FINAL REPORT - Tax Justice & Poverty

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“THE TAXATION SYSTEM IN ZAMBIA”FINAL REPORTWISDOM M. NHEKAIRO1

TABLE OF CONTENTS1.0 INTRODUCTION . 32.0 THE TAX SYSTEM IN ZAMBIA . 33.1 Income Taxes . 103.1.1. Excise Taxes . 103.1.2 Domestic VAT . 103.1.3 Trade Taxes. 104.0 TAX REVENUE TO GDP RATIO . 115.0 ASSESSMENT OF TAX CATEGORIES . 135.1 Income tax performance . 135.1.1 Value Added Tax (VAT) Performance. . 155.1.2 Trade Taxes Performance . 186.0 EVALUATION OF CONTRIBUTION OF MINING SECTOR . 186.1 Comparative Analysis of Mining Taxation . 217.0 EVALUATE INFORMAL SECTOR CONTRIBUTION . 247.1 Zambian Tax Legislation . 277.1.2 Comparison of Informal Sector. 288.0 ASSESS EXTENT OF REVENUE LOSS . 299.0 REPORT ON EMERGING ISSUES . 3010.0 TREND ANALYSIS ON REVENUE COLLECTION VS, PARLIAMENT TARGETS . 3010.1 Tax revenue collection and set targets . 3011.0 ASSESS CAPACITY OF ZRA . 312

1.0 INTRODUCTIONPrimarily a country’s tax system must provide sufficient funds for government expenditureprograms. However, the means of attaining this basic requirement to get a sufficient level oftaxation matters a lot. This mainly relates to the structure and productivity of the tax system. Aproductive and well-structured tax system should espouse two basic principles. It should: minimize the distortion caused by taxation as economic agents attempt to limittheir tax liability (the principle of ‘efficiency’); andextract tax without disadvantaging or discriminating against any taxpayer (theprinciple of ‘equity’).In addition to the main objective, taxes can also be used to redistribute income in the economy toreduce inequality or as a tool for regulation to encourage or dissuade particular activities in orderto enhance social welfare. For example, imposition of excise taxes on cigarettes and alcoholcould be aimed at reducing the incidence of diseases associated with the consumption of theseproducts. Taxation can also be used to achieve certain macroeconomic objectives such as lowinflation by increasing levels of taxation in general or to stimulate economic activity by offeringtax incentives in certain sectors of the economy. However, the achievement of these secondaryaims should not compromise the core tenets of efficiency and equity.Developing countries like Zambia face impediments to achieving key objectives of taxation.These objectives are universal, but countries endeavor to achieve them in very differentenvironments. Developing countries, in particular, face great obstacles in achieving these aims.In fact, the need for high government expenditure is even greater in developing countries wherethe capital stock (e.g. schools, hospitals and roads) is low. In Zambia, tax revenues fund a lot, butnot all of expenditure. The shortfall is mainly plugged by foreign aid from cooperating partnersand by government borrowing, both locally and internationally.2.0 THE TAX SYSTEM IN ZAMBIAThe Zambian tax system broadly comprises income taxes, consumption taxes and trade taxes.These taxes are collected by the Zambia Revenue Authority (ZRA) which is the corporate bodymandated to collect all taxes.Table 1: Broad tax categories in ZambiaTax categoryIncome taxesType of tax Company income tax Pay As You Earn (PAYE) Withholding tax Mineral royalty Property Transfer Tax Import and domestic VAT Excise dutiesProperty taxesConsumption taxes3

Trade taxesCustoms dutyExport dutyIn addition, the tax system also comprises non-tax instruments, which includes royalties and fees.These include fuel or road levy, rural electrification fund levy, medical levy, Carbon EmissionSurtax (CES) and motor vehicle licensing fees.Box 1: Taxes collected, definitions and applicable rates1.0 Income taxes and applicable ratesTax TypesDefinitionApplicable Rates A tax on all incorporated CategoryCompany TaxRatebusinesses on their profits Companiesgenerallyfrom businesses.35% Company tax applies on Charitable organizationscompanies whose turnover is15%above ZMW800, 000 per Farmingannum.15% Non – traditional exports15% Manufacture of fertilizer15% MobiletelecommunicationsectorFirst ZMW250,00 Profit35%AboveZMW250,000Profit40% PAYE is tax charged onPAYEincome from employment.CurrentPAYERegime Income from Employment (2014)includes: Salaries and wages; IncomeRatesOvertimeandbonuses, Bands(Monthly)Gratuities and allowances,0 – K3,0000%cashbenefitsand K3,001 - K3,80025%commissions.K3,801 - K5,90030% All cash benefits paid inAbove K5,90035%form of allowances aretaxable under PAYE, such, PreviousPAYERegimeas education, housing and (2013)utility.IncomeRates However, the following Bands(Monthly)Benefits are not subjected to0 – K2,2000%PAYE: Labor day awards;4

