CENTRE for Trade Policy and Development (CTPD) Acting Executive Director Isaac Mwaipopo says there are weaknesses in the Zambian tax incentives system which may have contributed to the loss of revenues in Zambia.
Mwaipopo said there were also various weaknesses and loopholes in the ZDA Act with regard to the collection of tax revenues.
“The Zambia Development Act (ZDA) of 2006 offers a wide range of incentives in the form of allowances, exemptions and concessions to both local and foreign investors provided they are registered with ZDA. The Act also stipulates investment thresholds that investors have to meet to qualify for fiscal and non-fiscal incentives. These Tax Incentives include deductions, exclusions, or exemptions from a tax liability offered as an enticement to engage in a specified activity (such as investment in capital goods) for a certain period,” Mwaipopo said.
“For instance the Zambian Government does not carry out any cost-benefit analysis on a case by case basis to inform its decisions when awarding tax incentives to potential foreign investors. Decisions to award tax incentives are mostly based on business plans, some of which may not meet the set criteria.”
Mwaipopo also noted a weakness in terms of access to the actual investment agreements.
These seem to be the preserve of a select few institutions; other stakeholders are excluded and little information filters through to other interested stakeholders. Furthermore, information on revenue foregone by the state and benefits accrued through award of tax incentives is a matter of speculation,” he noted.
Mwaipopo urged government to rethink its approach towards investments as there was need to realize that tax incentives were not the major prerequisite in attracting foreign direct investment.
He also noted that studies indicated that investment decisions were not motivated by availability of tax incentives but by other factors such as market availability, raw materials and skilled labour force.
Mwaipopo noted that offering tax incentives to attract foreign investments had been a “traditional approach” in many developing countries for a long time.
“The general assumption is that constant inflow of foreign direct investment (FDI) leads to economic growth and poverty reduction. This is a development approach that needs serious rethinking, especially for a country like Zambia which despite attracting quiet some huge volumes of FDI in the recent past, poverty levels still remain stubbornly high. Government needs to balance between trying to attract Foreign Direct Investments and ensuring that local private sector investments are actually championed and promoted,” said Mwaipopo.
“There is need to actually realize that tax incentives are a cost to government as they do not only impose an administrative cost but they also greatly contribute to loss of taxes through foregone tax revenues.”