Zambia's 2012 Budget Raises Mineral Royalty Rates

by Lorys Charalambous, Tax-News.com, Cyprus

16 November 2011

In his 2012 Budget Address to Zambia’s parliament, Minister of Finance and National Planning, Alexander Chikwanda, indicated that a major part of the government’s objective next year would be to mobilize tax revenues to support the country’s development agenda.

He noted that preliminary estimates indicate that, with the economy growing by 6.5% in 2011, in line with initial projections, Zambia’s budgetary performance has generally been satisfactory with year-end revenues expected to be above target. However, with increased pressures on expenditure, the overall fiscal deficit is expected to be 3.1% of gross domestic product (GDP), compared to the previous projection of 2.9%.

Preliminary figures, as at end-September this year, indicate that domestic revenues have over-performed. This trend is expected to continue and will result in an annual rise in 2011 of 23.2% by the end of the year - mainly attributable to the payment of mining tax arrears and improved tax administration.

In 2012, the government’s macroeconomic objectives will include the achievement of real GDP growth of above 7%, and a limitation of a planned increase to the country’s overall fiscal deficit to 4.3% of GDP. Within those parameters, it is budgeted that tax revenues should rise to ZMK19.3 trillion (USD3.8bn), or 19.1% of GDP.

The government’s reasoning, he disclosed, was that it should “rebalance the burden of taxation, providing tax relief for those who have borne a disproportionate burden in the past while at the same time generate more resources from those areas of the economy that have benefited most from our strong macroeconomic performance”.

Income taxes (including individual and company income tax, withholdings and mineral royalties), at a total of ZMK10.27 trillion, are projected to raise more than half of tax collections next year, while value added tax (VAT) should provide ZMK4.7 trillion and customs and excise duties ZMK4.3 trillion.

Chikwanda firstly announced a doubling of the individual income tax threshold from the current ZMK12m to MK24m per annum. “This,” he explained, “translates into tax free income of ZMK2m per month and will result in more than 80,000 low paid workers moving out of the taxable brackets.”

The individual income tax brackets will also be adjusted and it is intended that the employees’ disposable incomes will be raised by about ZMK1 trillion.

In addition, in an effort to reduce the cost of money, it is proposed that the 40% corporate tax rate for banks will be abolished, and they will now be required to pay the standard corporate tax rate of 35%. It is hoped that this will make banks more liquid by reducing their taxation by some ZMK65bn, and thereby facilitate low cost borrowing by enterprises.

With agriculture at the centre of the government’s development agenda, it is also proposed to reduce the corporate income tax applicable to that sector from 15% to 10%. The reduction is meant to increase investment, and thereby raise farming productivity, output and incomes, by providing an extra ZMK10.6bn.

However, in order to compensate for the bulk of the revenue loss arising from the above measures, which will come into effect on April, 1, 2012, Zambia’s mineral royalty rate is to rise by 6% from 3% and 5% for base and precious metals, respectively. Income arising from hedging activities will also be separated from core mining activities for income tax purposes. The government expects to raise ZMK981bn from these two measures.

In 2009, the government had introduced a policy to include copper and cobalt ores and concentrates within the VAT deferment scheme. Chikwanda explained that that had been done to promote the utilization of excess smelting capacity following the decline in the country’s mineral production, but that, with the increase in the local production of copper and cobalt ores, it is no longer justifiable to retain these products in the scheme. They will be removed with effect from January 1, 2012, to generate an extra ZMK6.9bn in revenue.

Furthermore, in 2006, the government introduced an export duty of 15% on the export of copper and cobalt concentrates in order to encourage local value addition and create employment. To make this duty less burdensome, but also to make its application non-discriminatory, it will be reduced 10% but, at the same time, extended to all unprocessed or semi-processed mineral ores – to raise ZMK70bn.

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