Government to Raise K41.1billion in Taxes in 2018- a Tax to GDP Ratio of 15%

The 2018 National Budget was presented to the National Assembly by the Minister of Finance, Hon Felix Mutati on 29th September 2017. The Minister informed the National Assembly that Government intends to spend K71.6 billion in the year 2018 and that K41.1 billion (57.4%) of it will be finance from domestic tax revenue mobilization. The balance of K30.5 billion (42.6%) would be financed by non-tax revenues, grants, domestic and foreign borrowing

 

The government intends to mobilize the K41.1 billion from the following taxes:

Name of Tax Amount (in Million Kwacha) % of Collections % of GDP
Value Added Tax (VAT) 12,369.47 30.1% 4.5%
Personal Income Tax 10,264.02 24.9% 3.7%
Company Tax 6,115.94 14.9% 2.2%
Excise Duty 4,744.83 11.5% 1.7%
Withholding and other taxes 3,957.64 9.6% 1.4%
Import Duty 3,302.25 8.0% 1.2%
Other Tax Revenues 334.00 0.8% 0.1%
Export Duty 51.63 0.1% 0.0%
Total 41,139.78 100.0% 15.0%

Value Added Tax (VAT) is expected to be the main driver of Government revenue in the year 2018, accounting for 30.1% of total tax revenue (4.5% of GDP). This is followed by Personal Income Tax at 24.9% (3.7% of GDP) and Company Tax at 14.9% (2.2% of GDP). The other taxes are Excise Duty at 11.5%, Withholding and other taxes 9.6%, Import Duty at 8.0%, Other Tax Revenues at 0.8% and Export Duty at 0.1%.

Improving domestic revenue mobilization is what Zambia and other developing countries need to financed investments in education, health, public utilities and transport systems in order to improve the living standards of people.

Most African countries have only attained a Tax Ratio (the percentage of tax revenue to GDP) of 15% or less. This, according to economists, is not enough to finance the much desired human and economic development. South Africa attained 29% in 2015. The Organization for Economic Corporation and Development (OECD) member countries averaged 34.3% in 2016 with Denmark scoring the highest at 46.6% and Mexico recording the lowest at 17.4%.

The 7th National Development Plan (7NDP) aimed to increase the tax ratio to above 18% by 2018 from a baseline of 17.5% in 2016, However, the prevailing institutional and economic situation can only afford Zambia the ratio of 15% in the year 2017.

Tax Reforms

To attain this level of domestic tax revenue mobilization, the Minister proposed the following tax reforms.

  1. Remove Insurance Premium Levy on Re-insurance

Insurance levy was introduced in 2017 to replace Value Added Tax which posed practicality challenges in the industry. However, there was an outcry amongst stakeholders that taxing re-insurance amounts to economic double taxation, thereby, disadvantaging re-insurers.

  1. Increase the Base Tax rate to K365 per year from K150 per year

This measure is intended to adjust the Base Tax rate for inflation as it has not been adjusted in over 10 years. The measure is also designed to expand the tax base and will be implemented through smart partnerships with stakeholders.

  1. Increase Presumptive Tax Rates on Buses and Taxis.

This measure is intended to adjust Presumptive Tax on buses and taxis for inflation as it has not been adjusted in over 10 years. It is worth noting that the consumer price index (CPI) increased by over 180 percent during the period 2003 to 2017, however, the presumptive tax rates have only been adjusted upwards by 50 percent.

Seating Capacity Previous Tax (K) New Tax(K)
64 and Above 7,200           10,800
50-63                       6,000             9,000
36-49                       4,800             7,200
22-35                       3,600             5,400
18-21                       2,400             3,600
12-17                       1,200             1,800
Below 12                           600                 900
  1. Remove the Tax Relief of Pension Contribution

The proposed change intends to remove the exemption of the K255 on an employee’s salary that is used to provide relief for the pension contribution as the terminal benefits are now tax free.

  1. Amend the Definition of Management Consultancy Services in Section 2 of the Income Tax Act

The amendment is meant to make it clear that the Term Management Consultancy Services includes ICT consultancy services. The definition is now reads as follows:

“management or consultancy fee” means payment in any form, other than an emolument, for or in respect of any administrative, consultative, managerial, technical, or any service of a like nature or any creation, design, development, installation and maintenance of any information technology solution, program, system, or a combination”.

  1. Amend the Definition of Incapacitated Person in Section 2 of The Income Tax Act

The amendment reduces the age at which a person is considered to have legal capacity from 21 to 19 years.

  1. Amend the Definition of Residence in Section 4 (3) of the Income Tax Act

The new definition now reads that:

In this Act, a person other than an individual is resident in the Republic for any charge year if-

  1.  the person is incorporated or formed under the laws of the Republic; or
  2. the place of effective management of the person’s business or affairs are exercised in the Republic for that year”.

This has the effect of extending the conditions for considering a foreign based business that is carrying on business in Zambia, but is not incorporated in Zambia for taxation in a tax year.

  1. Amend Section 7 (3) of the Income Tax Act to broaden the scope of taxes that the Agents appointed by the Commissioner-General may collect.

This change aligns the law with the practice of appointing agents to collect presumptive tax, turnover tax and withholding tax on rent.

  1. Differentiate the Late Submission Penalties for Income Tax and Turnover

This amendment introduces a late return penalty of 250 penalty units for Turnover Tax as opposed to 1000 and 2000 for individuals and Companies respectively.

