Over the past two weeks we have discussed the high debt levels the country has accumulated and the implications this has for Zambians. On the 28th of September 2018, the Minister of Finance announced the 2019 national budget which showed the impact of debt on the national purse. Debt payments have consumed the largest allocation of the national budget amounting to K23.6 billion or 27% of the entire budget. The amount allocated to debt servicing in 2019 is equivalent to the total allocation for health, education and social protection combined, showing that debt obligations alone are now consuming the majority of national revenues at the expense of the much-needed social spending.
As debt levels are increasing the Government needs to increase its revenue in order to provide public services and also pay back its debt. The Government does this through taxation and charging fees to raise revenues domestically and reduce its reliance on borrowing. However, taxes need to be raised fairly as there is a risk of stagnating private sector led growth and squeezing ordinary Zambians into poverty by leaving them with little money to meet their basic needs.
This year a number of taxes and fees have been imposed, such as the borehole tax, increased toll gates and the government is set to introduce internet calling tax. The 2019 budget has come with the introduction of new taxes as well as increases in different taxes and fees to finance the different plans set out for next year. Some of these taxes will hit low income consumers the hardest. The government will introduce a 30 ngwee excise duty on non-alcoholic drinks, increase the rate of carbon emission surtax on vehicles and increase the charge on fees and fines. Additionally, the National health insurance scheme will be implemented which will involve deducting a percentage of citizens’ income. This all adds to the pressure that ordinary Zambians are feeling.
One of the key policy changes is the plan to abolish VAT and replace with sales tax. VAT is a consumption tax placed on a product whenever value is added at each stage of the supply chain from production to the final point of sale. On the other hand, sales tax is a consumption tax imposed by the government on the final sale of goods and services. The rate and mechanism at which sales tax will be charged has not yet been announced but the introduction of the tax is likely to result in consumers paying more for goods and services. This is because VAT is a refundable tax and thereby producers do not overprice their commodities. However, with sales tax this is a non-refundable deduction on money made from sales and to offset the impact this will have on the seller’s profits, he or she is likely to increase prices of goods passing on the cost to consumers. The sales tax has not been developed yet so its impact is hard to predict, but as government makes its plans, it needs to consider the risk that the tax will further squeeze consumers.
It is commendable that in an attempt to broaden the tax base, compliance initiatives and new taxes were introduced targeting corporate sectors particularly the mining sector. This should be applauded because taxes are collected from industry players more capable of paying tax. The government should avoid reliance on fees, fines and taxes on consumer goods because these are ‘regressive,’ meaning that all individuals are hit by them regardless of income. Taxes on ordinary Zambians come at a time when families are feeling the pinch: the depreciation of the Kwacha (itself linked to Zambia’s debt position) is likely to increase inflation, with September food prices 8.6% higher than the year before. We can see evidence of this squeeze in how fees and fines are set to increase next year in line with inflation, but the Pay as You Earn (P.A.Y.E) thresholds are unmoved. All this creates a worrying picture for the wellbeing of ordinary Zambians.
Higher taxes threaten to increase the cost of living on individuals, push low-income earners into poverty, and also slow down economic growth if individuals have less money for consumption of goods and services. While government needs to improve revenue to pay off its debt, poorly executed taxation policies threaten to derail the government’s ability to raise money, as well as leave ordinary Zambians suffering. We are calling for the objective of the tax system to be progressive and for taxes to be designed in a way that ordinary people are not made worse off but wealth is redistributed from those more capable of paying taxes to the poor and most vulnerable in society.
Continue to follow the series for the next coming weeks and follow the conversation on social media #DebtConcernsMe.
Facebook – Consumer Unity Trust Society – CUTS Lusaka
Twitter – @CUTS_Lusaka