DOMESTIC TAX INCENTIVES

Boxes $4\mathrm{.}1$ and $4\mathrm{.}2$ show some of the major domestic tax incentives that some

economic sectors currently enjoy for income taxes and VAT respectively in Zambia.

Box $4\mathrm{.}1$ Income tax incentives by sector

Sector Tax incentives

Agriculture $$ Income tax is at a reduced rate of $15\%.$

$$ Farm improvement allowance is at $100\%$ on fencing, brick or stonewall and an

allowance of K$10$ million for farm dwelling occupied by farm workers.

$$ Farm works allowance is at $100\%$ for the full cost of stumping and clearing,

works for prevention of soil erosion, boreholes, wells, aerial and geophysical

surveys and water conservation.

$$ Dividends paid out of farming profit are exempt from tax for the first five years

the distributing company commences farming.

$$ Development allowance is given for any person who incurs expenditure on the

growing of tea, coffee, or banana plant or citrus trees or other similar plants or

trees. An allowance of $10\%$ of such expenditure shall be deducted in

ascertaining the gains or profits of that business.

Manufacturing $$ Income from chemical manufacturing of fertilizers is taxed at a reduced rate of

$15\%.$

$$ Capital allowances on industrial buildings used for the purposes of

manufacturing shall be entitled to a deduction of $10\%$ in case of low cost

housing $($low cost housing does not exceed K$20$ million$)$ and $5\%$ for other

industrial buildings of the cost of the building.

$$ Persons who incur capital expenditure on an industrial building are entitled to

claim a deduction called initial allowance at $10\%$ of the cost incurred in the

charge year in which the industrial building is first brought into use.

$$ Any person who incurs capital expenditure on an industrial building is entitled to

an investment allowance at $10\%$ of such expenditure in the first year used for

manufacturing purposes.

Mining $$ Any mining company holding a large$-$scale mining license carrying on the mining

of base metals is taxed at $30\%.$

$$ Other mining companies are taxed at $35\%.$

$$ Dividend paid by a mining company holding a large$-$scale mining license and

carrying on the mining of base metals is taxed at $0\%.$

$100\%$ mining deduction on capital expenditure on buildings, railway lines,

equipment, shaft sinking or any similar works.

$$ The debt equity ratio has been reduced from $2$:$1$ to $3$:$1$ to encourage further

investment in the Mining sector.

Tourism $$ Capital allowances at $50\%$ of the cost of plant and machinery.

$$ Investment allowance at $10\%$ of the cost of an extension to an hotel $($being an

industrial building$).$

$5\%$ wear and tear allowance to an extension to a hotel $($being an industrial

building$).$

$10\%$ initial allowance on an extension to a hotel $($being an industrial building$)$ in

the year the building is first brought into use.

General Income

Tax Incentives

$$ Income from non$-$traditional exports is taxed at a reduced rate of $15\%.$

$$ The income of a person operating an enterprise designated as micro or small

enterprise under the Zambia Development Agency Act operating in:

o an urban area shall be exempt from tax for the first three $(3)$ years

o a rural area shall be exempt from tax for the first five $(5)$ years

$$ Dividends receivable from a company engaged in the assembly of motor

vehicles, motor cycles and bicycles are exempt for the first five years from the

date of first declaration.

$$ Withholding tax deductible from payment of any management fees, consultancy

fee, interest or payment to a non$-$resident contractor by a person developing a

multi$-$facility economic zone or an industrial park under the Zambia

Development Agency Act shall be deductible at zero per cent for a period of five

years from the first date the payment is due.

$$ On the income of a business operating in priority sector declared under the

Zambia Development Agency Act, tax shall be charged as follows:

o At zero per cent for a period of five years from the first year profits are

returned;

o At fifty per cent from year sixth to eighth year after profits are

returned;

o At seventy$-$five per cent from ninth to tenth year;

o At one hundred per cent after year ten after profits; and

o At zero per cent on dividends declared by a company operating within

a priority sector for a period of five years from the first declaration.

With the information above, please discuss each of the sector incentives highlighted in this section and state whether you agree with the current incentive policy and amount of incentive or if you would modify or eliminate the incentives for that sector and why. Be specific regarding any adjustments you would make and why.