Changing customs to build Lesotho's future

There is no doubt that customs reform is a vital feature of successful trade.

Improving the ease and speed of goods, as they move across international borders, has a significant bearing on a country’s ability to trade successfully. If goods get stuck in transit, or if the duties are onerous to process, the business of trade is handicapped by red tape, sometimes even grinding to a halt.

In November 2005, Hilary Benn said: "If Africa is to achieve the 7% growth necessary to meet the key MDG of halving the number of people in poverty by 2015, the business environment must improve."

With the right backing, red tape can be cut and systems streamlined, as traders in Lesotho discovered when they switched to a new tax method. The move slashed the time it takes to cross the border from the three hours it used to be.

The Lesotho Revenue Authority (LRA), founded in 2003 and funded by DFID, has become a model of good practice in making changes to boost trade and maximize revenue collection.

This case study is part of Trade Matters

How did the reforms work?

Recognising the importance of strong links with its main trading partner through the South African Revenue Service, the LRA began by abolishing the Sales Tax and introducing VAT at 14%, similar to the rate in South Africa.

At a stroke the South Africa Revenue Service (SARS) was enabled to refund directly to the LRA all VAT paid on goods imported from South Africa – meaning individual importers had one less thing to bother about.

At two of the main border points over two years (2004 and 2005), revenue collections increased by 167% and 320% respectively. At all posts, year on year growth in revenue collection was 204%. Further reforms at the border minimized risks from smuggling and tax evasion. Since the refunds on imports were made directly to the LRA, the incentive to cheat has been removed. And as duplication has been reduced, so have waiting times at the borders.

The reforms also removed trade barriers for medium and small entrepreneurs in the informal sector, the pulse of Lesotho’s economic sector.

The successful introduction of both VAT and a system to claim tariff revenues from South Africa by the LRA, provides the Government with revenues, which enable it to finance services of benefit to the poor.

The new VAT system has a direct positive impact on the incomes and expenditure of poor families. Some basic foodstuffs are zero-rated for VAT and the system is progressive, allowing large traders to claim back input VAT.

Key facts

  • The Lesotho Revenue Authority is an operationally autonomous body that was established by an Act of Parliament to be the: “Main body responsible for the assessment and collection, on behalf of the Government, of specified revenue; for the administration and enforcement of laws relating to such revenue and for related matters.”
  • The Authority became operational in January 2003. It incorporates the functions of the former Income Tax, Customs & Excise and Sales Tax Departments of the Ministry of Finance and Development Planning.
  • DFID gave £3,220,000 in technical assistance to the Lesotho Revenue Authority to support sustainable, equitable and improved tax management. The project started in March 2002 and is due to end in June 2007.
  • DFID also gave £830,000 as financial aid beginning in January 2003 and ending in January 2006.
www.dfid.gov.uk/tradematters/tradematters.pdf