For most quarters of society, Statutory Instrument (S.I) Number 125 of 2020 known as The Value Added Tax (Zero-Rating) (Amendment)Order, 2020 was a good move by the Government. As it meant that the cost of the fuel pump price was going to be maintained. Indeed, and rightly so because zero rating means that the Value Added Tax (VAT) is charged at 0%, therefore, consumers would not be paying any VAT on fuel. Additionally, and most importantly, price stability of the fuel could be achieved despite exchange rate depreciation and increased fuel prices on the world market.
The Government used the removal of VAT from the fuel cost structure as an olive branch to society instead of increasing the fuel pump price in an inevitably high-cost environment. As demonstrated by the Energy Regulation Board (ERB) in the letter to the Oil Marketing Companies (OMCs) of 4th January 2021, the cost buildup showed that had the VAT component not been removed, the prices of fuel were going to increase roughly by the current price plus an added 16%.
Good as this may be, the catch twenty-two here is that, before the removal of the VAT cost, 90% of the VAT paid on diesel could be claimed as input VAT. But since VAT will no longer be charged, businesses can no longer claim the input VAT. Of course, this is a reasonable expectation, however, it has unintended consequences. The fact that the removal of VAT has had no knock off effect on the pump prices means that manufacturers will be paying more than they were previously paying before S.I No 125 and fuel has effectively become more expensive for them.
To exemplify what this means and for arguments sake we take the diesel price to be K15. Previously, 90% of the VAT paid on fuel could be claimed back. Meaning that instead of buying diesel at K15, manufacturers using diesel as an input, could claim back the input costs on diesel of roughly just over K1 and were in effect paying for the diesel in the range of K13.5 to K14.
Where then has the VAT that could have been relieved on the price of diesel gone to? Clearly, the price of fuel was inevitably going to increase given the high depreciation of the Zambian Kwacha against over convertible currencies. Thus, in an effort to maintain price stability the Government gave up its right to receive VAT income in its coffers and this has been passed on to other players in the value chain.
Initially, when VAT was removed, the wholesale price per 1000 litres of fuel was higher across the board. But with the rescinded policy decision effected on 14th January 2021, the price reduction on the OMC wholesale price saw major adjustments on the margins to the OMC’s which increased by K694, as well as to dealers with an increment of K421 and the Strategic Reserve Fund receiving between K660 and K976 all per 1000 litres depending on the fuel type.
To top this, the Government went further ahead through S.I No 5 of 2021 to suspend excise duty on diesel for a period of 6 months. The letter to the OMC’s of 4th January 2021 denotes that excise duty per 1000 litres of diesel amounted to K660 for both Diesel and Low Sulphur Gas Oil. This was further usurped by the revised cost margins to OMC’s, dealers and the Strategic Reserve Fund.
With the removal of the costs of excise duty and VAT that are ordinarily paid by consumers, the expectation was that at the minimum, the K660 per 1000 litres or at least K0.66 per litre paid as excise duty would be the benefit passed on to the consumer. This cost reduction would have helped offset, to a larger extent, the K1 or so that was claimed back especially by manufacturers and all those that would claim the 90% of the diesel input cost.
In the absence of this price reduction, S.I No 125 of 2020 has effectively increased the cost of fuel such that without the VAT claim, the price of K14 that manufactures used to pay is now K15. This in effect means an increase of about 15% in the diesel cost. Surely, we all know that when the price of diesel goes up, the cost of manufacturing will also inevitably go up.
Some manufacturing establishments have already indicated that their pricing structures will change, or they may have to cut other costs in the short to medium term as they figure out how to navigate this fuel increase. The easiest cost at this moment is labour, which becomes an easy scapegoat with COVID-19. Nonetheless, if the Government wants to avert such a situation the best would be to pass on the benefit of the removal of tax that consumers used pay, to the very consumers of fuel by reducing the fuel pump price.
The author is the Chief Executive Officer of the Zambia Association of Manufacturers.
