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The Taxation System in Zambia

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The Taxation System in Zambia A report for the Jesuit Centre for Theological Reflection THE TAXATION SYSTEM IN ZAMBIA Technical Report Final Report January 2011 This study was prepared by Messrs Alfred Mwila, David Manley, Patrick Chileshe, Ezekiel Phiri and Kelvin Mpembamoto for the Jesuit Centre for Theological Reflection (JCTR). The Debt, Aid and Trade (DAT) Programme provided funding for the study. The views expressed in this study are those of the authors and do not necessarily reflect the views of any allied institutions. ! ! I [ The Taxation System in Zambia Final Report-January 2011 CONTENTS Glossary... .......... ...iv Summary of the report.................................. vi PART 1 INTRODUCTION AND BACKGROUND........................................... .1 1.1 Introduction............... 1 1.2 Factors that motivated the study.......................................... ...2 1.3 The hypothesis and objective of the study........ ............ 3 1.4 Structure of the study.................. 4 PART 2 OVERVIEW OF THE TAX SYSTEM................................................ 5 2.1 Introduction...... ....................... 6 2.2 Alternative sources of developmental funding.. ..... ....... 6 2.3 The tax system in Zambia.............. 13 2.4 The process of formulating tax policies.............................. 19 2.5 Recommendations......... ............ .23 PART 3 THE STRUCTURE AND PERFORMANCE OF THE TAX SYSTEM...... 25 3.1 Introduction................................. 25 3.2 Structure of taxes in Zambia.... ........ 25 3.3 The performance of the tax system.............................. .....30 3.4 Recommendations................ 43 PART 4 TAX INCENTIVES................................ 45 4.1 Introd uction...................... 45 4.2 Arguments in support of tax incentives................ .45 4.3 Arguments against tax incentives............ ................ ....46 4.4 Domestic tax incentives.. ................ 48 4.5 Trade tax incentives.... ........... 51 4.6 Estimated revenue foregone from trade tax incentives.......................52 4.7 Incentives and compensatory measures in the national budget.......... 52 4.8 Proposals to manage tax incentives ...................... .54 4.9 Recommendations................. 56 PART 5 TAXATION OF THE MINING SECTOR........... ............ 57 5.1 Introduction......... .................. 57 5.2 The performance of the mining sector ................ 58 5.3 The optimal structure of a mining tax system................... 58 5.4 A simple guide to mineral policy formation in Zambia......................... 59 ii The Taxation System in Zambia Fi nal Report-J anuary2011 5.5 Description of current and past regimes.... ................................ 60 5.6 The current regime in detail and alternative modifications........... ..... 61 5.7 Tax loopholes in mining taxation................... .....66 5.8 Reforming tax mining regimes.................... 66 5.9 Recommendations................................ 67 PART 6 INFORMAL SECTOR TAXATION............ .... ...... 68 6,1 Introduction.. .... .............................. 69 6.2 Definition of the informal sector and rationale for taxation............... .69 6.3 The structure and conduct of the informal sector...... .......... 71 6.4 The size of the informal sector.......... ......................... 73 6.5 The informal sector tax regime.................. ......76 6.6 The performance of informal sector taxes.................................... 77 6.7 Challenges of informal sector taxation..................................... ....81 6.8 Recommendations.............. ............ 83 PART 7 FEASIBILITY OF A FINANCIAL TRANSACTION TAX.................... .86 7.1 Introduction..... .............. .....86 7.2 Concept of FTT and how it reduces volatility...... .......... 86 7.3 FTT experiences in other countries ............................ 87 7.4 Impact of a FTT.. ...................... 88 7.5 Benefits of a FTT........... .................. 90 7.6 Technical feasibility of a FTT................... ...91 7.7 Feasibility of a transaction tax with direct remittance of revenues... 91 7.8 Recommendations...... ........................ 92 PART 8 CONCLUSION AND SUMMARY OF RECOMMENDATIONS.. ........... 94 8.1 Conclusion............ .............................. 94 8.2 Recommendations........ ........................ 95 REFERENCES.......... ................... 