SelfEmployedIndividual(SEI)taxWithholding TaxMineral RoyaltyEx-Gratis Payments, Medical K2,201 - K3,00025%Expenses;andFuneral K3,001 - K5,90030%Expenses.Above K5,90035% Tax is paid for annual PAYE rates apply forturnoveraboveZMWannual turnover above800,000 and is charged underZMW 800,000.the PAYE rates. Tax paid is at 3% of For annual turnover belowturnover for turnoverZMW 800,000, tax paid is atbelow ZMW 800,000.3% of turnover. Is tax collected at source Categoryfrom some payments like Ratedividends, interest, rent, Dividends(finaltax)commissions, management15%and consultancy fees. Interest(Companies)15% Interest(Individual)finaltax25% Rentfinaltax10% Commissions15% Management&Consultancyfees15% Mineral royalty is the The mineral royalty ratecompensationtothefor base metals is at 6%government for extracting The rate for preciousminerals from the earth.metals is at 6% Mineral royalty on base The rate for industrialmetals and precious metals isminerals is at 6%based on norm value. The rate for gemstones is Norm Value means theat 6%monthly average London The rate for energyMetal Exchange (LME) Cashminerals is at 6%pricepermetrictonmultiplied by the quantity ofthe metal or recoverablemetal sold. Mineral royalty rate ofenergy minerals, industrialminerals and gemstones iscalculated on gross value. Gross value means therealized price for a sale free5

on board, at the point ofexport from Zambia or pointof delivery within Zambia.Property TransferTax Tax levied on transfer ofland and buildings and ispaid by the seller. It is alsopaid on transfer of shares. Where a person transfersproperty to a member of hisimmediatefamily,thetransfer will be treated as agift and transfers will go atnil value. No property taxwill be paid. Immediatefamily means a spouse, childadopted child or stepchild. Exempt Organizations ;ApprovedInternational organizations;Political Parties; Cooperativesocieties; Local authorities;Registered Trade UnionClubs or societies; andapproved pension funds orMedical aid societies. Other exemptions includetransactions as a result of asale or other disposal of anystock or share listed onLusaka Stock Exchange.6 Tax rate is at 10% of theRealizable value.Realizable value is price atthe time of transfer, atwhichitcouldbereasonably sold on openmarket.

Tax on IndividualMinibus and TaxiOperators. A predetermined amount ispaid by the individual publictransport operators. Turnover Tax Tax on businesses for bothcompanies and individualswhose turnover is belowZMW 800,000 per annum This is the tax charged onimporters that are either notregisteredwithZambiaRevenue Authority or areregistered but are notcompliant. Base Tax is a tax on smallbusinesses and marketersthat are difficult to assess. Levy charged on all importsof Petroleum products suchas diesel and petrol. ThisLevy is meant for themaintenanceandconstruction of roads in thecountry.AdvanceIncomeTax (AIT)Base TaxFuel or Road LevyRates range from ZMW600 per annum for a lessthan 12-seater bus toZMW 7,200 per annumfor a 64-seater and above.Applicable tax rate is 3%of the turnover. The tax is computed at 6%of Value for DutyPurposes (VDP) but is nota final tax. The current amount ofbase tax is ZMW 150.00per annum. The levy rate is up to amaximum of 15%.2.0Customs and Excise taxes and applicable ratesTax typesMain featuresRatesCustoms Duty This is a tax levied on allCategorygoods imported into the Ratecountry. Duties are based on Rawthe CIF (cost, insurance and0%freight) value. Capital5% Intermediate15% Finished25%Excise Duty Taxation on a range of Product (some examples)selected products whether Petroleum Productsproducedlocallyor- 36%imported, determined by Winesandgovernment policy.125%7materialsgoodsgoodsRate7%Spirits

