Financing and Tax in Botswana (BOTEC INSABA, 2006)

ASSESSMENT OF FINANCING AND TAXATION ASPECTS IN BOTSWANA

  1. Project Financing in Botswana

Project financing relates to SMMEs (small, micro and medium enterprises) soliciting funds from other sources for a planned project undertaking. In most cases the SMMEs rely on financial institutions for financial assistance. In the case of Botswana, these SMMEs have access to private and public/ parastatal institutions from which they can acquire such funds. The key aspect is for an individual/ entrepreneur to solicit information on the various options available to them from which they can choose the option which they feel best addresses their needs, taking into account conditions associated with such funds. In addition they need to fully understand and also be able to explain in definite terms what the project is all about and what it aims to achieve. Below are a number of financial institutions which offer loans to SMMEs for project financing:

Private institutions

a)Barclays Bank of Botswana

b)First National Bank

c)Standard Charted Bank

Private financial institutions offer SMMEs loans from BWP15 000 to BWP40 000[1] and in addition they require the applicant to provide security in the form of an asset. The market interest rate for such loans usually ranges from 15-20%.

Public/ parastatal institutions

a)Citizen Entrepreneurial Development Agency (CEDA): the minimum amount that an SMME can borrow from this institution is BWP500 while the maximum is BWP2 million. In addition this institution does not require any security to process an applicant’s loan.

b)National Development Bank (NDB): NDB provides loans from BWP20 000 to BWP52 million (a range that clearly covers SMMEs) and in addition the bank requires the applicant to make some form of contribution (i.e. 25% of the total project costs or provide the land on which production will take place).

c)Botswana Development Corporation (BDC): BDC does not usually have limits on the amount it lends but just like NDB, it dictates that the applicant makes some contribution. In addition, unlikethe other institutions, BDC prefersto form partnerships with applicantsrather than just handing out the loan.

Given the above conditions and pre-requisites, it would therefore proof advantageous for a small and/or medium entrepreneur who is starting up and does not have any asset to back up their initiative, to apply for a CEDA loan. Otherwise if an entrepreneur feels they have all the requirements that may be put forward by the other institutions (both public and private) they can always approach them. One advantage from private financial institutions is that as long as an entrepreneur meets their pre-set conditions the processing of the loans is faster than the public/ parastatal institutions, for example loans are usually approved in 48hours. Private institutions however, have the disadvantage of high interest rates ????.

It is worth noting thatboth the private and the public institutions have the same requirements and expectations from an SMME. Below is a summary of the expected documents that must accompany an SMME’s application for a loan (all these details need to be in the form of a business plan):

Applicant's Background: Applicant (or Company's) information including name, address, legal status, history and nature of the business.

Management Information: Details of the corporate structure and management setup of the company, including names of the principal shareholders (if any), directors, managers and other key personnel (staff members).

Project Description:Description of the project to be financed, including project plan, all existing and proposed plant, production facilities and their capacities, labour, raw materials and other essential requirements.

Cost estimates:An estimate of the cost of project with breakdown by major items such as land, building, civil works, machinery, ancillary installations, preliminary and pre-operation expenses and working capital.

Market Analysis: Analysis of the market, including an assessment of present and future demand, prices, competition, description of the existing and/or proposed distribution channels in the case of a product.

Operational Plans and Profitability:Information on the planned operation and its estimated profitability, including anticipated sales, selling prices, manufacturing costs and overheads.

Other Relevant Information:Documents such as copies of Memorandum of Agreement and/or Articles of Association, manufacturing licenses, relevant approvals from Government authorities, technical assistance, financial accounts for the last 3 years (if the company has been in operation).

  1. Tax aspects in Botswana

Botswana, like most countries relies to a certain extent on revenues generated from taxes to assist in funding some of its development projects. For instance it is estimated that non-mineral income taxes contributed12.1% to government funds for the financial year 2005/06.Below is a brief explanation of tax aspects including a brief summary on the operations of the overall regulatory body of all tax laws in Botswana; and a brief description of the various taxes in Botswana.

The Botswana Unified Revenue Services (BURS)

Botswana Unified Revenue Services (BURS) is a regulatory parastatal body which is mandated with governing and implementing all tax laws in the country. Specifically, BURS is tasked with executing the following functions:

  • Assess and collect tax revenues on behalf of the Government
  • Administer all revenue (tax) laws
  • Promote compliance with revenue laws
  • Take any measures required to improve service given to tax payers etc.

Botswana has a number of Acts of Parliament which set out regulations that govern the various tax levies in Botswana. These include the following:

  • Income Tax Act
  • Capital Transfer Act
  • Value Added Tax Act
  • Customs and Excise Duty Act

The various acts stipulate specific tax rates to be levied on companies (SMME’s included) and individuals as long as they are above the stipulated thresholds associated with each tax. There are various domestic tax levies but of particular importance to SMMEs is the Value Added Tax (VAT), corporate income tax and personal income tax.

Below is a table depicting the various taxes; their statutory tax rates and the tax base.

Tax / Statutory tax rate / Tax base
Value added tax / 10% / Value added
Corporate income tax / 15% / Taxable income
Company tax / 15% and 5% for non-manufacturing and manufacturing sectors respectively / Taxable income
Personal income tax / Various rates / Taxable salaries

In order for any of the taxes stated above to be applicable, there are special conditions that an SMME has to meet, and some of the conditions are discussed below.