  1. Introduce a Due Date for Provisional Income Tax for Taxpayer that Register for Income Tax after 31st March.

The amendment proposes a due date of 90 days from the effective date of registration of Income Tax.

  1. Harmonize the Due Dates for Filing a Withholding Tax Return and Making Payment

The due dates for both the Withholding Tax and Return and the payment are now on the 14th day following the month in which payment fell due.

  1. Clarify the Time When Withholding Tax Falls Due

This is an amendment to section 82A if the income Tax Act, which now states that:

The time at which payment shall be deemed to have been made shall be whichever is earlier of the following times:

  1. The time when income is paid;
  2. The time when income accrues to a person; and
  3. The time when income is in any way due to a person or held to that person’s order or on their behalf, or it is in any way disposed of according to that person’s order or in that person’s favor.

The time when a payment is deemed to have taken place according to this rule, the due date for the Withholding Tax Return and payment is according to this amendment is the fourteenth day of the month following the deemed payment date.

  1. Remove the Clause that Restricted the Capital allowance of soft drinks manufacturer that sets up in rural areas to 20% as opposed to 50% that is enjoyed by other Manufacturers

This amendment repeals clause 10 (6) of the Fifth Schedule (Capital Allowances for Buildings, Implements, Machinery and Plant, And Premiums) that restricted the capital allowance that soft drinks manufacturer that sets up in rural areas can claim. They will now enjoy 50% capital allowance like all other manufacturers, under the provision of clause 10 (5).

  1. Allow Zambian with National Registration Cards (NRC) at the Age of 16 to Register for TPIN

This measure is intended to legalize the registration for TPIN for persons aged between 16 and 20. Previously, persons under the age of 21 were considered minors and could not apply for TPIN in their own right.

  1. Clarify the Institutions that Must Require their Account Holder to Have TPIN

The amendment now requires, “Banks and Financial Institutions”, to make it mandatory for account holders to have TPINs.

  1. Clarify that Institutions Covered Under the Diplomatic Immunities and Privileges Act Are Not Required to Pay Skills Development Levy

Skills Development Levy is a tax that is Imposed on Every Employer. The amendment clarifies that institutions that enjoy diplomatic immunity and privileges, under the Diplomatic Immunities and Privileges Act are not required to pay this tax.

  1. Impose Property Transfer Tax at the rate of 5% on Intellectual Property

This measure extends the scope of Property Transfer Tax from the transfer of immovable property (land and buildings), shares and royalties to intellectual property, such as trademarks, patents and brands.

  1. Introduction of Property Transfer Tax at 5% on Shares of Foreign Companies that are attributed to Zambian Companies

This measure is aimed at taxing income tax from the sale of shares of foreign companies whose value includes the value of assets that are based in Zambia.

  1. provide Form Waiving of Penalties in the Property Transfer Tax Act

This amendment aims to provide for waiving of penalties imposed under the Property Transfer Tax Act. Previously there was no legal basis on which they could be waived.

  1. Make it Mandatory for Companies to disclose All their Related Companies

This measure is meant to make intercompany dealings transparent in order to be more able to detect transfer pricing and other tax avoidance schemes.

  1. Move the Due Date for Filing VAT Returns to the 18th Day of the Month following the Tax Accounting Period

This amendment is meant to create a lapse between the filing of Withholding VAT Schedules and VAT Returns so allow for crediting of the Withheld VAT to respective accounts of the suppliers from which the VAT was withheld and avoid wrong charging of penalties.

  1. Introduce Penalties for Failure to Issue a Prescribed Tax Invoice

The measure is meant to enhance the enforcement of issuing tax invoices using prescribed auditable means, such as the use of approved computerized sales and invoicing systems, use of fiscal cash registers and use of pre-printed Invoice books. The penalties shall be structured as follows:

  1. K1,800 of first breach
  2. K4,320 on second breach; and
  3. K9,000 on third breach
  4. Exempt Semi Processed and Unprocessed Tobacco

With this measure, Tobacco Farmers no longer have to charge VAT on their sales and neither will they be able to claim the VAT that they incur in the process on producing tobacco. The VAT therefore becomes part of the cost of production.

  1. Introduce Penalties for Failure to Produce Records for Inspection

This measure is meant to introduce penalties for taxpayers that fail to make available their records for inspection during audits.

Remove Customs Duty on Point of Sale Machines, Electronic Fiscal Devices and Sim Cards

This measure is meant to facilitate the implementation of the Fiscal Device Management System.

Remove Customs Duty on Importation of Ladle Bricks for Steel Manufacturing Plants

The measure is meant to promote steel foundry industry. Ladle brick are used to provide a lining for steel melting furnaces.

Amend the Surtax Schedule

The measure is meant to remove items that were added erroneously on the schedule of item on which a surtax must be levied to discourage their importation, and adding some more.

Remove Customs Duty on Imports of Inputs in The Manufacture of Animal and Fish Feeds

The measure is meant to provide an incentive for the agriculture industry.

Increase Customs Duty on Unmanufactured Tobacco and Tobacco Refuse from 15% to 25%

The measure is meant to harmonies the tax treatment of all tobacco products. “Unmanufactured Tobacco” is a classification of Tobacco import and export.

Introduce Excise Duty at 125% on the Treatment of Goods Classified Under Chapter 2207 of the Harmonized Commodity Description and Coding System

The measure is meant to harmonize the treatment of undenatured ethyl alcohol of an alcoholic strength by volume of 80% vol. or higher; ethyl alcohol and other spirits, denatured, of any strength

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