Motor Vehicles5%- 30% Perfumes and Body lotions25% Clear Beer35% 75% Talk time and mineral water10%Standard rate of 16%.ProductRate Copperconcentratesat15% Scrap Metal at15%25% Cottonseedat15%Import VATExport DutiesThis a tax charged on imports.This is a duty charged on specificexported goods. This duty is meantto encourage further processing oflocally produced goods and ischarged on Copper concentrates,Scrap Metal and Cottonseed.CarbonEmissionSurtax (CES)This is a tax charged on motor EngineCapacityvehicles based on the engine (ZMW)capacity. 1500and50.00 1501–100.00 2001–150.00Motor Vehiclelicensing FeeinCCbelow20003000 This fee is charged on The fee is ZMW 163.00imported motor vehicles andcovers the registration costs.3.0VAT and applicable rates.Tax typesDefinition This is taxation on every value added to a taxable service orDomestic VATproduct. The tax is borne by the consumer. For VATpurposes, sale or disposal of goods or rendering of servicesis called supplies. Taxable supplies are taxed at either 16% (standard rate) or0% (zero-rated). Zero-rated supplies include Exports,Energy Saving appliances, Equipment and machinery,medical supplies and schoolbooks. Exempt supplies are items specifically excluded by lawfrom liability to VAT, (i.e., no VAT is charged) even ifsupplied by a registered business. Examples of exemptsupplies include:8

Only registered businesses can charge and claim VAT.There are two types of VAT registrations: Statutory registration – annual taxable turnover in excessof ZMW 800,000. Voluntary registration – where the turnover of a businessis below ZMW 800,000 per annum but the business hasfulfilled all the requirements for VAT registration. A registered business charges and collects VAT on itssupply of goods and services to customers. VAT so chargedis called output tax. On the other hand, registeredbusinesses claim the VAT that they pay on purchases oftaxable goods and services for their businesses. The tax soclaimed is referred to as input tax. The net of output andinput tax is paid to ZRA or refunded to the taxpayer as thecase may be. Therefore, a business dealing in taxablesupplies can claim input tax, while a business dealing inexempt supplies will not be required to register for VATand therefore cannot claim the input tax. For example,educational services from Nursery to secondary school areexempt, therefore, a primary school will not register forVAT and will not claim any input tax.Source: ZRA3.0 ASSESSMENT OF TAX REVENUE PERFORMANCEAn assessment of the performance of the Zambian tax system between 2010 and 2013 reflects anincrease in tax revenues in nominal terms, with tax collections increasing from ZMW13, 125.5million in 2010 to ZMW 23,154.8 million in 2013, representing an increase of 76.4% (SeeTable2). This performance is attributed to higher than projected collections in most tax types,especially income taxes, excise taxes and trade taxes.Table 2: Tax Revenue Performance (ZMW millions)Total RevenueTax RevenueIncome TaxCompany TaxNon Mining Company TaxMining Company TaxPAYEWithholding Taxes & Others2010201113,161.4 18,928.013,125.5 18,889.07,350.6 9,766.92,421.7 3,643.61,176.5 1,169.71,245.2 2,473.93,866.3 1,630.62,852.31,767.51,084.75,738.71,278.9

Mineral RoyaltyMining Tax ArrearsExcise TaxesExcise DutiesRural Electrification LevyFuel levyCarbon TaxVAT on domestic goodsTrade TaxesVAT on importsCustom DutyExport DutiesExport Duty on Scrap metalsExport Duty on Cotton seedExport Duty on CopperConcentrateNon Tax RevenueMedical LevyMotor Vehicle FeesSource: .160.736.02.533.53.1 Income TaxesIncome taxes have increased from K7,350.6 million in 2010 to K11,630.6 million in 2013representing an increase of 58.2 per centum. This growth is driven by all the tax types, except formining company tax, which have registered positive growth in line with the growth in theeconomy. Mining company tax though showing growth in the first three years, declined in 2013due to negative factors in production levels and commodity prices.3.1.1. Excise TaxesExcise taxes have increased from K1,372.4 million in 2010 to K2,339.5 million in 2013representing an increase of 70.5 per centum. This growth is driven by all the tax types whichhave registered positive growth in line with the growth in the economy.3.1.2 Domestic VATDomestic Vat has recorded negative collections for the years of 2011 and 2012 and thenincreased to K1,185.5 million in 2013. This performance in 2011 and 2012 is attributed to taxavoidance and evasion by some sectors of the economy.3.1.3 Trade TaxesTrade taxes have increased from 3,911.8 million in 2010 to 7,999.1 million in 2013 representingan increase of 104.5 per centum. This growth is driven by all the tax types, especially importVAT, which have registered positive growth in line with the growth in the economy throughincreased imports of capital and consumption goods.10

