KALONDE NYATI, Lusaka
LIKE many countries looking for foreign direct investment as a means of contributing to economic development, Zambia over the years opened up the country for investment using various incentives. Among them were the five-year tax holidays, which have now been discontinued effective January 1 2018.
The tax holiday, which is a five-year incentive facilitated through the Zambia Development Agency (ZDA), enabled the country to attract FDI investments in various sectors of the economy.
These incentives also made it easier for the country to be marketed in the midst of global tight monetary and economic conditions. Despite this scenario, Zambia managed to attract investments due to the various tax incentives such as the tax holiday, and the non-restriction of foreign exchange as long as one has declares the source of funds.
The tax incentives were meant to boost the country’s economic development, however, some investors saw loopholes, which they ‘abused’ to their advantage and disadvantage of Zambian people. For example, some companies opted to wind up their operations in Zambia when their tax holiday ended, only to re-appear under a different name.
This compelled civil society organisations (CSOs) to condemn the tax incentive because of its propensity to favour foreign firms at the expense of poor Zambians.
According to a report published by ActionAid in June 2013,the cost of tax incentives extends beyond reductions in public spending, and to make up for the lost revenue, governments also raise taxes on ordinary people.
In addition, tax incentives corrode confidence in the tax system, while damaging ‘tax morale’.
“Eliminate all tax holidays, publicly review all tax incentives, assess the amount of tax foregone from incentives and ensure incentives are well targeted and commensurate with the benefits expected to citizens. Governments should further publish a costing and justification for each incentive offered, followed by monitoring of conditions and a tally of costs and benefits, so the public can see the impact of tax incentives,” the ActionAid report states.
It is probably against that background coupled with consultations that Government has decided to discontinue the incentive in place of an accelerated depreciation for capital expenditures by qualifying investments in priority sectors.
However, the development has been received with mixed feelings by various sections of society with the Centre for Trade and Development (CTPD) commending Government for abolishing the tax holiday because it only benefited foreign investors at the expense of local investors.
CTPD trade policy programmes assistant Emmanuel Muma said the pronouncement by the Minister of Finance Felix Mutati is a welcome move as CSOs have always called for the revision of the tax system for the benefit of the people.
“The move to remove the tax holiday and curb tax evasion should be welcomed by well-meaning Zambians. Government should consider removing similar pieces of agreements such as the double taxation if they are to further curb revenue leakages and secure more revenue from the key economic sectors,” Mr Muma said.
Similarly, the Bankers’ Association of Zambia (BAZ) has hailed the development, saying the new accelerated depreciation for capital expenditures tax relief will go to specific interventions that investors will bring into the country.
BAZ chief executive officer Leonard Mwanza said, “Government has given investors a new tax relief in terms of the wear and tear of the equipment they bring in, so it’s more directly to their productivity,” he said.
Mr Mwanza explained that if an investor is coming into Zambia and bringing equipment for their operations, it makes sense that the equipment is allowed to depreciate faster as opposed to five years without paying taxes.
However, auditing firm EY notes that the measure might contradict the objectives stated in the Seventh National Development Plan to develop a smart economy.
EY also says the change may not solve core problems surrounding the current tax incentives regime, where capital allowance reliefs expire before or at the same time as the tax incentives.
“The replacement of an incentive based on taxable profits with an incentive based on capital allowance reinforces the focus on manufacturing and the industrial economy at the expense of the knowledge economy that should be a driver of economic growth,” the EY statement reads.
EY argues that the change will offer little incentive for investments in the service industry, which is key to diversification and strong economic growth.
Private Sector Development Association chairperson Yusuf Dodia observed that most of Zambia’s incentives for investment tend to be targeted at foreign investors which in some way, compounds the current scenario whereby most major industries in Zambia are foreign owned.
“If the country is to begin to make inroads on the shifting of dependence from foreign investors towards domestic investors, then the tax holiday will play a useful role in achieving this goal. The difficulty with the application of the tax holiday has been the lethargy in the Ministry of Finance in delivering on the investment incentives offered by the ZDA,” Mr Dodia said.
It would therefore be useful for Government and the ZDA to do an analysis of the investment incentives and take into account the slow pace of application for incentives and the red-tape that may undermine this initiative which is meant to attract high volumes of both foreign and domestic investors.