Value Added Tax

VAT is charged at a rate of 10% on most goods and services that an organisation sells/ supplies to other organisations or persons. VAT it therefore a tax that is levied on the consumption of a wide range of goods and services. At the end of each tax period, a business is expected to totalall its output tax collected and deduct from it all the input tax incurred and the net amount is then paid out to the customs and excise unit within the BURS.Businesses that have an annual turnover of less that BWP12 000, 000 are required to submit a return every second month while those with a higher turnovers have to submit monthly returns.

Who is required to register for VAT?

Any person/ company whose taxable supplies for the past period of 12 months are more than BWP250 000 or are expected to exceed BWP250 000 in the next 12 months. This is referred to as compulsory registration. Those below the threshold need not register but they can register if they so wish (voluntary registration).A business/ person will not however be accepted for voluntary registration if:

  • theyhave no fixed place of abode or business
  • theydo not keep proper records
  • theywill not submit returns as required

A person who is liable to register but does not register can be charged a penalty of up to 200% of the tax they should have collected. This is in addition to being liable for the tax as well asthe risk losing theinput tax credit.

A few examples of goods subject to VAT are: food, household appliances, electricity, water, thermal or electrical energy, heat, gas, refrigeration and air conditioning, land and buildings, computers, stationery. Examples of services/ activities that are subject to VAT are: commercial services, electricians, plumbers, builders, and professional services - doctors, accountants, lawyers advertising agencies, intellectual property rights - patents, trademarks, copy rights, know-how and personal rights - restraints of trade provision of cover under an insurance contract.

Private or recreational pursuits or hobbies (unless run as a business) and the services of an employee to an employer are not regarded as a taxable activity. There are also goods and services that are not subject to VAT and quite a significant number of these are those that are provided by Government or those that are considered as essentials e.g. prescription drugs; public medical services; sorghum and maize meal for human consumption.

Company and corporate taxes

Corporate and company taxes are administered through a process called Self Assessment. Through this process the taxpayer is required to make his own assessment which he / she does by submitting a Self Assessment Return form on which they can determine their own taxes. The requirement to Self Assessment Return applies only to taxpayers determined by the Ministry of Finance and Development Planning. Subsequently, self assessment return is usually sent by mail during May of every year for those already registered otherwise they may be collected from BURS. The sequence of the self assessment process is as follows.

  • Determining the assessable income (income arrived at after deducting types of income exempted from the imposition of tax, these may include dividends received by an International Financial Service Centre company)
  • Determining the ‘chargeable income’ from each source
  • Determining the taxable income of the person/ business as a whole, and
  • The application of the tax rates as appropriate

What is of particular importance is determining the ‘chargeable income’ of each source in accordance with the income tax act. For purposes of this process, provisions of the act should be interpreted and applied. The ‘chargeable income’ is determined from assessable income by deducting all expenditures wholly and exclusively incurred in the production of the income. These include: legal expenses in the ordinary operations of the business; as an employer, contributions to approved pension or benefit funds; debts written off; expenditure on scientific research and subscriptions to institutions and universities; approved training expenditures etc.

Determining income for farming activities differs differently from the determination of any other business income. Of particular importance is expenditures i.e. some expenses which would normally be classified as capital expenditure under accounting concepts are permitted as deductions when determining the chargeable income for the year. Such items are sinking of boreholes; planting trees, plantations, orchards and vineyards; erection of buildings for farming operations and erection of fences.

Determining the taxable income is the aggregate of the chargeable income from all sources less the following deductions: Contributions, in cash or in kind to educational organizations and sports bodies approved by the Minister of finance and Development Planning. This deduction is however subject to the following limitations:

  • The donation has to exceed BWP1, 000
  • The amount of the deduction should not exceed one fifth of the aggregate chargeable income

Additional tax relief for business may also be so ordered if such business can promote the development of Botswana’s economy. These include facilities to train and impact skill to Botswana and number of Batswana employed and their capacity.

Tax payable for resident companies consists mainly of the basic company tax, and the rate for a company other than a manufacturing or an international financial services company is 15% of the taxable income. Where the taxable income comprises of manufacturing income and other income, the rate of 5% will be applied on that part of the taxable income attributable to the manufacturing income, and 15% on the other income. Non-resident companies have to pay 25% of their taxable income.

Companies affiliated to the Botswana International Financial Services Centre[2] pay corporate tax of 15% guaranteed until 2020 and in addition these companies are also exempted from (amongst others) the value added tax and the company tax..

Personal income tax

The personal income tax is levied on an individual’s salary or earnings and it varies according to amounts earned. For instance the tax-free threshold is P30 000 per annum, while the maximum personal tax rate is P120, 000 per annum and the tax rate for this salary is 25%. The details are presented in the table below;

Taxable income / Tax
0 - 30 000 / 0
30 000 – 60 000 / 0+5% of the excess over 30 000
60 000 – 90 000 / 1 500+12% of the excess over 60 000
90 000 – 120 000 / 5 250+18.75% of the excess over 120 000
120 000 and above / 10 875 + 25% of excess over P120 000

The above details are however relevant to residents, citizens and any individual who is physically residing in Botswana for more than 183 days. The personal income tax is based on the principle of ‘pay as you earn’. It is therefore, expected from an SMME to deduct payable income taxes from their employees on behalf of Government as and when they receive their salaries.

Finally it is very important for an SMMEs to thoroughly understand tax laws and regulations of Botswana. Although in some instances it may be difficult for them to come across such information, networking with relevant authorities makes it easier for an entrepreneur to have access to crucial information. In addition they can easily ask for assistance from the authorities on tax issues they do not understand.

1

[1] 1BWP = 0.1250 Euros (

[2] An institution that facilitates the delivery of a wide range of cross-border financial services to clients in other countries.