For the past two years, Lesotho Tribune investigated an intricate web of corruption, negligence, and environmental degradation which quietly festered within Lesotho’s most prized industry — diamond mining.
In an explosive five-part investigative series, we unravel how the government of Lesotho has consistently turned down over a billion Maloti annually, allowing a devastating loss of national wealth.
At the heart of this saga lies the illegal renewal of Letšeng Diamonds’ lease, a manoeuvre that has not only defied regulatory frameworks but also wreaked havoc on the Moloraneng stream and the surrounding environment.
The revelations do not stop there. This investigation exposes how the Ministers of Mines flagrantly violated the Mines and Minerals Act, disregarding legislation meant to safeguard Lesotho’s natural resources. More shockingly, we uncover how diamond mining giants have been manipulating depreciation laws that simply do not exist, robbing the country of billions in tax revenue.
In this meticulously researched series, to be published in five riveting episodes, we delve into the murky nexus of power, policy, and profit, revealing the untold stories that have been hidden from public view — until now.
The Precious Stones Order of 1970: Embedding Equity in Diamond Taxation
Enacted through Section 17, the Precious Stones Order of 1970 mandates a 15% sales tax on unwrought diamonds exported from Lesotho. This statute was crafted not merely as a revenue tool but as a strategic measure to ensure the equitable distribution of wealth from Lesotho’s natural resources. It aims to harness the diamond industry’s potential to propel national growth, embedding equity at its core by requiring that beneficiaries of resource extraction contribute proportionally to national advancement.
The Precious Stones Order 1970, which is still legally in force, is an order that regulates the trade in precious stones and related matters. It is not subject to any mining legislation, but it requires that anyone prospecting or mining for diamonds must be authorized to do so under the prevailing mining legislation. Section 17 of the Precious Stones Order imposes the Sales Tax as follows…
(1) Unless otherwise agreed in writing between the Government of Lesotho and the licensed exporter or producer concerned, there shall be paid sales tax on the value of every diamond found in Lesotho and exported therefrom. (Amendment Order of 1973)
(2) The rate of the sales tax shall be fifteen per centum of the value of the diamond or such other amount as the Minister may from time to time by regulation prescribe.
(3) The sales tax shall be paid to the Commissioner on behalf of the Government by the licensed exporter who proposes to export the diamond at or prior to the time at which it is registered for export.
(4) (i) The value referred to in subsection (2) of this section shall be the true market value which shall be determined by the Commissioner. (ii) For the purpose of assisting him to determine the true market value the Commissioner may consult a diamond valuator. Although the section has been on the statute books in Lesotho for many years it has not been imposed.
Purpose of the Precious Stones Order of 1970
In the Kingdom of Lesotho, the mining and subsequent sale of diamonds signify not merely transactions of commerce but profound diminishments of the nation’s wealth. The 10% royalty imposed on mining activities by the Mines and Minerals Act of 2005 is predicated on this recognition—it serves as a recompense for the depletion of the nation’s assets. This royalty is crafted not as an arbitrary levy but as a necessary restitution, ensuring that a just portion of the diamond’s inherent value is reinvested into the nation’s future.
Further exacerbating this depletion is the act of exporting these precious stones. When diamonds leave the borders of Lesotho, not only is the immediate monetary value exported but also the potential for further economic enrichment through local beneficiation.
Such exports represent-not only a forfeiture of revenue but a missed opportunity for economic development, job creation, and skill enhancement within the nation.
In response to this compounded loss, the 15% sales tax mandated by the Precious Stones Order of 1970 acts as a corrective measure.
This tax is not punitive but protective, ensuring that Lesotho secures a proportionate share of the diamonds’ comprehensive value, which includes their potential to catalyse local economic benefits.
The exemption of this tax for diamonds processed locally transcends fiscal policy; it is a strategic incentive. It fosters the establishment of a local diamond industry, thus converting a finite natural resource into a source of sustainable benefits.
This exemption is designed not as a mere financial relief but as a strategic investment in the nation’s future, promoting the creation of a local value-added industry that can perpetuate economic benefits long after the diamonds are extracted and depleted.
On the contrary, exporting diamonds without local processing does not merely sidestep economic benefits; it imposes a negative externality. It signifies a transfer of wealth from Lesotho to international markets, a transfer that strips the nation of the comprehensive benefits of its natural resources.
