LESOTHO TAX MODERNISATION PROJECT


Overview

  • Reference: P-LS-KF0-003
  • Appraisal Date: 28/03/2017
  • Board Presentation: 25/10/2017
  • Status: LendingLEND
  • Implementing Agency: MINISTRY OF FINANCE
  • Location: All Country

Description

The overall development objective is to promote economic growth by providing the fiscal space (i.e., increased tax revenues) to maintain macroeconomic stability, while providing for priority economic and social expenditures. The specific objective of the Project is to support the effective implementation of the revenue modernisation program to strengthen tax revenue administration capacity through targeted assistance to (a) e-taxation that will allow online tax services including registration, taxpayer relationship management, filing and payment; (b) introduction of fiscalised cash registers to improve VAT collections; and (c) introduce a simplified tax regime for small and informal sectors in order to reduce the costs of compliance and broaden tax base.

Project components: The Project has three mutually reinforcing components: (a) Enhancing Tax Modernization,

(ii) Improving Domestic Revenue Reform; and

(iii) Project Management Support. Reflecting the lessons of past support, more emphasis will be given to strengthening national capacity and ownership of the project as well as adopting innovative approaches to capacity building through peer learning and partnering with ATAF.

Project components cOMPONENT 1: Enhancing tax modernisation (UA 4m)Objective: Introduce online tax services and cash registers to improve revenue collection and reduce leakages and corruption. Activities under this component will includes: 1.1 Technical assistance to Redesign business processes and development of business requirements for e-taxation and cash registers 1.2 Development and enactment of enabling legislation 1.3 Procurement of e-taxation and cash register appropriate IT solutions and equipment 1.4 Capacity building and training for rollout and implementation Component 2Improving domestic revenue reform (UA 1m)Objective: Introduce a simplified tax regime for taxation of small and informal taxpayers, and toll fees in order to broaden tax base and tax collection and reduce cost of compliance. Activities under this component includes: 2.1 Technical assistance to development of new processes and forms as well as business requirements 2.2 Development and enactment of enabling legislation 2.3 Configuration and customisation of ETPM system 2.4 Development user requirements specifications, and software enhancements 2.5 Procurement of hardware and site installation 2.6 Training and roll out

Comoonent 3Project Management (UA 560,000)Objective: to strengthen project management and implementation capacity. Activities under this component includes: 3.1 Project management, monitoring and audit


Rationale

In 2008, the LRA embarked on a modernisation program which started with development of an Enterprise Architecture design initiative with the aim to address inefficiency and transparency in tax administration and reduce the cost of tax collection to government and tax payers. This culminated in a broader modernisation agenda which covered Customs, Domestic Taxes and Business Support Modernisation. The implementation of the modernisation agenda has been led by the Lesotho Revenue Authority (LRA) and funded largely by the Government of Lesotho. Due to a decline in the SACU revenues and the impact on its revenue, the Government of Lesotho is unable to fund all of these developmental projects at the pace desired by the LRA. In this regard, the Government requested the Bank to provide targeted technical assistance to consolidate the LRA modernisation program.

Alignment with the Country Development Agenda: The proposed operation is aligned with the country's vision and priorities in the National Strategic Development Plan (NSDP), 2012/13-2017/18, and in particular one of the sixth strategic goal of NSDP - governance and building effective institutions. The proposed operation is also consistent with the LRA strategic plan (2014-19) which provide a framework on which to base revenue administration reform interventions by development partners including the Bank. The strategic plan highlights the need to increase efforts for mobilization of domestic revenue to ensure the NSDP is adequately funded, and to manage the risk around the uncertainty of SACU transfers. The strategic plan also identify the main challenges, constraints and opportunities for domestic resource mobilization and propose critical priorities in the short to medium term including: measures to broaden tax base, introduce IT and modernize LRA's processes and systems, strengthening institutional and human resource capacity, and building performance oriented revenue administration characterized by integrity, innovation and service excellence. The proposed Project will directly address challenges and priorities sets out in the Government policy and LRA's strategic plan with the aim to enhance national capacity for domestic resource mobilization to finance social and economic development priorities.

Alignment with the Bank's strategy: The Project fits firmly with the objectives and priorities of the Lesotho Country Strategy Paper (CSP, 2013-2017). The CSP is aligned with the Government's development plan by promoting two pillars:

(i) infrastructure development; and

(ii) institutional capacity building. The operation is consistent with Pillar II of the CSP by providing targeted institutional capacity building and technical assistance to enhance the efficiency and effectiveness of the country's domestic revenue administration. The operation is also aligned to the Bank Group's priority areas (Governance and accountability), and the High Fives (Improve Quality of Life for Africans), all of which identify domestic resource mobilization as key to finance development plan for inclusive growth and poverty reduction.

Complementary and synergy with the ongoing operations: The proposed operation will complement and enhance the effectiveness of the Bank's ongoing projects by focusing on revenue administration reforms. The ongoing Projects are focused on infrastructure (power and water), enterprise development and public finance management reform which also contribute towards creating a conducive environment for economic diversification. The project will enhance government capacity to raise domestic revenue to create fiscal space for priority sectors of the economy including infrastructure financing and economic diversification. By focusing on the revenue side of the public finance, there are synergies with the ongoing multi-donor funded PFM reform which focus on budget, execution, procurement, accounting and audit reporting.


Benefits

The project will contribute directly and indirectly to the Government efforts to achieve sustained growth and poverty reduction, which are critical challenges facing Lesotho. Directly, the increase in tax revenues will help foster macroeconomic stability which is an essential condition for economic growth as well as provide fiscal space for priority social and economic expenditures. To the extent that the increased tax revenues are channeled to priority social and economic expenditures that directly benefit the poor segments of society will further improve the overall well-being of the people of Lesotho. Indirectly, the modernization of the tax administration will minimize corruption and reduced compliance costs, improve consistency and fairness of treatment of taxpayers, and improve transparency and integrity which are also expected to support growth, job creation and poverty reduction. Tax payers and SMEEs will benefit from a more efficient LRA procedures and use of modern technologies which will reduce their compliance costs and facilitate their business operations. The beneficiary institutions will be the Lesotho Revenue Authority, the Ministry of Finance, and the private sector (taxpayers).


Key contacts

GEBRE-SELASSIE Kalayu - RDGS5


Estimated Cost

Amount
 5,000,000