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Zambia: I.M.F. Levy Proposal Rouses Ire of Taxpayers

Integrated Regional Information Networks, United Nations, December 29, 2006

President Levy Mwanawasa urged his rivals to join him in fighting Zambia's deep-rooted poverty as he took office for a final term after disputed elections that sparked a wave of opposition riots. (Photo: - / AFP-Getty Images)

The Zambian government is divided over controversial tax proposals by the International Monetary Fund (I.M.F.), and analysts have warned that extending the value added tax (V.A.T.) of 17.5 percent to include food and other basic commodities would make necessities unaffordable.

"We have been assessing [the tax proposal] like any other proposals from other stakeholders. For us to adopt them, they must meet the demands of the local scenario, and not just represent the interests of co-operating partners or donors," Jonas Shakafuswa, deputy finance minister, told IRIN.

"We are very cautious because we just came from an election that taught us a lot of things about the people's general feelings with regard to issues of tax," he added.

In a recent report, "Zambia — Key Issues of Tax Reform," the I.M.F. suggested that in the 2007 national budget the government should reintroduce V.A.T. on currently exempt items, such as food and other agricultural products, water and sewerage, domestic transportation, mosquito nets, books, magazines and newspapers. About two-thirds of Zambia's 11.7 million people live on less than $1 a day.

The 17.5 percent V.A.T. would be paid on purchases at all stages of the production-distribution chain and claimed back by producers, wholesalers and retailers, with the end-user paying the tax but unable to claim it back.

"The proposals are the I.M.F.'s opinion — we have not adopted this report, and not a single tax proposal by the I.M.F. should be taken as government's position. [This] is just one of the reports that we are using to review the tax system before the 2007 national budget," Shakafuswa said.

The IMF proposal has been widely criticized by various stakeholders, who claimed the tax would harm the country's development. Guy Robinson, president of the Zambia National Farmers Union (Z.N.F.U.), maintained that it would stunt agricultural output and increase the production costs of food, leading to higher prices for consumers.

"The I.M.F.'s starting point is the loss of government revenue as a result of V.A.T. exemptions — I.M.F. should have looked at the impact of V.A.T. on agricultural performance," he said.

Muyunda Ililonga, president of the Consumer Association of Zambia, said the tax measures would result in many Zambians being unable to access basic goods, as increased costs, caused by having to pay an additional 17.5 percent at the time of purchasing materials to produce items for sale, would be passed on to the consumer.

"These recommendations are a negation of government efforts aimed at improving the quality of life for most people in Zambia," Ililonga said.

The I.M.F. also called for an end to generous incentives, including tax holidays and reduced V.A.T., which the government has offered foreign investors, especially in the mining sector, pointing out that such exemptions had amounted to over $15 million in lost revenue in 2005.

In an effort to reduce overdependence on copper, Zambia's traditional export, and elevate agriculture as the mainstay of the economy, in 2004 the government suspended V.A.T. on agricultural products and started subsidizing farm inputs for smallholder farmers by 50 percent.

Robinson said, "The I.M.F. is recommending that the current price of food must attract 17.5 percent V.A.T. on top [of the current price], and that small-scale farmers must pay 17.5 percent on agricultural inputs, which they will not [be allowed to] claim back, like other V.A.T.-registered businesses. The recommendations mean that the I.M.F. does not want to see agriculture grow, and people [being able] to afford basic foodstuffs."

Taxation became a contentious issue ahead of the presidential poll on Sept. 28, 2006, particularly in the election campaign of losing candidate Michael Sata, who claimed the narrow tax base resulted in high income tax for civil servants. Zambia's 400,000 civil servants sacrifice up to 37.5 percent of their basic pay to income tax, while foreign investors receive tax holidays and all capital goods brought into the country for production purposes are exempt from V.A.T.

Joyce Nonde, general secretary of the Zambia Union of Financial and Allied Workers, said employees were fed up with being suffocated by high income taxes, introduced as a conditionality for a $3.8 billion external debt write-off.

"We are saying, 'I.M.F. and World Bank, please stay out of our country' … They are not going to dictate the budget again to us. We want to see the government reducing tax, because we made huge sacrifices to attain the H.I.P.C. [Highly Indebted Poor Countries Initiative] completion point. Government imposed a wage freeze on us, there were no salary increments for over two years, and we have had to pay high taxes," Nonde said.

Shakafuswa told IRIN that "People want better lives, reduced tax, and it would be unfair to overlook all their desires. But at the same time, government needs to raise revenue to meet its obligations to deliver. It has to tax people, and we seem to be in an awkward position at the moment to make an outright decision on this matter," the deputy finance minister said. "We have decided to call a national stakeholders meeting before the 2007 budget, where we shall discuss all issues of concern." © IRIN

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