The 15% tax on exported diamonds thus functions to mitigate this externality, ensuring that Lesotho is compensated for the broader economic opportunities forfeited when a mining company chooses to export unpolished diamonds.
This tax is designed not only as a means of raising revenue but also as a pivotal policy instrument aimed at shaping corporate behaviour.
By increasing the cost associated with exporting unwrought diamonds, the tax encourages mining companies to channel their operations toward local beneficiation, aligning their business strategies with national economic development objectives.
Furthermore, as an excise tax specifically levied on diamonds, this fiscal measure seeks to redistribute the economic burden, shifting it from the general populace to those directly benefiting from the export of Lesotho’s valuable diamonds. It ensures that those entities which reap the most substantial profits from Lesotho’s diamonds also contribute significantly to the nation’s economic sustenance.
Denominated in US dollars, the tax also serves as a safeguard against currency fluctuations, securing the real value of the revenue against global economic volatilities. This aspect underscores the tax’s role not merely as a revenue tool but as a bulwark for national economic stability.
In sum, the imposition of this sales tax on diamond exports is more than a fiscal obligation; it is an assertion of national rights—a declaration that the wealth derived from Lesotho’s natural resources is to be enjoyed broadly by its people. It reinforces the principle that the extraction of diamonds, while a depletion of physical resources, should also culminate in substantial and equitable economic gains for the nation.
Revenue Services Lesotho to blame for not collecting sales tax?
When quizzed by Lesotho Tribune, why they have not been collecting the sales tax as mandated by the law, Revenue Services Lesotho (RSL), through Mr.Pheello Mphana had this to say.
“In 1970, the administration of the Precious Stone Order of 1970 (the Order) which amongst others regulated payment of Diamond Sales Tax, fell under the responsibility or scope of functions of the then Minister of Finance, Commerce and Industry…”
“What was then the Ministry of Finance, Commerce and Industry in 1970, has today evolved into the Ministries [of] Finance and Development Planning, Natural Resources and Trade, Industry, Business Development and Tourism. The bulk of matters provided for in the Order are too remote to functions currently played by the Minister of Finance and Development Planning, except for the determination of diamond sales tax rates and its collection. The bulk of matters dealt with under the Order are now regulated by the Minerals Act No.4 of 2005 which makes no mention of the collection of diamond sales tax.”
Mr. Mphana continued, “given that what used to be a single Ministry then responsible for the Order, has evolved into three Ministries, with of course the Ministry of Finance and Development Planning having the closest connection to the collection of diamond sales tax, it could be argued that the Minister of Finance and Development Planning is empowered by the Public Finance Management and Accountability Act (PFMA) of 2011, to assign the responsibility for the management, supervision and collection of the Diamond Sales Tax to the RSL…”
“Given however that the office of the Commissioner of mines and to whom amongst others the diamond sales tax was payable to, was an office found in the Ministry of Finance, Commerce and Industry, and which today its functions cuts across the spectrum of the control of the Ministries of Finance and Development Planning, Natural Resources and Trade, Industry, Business Development and Tourism, in respect of their respective mandates.”
“All the three Ministries therefore have some form of connection to the Order, whether strong or weak, with no single Ministry today being in a position to claim it is exclusively in charge of the administration of the Order. As it were, there could only be one Ministry responsible for the administration of an Act of Parliament and by implication the Order and which could affect amendments to it.”
Mr. Mphana concluded, “The Minister of Finance and Development Planning would require the consensusof the other two Ministries to make legislative changes to the Order empowering the RSL to collect the Diamond Sales Tax, given that is has the closest connection to the collection of diamond sales tax, which as a matter of fact is not being collected by the other two Ministries.”
Ministry of Finance and Development Planning did not answer questions posed them weeks ago until publication of this article.
Who is Responsible for Enforcement and Administration of the Sales Tax?
The Minister of Finance and the RSL are responsible for administering the Sales Tax
Section 110 of Chapter X of the Lesotho Constitution.Which relates to the finances of Lesotho, states that all revenues or other moneys raised or received for the purposes of the Government of Lesotho (not being revenues or other moneys that are payable, by or under an Act of Parliament, into some other fund established for any specific purpose or that may, by or under such an Act, be retained by the Authority that received them for the purpose of defraying the expenses of that Authority) shall be paid into and form a Consolidated Fund.
