma was not in town; therefore, the Vice President, Samuel Sam-Sumana, had to deal with the issue. The message from the President was explicit, and the tax should go ahead. By the end of the 4th January 2010, the Vice President had convened a meeting with government officials including the then Minister of Finance, Dr Samura Kamara and business community leaders to give them the message that there is political will for the new tax and the tax will be implemented. To ensure that prices were not increased by 15%, businesses were allowed to claim Sales Tax on the goods they had in stock.
In the next few weeks after implementation, the GST team continued to actively engage businesses to ensure they understood how to calculate the tax, the records that should be maintained and how to complete a GST return.
Policy Considerations
Over the years, the GST Act 2009 has been amended several times by various Finance Acts to reflect current business trends, shore up revenue for the government and clarify provisions for taxpayers. However, to improve the operation of GST in Sierra Leone and help businesses grow, the various policy considerations should be considered to help improve the operation of the tax which will enhance the business climate and also to ensure our GST legislation is in line with global trends in taxation.
1. GST Threshold. The GST threshold determines the businesses that are registered to administer the tax, as taxpayers that have a turnover equal or above the GST threshold should register for GST. The current GST threshold is Le 350 Million (approximately US$ 35,000), which is much lower than the GST threshold set in 2010 of Le 200 Million (about US$ 50,000 at that time). The primary purpose of placing a relatively high GST threshold is only to register businesses that can properly administer the tax. GST thresholds are usually revised or set high to reduce the compliance cost of SMEs in accounting for the tax in terms of record-keeping, return filing and other legal requirements. Accounting for GST limits the productivity and growth of SMEs, as they could spend the money used to account for the tax to grow their businesses leading to an improvement in the economy. A high GST threshold is also beneficial to the tax authority as administrative and overhead costs are reduced in dealing with a relatively high number of taxpayers that pay little or no GST. NRA will be able to concentrate on improving the tax efficiency for GST and other
taxes. There will be fears at the NRA that a high GST threshold will encourage businesses to suppress their sales to stay out of the GST net. However, NRA can improve compliance with the GST threshold when their Integrated Tax Administration System (ITAS) is introduced.
2. Reducing the GST Rate. The GST rate was set at 15% to mirror the main tax it was replacing, i.e. Sales Tax, and ensure that there were little revenue implications at the start of the tax. However, after ten years of the tax, a rate reduction should be considered. Since the introduction of GST in Sierra Leone in 2010, virtually everyone became a taxpayer as citizens whether in employment or not pay GST when they consume goods and services. Income Taxes are usually designed to be progressive as citizens that earn higher income pay more income taxes than low-income earners. In most cases and in Sierra Leone, our GST is regressive as low-income earners pay a much higher percentage of their income in GST compared to top income earners. Therefore, to reduce the tax burden on low-income earners in Sierra Leone, a reduction in the GST rate should be considered. Additionally, research has shown that a reduced VAT rate could boost domestic consumption as citizens will have more money to spend, which will help stimulate an economy.
3. Input Tax restrictions. The critical difference between Sales Tax (the main tax GST replaced) and GST is that GST allows taxpayers to claim input tax for purchases that relate to their taxable supplies. GST is a consumption tax paid by the end-user (customer); therefore, the burden of the tax should not rest on businesses as they should be able to claim GST paid to make taxable supplies. The overarching purpose of a VAT is to impose a broad-based tax on consumption, which is understood to mean final consumption by households. The original GST Act 2009 allowed businesses to claim input tax with no limits on the timeframe to reclaim tax credits as this was in line with good international practice. Section 13 of the Finance Act 2015 changed that and placed a timeline of three years within which a business can claim input tax. This provision which amends Section 41 of the GST Act 2009 should be reversed to the original provision which doesn’t place a limit on when input tax could be claimed. Allowing input tax claims is one of the fundamental principles of a VAT/GST system; therefore, restricting it affects the operation of a business which may result in losses.
4. Paying GST Cash Refunds. Sierra Leone, like many countries, use the invoice-credit method of VAT/GST, wherein a GST registered business charges GST for supplies to the purchaser. The purchaser can claim that input tax paid on purchases against the GST charged on its sales (output tax), remitting the balance to the NRA. If the input tax is more than the output tax for that tax period, the NRA will owe the taxpayer. When we were designing the GST mechanism, we feared that taxpayers would defraud the system by overclaiming input tax, and the government was not ready to pay cash refunds to taxpayers. Only exporters that met a certain threshold were allowed cash refunds, although no cash refund has been paid to date. However, with a more robust monitoring
and risk management system, the NRA should consider paying eligible cash refunds to taxpayers.
5. Introducing GST on imported electronic services. We are in the digital age where digital multinationals such as Apple and Netflix easily provide e-services to Sierra Leoneans without paying taxes in Sierra Leone. There is currently a global debate facilitated by the OECD on how to tax multinationals that have a digital presence in countries with no or very little physical presence. It is hoped that by the end of 2020, there will be a global consensus on allocating taxing rights to countries where non-resident enterprises create sufficient physical presence in that country. Some countries like South Africa are not waiting for a global consensus and have started implementing unilateral approaches as they now levy VAT on e-services by requiring non-resident suppliers of electronic services to register and account for VAT on supplies made to South African residents. Sierra Leone should also consider such an approach as that will expand the tax base and reduce some burden on local businesses.
6. Reviewing Filing Return Frequency for Small and Medium Taxpayers. Currently, the tax period for GST is one month; therefore, all GST registered businesses are required to file and pay GST monthly. Since a majority of GST revenue comes from large taxpayers, tax policymakers should consider increasing the tax period for small and medium taxpayers to a quarter. The key advantages of such a move are that SMEs will have better cash flow which they can use to grow their businesses; compliance costs for businesses will reduce as they will now have to report for GST four times instead of twelve; NRA’s compliance cost will decrease as they have to process fewer returns and payment; and Sierra Leone’s World Bank Doing Business Ranking may improve as reporting time for GST will reduce.
Although the above points have validity and are implementable, tax policymakers should adequately analyse the merits of each of them to ensure that they benefit both the country and particularly the private sector.
Conclusion
VAT/GST is a core tax, and Sierra Leone is among the 166 plus countries that have a VAT/GST system. Tax policy plays a vital role in the development of any economy. Therefore, our GST system should be used to stimulate growth as the two main objectives of the tax is to collect revenue and improve the business climate as taxpayers can claim input tax credits
