The Zambian Minister of Finance and National Planning, Dr Situmbeko Musokotwane, (Minister) delivered the 2022 National Budget Speech to the National Assembly on 29 October 2021, the first after a change of Government.
The Minister proposed ZMW 173 billion in spending, aimed at both supporting the country through the effects of extreme indebtedness and stimulating economic recovery in the wake of the COVID-19 pandemic.
The Budget— themed ‘Growth, Jobs and Taking Development Closer to the People’— is equivalent to 37.1% of the country’s gross domestic product (GDP), surpassing the 2021 Budget, which equalled 32.6% of GDP forecast for that year.
From extending pandemic business support, to putting in place legislation that promotes innovative financing for climate change interventions, the Budget outlines Government’s ambitious plan to rebuild the country in a way that ‘takes resources closer to the people through decentralisation’.
Further, the Minister underscored that Government’s focus will be to increase output in the agriculture, tourism, mining, manufacturing, energy and transport sectors, to grow the economy and to create employment opportunities.
To achieve the aims of the Budget, including increasing output in the above-mentioned sectors, attaining a GDP growth of at least 3.5%, and reducing inflation to a single digit, the Minister proposed to undertake major legislative and structural reforms.
Notable and cutting across all sectors, the Minister has proposed to reduce the standard corporate income tax rate (CIT) to 30% from 35% for corporate entities. This excludes the top marginal tax rate for telecommunications companies, which is maintained at 40%.
In this article, members of our Corporate Practice give their views on some of the business and tax reforms including:
- re-introducing fiscal incentives to promote manufacturing in economic zones;
- extending tourism fiscal relief for another year;
- re-introducing the deductibility of the mineral royalty for corporate income tax assessment purposes;
- introducing measures to support the agricultural and agro-processing sectors;
- using public-private partnerships (PPPs) to fund transport infrastructure; and
- using the insurance sector as a source of revenue.
Re-introducing fiscal incentives to promote manufacturing in economic zones
The Government has outlined its plans to grow the manufacturing sector by facilitating trade and investment, enhancing the competitiveness of local products and concretising value addition.
In his Speech, the Minister revealed that Government will reinvigorate the programme of multi-facility economic zones (MFEZs) and industrial parks by providing tax incentives to increase private sector investment.
The Zambia Development Agency Act 11 of 2006 (ZDA Act), a key legislation on foreign direct investment in Zambia, provides the legal basis for MFEZs and industrial parks in Zambia.
At present, four MFEZs have been established: the Lusaka South Multi-Facility Economic Zone (LSMFEZ), Zambia-China Economic & Trade Cooperation Zone (ZCCZ) (also called the Lusaka East Multi-Facility Economic Zone); Chambishi Multi Facility Economic Zone (CMFEZ) – a sub-zone of ZCCZ; and two industrial parks: Roma Industrial Park and Sub-Sahara Industrial Park.
The full potential of MFEZs has, however, not been fully realised, for example, the Lusaka South MFEZ has reported that of the 62 companies approved to operate in the MEFZ, 17 are operational, 31 are in the process of obtaining sector approvals and 14 are at different stages of construction.
The reinvigoration of the concept of MFEZs and industrial parks is based on the evidence that a strong and competitive manufacturing sector is the foundation for any country’s economic growth.
The Government has noted the need to penetrate regional and international markets to expand output from Zambia whose internal market is limited. This access to export markets will be encouraged through Zambia’s participation in regional trade bodies and ratification of the African Continental Free Trade Area.
To encourage investment in the MFEZs and industrial parks and to propel Government’s long-term strategy of promoting growth of the manufacturing sector, the Minister of Finance has proposed the following measures:
- introduction of 0% tax for a period of 10 years from the first year of commencement of works in an MFEZ or industrial park, on dividends declared on profits made on exports;
- introduction of 0% tax for a period of 10 years from the first year of commencement of works in an MFEZ or industrial park, on profits made on exports;
- taxation on profits made on exports by companies operating in the MFEZs and industrial parks to increase to 50% of profits of profits for years 11 to 13 and 75% of profits for years 14 and 15.
- reduction of the threshold for a Zambian citizen to qualify for incentives provided under the ZDA Act to USD 50 000.