This is also expressed in the “Offices of Ministers Notice 1970” which provides in section 8 that “the office of Minister of Finance, [Commerce and Industry] has responsibility for amongst other matters, the overall control and application of the national financial resources of Lesotho. The preparation and presentation to the Council of Ministers of estimates of the revenue and expenditure of Lesotho, formulation of Taxation policies and generally the administration of those laws that relate to the revenues and expenditure of Lesotho”.
The Public Financial Management and Accountability Act of 2011 section 20 states that the Minister of Finance has responsibility for the management, supervision, control, and direction of all matters relating to the financial affairs of Government which are not by law assigned to any other minister or Authority.
Section 31 of the LRA Act of 2001 reads: Upon the coming into operation of this Act- (a) all references to the Director of Customs and Excise, the Commissioner of Sales Tax or Commissioner of Income Tax in the laws specified in the Schedule or any other law shall be constructed as references to the Commissioner-General; (b) any reference to the existing revenue departments in the laws specified in the Schedule or in any other law shall be deemed to be a reference be the Authority. (c) except as provided in paragraph (a) any reference to an officer of the existing revenue departments howsoever designated in the written lawsspecified in the Schedule or in any other law shall be deemed to be reference to the Authority.
Based on the above, the Minister of Finance and the RSL are responsible for administering the Sales Tax…
Does the Customs and Excise Act Include the Control of Exports Under Any Other Law?
In addition, as part of the Minister of Finance and RSL’s responsibility for administering the Sales Tax, there are additional checks in the Customs and Excise Act, 1982, to ensure enforcement of the Sales Tax. The Director must ensure that all laws (which includes the Order) relating to exported goods must be complied with before allowing such export.
The 15% sales tax as envisaged by the Precious Stones Order of 1970 would be considered an excise tax. An excise tax is a specific ad valorem sales taximposed on a particular good or service, and in this case, it is imposed on the export of unwrought diamonds from Lesotho. The tax is levied in addition to other broad consumption taxes, making it a selective tax imposed on an act. Therefore, it meetsthe definition of an excise tax.
Consequently, the 15% sales tax as envisaged by the Precious Stones Order of 1970 would fall under the Customs and Excise Act of 1982 as an excise tax.
The preamble of the Customs and Excise Act indicates that it provides for the levying of customs, excise, and sales duties, as well as the control of the importation and exportation of certain goods. Additionally, subsection (3) of section 39 requires that every exporter exporting any goods, including diamonds, must deliver a bill of entry in the prescribed form and pay any applicable export duties and taxes, which would include the excise tax on diamonds as required by the Precious Stones Order 1970.
Subsection (2)(a) of section 40 declares that if any goods intended for export are liable to any export duty under this Act, the amount thereof shall be stated in the bill of entry relating to such goods and shall be payable upon presentation of such entry to the Director.
Section 72(a) explains that for the purposes of this Act, the value of any goods exported from Lesotho shall be the price of those goods free on board at the place of dispatch from Lesotho, which value shall be declared on the bill of entry export.
Subsection (2)(a) of section 107 directs that the Director shall not allow goods to pass from his control until he has satisfied himself that the provisions of this Act or any law relating to the importation or exportation or transit carriage through Lesotho of goods have been complied with in respect of such goods.
Therefore, the Customs and Excise Act provides for the levying of customs, excise, and sales duties on goods, and subsection (10) of section 114 specifically states that “the exportation of goods the exportation of which is in terms of any provision of this Act or of any other law required to be authorized by a permit, certificates or other authority, is hereby prohibited unless exported under such a permit, certificate or other authority which in terms purports to have been issued by virtue of such provisions and such permit, certificate or other authority is produced to the officer before exportation of such goods.“
The Precious Stones Order of 1970 is a law requiring authorization for the export of rough diamonds and imposes a specific ad valorem sales tax on such exports, which would fall under the definition of an excise tax. Therefore, it can be concluded that the 15% sales tax as envisaged by the Precious Stones Order of 1970 would fall under the Customs and Excise Act of 1982 as an excise tax.