96 The Taxation System in Zambia Final Report-January 2011 GlossAry AfDF African Development Fund AIT Advance Income Taxes ASIP Agricultural Sector Investment Programme CES Carbon Emission Surtax CFDs Contracts for Differences CFTC Commodity Futures Trading Commission CIT corporate income tax COMESA Common Market for Eastern and Southern Africa COMEX COMEX = NYMEX = New York Mercantile Exchange CSO Central Statistics Office CSPR Civil Society for Poverty Reduction CSR Corporate Social Responsibility DFID Department for International Development EITI Extractive Transparency Initiative FDI Foreign Direct Investment FTT Financial Transaction Tax GDP Gross Domestic Product GNI Gross National Income GRZ Government of the Republic of Zambia HDI Human Development Index HIPC Highly Indebted Poor Countries ICT Information Communication Technology IDA International Development Association IMF International Monetary Fund JCTR Jesuit Centre of Theological Reflection KCM Konkola Copper Mine LME London Metal Exchange MDGs Millennium Development Goals MDRI Multilateral Debt Relief Initiative METR Marginal Effective Tax Rate MoFNP Ministry of Finance and National Planning MTEF Medium Term Expenditure Framework NGO Non-Governmental Organizations ODA Official Development Assistance OECD Organization for Economic Cooperation and Development PAYE Pay as You Earn iv The Taxation System in Zambia Final Rep ort-January 2011 SACU Southern African Customs Union SADC Southern African Development Community SEI Self-employed Individuals TPRC Tax Policy Review Committee UK United Kingdom UNDP United Nations. Development Programme VAT Value Added Tax ZESCO Zambia Electricity Supply Corporation ZMK Zambian Kwacha ZRA Zambia Revenue Authority The Taxation System in Zambia Final Report-January 2011 SummAry oF tHe report Taxes world over are mainly levied in order to raise revenue to fund government developmental operations and assist to reduce disparity between the rich and the poor and reduce poverty. This study was undertaken on behalf of the Jesuit Centre of Theological Reflection (JCTR), which is a research, education, and advocacy organization that promotes study and action on issues linking faith and social justice in Zambia. The Debt, Aid and Trade (DAT) programme of JCTR commissioned the study to comprehend the taxation system in Zambia with the aim of forming knowledgeable and evidence based opinions on how it affects social justice1. The study uses qualitative and quantitative analysis based on data compiled from various sources. This study was motivated by the poor performance of the revenue system in the last decade. In particular, there has been an obvious decline in the share of tax revenue to Gross Domestic Product (GDP) while the performance of some tax types, such as domestic VAT and trade taxes, have also progressively declined. The performance of the mining sector taxes has equally not been impressive and there has been concern as to whether the sector is being taxed optimally. Another factor that motivated the study was the need to analyse the role of the informal sector in the tax system and how it can sustainably contribute to domestic revenue mobilization. This is because, up until now, the tax system has relied mostly on revenues from the formal sector while the informal sector remains largely untaxed. The last motivating factor was the need to explore how Zambia can raise extra revenue from its traditional exports, like copper, through a financial transaction tax. The premise of this study is that Zambia has the potential to raise more tax revenue and improve social justice by employing prudent policies and practices that improve tax revenue administration. The major objective of the study is to contribute to the existing body of knowledge on the tax system in Zambia by identifying the key challenges and possible success factors. The information generated by this study would be used by the JCTR as research, education, and advocacy tools to lobby relevant authorities on how the current tax system can be best utilized and reorganised in order to attain social justice. Social justice deals with matters of fair distribution of advantages, assets, and benefits among all members of a society. This can be attained through degree of economic equality through progressive taxation, income redistribution, or even property redistribution. The Taxation System in Zambia Final Report-January 2011 Study findings Part 2 Government funding sources and overview of the tax system Zambian taxes are broadly categorised into three groups as follows: income taxes, consumption taxes and trade taxes. These taxes make up the domestic revenue base for the country. These taxes contribute up to 70 percent to national budget. Other revenues that Government mobilises to supplement tax revenue comes from funding from external donors through budgetary support, Foreign Direct Investment (FDI), and debt provision. Apart from these revenue sources, there are other sources that are not fully exploited yet. These include, local government revenues and alternatives taxes, such as wealth taxes. However, these alternative sources of revenue have challenges that need to be addressed if
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