Zambia's Tax Revenue Challenges Highlighted by CTPD Amidst Mounting Debt Concerns

In the face of Zambia's ongoing struggle to ensure the sustainability of its public debt, the Centre for Trade Policy and Development (CTPD) has issued a statement shedding light on the pressing issue of tax revenue performance in the first half of 2023. This analysis arrives at a pivotal moment when the nation is actively working to reduce its reliance on external financing to support its national budget.

Tax revenue mobilization plays an essential role in Zambia's financial landscape, as it holds the potential to reduce dependence on external funding sources. However, the first half of 2023 has witnessed a significant shortfall in achieving tax revenue targets.

According to data provided by the Zambia Revenue Authority (ZRA), the first half of 2023 marked 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 concerning 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 behind this revenue decline is the prolonged closure of major mines, resulting in reduced output and consequently a diminished contribution to the national revenue pool. Swiftly addressing this issue is imperative to mitigate further revenue losses.

Furthermore, net tax collection during this period showed a 7.7 percent decrease, primarily 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 underscores 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 emphasizes the critical role of resource generation to fund vital sectors such as education and healthcare. This highlights the urgency of addressing 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 upon 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.