The Zambia Chamber of Mines has released a report on the impact of the Government’s proposed Sales Tax. In case you haven’t had time to read it, here are the key take-aways: The research illustrates that many Zambian mining suppliers will go out of business, and that prices, especially of imported goods, will skyrocket if the tax is implemented. Alarmingly, the Chamber’s research demonstrates that fuel prices are likely to increase by as much as 37%.
The report entitled A Tax Too Far: The economic impact of Zambia’s proposed Sales Tax was researched with the assistance of one of the world’s leading international accountancy firms. Among its startling key findings is the fact that significant nationwide price inflation will have a ‘cascade effect’ through supply chains, increasing costs in every sector of the economy, making life more expensive for every Zambian.
significant nationwide price inflation will have a ‘cascade effect’ through supply chains, increasing costs in every sector of the economy, making life more expensive for every Zambian.
The report provides several projections of the economic effects of the Sales Tax, should the Government move to enforce it. One illustrative example shows a typical fuel value chain from the international fuel supplier, through Zambian intermediaries, to the end customer. Three worrying conclusions can be drawn from this analysis, as it applies to a fuel value chain.
1) Sales Tax increases the cost of operations for each supplier in the value chain because it cannot be reclaimed/credited.
2) The more transactions there are in a supply chain, the worse the effect will be. This is because of the compounded increase — or ‘cascade effect’, as the report terms it — that results from a “tax on tax” effect at each intermediate stage of the value chain. The inevitable business incentive will be to shorten supply chains, wherever possible.
3) The cost for the end user increases by 37.82% compared to the VAT regime (as the diagram shows below.)
“The outcome will be just the same for the ordinary Zambian buying fuel,” said Goodwell Mateyo, President of the Zambia Chamber of Mines. “Sales Tax will increase the pump price by more than a third. Many other goods and services will likely suffer similar increases too”, said Mr Mateyo.
Indeed, it is very clear that these increases will be widespread, extending far beyond internationally-supplied fuel. One can see what this “tax on tax” would look like in action by taking any imported product purchased in Zambia that is not on the exemptions list as an example. There are two levels to the Sales Tax: The 16% rate that applies to imports, and the 9% rate that applies to locally produced goods.
If the current cost of an imported non-exempt product is K1,000, it will incur a 16% import tax, increasing the cost to K1,160. But it’s the extra 9% that will be slapped on when a local distributor supplies to a local retailer that will create a double taxation, effectively pushing up the price of a product made abroad and sold locally by 26.44%. Any product that is not on the exemption list and is imported — in part or in its entirety — will be taxed in this way.
“Sales Tax will be levied at each stage within the supply chain on non-exempt goods. As there is no ability to offset or recoup Sales Tax on expenses incurred, the cost of the tax will ‘cascade’ from one business to the next, with the end customer — often individual Zambians — left in the worst possible position,” said Mr Mateyo.
According to the Chamber, the exemptions list is far from complete, and does not include key consumable inputs and services that particularly affect the mining sector, such as fuel and electricity.
Nurturing or destroying local participation in the mining value chain?
Sales Tax will create an unavoidable business incentive to import goods directly, to the exclusion of Zambian intermediaries. This is despite the Government’s expressed interest in diversifying Zambia’s economy and encouraging local participation, especially in the mining industry.
“This is disastrous,” said Mr. Mateyo. “Mining companies will end up having to bypass the local supplier and instead import the goods directly. This would leave them subject to the 16% on imports, but not the additional compounded local Sales Tax they would incur from buying the same import from a local supplier. Mining companies rely heavily on local suppliers, but the prospect of such a big cost increase will end many of these relationships.”
The existence of a Zambian mine supply sector is in everyone’s interests, yet Sales Tax incentivises its removal.
As taxes go up, production goes down
According to independent research published by the Chamber of Mines in December 2018, Zambia presently has – by a large margin – the highest tax burden of all comparable mining jurisdictions. Sales Tax would push the burden even higher.
Logic assumes that raising tax rates produce more taxes. But in practice, doing so can have the opposite effect, and actually produce lower taxes. According to the Chamber of Mines, this phenomenon is happening right now. Why is that?
Raising tax rates means that the tax return on any given transaction will increase, but the number of transactions will start decreasing if goods and services become too expensive. At a certain point, the overall decrease in economic activity outweighs the gains from increasing the tax rate. This is well understood by economists (it’s known as the Laffer Curve).
Interestingly, the Chamber estimates that the Government would have netted approximately $140 million more this year under the 2018 mining tax regime, than under the present regime where tax rates are that much higher. This is because reinvestment has been squeezed out by increasing costs and taxes, which in turn has led to operational problems and lower production. Lower production leads to lower revenues and lower profits – as most mining costs are fixed – which leads to less to reinvest, and less tax revenue. This is a spiral of decline, and on the Chamber’s estimates the outcomes will be even more marked for 2020 and beyond.
Interestingly, the Chamber estimates that the Government would have netted approximately $140 million more this year under the 2018 mining tax regime, than under the present regime where tax rates are that much higher.
According to the Chamber, the shelving of Sales Tax is imperative, but that alone is not enough. From their perspective, it is the entire philosophy behind Government’s present approach to mining taxation that is wrong. A ‘win-lose’ style negotiation, over higher or lower mining tax rates, ignores the more fundamental question of what approach results in greater tax revenue.
The answer to the real question is clear: Governments can receive greater tax revenue when production (i.e. economic activity) is expanding, than from over-taxing existing production. As the Chamber of Mines says, in the closing line of a recently published infographic, ‘only through growth can we deliver more’.