By Tokiso Nthebe
Tax planning is a critical pillar of our financial plans and if neglected, the consequences can be dire. Though the tax jargon can be complicated, overwhelming and daunting, noncompliance should never be an excuse. This blog post discusses different types of taxes, how to plan, file and ensure compliance.
What is tax?
While taxes may seem complicated, with a bit of simplification and explanation it should not sound like Greek. So, what is tax?
In simple terms, tax is the payments that you make from the income that you generate whether you are an individual, consultant, in a partnership or a micro small medium enterprise (MSME) or big corporation. There are different types of taxes and laws that are administered by Revenue Services Lesotho (RSL).
What is Revenue Services Lesotho’s mandate?
Revenue Services Lesotho (RSL) is an agent of the Government of Lesotho, trusted to administer various tax laws and ensure taxes are collected. The revenue that is collected is used to support and fund government policies to ensure there is development in the country.
There are quite a few laws such as the Customs and Exercise Law which deals with the taxation of goods and services which are coming outside of the Southern African Customs Union (SACU) member states. The second is Value Added Tax (VAT) which is the tax applicable to the goods and services consumed within the borders of Lesotho or imported from outside the borders of Lesotho.
Thirdly, there is the Tobacco and Alcoholic Product Levy that was introduced in 2013, which is taxes paid on the consumption of alcohol and tobacco products. The fourth piece of legislation is the Income Tax Act of 1993, comprising of corporate income tax (CIT) paid by corporations or companies and personal income tax (PIT) which is paid by individuals. The individuals referred here could be employees, consultants or sole traders.
There are taxes paid monthly or quarterly such as Pay as You Earn (PAYE) paid by employers on behalf of their employees, Fringe Benefits which is a tax on benefits that are provided to the employees and lastly, Withholding Taxes which are the taxes at source.
What is the tax collected used for?
The government’s responsibility is to ensure that it provide services and caters for the needs of its citizens, for example pension income for the elderly or economically disadvantaged citizens. Taxes are also used to develop infrastructure such as roads, bridges, hospitals and schools. So in essence, taxes are used for healthcare, education and social security among others.
How are individuals taxed?
As aforementioned, individuals refer to employees, consultants, partners in a partnership or sole traders who generate money or income. For employees who receive a salary, a portion of the salary is taxable. Where the employee contributes to an approved and complying superannuation fund i.e. retirement fund then the contribution will be deducted first, and the rest will be taxable income.
When it comes to partners in a partnership or consultants, the law provides that the expenses incurred to generate the income can be deducted. The difference between the income generated and expenses incurred can either be a profit or loss. If there is a profit, then tax will be applicable at the marginal rates for individuals.
What are the marginal tax rates?
To determine that taxable income and how much tax individuals should pay, the marginal tax rates will apply. There are two marginal rates for individuals of 20% and 30%, where the 20% rate is applicable to the maximum of LSL69 120 for the 2023/24 financial year. This means that any income from Zero Lisente up to LSL69 120 will be taxable at the rate of 20%. If you made a profit of, say LSL50 000 then you will apply the 20% rate.
Any amount more than LSL69 120 will be taxable at a rate of 30%. For example, if you receive a bonus of LSL100 000, then the first LSL69 120 will be taxed at a marginal rate of 20% and the LSL30 880 will be taxed at a rate of 30%.
What is the personal tax credit?
Every taxpayer has a non-refundable personal tax credit or benefit to reduce the tax burden. In simple terms, this is like a rebate or discount that you receive. For instance, say you are supposed to pay LSL20 000 tax as an individual, the tax liability will be reduced by the rebate of LSL10 800, and you will pay a tax of LSL9 120.
If your tax liability is LSL5 000, the burden will be reduced by the tax rebate of LSL10 800 resulting in no tax being paid. It is, however, important to note that the rebate is non-refundable
How are Basotho who work abroad taxed?
While many Lesotho citizens work abroad and should comply with relevant tax laws, it is, however, important to consider and determine a few factors. For example, it will depend on their type of work engagement abroad. If they are working as consultants, then they should pay taxes in Lesotho.
If they pay taxes abroad because every country is governed by its income tax laws, the law provides that tax credits be applicable if tax is already paid. There will be a comparison between how much tax they paid abroad and how much should have been paid in Lesotho. For example, if the tax paid abroad is LSL25 000 and should have paid LSL20 000 in Lesotho, a tax credit of LSL25 000 will be granted meaning they will not pay tax in Lesotho.
For Basotho who are employees abroad, if their income is taxable in the countries where they work, then the law provides that their income be exempt from taxes in Lesotho.
What are the benefits of contributing to retirement?
From a tax planning perspective, if you make contributions to a complying superannuation or retirement fund within the borders of Lesotho you can deduct that contribution from the gross salary and whatever remains is taxable income. When you do retire someday, the lump sum retirement benefits and monthly pension benefits also known as annuities will be taxable.
“Nothing can be said to be certain except for death and taxes”
Benjamin Franklin
How are retirement benefits taxed?
As mentioned above, retirement benefits will be taxed should you resign from your job and cash out your retirement benefits or at the age of 55 years or older when you retire from employment.
The provisions under the law states that such income must be given an exemption of 25% of the total employment income. Say for example you have been working for 30 years with a total employment income of LSL1 600 000 over the 30 years, 25% of the LSL1 600 000 will be exempt.
Let us help you in navigating the complexities of managing your finances and tax affairs. Like Benjamin Franklin said, ‘nothing can be said to be certain except for death and taxes.’ It is therefore important to prioritise our tax matters and comply. The next blog post discusses how to file and submit your tax returns. Visit Revenue Services Lesotho’s website at www.rsl.org.ls for more information.
You can listen or watch to the podcast version on My Money Adventures Podcast where I had RSL guests. The full episode available on YouTube, Spotify and Apple Podcast. Visit our learning portal at www.mymoneyadventures.com for more personal finance content.