4.0 TAX REVENUE TO GDP RATIOIn general, a tax system should be responsive to the growth of the economy. As economicactivity grows, tax revenues should also increase, as the country’s tax base often closely followsGDP. A simple way to measure this is to look at the ratio of total tax revenues to GDP. ForZambia, the share of total tax revenue as a percentage of GDP has averaged 18 percent in the lastdecade after falling precipitously to 13 percent just before the reform period (see Figure 3.10).However, since the reforms, the ratio has declined steadily, reaching 15 percent in 2009. Thiswas considered too low and Government and other stakeholders like the IMF and the WorldBank believed that it should be raised to at least 20 percent to enable Zambia to meet itsdevelopment goals (MTEF 2011 – 2013).Figure 1: Tax revenue to GDP ratio (1973 – 2009)The tax to GDP ratio reached 20.1 percent and 20.3 percent in 2011and 2013 respectively.However, in 2012 it declined to 18.7 percent (see Figure 3.10A). The increase in 2010 through to2011 was due to an improvement in the economic growth of key sectors of the economy,especially in mining, construction, transport, storage and communication sectors (See Table ); as11

well as improvements in taxpayer compliance. In 2011 the achievement of a tax to GDP ratio of20.1 percent was due to the collection of mining tax arrears. If mining tax arrears are removed,the tax to GDP ratio is 18.2 percent. The fluctuation in the ratio is a sign that the tax system isrobust and responding to certain factors in the economy. In 2013 tax revenues were mainlydriven by PAYE and trade taxes.Figure 2: Tax revenue to GDP ratio (2009 – 2013)25%20%15%10%5%0%20092010201120122013Source: ZRAOn the basis of the tax to GDP ratio achieved in 2011, it is clear that the collection of arrears canensure that revenue collections are increased especially if this is targeted at key sectors of theeconomy like mining. The positive performance of tax revenues continue to be driven by PAYEand trade taxes, tax types that cannot be fully relied for the long term sustainability of revenueflows.Table 3: Growth and share of GDPPercentage growthPercentageshare2011201020112010KIND OF ECONOMIC ACTIVITY7.76.612.612.5Agriculture, Forestry and Fishing1.315.29.49.9Mining and tricity, Gas and sale and Retail trade5.010.22.32.4Restaurants, Bars and Hotels14.910.49.9Transport,Storageand 12.3Communications6.06.07.17.1Financial institutions and Insurance2.93.07.57.7Real Estate and Business services5.38.78.6Community, Social and Personal 8.512

ServicesTOTALSource: CSO6.57.6100.0100.05.0 ASSESSMENT OF TAX CATEGORIESStructure of the Zambian systemIncome taxes continued to be the major source of revenue accounting for more than 50 percent ofthe total tax collections in the last four years. The trend analysis of tax type contributions to totaltax revenue is a useful tool for long term tax planning. The dependence on income taxes toprovide most of the revenues needs to be assessed for long term sustainability of revenue flows.It is better to rely more on consumption taxes as these are more broad - based. Consumptiontaxes like VAT and Excise are paid by almost the entire population as they consume variousgoods and utilize certain services. The tax base of the consumption taxes are therefore muchbroader than income taxes like PAYE and company tax, which are paid by a limited section ofthe population. External shocks have less impact on a broader base compared to a narrower base.Figure 3: Structure of the Zambian tax 201120122013Source: ZRA5.1 Income tax performanceIncome taxes have shown an upward trend over the last 4 years in nominal terms, rising fromZMW 6,914 in 2010 to ZMW 9,812 in 2013. This represents an increase of 29.5% which is13

attributed to increased economic activity. The increase in income taxes was mainly driven byPAYE and company tax. PAYE has consistently increased in line with increased wages over thesame

The Zambian tax system broadly comprises income taxes, consumption taxes and trade taxes. These taxes are collected by the Zambia Revenue Authority (ZRA) which is the corporate body mandated to collect all taxes. Table 1: Broad tax categories in Zambia Tax category Type of tax Income taxes C

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