Implementation of Sales Tax Will Increase Prices and The Cost of Doing Business

Lusaka, May 21, 2019

We as civil society organisations are concerned about the negative impact that the implementation of sales tax will have on our economy and citizens particularly women, children and other vulnerable groups.

If implemented the proposed sales tax, which involves tax imposed at every stage of the supply chain, will result in a steep rise in the cost of goods and services and ultimately result in higher poverty levels. Given the higher probability of sales tax increasing citizens’ tax burden, there is need for a fairer and more progressive tax system within the existing gender and age inequalities.

According to Zambia Institute for Policy Analysis Research’s analysis it is estimated that the proposed sales tax will create an effective tax rate of 23% for Zambians (i.e. the average rate on goods and services across the economy), up from an effective rate of 13% under VAT (allowing for exempt and zero-rated items). Such a tax rise will hit an already fragile economy, and further squeeze living standards for a struggling population.

We are of the view that government should address the existing limitations with the VAT system instead of replacing it with Sales tax. However, should the government insist on proceeding to enact the bill, to extend the time period for implementation up until sometime after the current Medium-Term Expenditure Framework (MTEF) planning period which will help coordinate sales tax with the existing government policy.

Concern 1: Sales tax will increase prices

The proposed sales tax will be imposed at every stage of the supply chain. This means that from importation, manufacturing, production, distribution, wholesale and retail point of supply a tax will be paid to the government. We are concerned that this taxation across the value chain will make goods and services more expensive for consumers.

At every stage of the value chain there will be a 9% tax levied on the supplier and the longer the supply chain will be the more costly these goods will be for final consumers. For imported goods the rate will be 16%. This will increase the price of goods across the spectrum: for example, the tax additional tax burden on soap could be up to K1.14, which could be passed on to consumers while the additional tax burden on a mobile phone priced at K2699 could be up to K543.04, which would see a price increase of K271.52 if just 50% of the cost was passed onto consumers. This tax will thereby increase the cost of living for ordinary Zambians who are already burdened with high living expenses in the country. Currently, the Basic Needs Basket for a family of five is at ZMW 5,519 which is way above the average income of most poor households.

These indirect taxes are paid on economic transactions which affect the ultimate price borne by consumers and therefore have a strong impact on the household budget for the poorest. Currently the poverty rates are high with rural poor standing at 76.6 per cent and 23.4 per cent in urban areas including extreme poverty rate among women standing at 60% and even higher among those aged 60 years and above. The inflationary pressure of the sales tax will hit the poorest and most vulnerable and therefore threatens to increase Zambia’s already high poverty rates.

Concern 2: Sales tax causes job losses

If goods and services are too costly for ordinary citizens, this slows down the rate of economic activity and has negative implications for businesses which will be at loss if their products are no longer affordable for consumers. When economic activity is low due to less consumer spending, firms reduce their workforce and unemployment rises. If businesses are no longer making sustainable profits this forces them to close down which is a blow to the Zambian economy as the private sector is instrumental to economic growth.

We are also concerned about the implications that the tax will have on Zambian businesses along the value chain and in different sectors of the economy. Firstly, the sales tax will increase the costs of production for domestic manufacturers by increasing the purchase price of locally sourced and imported raw materials and semi-finished products for locally-produced commodities. Secondly, the cascading effect of sales tax will incentivize large manufacturers and retailers to sell or buy goods directly from each other, which cuts out wholesalers and distributors from the value chain, which will damage the many SMEs that make up the sector and create jobs. This effect can be encapsulated by the fact that domestically produced goods selling into supermarkets could face a higher tax burden of up to 36% than goods imported directly by the store at 25%. The effect of the sales tax will disadvantage Zambian firms, particularly SMEs, at home and when exporting.

Concern 3: Economic slowdown will impact revenue

Sales tax was introduced to increase resources domestically, but we are concerned that the introduction of the sales tax will not achieve this objective. If, as expected, sales tax harms economic growth, the tax base will narrow as profits fall and companies close down. This means that sales tax will not increase revenue and will exacerbate the already constrained Treasury ability fund poverty reduction in the face of growing debt servicing costs.

As the government prepares to implement the sales tax, we would like them to clarify on the following:

  1. What projections have been made on the impact on growth, inflation, unemployment, poverty, trade and revenue?
  2. How have the tax rates been decided and what is the objective and expected impact of setting the tax at these levels?
  3. How have the exempted goods been chosen? How will the exemption regime mitigate the risk to businesses with a smaller voice, as well as the risk of corruption?

Civil society recommendations

Given the serious risk of the proposed sales tax to inflation, jobs and government revenue, we urge the government to delay implementation so that measures can be put in place which ensure the burden on consumers and businesses is minimized.

We are of the view that the proposed rates of 9% and 16% should be lowered to 5% as this is charged at multiple points of the supply chain and the cascading effects will result in sharp price increases for final consumers.

We wish to urge government to carefully consider the consequences of taxation policy due to the harmful negative effects of the proposal on the economy and on poverty. Sales tax will increase consumer prices, pushing people into poverty, particularly women and the elderly, who bear the brunt of high poverty levels and inequalities. In turn Zambian businesses will suffer, with the result of job losses.

While it is important to mobilise domestic resources as part of the government’s fiscal consolidation programme, we do not believe the sales tax in its proposed form will achieve this aim and will in fact be harmful. We therefore call on Government to consult with civil society and businesses and demonstrate how the proposed change to the tax regime will protect citizens as consumers, workers and business owners.

This statement is endorsed by the following organisations:

Non-Governmental Coordinating Council (NGOCC)

Civil Society for Poverty Reduction (CSPR)

Jesuit Centre for Theological Reflection (JCTR)

Centre for Trade Policy and Development (CTPD)

Support to Older People in Zambia (STOP Zambia)

Consumer Unity and Trust Society (CUTS) International

Zambia Council for Social Development (ZCSD)

Action Aid Zambia