The impact of the 2004 Tax Legislation on the small scall farming sector

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Phillips, Martin William
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By end-2003, Government was "off track" with the IMF and HIPC "completion" was unattainable. Excessive government borrowing had to be curbed and this required, inter alia, that the tax effort be raised to nineteen percent of GDP. Thus, a three percent presumptive tax on annual turnovers of under K 200 million was introduced and farms producing unprocessed produce could no longer claim back input VAT.Using tax entity models for small-scale farms, PSV operators, employees and "high-profit, low-cost" enterprises, this paper shows that the change in the tax treatment of small-scale farms fell short of accepted standards of taxation and wider notions of justice. Significant horizontal and vertical, inter-temporal and inter-entity, inequity resulted, the cost effectiveness of the tax is not a priori demonstrable - especially with high marginal tax rates providing an incentive for tax evasion and avoidance - and there was conflict with society's wider "growth with equity" objectives. Further, ex ante uncertainty as regards tax/penalty liability has arisen, undermining the basic tenets of the "rule of law" by conferring increased discretionary powers on officials (with potentially large material consequences on citizens) without adequate legislative control.The paper concludes that the main motive for the 2004 tax legislation was to raise revenue, a motive pursued without due regard to recognised standards of taxation, which were violated as a result. These violations could have been mitigated or eliminated if the presumptive tax had been better designed thereby attaining a better balance between revenue and justice to the taxpayer. Thus, a "lower threshold" for the tax could have been factored into the legislation or it could have been based on a presumed level of cost deduction from turnover, with the option given to the taxpayer to deduct actual costs if these were higher.
Tax Legislation - Zambia