[By Kennedy Nakoonje Munyandi]
A holder of an electronic communications (EC) network or service license that is issued by the Zambia Information and Communications Technology Authority (ZICTA) is subject to a separate tax regime from that of other economic sectors.
The first K250,000 of taxable income is subject to a tax rate of 35 per cent, and any excess above this amount is taxed at 40 per cent. This is in contrast to a standard corporate income tax rate of 35 per cent that is applicable on the taxable income of other business sectors. Until April 2011, this rather burdensome tax regime was only applicable to the banking sector.
On extending the tax regime to the EC network and service operators (or telecommunications sector), the then minister of Finance and National Planning (MFNP), honourable Dr Situmbeko Musokotwane, in his budget address of 8 October 2010 to the National Assembly explained the rationale as follows:
“Mr. Speaker, in order to mitigate the revenue loss as a result of the personal income tax relief that I have proposed, but still raise sufficient resources for our development agenda, I propose the following:
(a) to align the income tax structure for the telecommunication sector with that applicable for the banking sector. In this regard, profits of K250 million or below will continue to be taxed at 35 per cent while any profits above K250 million will now attract a tax rate of 40 per cent;
(b) to increase the property transfer tax rate from 3 to 5 percent; and
(c) to make interest paid on mortgage for residential property non deductible for tax purposes.” (2011 Budget Address, paragraph 155, page 22)
Based on the above statement, the motives for this change were “to align the income tax structure for the telecommunication sector with that applicable for the banking sector” and to mitigate the revenue shortfall occasioned by the tax relief measures that had been offered to individuals. It is worth noting that no details were provided as to why the alignment specifically to the banking sector was necessary. Readers might need to note that since that Budget Address, the Zambian Kwacha has been rebased by a factor of one thousand, essentially by dropping the last three zeros. Therefore, K250 million is now equivalent to K250,000.
But soon after the MFNP announced the alignment of the two sectors, the then ruling Movement for Multi-Party Democracy (MMD) was voted out of government and replaced by the Patriotic Front (PF). In his very first budget address to the National Assembly, the new MFNP hon. Alexander B Chikwanda made the following pronouncement:
“Mr. Speaker, the Government believes that growth should be largely private sector driven. However, the cost of borrowing for investment has inhibited most of the private sector, particularly our local entrepreneurs, from engaging in gainful ventures. In order to compliment the efforts that we have already undertaken to reduce the cost of money, I propose to abolish the 40 per cent upper corporate tax rate for banks. With this measure, banks will now be required to pay the standard corporate tax rate of 35 per cent. This will help to make banks more liquid, a desirable objective to facilitate low cost of borrowing by enterprises.” (2012 Budget Address, paragraph 91, page 14)
Therefore, effective 1 April 2012, the banking sector was removed from the punitive tax regime. This entailed that the telecommunications sector was left twisting in the wind!
In this respect, the Charging Schedule to the Income Tax Act now simply reads:
“3. (I)(1) Subject to the provisions of this Act, tax in respect of the income of a person other than the income of an individual, a trust, deceased’s estate or a bankrupt’s estate for a charge year, shall be charged as follows – …
(c) on so much of income of electronic communications network or service licensee as does not exceed two hundred and fifty thousand Kwacha at the rate of thirty-five per centum per annum;
(d) on so much of the income of electronic communications network or service licensee as exceeds two hundred and fifty thousand Kwacha, at the rate of forty per centum per annum; (As amended by Act No. 27 of 2011)”
Making an analytical review of this tax policy is quite difficult in light of the scant reasoning behind its introduction. Nonetheless, a few observations and comments can be made.
Possibility of an oversight: If the initial reason for aligning the telecommunications to the banking sectors was because the two were in similar economic circumstances, then it is possible that it was an oversight on the part of the new government not to also standardise the corporate income tax rate of the telecommunications sector. One might argue that the removal of the banking sector from the high tax regime was specifically done in order to lower lending rates. But I do not think that there is sufficient empirical evidence to show that this was achieved or that it was reasonable to expect that it would be achieved. In light of this, could the telecommunications sector have had a legitimate reason to file a claim for similar treatment?
Temporary measure: It is clear that the change was intended to be a short-term measure aimed at cushioning the impact of reduced taxes from employment income. But as they say, there is nothing as long lasting as a short-term tax measure.
Low and unrevised threshold: The threshold of K250,000 for the upper tax rate is too low. It is possible that the upper tax rate was intended to tax super or exceptional profits. At the time this threshold became effective on 1 April 2011, this amount of K250,000 was equivalent to about USD 50,000. At current exchange rates, this threshold translates only to about USD 11,000. Effectively, and in real terms, the threshold has been reduced. This is so even before one takes into account a possible adjustment for economic growth. That is, a taxable profit of above K250,000 is no longer as exceptional as it was a decade ago in 2011. Many more companies easily achieve and surpass this figure. Therefore, the effect of this ‘reduced’ threshold is that a larger portion of the income of telecommunications companies is taxed at a high tax rate relative to the other economic sectors. This raises issues of equity and fairness, which are a constitutional entitlement. Ultimately, the question still is: can the telecommunications pursue a legal challenge with a reasonable chance of success?
Unfair external competition: A lot of non-resident telecommunications companies can remotely offer the same or similar services. But since these companies are not licensed by ZICTA, they would fall outside the scope of this burdensome tax regime. Consequently, this again goes against the principle of equality. Besides, do we really want our local entities to be less favourably treated?
Declining corporate income tax rates: Our standard corporate income tax rate of 35 per cent is already way above the regional and global averages. Therefore, tax rate that is as high as 40 per cent only encourages tax avoidance and aggressive tax planning. In fact, the country could gain more from a reduced standard tax rate.
Working from home: The telecommunications sector is playing a crucial role in fighting the COVID-19 pandemic by facilitating remote working. It might therefore be more economically beneficial for the government to encourage increased investment in the sector by standardising the corporate income tax rate.
In conclusion, I think the government should do one of the following two options as a matter of urgency. The government should consider increasing the threshold from K250,000 to a higher and reasonable amount that takes into account both inflation and economic growth. Alternatively, the government could altogether standardise the tax rate on the telecommunications sector by doing away with the prevailing regime. As stated above, the government might even need to consider steadily reducing the standard corporate income tax rate from 35 per cent to below 30 per cent in line with global trends.
Finally, I also think that the telecommunications sector did (and still do) have sufficient grounds to challenge this tax treatment.
The author is the proprietor of Munyandi InterTax Advisory Xervices (MiTAX), an international and domestic tax law specialist firm. He can be contacted via e-mail (email@example.com), WhatsApp (+260 76 203 1514) or Facebook (www.facebook.com/MiTAX2021).