By Florence B. Muleya and Malindi Msoni
On the 9th of October, 2015, during the national budget address, the Minister of Finance announced the Government's plan to raise K41.9 billion from domestic resources in 2016, representing 20.4% of Gross Domestic Product (GDP). Currently, with falling copper prices, severe energy shortages and a depreciating Kwacha, meeting the 2016 revenue target is likely to be an uphill battle compared to the 2015 revenue target of 18.1% of GDP. Moreover, Government has often revised revenue targets downwards even in years with good economic performance.
Revenue collections will be hampered by job losses, lower production levels, lower volumes of merchandise trade and lower overall growth.
Domestic revenues are important for any government to carry out its responsibilities. They are categorized into tax and non-tax revenue. Tax revenues comprise levies charged on income, wealth and consumption, production and sale of goods and services and on imports and exports. These are in form of Income Tax, Value Added Tax (VAT), and trade taxes. Non-tax revenues originate from fees and charges on various services provided by government and fines on offences. Examples are charges for the issuance of licenses and fines on traffic offences. Most of the domestic revenues collected in Zambia are in form of tax revenue.
The successful collection of domestic revenue often depends on the health of the economy. Economic growth for Zambia from 2004 to 2014 averaged 7.7%, while it is expected to grow at 4.6% in 2015 and 5% in 2016. With such a slowdown in the growth of the economy, it is expected that production and therefore incomes and consumption will contract. Consequently tax revenues will reduce. For example, some mining companies have resolved to suspend or cut down their operations resulting into a number of job losses. Recently, Mopani Copper Mines, laid-off over 3,051 workers. This may reduce the expected tax collections from Company Income Tax, Pay As You Earn (PAYE) and VAT.
Importing goods for consumption and production have become expensive because of the depreciation of the Kwacha. Even though the depreciation is good for exports as exporters earn more, Zambia unfortunately is not reaping the benefits, because the country's base for non-copper exports is so small. The increasing cost of importation is likely to impact negatively on the collection of revenue from trade taxes. For example, to boost revenue collections in 2016, Government has proposed an increase of customs duty on selected categories of motor vehicles and a surtax on vehicles older than five years. However, should the Kwacha continue to fall in 2016, the cost of importing motor vehicles will become prohibitive and is likely to result in a fall in motor vehicle imports and therefore less government revenue.
Government's plan to raise an extra K5 billion from non-tax revenue in the form of fees and charges on land and fees and fines in the Immigration and Forestry departments, may see a reduction in 2016. While increasing revenue collections from land consideration fees is tenable given the increase in the demand for land, the increase in the general cost of living due to rising inflation may reduce the demand for land and hence the amount of revenue collected. In addition, the recent reversal of the increase in fines and fees for traffic offences and services could make reaching this target even tougher.
The challenges with raising revenue in Zambia are centred on the narrow tax base, weak revenue administration capability, weak enforcement and low tax morale. Efforts have been made to tackle these weaknesses but more can be done. To widen the tax base, tax incentives need further streamlining, as significant amounts of money are being foregone from these incentives. A report by the Ministry of Finance indicates that almost K967 million and K10.4 million was lost through forgone import duties and incomes taxes respectively, between 2006 and 2012. Maintaining disproportionate incentives may deter tax morale and encourage tax evasion in smaller entities.
The capabilities of the tax authority to improve compliance and morale have a lot to do with information sharing and accountability. Government should intensify tax payer education to ensure that tax payers are aware of their role and the benefits of paying tax. While Internet solutions like Tax-online are welcome, mobile tax services should be introduced, since they have a wider catchment and more useful in ensuring successful resource mobilisation. To improve non-tax revenues, direct deposit initiatives should be rolled out to all government departments and ministries in charge of non-tax revenue collection.
Taxing the informal sector has continuously been elusive and it is surprising that a decision to revoke presumptive taxes and renounce the increase effected in January 2015 was made at a time when Government is trying to enhance domestic revenues. Government will therefore miss an opportunity to widen the tax base and therefore increase revenue collections.
With such a high target on revenue collection in 2016 given the prevailing economic conditions, it will be important to safe guard all proposed revenue measures from any form of erosion.
The authors are researchers at the Zambia Institute for Policy Analysis and Research (ZIPAR).
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