Government cannot afford to ‘baby-sit’ mines

EMELDA Musonda.

GOVERNMENT’S bold step to raise more revenue through corporate tax reforms and particularly mines is not only commendable but a necessary measure to boost the country’s resource basket amid huge debt obligations.
Getting more revenue out of mines is also the only way to give Zambians a fair share of their mineral wealth.
Increased revenue from mines will certainly help reduce the budget deficit from 7.4 this year to the targeted 6.5 percent of gross domestic product next year, according to a medium-term expenditure plan that sets the fiscal course until 2021.
For a long time many Zambians have raised concern over the country’s failure to derive desired benefits from its mineral resources.
Despite being endowed with so many precious minerals, Zambia continues to grapple with high poverty levels estimated around 60 percent.
Given that mines are in the hands of foreign investors, it is within their legal rights to externalise profits to their countries of origin.
This means the country can only benefit through taxes paid by mines, job creation and engagement of local contractors and suppliers.
While this may be so, many have contended that mines are treated with kid gloves when it comes to tax obligations.
Many stakeholders, including economic experts, have argued that citizens have carried the weight of the country’s tax burden while mines have enjoyed tax incentives such as tax holidays and value added tax refunds.
Economic Association of Zambia president Lubinda Haabazoka observed that:
“How can you pay mineral royalty of 3.5 percent and then fail to declare corporate income tax despite the fact that you receive US$700 million in VAT refunds, US$240 million in electricity tariffs, US$60 million in fuel subsidies? It’s high time the mines came on board to help Government raise resources.”
Dr Haabazoka also said “Government buys power from Maamba coal plant at 13 cents then sells to the mines at 6 cents when households and other companies pay 9 cents? Mines should stop holding Government at ransom.”
Like Dr Haabazoka, many have been unsettled by mines’ perceived tendency to armytwist Government through job cuts threats.
This has been perceived by many as a strategy to reap more benefits from the mines by paying low taxes through overly generous incentives.
Mines, like many other multinational companies, have also been notorious in as far as dodging tax is concerned.
The country has been losing huge sums of money through tax avoidance by under-declaring mineral production and pricing.
It is therefore not surprising that despite the country being rich in natural resources, this has not translated into poverty reduction and development.
Through generous tax incentives and tax avoidance, the country has been losing out on money which could be invested in public services such as education and health, among others.
However listening to the 2019 national budget presentation by, Minister of Finance Margaret Mwanakatwe, hope is ignited that Zambia is poised to begin reaping more benefits from its mineral wealth.
The minister acknowledged that the nation is endowed with vast mineral resources which transcend beyond copper and cobalt.
She submitted that as mineral resources are diminishing in nature, it is vital to structure an effective fiscal regime for the mining sector to ensure that Zambians benefit from the mineral wealth our country is blessed with.
As such, the minister proposed an increase in the mineral royalty rate by 1.5 percentage points at all levels of the sliding scale.
She also proposed the introduction of a fourth tier rate at 10 percent on the sliding scale mineral royalty regime which would apply when copper prices rise beyond US$7,500 per metric tonne.
Other tax regime reforms include non-deductibility of mineral royalty as an expense from company income which previously contributed to tax losses, by preventing mines from paying income tax, taxing the imports of copper and cobalt concentrates at 5 percent, increase of withholding tax on dividends, interest and branch profits from 15 to 20 percent.
The major tax reform is the abolishment of the VAT system replacing it with sales tax.
The VAT system allowed the mines to enjoy refunds as incentives for value additions.
According to Zambia Revenue Authority, the country is losing about K9.6 billion annually in VAT refunds.
At a time when we are implementing austerity measures this is certainly unsustainable.
As we work towards reducing fiscal deficit, maintain a sustainable debt position and safeguard the vulnerable in our society, we need a robust and broad resource mobilisation strategy, and the new mining tax regime takes us in this direction.
At a time when we need to effectively utilise our resources, we cannot afford to continue lavishing mines with subsidies and other overly generous tax incentives.
The author is Zambia Daily Mail editorials editor.

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