Tue, 07 Mar 2017 07:54:44 +0000
BY KELVIN CHUNGU
WHEN the idea of turnover tax was introduced some years past, it was seen in many circles as a tax on investments as it sort of punished the small business owners who were loss making or were breaking even and it also in some ways served to disincentive those wishing to venture into business in the first place.
At the time as it is now, the objective of broadening the tax base was highly heralded and featured in consequent budget speeches. In its essence, and given the turnover amounts in question, Turnover tax is targeted at those businesses that are likely to be less formally organized and for which the majority remain unregistered such as marketeers, craft worker or streets vendors.
It is therefore not under debate that “turnover tax” is and continues to be seen in many circles as an effective tool to achieving a broadened tax base. The selling point is that it is fairly simple and it would also be very difficult to avoid. The other advantage that it brought forth was that the SME that were not registered for VAT and met the threshold could opt to pay a lower flat fraction of sales rather than go through the challenge of working out all their receipts and expenses and claiming them back from the Zambia Revenue Authority (ZRA).
As an added incentive, the turnover tax was going to be efficient with the electronic system that was being implemented, easy to compute and less taxing on the tax payer. It was also welcome that the government sought to make this tax as less burdensome as possible when it proposed that the tax be capped at 3%.
Additionally, turnover tax was a simple way of taxing companies that could have had difficulties in paying for tax advice given the computational simplicity. And it should be noted that tax advice as a service is becoming expensive as the service comes under increasing regulation by the Zambia Institute of Chartered Accounts (ZICA).
Once this idea was effected and implemented, and the tax payers were getting accustomed to it, it was now anticipated that government would focus its attention on ensuring that as many tax payers meeting the threshold were brought into the tax net and taxed appropriately as an administrative imperative. However in the 2017 budget announced on 11 November 2016, Government decided to restructure the current turnover tax and replace the flat rate of 3% with the new bands based on monthly turnover as follows:
Monthly Turnover Category Proposed Regime
The main concern with this restructuring is that now the SME are charged tax using varying tax band, introducing the complexity that might potentially impede on the goal of achieving relative moderate compliance. People generally shun complexities.
A turnover tax in of itself punishes SMEs by removing the incentives such as capital allowances offered to the more organised businesses that are taxed on profit, as such the simplicity of the turnover tax was a worthy incentive for losing the advantages that are accorded to those taxed on profit. With the introduction of bands, that advantage is gone.
David Simiyu (2010) Challenges Affecting Collection of Turnover tax in Nairobi County – Kenya, 13’ wrote that in the United States, for instance, a significant percentage of Americans, mostly in the informal sector, are not in compliance with income tax and some of the reasons for non-compliance are because taxpayers lack the requisite knowledge of the tax law, have different interpretation of the law from the Internal Revenue Service of the USA, lack of satisfactory record keeping ability sufficient to satisfy the Internal Revenue Service and sometimes taxpayers can’t get their maths right.
Kimaru, T. and Jagongo, A (2014). Adoption of Turnover Tax in Kenya: A Snapshot of Small and Medium Enterprises in Gikomba Market, Nairobi Kenya. International Journal of Social Sciences and Entrepreneurship, 3 (1), 18-30 detailed the following conclusions:
- Most traders who trade businesses in busy markets and other markets do not understand the tax administration system and are usually busy therefore are unable to understand the system. Thus they remain non-compliant.
- Most traders feel discouraged with the complexity of the system and that the staff are usually not friendly to them or their businesses. It was also noted that most of the small businesses found the tax computation tedious.
- Other businesses believed that tax administration did not provide an even playing field for all businesses by ensuring all owners of the businesses meet their tax filing and paying requirement. It was noted that the educational and assistance role was lacking with only the enforcement role being seen to be visible.
Thus for these reasons, the research noted that most of the traders in Kenya experienced difficulties in dealing with government in general and the tax administration staff and consequently were less compliant. The lessons from Kenya are enlightening and should be considered as we complement our own turnover tax model.
In Kenya as an example, the small and medium-sized enterprises are subject to turnover tax on income from business of over US$5,500 and subject to a limit of $55,000 in a year of income. This tax is based on the gross income earned by businesses and is usually a final tax. There is however still challenges being faced in achieving high compliance levels partly on account of failure to compel a number of tax payers to register and on the cost of administration as the Kenya Revenue Authority has limited capacity to enforce compliance. This is the similar challenge that is faced in Zambia.
The South African Revenue Authority (SARs) on the other hand did introduce tax bands, some time ago, in 2009, however in an effort to reduce the tax ad ministration burden and provide relief to the informal sector that are at the borderline of poverty, they increased the amount of income that is not subject to tax to ZAR 335,000 from ZAR 150,000 in 2016 and also provided that the next bracket subject to tax is ZAR 175,000 taxed at 1%. The SARs ensured that the SME are not unnecessarily overburdened by the cost of compliance that are potentially apparent in small scale businesses. They also have large tax bands which assist the SME venturing into business with relief at the time these are needed until they reach the middle turnover tax bands, when they are almost certainly capable of being more organised with their accounting affairs.
Although the SARs has attained more success than others in the region in its efforts to broaden the tax base and has attracted a lot of small businesses into the tax net, they have at the same time faced difficulties to bring in small businesses operating in the informal sector into the South African tax net at the faster pace. This is a point of consideration by the tax administrators in Zambia.
Further, an analysis of the potential tax burden as contemplated by the new tax bands introduced in the 2017 budget shows that the effective turnover tax rate borne by SMEs has been slightly increased. If the objective was to increase rate charged on those already brought into the tax bracket, It is unclear why the proposal was not just to increase the tax rate applied to revenue so that the turnover tax calculation remained uncomplicated.
While it is understood that Government is looking at every measure to increase its tax collection in an effort to improve its service delivery, it remains to be seen whether the SME’s will have the tools to correctly compute the tax due to the Revenue Authority. And added to that, SME’s may be adversely impacted by tax budget penalties if they fail to comply.
The additional complexity may ultimately lead to lower tax compliance and run contrary to the governments stated aim of simplifying compliance for SMEs. With these changes, the nation could benefit by well publicised tax educational tours to enhance tax compliance.
In conclusion, the tax bands are here, but the verdict in terms of compliance is further away, even though the outcome seems all too obvious as the tax year unfolds
About the Author
Kelvin Chungu is an Associate Director in the Assurance, Advisory and business development service department of EY Zambia
