The Government invited submissions for the 2010 Budget (to be announced in December 2009). The Zambia Institute for Public Policy Analysis (ZIPPA) contribution is set out below - we'll share other submissions as and when we have them (if you or your organisation have made submissions do send them across) :
As reported in the April Journal, ZIPPA was invited by the Clerk of the National Assembly to submit comments on the 2009 National Budget. We complied, and sent a copy to the Minister of Finance, who asked us to resubmit our comments in good time for the 2010 Budget. This has now been done,as follows.Personal Income TaxPersonal income tax, with the focus on Pay as You Earn (PAYE), is the most controversial part of the national budget, since it affects us all. So it needs to be based on a settled principle, generally accepted as fair. It should not depend on unpredictable decisions in the annual Budget. With this requirement in mind, the following alterations deserve consideration.
- Inflation Linking : Most developed countries now link personal tax to inflation. The tax-exempt threshold and the income bands then expand annually in step with the previous year's inflation. In our 2009 Budget such action is proposed for the threshold, which is to be raised from K600,000 to K700,000. The increase of 16.6% matches almost exactly the annual inflation in 2008. It would, we suggest , have been appropriate to apply inflation linking also to the income bands, instead of raising each by a flat K100,000. Inflation linking is integral to fair taxation. It protects taxpayers against tax-creep through inflation. If the principle of inflation linking was embraced as standard practice, contention would be avoided, and personal tax would become readily accepted by taxpayers as fair.
- Flat Tax: Increasingly around the world, starting from Eastern Europe, countries have in recent years been adopting 'flat' taxes, with a single low rate for all, regardless of income. Flat taxes, which replace tax bands above the exemption threshold, have two great merits, simplicity of assessment and ease of collection. Tax evasion is much less common at low rates . Hence this year's proposed reduction of customs duty on clear beer from 75% to 60%, for the sake of 'improved tax compliance'. Many countries have found that a low flat tax is the best way to capture the informal sector. Could next year be the right time for Zambia to lead the flat tax revolution on the continent of Africa? Off-shore Mauritius has already shown the way. Some flat tax countries. 1994: Estonia 21%, Lithuania 24%. 1995: Latvia 25%. 2001: Russia 15%. 2004: Slovakia 19%, Ukraine 15%. 2005: Romania 16%, Georgia 12%. 2007: Kazakhstan 10%, Mongolia 10%, Macedonia 10%, Albania 10%. 2008: Mauritius 15%, Czech Rep. 15%, Bulgaria 10%.Infant IndustriesThe budget contains an increase in duty on mobile phones to help an investor establish a manufacturing facility. Such protection is fine, provided it is limited to a specific period, like 2 or 3 years. Lack of such a provision tends to create perpetual infants, which become a permanent burden on the local consumer. New manufacturers should be expected to grow up, so they can compete against imports and even start exporting to neighbouring countries.The Threat of InflationThe 2008 Budget forecast inflation of 7%. Actual inflation was 16.6%, while domestic borrowing was 1.4% of GDP. The 2009 Budget forecasts that domestic borrowing will rise to 1.8% of GDP, but that inflation will fall to 10%. Is that realistic? Domestic borrowing amounts to printing money, and inflation is caused by increased money supply. Past experience has taught us - or should have taught us - that high inflation is Economic Enemy No.1. It destroys savings, prevents wealth creation and stops development. It will therefore be of the utmost importance in 2009 for the government to tie spending to revenue actually collected. It will be essential to operate a cash budget.Long Term SavingLong term saving deserves to be encouraged. This could be done by greatly increasing, or better still removing, the cap above which monthly pension contributions become taxable. In this regard there should be no discrimination between NAPSA and other pension schemes.