Let them tax cake: IMF tells Zambia to apply VAT to food

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IMF Says Zambia Should Increase Taxes on Copper Mines

By Shapi Shacinda
Reuters
Tuesday, December 19, 2006

http://za.today.reuters.com/news/newsArticle.aspx?type=businessNews&stor...

LUSAKA, Zambia -- The IMF has suggested Zambia raise taxes on copper mines and reintroduce taxes on food and other agricultural products to plug holes in its government budget, a document by an IMF mission has indicated.

Apart from raising taxes paid by copper mines, Zambia's main economic lifeblood, the International Monetary Fund said President Levy Mwanawasa's government needed to ditch its promises of tax relief and consider a wide range of new taxes to keep government coffers full.

A document containing the IMF proposals seen by Reuters on Tuesday said Zambia should introduce VAT on food and other agricultural products, domestic transportation, water and sewage services, magazines, newspapers and books in 2007.

Zambia's VAT is pegged at 17.5 percent.

"Although Zambia has a modern and well-designed tax system, it nevertheless has several weaknesses," the IMF document said.

The Fund said tax revenue had declined to 17 percent of gross domestic product (GDP) in 2005 from 18.4 percent of GDP in 1996, mostly due to VAT exemptions and tax fee zones.

The Treasury was not immediately available for comment.

Chileshe Mulenga, the head of the Institute for Economic and Social Research, a Lusaka think-tank, said Mwanawasa would be facing "political suicide" if he raised taxes after a tough presidential campaign in September that saw his government attacked for failing to care for Zambia's poor majority.

"The national consensus is that taxes must come down and this was exhibited by the urban centres which did not vote for the ruling party during the elections. It is not politically tenable and is unrealistic," Mulenga said.

The IMF said company income tax rates, which vary between 33 percent and 35 percent, distorted economic decisions and misallocated resources because they differed by sector.

The Fund proposed that existing copper mines should pay 25 percent company tax while the new mines should pay 30 percent.

The mines, which account for about 65 percent of Zambia's total export revenues, have paid no corporate tax since the early 2000s when Zambia was actively seeking foreign investment in the sector after a sharp decline in world copper prices.

Major foreign investors in Zambia's copper mines include London-listed Vedanta, Canada's First Quantum Minerals and Australia's Equinox Minerals Ltd.

Finance Minister Ng'andu Magande told Reuters in October that the government planned to raise mineral royalty tax to 2.5 percent from 0.6 percent in the next budget due to be presented to parliament in January.

The Fund also proposed eliminating a tax break on hotel accommodation in Zambia's tourism city Livingstone at Victoria Falls, an incentive which has helped to raise foreign tourist arrivals to more than 600,000 in 2005 from just about 100,000 five years ago.

The document showed that the Fund also wanted Zambia to introduce 25 percent customs duty on imported raw materials for building products and to raise excise duty on imported beer to 85 percent from 70 percent.

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