Regulatory Function of Tax Sovereignty
Tax sovereignty stands as a fundamental pillar of a state’s governance, empowering it to perform essential governmental functions and epitomizing the breadth of state authority. This sovereignty transcends the mere collection of revenues, extending into the realm of economic regulation and the shaping of societal behaviours through fiscal policy. Historically, tax policy has been a dynamic tool for indirect regulation, influencing both economic and social outcomes by incentivizing or disincentivizing particular behaviours among taxpayers.
Globally, governments deploy their tax sovereignty to foster industrial growth, support sectors impacted by economic transitions, incentivize specific industries, and promote social justice and equality. This regulatory dimension of tax sovereignty is pivotal in sculpting national economic strategies, propelling social reforms, and advancing foreign policy goals through differential tax regimes.
The role of taxation as a regulatory instrument is well-acknowledged by legal scholars and enshrined within constitutional frameworks, underscoring its legitimacy and efficacy in achieving comprehensive regulatory objectives beyond mere fiscal accrual. This perspective is buttressed by jurisprudential precedents, notably in jurisdictions like the United States, where taxation has been leveraged to support general welfare, regulate non-fiscal behaviours, and facilitate desired social and economic outcomes.
In the context of Lesotho, the Precious Stones Order of 1970, particularly through Section 17, exemplifies the strategic use of tax sovereignty for regulatory aims. The stipulation of a 15% tax on the export of rough diamonds serves not merely as a fiscal mechanism but as a regulatory duty designed to encourage local diamond beneficiation, bolster the domestic economy, and ensure a fair distribution of natural resource benefits.
This export duty is strategically aimed at promoting the local processing of diamonds, thereby enhancing industrial development, generating employment, and advancing national interests by retaining substantial diamond value within Lesotho. It represents an assertion of Lesotho’s sovereignty over its natural resources, ensuring that their exploitation contributes positively to national welfare and aligns with broader development goals.
The regulatory essence of the Diamond Sales Tax is integral to ensuring a sufficient domestic supply of rough diamonds, fostering the growth of a local diamond industry, and encouraging in-country beneficiation. This policy echoes measures in other diamond-producing nations, such as South Africa, which impose export taxes to stimulate local industries and economic expansion.
Moreover, the Precious Stones Order of 1970 establishes a comprehensive regulatory frameworkfor the diamond sector, including the creation of a Diamond Cutting Industry Board, underscoring the government’s commitment to regulate the industry, ensure a stable local diamond supply, and support the development of a domestic processing industry. This framework acts as a deterrent against exporting rough diamonds by incentivizing local sales and processing to circumvent the 15% export levy.
In essence, the Diamond Sales Tax articulated in Section 17 of the Precious Stones Order of 1970 is a manifestation of Lesotho’s tactical use of tax sovereignty to achieve regulatory objectives. It exemplifies taxation not solely as a revenue-generating tool but as a strategic instrument for economic regulation, industrial development, and the promotion of national interests. This tax reflects a sophisticated understanding of tax sovereignty, where taxation transcends its traditional role and becomes a fundamental mechanism for advancing public policy, economic justice, and the sustainable and equitable use of natural resources for the collective benefit of the Basotho nation.
Why is the Government of Lesotho Turning Down M1 Billion in Revenue Per Year?
Lesotho’s economic framework is significantly bolstered by the M1.1 billion in royalties received annually from South Africa for water from the Lesotho Highlands Water Project, constituting about 5% of the national budget. Concurrently, the nation foregoes a comparable sum due to the non-enforcement of the excise tax on rough diamond exports. This uncollected revenue represents not only a fiscal shortfall but also a missed opportunity for substantial economic development and job creation within the country.
The government of Lesotho faces a pivotal opportunity to mitigate these challenges through the enforcement of the 15% sales tax on rough diamond exports as stipulated by the Precious Stones Order of 1970. This enforcement could compel mining companies to process diamonds locally, fostering job creation and industrial growth, or to comply with the tax obligation, enhancing domestic revenue mobilization. The Order, duly enacted by Parliament, mandates the Minister of Finance and the RSL to ensure its rigorous implementation, thus addressing significant economic needs and advancing national development.
You love reading stories like this? Our will alone will not take us far. Help us by subscribing, sent us a WhatsApp message here +266 5636 5968 for different subscription options
