Sales Tax will increase poverty – CSOs

LOCAL civil society organisations have expressed fear that government’s proposed Sales Tax will increase poverty levels amongst ordinary Zambians. The organisations urged government to carefully consider the consequences of the taxation policy due to the harmful negative effects of the proposal on the economy and on poverty. They said the Sales tax would increase consumer prices, pushing people into poverty, particularly women and the elderly, who bear the brunt of high poverty levels and inequalities.

They fear that the proposed tax would in turn negatively affect the Zambian businesses, leading to job losses. The organisations argue that if implemented, it “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.”

They observed that according to Zambia Institute for Policy Analysis Research’s analysis, it was estimated that the proposed sales tax would create an effective tax rate of 23 per cent for Zambians (i.e. the average rate on goods and services across the economy), up from an effective rate of 13 per cent 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,” they feared.

They urged government to address the existing limitations with the VAT system instead of replacing it with the sales tax.

“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,” according to a joint statement signed by Consumer Unit Trust Society communications officer Njavwa Wilanji,

They feared that at every stage of the value chain, there would be a 9 per cent tax levied on the supplier and the longer the supply chain the more costly the goods would be for final consumers.


“For imported goods, the rate will be 16 per cent. This will increase the price of goods across the spectrum: for example, the 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 K2,699 could be up to K543.04, which would see a price increase of K271.52 if just 50 per cent of the cost was passed on to 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,” they stated.

They further said indirect taxes were paid on economic transactions which affect the ultimate price borne by consumers and therefore have a strong impact on household budgets 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 per cent 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,” they observed.

They said if goods and services were too costly for ordinary citizens, that could slow down the rate of economic activity and had 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,” they said.

Further, the CSOs stated; “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 incentivise 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 per cent than goods imported directly by the store at 25 per cent. The effect of the sales tax will disadvantage Zambian firms, particularly SMEs, at home and when exporting.”


They feared that the sales tax would end up harming the country’s economic growth because the tax base would 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 to fund poverty reduction in the face of growing debt servicing costs,” they said.


They asked government to clarify what projections it made on the impact on growth, inflation, unemployment, poverty, trade and revenue.


“How have the tax rates been decided and what is the objective and expected impact of setting the tax at these levels? 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?” they asked.


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


Further, the CSOs stated that while it was important to mobilise domestic resources as part of the government’s fiscal consolidation programme, they did not believe the sales tax in its proposed form would achieve its aim and would in fact be harmful.


“We therefore call on government to consult with civil society and businesses and demonstrate how the proposed change to a tax regime will protect citizens as consumers, workers and business owners,” stated Wanji.


The other organisations included (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), International Zambia Council for Social Development (ZCSD) and Action Aid Zambia.

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