The Sales Tax Proposal: Are we Beating a Dead Horse? Preliminary Results from a Rapid Assessment

The tribal wisdom of the Dakota tribe in the United States of America, passed on from one generation to the next, says that “when you discover that you are riding a dead horse, the best strategy is to dismount”. The fiscal authorities have argued that the horse – in this case, (value-added tax) VAT – is dead. In contrast, this rapid assessment argues that the VAT may have been pronounced dead too quickly, perhaps for expediency’s sake. Examples from many countries abound and show that with the right fiscal discipline to ring-fence VAT refunds and improve compliance, VAT works just fine, offering value-added incentives and avoiding cascading effects. In finding a solution for this supposedly dead horse, important questions that we need to ask are “Is the horse really dead? If it is, what killed the horse?” Without this introspection, the other horse in form of Sales Tax, which in fact died and was buried 25 years ago, might be resurrected. Without learning from previous experiences and experiences elsewhere, we are bound to make the same mistakes in trying to resuscitate a truly dead horse. Granted, the authorities have tried to clarify that Sales Tax is not exactly the dead horse from 25 years ago. They suggest that what they have devised is a hybrid Sales Tax that draws from the VAT system. This hybrid reportedly includes: a self-policing mechanism through the TPIN requirement for all transactions between registered purchasers and sellers; an exemption of some businesses below the Sales Tax registration threshold from being charged the Tax; taxation at every point of value addition; and input exemptions for producers and manufactures from the tax. It is an undeniable fact that the VAT system, like all other tax regimes in Zambia, has been dogged by low yields as evidenced by low VAT C-efficiency rate. The low yields have been due to, among other things, numerous exemptions, weak tax administration, and high and unsustainable refunds. The proposed Sales Tax deals with the VAT refund issue. But removing refunds does not necessarily fix the low yield problem considering that the low yields are a result of weak tax administration and poor compliance.