As Zambia grapples with the challenge of ensuring the sustainability of its public debt, the Centre for Trade Policy and Development (CTPD) has released a statement shedding light on the critical issue of tax revenue performance in the first half of 2023. The analysis comes at a pivotal time when the nation is seeking to minimize its reliance on external financing to fund its national budget.
Tax revenue mobilization plays an indispensable role in Zambia’s financial landscape, with its ability to reduce dependency on external sources. However, the first half of 2023 has witnessed a significant shortfall in meeting tax revenue targets.
According to data provided by the Zambia Revenue Authority (ZRA), the first half of 2023 saw a substantial decline in tax revenues, amounting to 6.3 percent below the targeted figures when compared to the same period in the previous year. This alarming trend was observed across various tax categories, with company tax experiencing a staggering decline of 29.1 percent. Mineral royalty tax declined by 23.2 percent, customs duty by 13.0 percent, and domestic value-added tax (VAT) saw a drop of 6.8 percent.
One of the primary drivers of this revenue decline is the prolonged closure of major mines, resulting in reduced output and consequently a diminished contribution to the national revenue pool. Addressing this issue swiftly is imperative to mitigate further revenue losses.
Furthermore, the net tax collection during this period showed a 7.7 percent decrease, mainly attributed to reduced output in the mining sector, which has had a detrimental impact on key tax categories, especially company taxes.
During the same timeframe, VAT on imports, pay-as-you-earn (PAYE), and withholding taxes emerged as the top three contributors to total revenue, accounting for 21.1 percent, 20.1 percent, and 10.1 percent, respectively. While this signals an increase from the previous year, it also highlights an overreliance on formal sector taxation. There is an urgent need for the ZRA to expand its tax base into the informal sector and encourage its transition into the formal economy. However, the high fixed entry costs into the formal sector act as a deterrent, necessitating government intervention to eliminate these barriers and bolster tax revenue.
As Zambia approaches the presentation of the 2024 National budget, expected later this month, CTPD underscores the importance of resource generation to fund critical sectors such as education and healthcare. This underscores the urgency of addressing the challenges in the mining sector and enhancing tax administration and enforcement capabilities within the ZRA to strengthen revenue streams and improve the performance of underperforming tax categories.
CTPD is calling on the government to expedite the process of attracting investors to revive non-operational mines, thus enhancing revenue generation. These steps are essential to ensure a sustainable fiscal future for Zambia.
Will government ever really reduce PAYE?