By Florence Banda-Muleya
On the morning of 24th April 2017, Zambia Revenue Authority (ZRA) announced that it had declared a tax amnesty. This undertaking showed that Santa had come early and was not being discriminatory!
A tax amnesty is a limited-time opportunity granted to defaulting taxpayers, to pay their tax liabilities that should have been paid in previous tax periods in exchange for forgiveness on penalties and interest and without fear of criminal prosecution.
Under this amnesty the Commissioner General of ZRA has exercised his powers to waive all interest and penalties accrued for late returns and non-payment of taxes due. Non-compliant taxpayers are to be forgiven their bad debts accrued in interest and penalties, only if they submit their outstanding tax returns and pay their principal tax obligations for periods prior to 1st March, 2017. The amnesty season is to run for three months until 31st of July 2017, and is, in my view, sufficient time to allow taxpayers to put their houses in order.
Tax amnesty has been used in Zambia before and is also extensively used in other countries. In the last quarter of 2016, ZRA declared a tax amnesty on smuggled motor vehicles. Elsewhere, the UK uses a continuous tax amnesty to encourage voluntary tax compliance on rental taxation. Those who voluntarily apply and pay tax accrued for previous years are either charged no or a small penalty depending on the reason. The aim is to get the taxpayer registered, formalize their economic activities and bring them under the tax net.
Under the motor vehicle tax amnesty ZRA raised K3.6 million. This strategy has now been extended to all outstanding principal tax liabilities. ZRA anticipates to raise over K8 billion, an amount almost equivalent to what has been provided for road infrastructure in the 2017 national budget. Noteworthy exceptions from the amnesty include cases under litigation and investigation, as well as interest and penalties relating to assessments from audits. Additionally, penalties arising from customs duty and property transfer are excluded.
The purpose of the recent tax amnesty is to dismantle the huge taxpayer arrears. ZRA estimates that it is owed over K15.9 billion. A large portion of this debt - at 98.7% - is from inland taxes and the debt has been increasing at a fast rate. For instance, sums unpaid for domestic VAT amounted to K11.3 billion, Company Tax at K3.6 billion, PAYE at K473.4 million, while Mineral Royalty and Turnover Tax were at K133.8 million and K75.9 million respectively in 2014.
The amnesty is advantageous for both ZRA and defaulting taxpayers. Default for taxpayers can be attributed to various factors. One of the reasons well known in tax literature arises from the need for cash flow if the firm is credit constrained, particularly if the penalties and interest paid on defaulted tax amounts are below interest rates in the money market. This provides an incentive to default on taxes than to borrow money at market rates. Others, once default has set in, may choose to remain hidden to avoid paying the defaulted amounts and what may have accrued in penalties and interest. These penalties and interest can accumulate to exorbitant levels and thereby threaten the existence of a firm.
For example, an individual that delays to submit a return is charged K1,800 for every month that the return delays. The penalty is stiffer for a limited company at a monthly charge of K3,600 for a late return. Suppose the tax amount to be paid on the return is K1,000 and that the return is filed in 3 months late. The penalty for the late return will be K5,400, five times more than the tax obligation for an individual and as high as K10,800 for a company. Furthermore, should the K1,000 tax remain unpaid, a further fine of 5% or K50 is charged in penalties and additionally interest discounted at the rate published by Bank of Zambia plus 2% is charged for those 3 months.
The penalty amount (K10,850) together with the interest might present an incentive for defaulting taxpayers to remain unidentified, hoping they will not be audited. However an amnesty allows them to pay off what rightfully belongs to Caesar (K1,000) without squeezing the life out of their existence. As such the tax authority receives its share of tax that would have remained concealed, while the tax payer is allowed to start smart on a clean sheet.
As countries elsewhere have learnt, declaring tax amnesties encourages citizens to become compliant. This move will help those that were not on Santa’s good behaviour list to clear their tax debt as delayed tax is delayed development. Though the amnesty is a good thing and ZRA is commended for adopting the measure, there is need to understand the reason behind non-compliance. Since taxes need to be collected timely, penalties therefore have their place. However it is worth reviewing the regime to concurrently improve voluntary compliance and avoid another amnesty to support the revenue mobilisation measures of the Government.