In addition, the Government has suspended CIT for persons carrying on the business of manufacturing ceramic products for the 2022 and 2023 charge years. To further promote the growth of the ceramic industry, the Government proposes to increase customs duty to 25% from 15% on floor and wall tiles imported from outside the SADC and COMESA regions.
Apart from the tax incentives, and to align the above measures with other investment objectives, the Government has indicated that it will undertake a comprehensive review of the investment promotion strategy. Therefore, more changes aimed at encouraging investment in Zambia are expected.
Extending fiscal relief for another year
In the 2021 Budget, Government reduced the CIT rate on income earned by hotels and lodges on accommodation and food coaches, to 15% from 35%. The Government has extended the reduced CIT to the 2022 fiscal year.
Other retained and new COVID-19 relief measures include the:
- suspension of registration fees for hotel managers;
- suspension of licence renewal fees paid by hotels and lodges;
- retention of fees paid by tourism enterprises;
- suspension of the15% customs duty on tourist buses and coaches (double-decker) and safari game viewing vehicles; and
- reduction of visa fees of all categories by 50%.
These measures are aimed at putting the sector on a course to recovery and to market the country as a favourable tourist destination.
To promote the growth of tourism, the Government has outlined plans to develop other parts of the country by establishing the necessary infrastructure and regulatory framework that will make them attractive for the private sector to establish hotels, lodges and other tourism facilities.
On the revenue side, these measures are expected to result in the revenue loss of around ZMW 2.9 million. However, this is significantly lower than the estimated USD 400 million lost because of the negative impact of the pandemic on the country’s travel and tourism industry and its entire value chain.
Government has indicated that in addition to the relief measures introduced, it will also reduce the number of licences required to operate in the sector to reduce the cost of doing business in the sector and to promote investment.
Re-introducing the deductibility of the mineral royalty for corporate income tax assessment purposes
The Minister of Finance and National Planning has proposed to re-introduce the deductibility of the mineral royalty for CIT assessment purposes, beginning January 2022.
The proposal, which will ensure compliance and uniformity with international best tax practices, settles what has been the mining companies and stakeholder’s call, over the last three years, to treat mineral royalty payments as a deductible expense to avoid double taxation and attract investment in the sector.
The proposal is anchored on the Government’s desire to benefit from the expected copper boom, as well as to ramp up production.
In particular, the Government is looking at facilitating the increase in copper output from the current 800 000 to over three million metric tonnes over the next 10 years and promoting further exploration and value addition to spur job creation, investment, foreign exchange and economic development.
Stakeholders in the sector have observed that the non-deductibility of mineral royalty tax encouraged tax avoidance and negatively impacted the sector, particularly, the mining companies’ ability to see Zambia as a prospect for investment or expansion of existing projects in the case of existing companies.
Other tax measures relating to the mining sector include the extension of property transfer tax (PPT) on transfers of mineral processing and other mining-related licences.
At present, only a transfer of a mining right is subject to PTT while the transfer of a mineral processing licence is not. This measure aims to subject transfers of mineral processing licences to PTT as they have intrinsic value akin to mining rights.
In terms of the MRT rates, the Minister has maintained the MRT rates based on a sliding scale and has intimated plans to review the rates in future as part of the Government’s broader mining tax policy framework.
Elsewhere, the Minister revealed that the Government is currently undertaking a comprehensive audit of the mining licences issued, to develop and implement reforms that will increase local participation in the mining sector.
Introducing measures to support the agricultural and agro-processing sectors
The Government has announced a series of support measures aimed at opening market access, developing value chains, enhancing mechanization, and mitigating effects of climate change in the agriculture sector.
The agriculture sector employs over half of the workforce, although its contribution to GDP has gradually declined to just 2.7% by 2020. Nonetheless, agriculture has been identified as the best opportunity to attain economic growth and diversify Zambia’s economy.
The sector faces challenges ranging from low productivity levels, insufficient agricultural support infrastructure, inadequate delivery of extension services, inadequate value addition, high cost of finance and dependence on rain fed agriculture.
