The roots of Zambia’s need for debt restructuring lie in low tax collection, as the only alternative for the government to bridge the budget deficit is borrowing, says Twivwe Siwale, an IGC economist and a former tax inspector in Zambia. The IGC is carrying out research on tax for the Zambian government to use in formulating policy.
In 2021, about 19% of Zambia’s GDP was collected in tax, about half the level of developed countries. For the state to be able to deliver modern services and infrastructure, tax collection needs to increase to around 40%, Siwale says.
She sees no mileage in increasing tax rates and says such a move could even lead to the tax take being reduced. A challenge for Zambia is the “underperforming” rate of VAT collection, Siwale says. This can be improved without increasing the tax rate. “It’s an issue of enforcement,” she says.
Maximising mining gains
Zambia’s 2023 budget reforms the mineral royalty regime to achieve a smoother sliding scale. Tax rates now apply to the incremental value in each price band, as opposed to the overall aggregate value, which led to sharp increases in the overall liability when a threshold was crossed.
There was also a reduction in the property transfer tax from 10% to 7.5% on exploration rights to encourage more exploration.
The mining tax regime in Zambia has changed about 10 times in as many years and what is needed now is predictability, Siwale says.
Zambia has been seeking to increase the size and predictability of revenue streams from mining as it seeks to raise annual copper production from the current 830,000 tonnes to 3 million tonnes over the next decade.
Finance Minister Situmbeko Musokotwane has said that a shift from dividend payouts to a royalty model, agreed with First Quantum Minerals in April, will lead to a doubling in revenue collection from Zambia’s largest copper mine at Kansanshi.
Previous booms in the copper industry have shown that “we don’t ride the wave well” when prices are high, Siwale says. She sees a need for the mining sector to become more broadly anchored in the economy.
One way would be to encourage mining companies to produce excess electricity to support the wider economy, she says. Miners should also be encouraged to build up local supply chains, as most supplies are still coming from foreign sources, Siwale adds.
“The instability in the tax rate is a hindrance. Tinkering with the tax rate has not worked in the Zambian case.” The administration needs to concentrate on building a technically skilled team to improve collection, she says.
The way in which tax revenues are spent is crucial. Decades of economic growth have not resulted in a reduction in poverty levels, but has simply seen a “corporate boom and bust” cycle, says Shahrukh Wani, IGC’s country manager for Zambia.
Revenues generated in boom times need to be spent on education, skills and improving internet connectivity, Wani says.
Digital processes and data are key, Siwale says, pointing to the use of dashboards by tax authorities in Tanzania to synthesise information. In Zambia, she says, data is “not being harnessed and used” enough.
Zambia can’t do everything alone. Taxation requires global solutions in areas such as sharing information on corporate activities as companies seek to “optimise” tax by obscuring the real nature of their operations, Siwale concludes.
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