Investment Incentive Aspects of Zambian Tax Laws

Abstract

In the Zambian economy, Taxation holds a key role to economic development. This has been the case since the time of independence in 1964 when the use of five-year development plans was introduced. Since then, what has troubled the minds of economic planners has been to devise a system of taxation, which, while providing the government with sufficient revenues to finance its developmental and non-developmental expenditure, it does not create disincentives to local and external investment. During the earlier days, the demands for reform made by prospective investors created the impression that the tax system was more revenue-oriented than to attract foreign investments. This impression was to a considerable degree confirmed by the fact that government has relied quite heavily on tax revenues. However at present, demands for tax reform have subsided, and two facts can account for this. The first obvious one is that there has been a considerable amount of reform already which has satisfied the minds of investors especially corporate foreign investors who made the most demands. The second one is the fact that, owing to government infiltration into the bulk of our private sector enterprises, e.g. the 5T£ takeover of the Mining Industry and the many companies controlled by the Industrial Development Corporation (INDECO), the influence of officers who owe greater allegiance to the government has been to make less demands for tax reform which would reduce government tax revenue. As at present, there is an urgent need to rationalise the tax system so that it should fall more in line with the economic circumstances of the country. In some cases, there is the need to create incentives for investment even if these would reduce revenue, because the long term benefits would be substantial. This is more so in the fields of farming and the creation of a rural economy which would both create additional employment facilities. In other cases, reform is needed in order to enable the flow of more revenue to the Government. This would offset the loss in revenue occasioned by the incentives granted as suggested above. In this paper we have not made concrete suggestions for reform. However, the criticisms made of the system of taxation should form a good basis for formulating any future reform. Finally, one should not forget to mention that the lack of suitable manpower has contributed to a large extent to the lack of reform and in some cases to undesirable reform. For as long as this constraint continues, no major changes in the Zambian tax system may be expected.