To promote large scale estate production for both domestic and export markets, the Government has proposed to zero-rate value added tax (VAT) on the following selected agricultural capital equipment and accessories:
- Manure spreaders;
- Combine harvesters;
- Commercial sprinkler irrigation systems;
- Animal feed grinder-mixers;
- Pelleting machines;
- Trailers of a specific HS code; and
- Dryers for agricultural products of a specific HS code.
The Government has also committed to providing the necessary infrastructure for farm blocks and completing and operationalising the ongoing irrigation infrastructure projects.
Further, as part of the agriculture mechanisation initiative, the Government indicated that it would mobilise highly concessional financing for irrigation equipment for small-scale farmers.
Other measures include the extension of the suspension of customs duty on the importation of refrigerated trucks for agro-processing to December 2022 and the removal of the 10% export duty on maize which became effective 1 November 2021. This is aimed at stimulating maize production and enhancing the competitiveness of maize exports.
Relief proposals have also been extended to the livestock subsector, particularly the removal the 5% customs duty on importation of cattle breeding stock, and the suspension of the 5% customs duty on grandparent and/or parent stock of day-old chicks when imported by a breeding company, for a period of 12 months.
These initiatives could guarantee significant improvements in the lives of most Zambians in the long term – in the form of direct and indirect employment, business opportunities, out grower schemes and foreign exchange.
Using public-private partnerships to fund transport infrastructure
The Minister has revealed that Government will aggressively pursue PPPs, as a mechanism to fund and construct transport infrastructure.
The Public-Private Partnership Act 14 of 2009 (PPP Act) defines ‘public-private partnership’ as investment through private sector participation in an infrastructure project or infrastructure facility.
Speaking during the 2022 National Budget presentation, the Minister said Government will exploit the PPP funding model to overhaul the existing rail line and construct new railway spurs as well as roads.
In the aviation sub-sector, the Minister outlined that the focus will be on the completion of Kasama and Mbala airports as well as the rehabilitation and maintenance of provincial airports and aerodromes to facilitate air transport for both cargo and passengers. While in road transport, priority will be placed on maintenance, rehabilitation and upgrading of feeder roads and rehabilitation of economic roads, some of which are in a deplorable state.
The Minister, who acknowledged that the financing requirements to construct new roads as well as rehabilitate and maintain existing roads was beyond the financial capacity of the Government, noted that the PPP mode of financing would be very successful because Government had already received some proposals.
Further, the Minister presented that Government will repeal and replace the PPP Act, adding that the new Act will address the shortcomings of the current law by ensuring mutual benefits to the public and private sectors and will also enhance the enabling environment for local and foreign investment.
The Minister, who emphasized that transport infrastructure and systems are the arteries through which the economy pulses, appealed ‘to the private sector to come forth and take advantage of business opportunities by investing through PPPs’.
This seems to be part of the Government’s broader framework to leverage PPP investments to deliver balanced and integrated infrastructure development.
The PPP approach will not only supplement Government efforts in infrastructure development but also free resources to support social sectors such as health and education. Even more, good roads, rail, air and maritime infrastructure are the backbone for facilitating economic activities as well as trade and investment domestically and within the region and beyond.
Using the insurance sector as a source of revenue
In 2016, the Government introduced an insurance premium levy at a rate of 3% of the insurance payable on both general and life insurance contracts. The insurance premium levy substituted VAT on insurance.
Five years down the line, in the 2022 National Budget, the Minister has proposed to abolish the current applicable insurance premium levy and reintroduce VAT on property and non-life insurance contracts at 16%.
Further, to increase revenue and to promote the growth of the local re-insurance sector in Zambia, the Minister has introduced a 20% withholding tax on re-insurance payments to foreign re-insurers. This is aimed at encouraging the placement of reinsurance contracts with local re-insurers.
Statistics from the Insurers Association of Zambia (IAZ), a member organisation for all licensed insurer and re- insurer companies in the country, indicate that there are 34 insurance companies currently operating in Zambia: 10 of which operate in life insurance and 19 in non-life activity. The market also involves five reinsurers.
To successfully effect the above proposals, Government will review and amend relevant legislation including the Insurance Premium Levy Act and Value Added Tax Act, among others.
Written by Bwalya Chilufya Musonda, Partner, Joshua Mwamulima, Senior Associate, and Nchimunya Nedziwe Associate Bowmans, Zambia