2011 BUDGET OVERVIEW OF TAX CHANGES

INTRODUCTION 2

1.0 DIRECT TAXES 3

1.1 CONCESSIONS 3

1.2 COMPENSATING MEASURES 4

1.3 HOUSEKEEPING MEASURES 4

2.0 VALUE ADDED TAX 6

2.1 CONCESSION 6

2.2 COMPENSATING MEASURES 6

2.3 HOUSEKEEPING MEASURES 7

3.0 CUSTOMS AND EXCISE 9

3.1 CONCESSIONS 9

3.2 COMPENSATING MEASURES 9

3.3 HOUSE KEEPING MEASURES 10

2011 Budget overview of Tax changes 1

INTRODUCTION

I am pleased to present an overview of the major changes in the tax legislation and
other relevant information to our taxpayers as announced by the Minister of Finance
and National Planning in his annual National Budget Address for the fiscal year 1st
January 2011 to 31st December 2011 presented to the National Assembly on 8th
October 2010.

The overview gives a guide on the measures announced in the Budget as reflected in
the various Bills, Statutory Instruments and Commissioner General's Rules that
contain the enabling legislation. The finer details are contained in the published
legislation. However, it is worth noting that some measures in this pamphlet are
subject to Parliamentary approval.

I also recommend visiting the ZRA website, which includes all the information
enclosed in this booklet and many further useful tax details: www.zra.org.zm. The
ZRA Advice Centres throughout the country will provide any clarification and
explanation on these 2011 budget measures.

Wisdom M. Nhekairo
Commissioner General

2 2011 Budget overview of Tax changes

1.0 DIRECT TAXES

1.1 CONCESSIONS

1.1.1 Adjust the exempt PAYE threshold from K 800, 000 per month to
K1,000, 000 per month and adjust income bands as specified in the
table below.

Proposed PAYE Regime Current PAYE Regime

Income Bands Tax Rate Income Bands Tax Rate
K 0 -K 1,000,000 0% K0-K 800,000 0%
K1,000,001-K1,735,000 25% K800,001- K1,335,000 25%
K1,735,001-K4,200,000 30% K1,335,000-K4,100,000 30%
Above K4,200,000 35% Above K4,100,000 35%

This measure is intended to give relief to workers especially those earning

lower incomes. Increasing the exempt threshold will provide greater relief to
those on low incomes, while adjusting the bands will introduce greater
progressivity within the system.

1.1.2 Increase the exempt portion for income paid upon the termination of
employment from K25 million to K35 million.

This measure is intended to mitigate the effects of inflation and give further
relief to those whose formal employment has been terminated.

1.1.3 Increase Tax credit for differently-abled persons from K1.92 million to
K3 million per annum.

This measure is intended to provide additional relief to the differently-abled

persons and offset extra costs such as transport costs, purchase of assistive
devices, and other personal costs (guides, readers, sign language
interpreters etc).

2011 Budget overview of Tax changes 3

1.2 COMPENSATING MEASURES

1.2.1 Change the tax structure for the mobile telecommunication sector, so
that profits of K250 million or below are taxed at 35 percent while any
profits above K250 million are taxed at 40 percent.

This measure is intended to extend the two-tier tax rate system currently
applicable to banks on the super-normal profit tax liability to the mobile
telecommunications sector as this sector has been observed to be making
substantial profits.

1.2.2 Increase property transfer tax from 3 percent to 5 percent.

This measure is intended to generate more revenue for the Treasury.

Property transfer tax is charged on the transfer of shares, land and buildings.

1.2.3 Discontinue deductibility of interest expenses on mortgages for

residential properties.

This measure is intended to redress the equity principle within the taxation
system by removing the deductions that are allowed on mortgage interest as
this current system has disproportionately benefited high-income earners.

1.3 HOUSEKEEPING MEASURES

1.3.1 Provide for specific penalties for Mineral Royalty.

This measure seeks to introduce penalties specifically for royalties using the
principle of the corporate income tax penalty structure. The proposed
measure will bring in equity as the specific penalty structure will be tied to the
mineral royalty rate of 3 percent. Currently, the Income tax Act has no
specific penalties for mineral royalty. As such, penalties used are those that
apply to company income tax and are tied to the standard corporate income
tax rate of 35 percent.

1.3.2 Remove the requirement to submit audited accounts to ZRA.

This measure is intended to remove the requirement particularly for Micro,

Small and Medium Enterprises to submit audited accounts as this has raised
a number of challenges to them due to insufficient capacity from domestic
auditing firms to audit all firms in the country and lack of a reporting
framework on the audit standards for different categories of taxpayers.

4 2011 Budget overview of Tax changes

1.3.3 Amend the Income Tax Act so as to align it with the provisions
dealing with the Environmental Protection Fund in the new Mines
and Minerals Development Act.

This measure is intended to align the reference to the Environmental

Protection Fund by the Income Tax Act to the Environmental Protection Fund
in the Mines and Minerals Development Act No.7 of 2008 and not to that
referred to under the repealed Mines and Minerals Act, CAP 213.

1.3.4 Amend the Income Tax Act by replacing Paragraph 3 of the Charging
Schedule to the Act.

This measure is intended to correct the various drafting errors that have
been identified in the paragraph.

1.3.5 Amend the Income Tax Act so as to align it with the current re-
structuring process under the Zambia Revenue Authority.

This measure seeks to re-align the Income Tax Act to take cognisance of the
re-structuring processes currently underway at ZRA such as the merging
and renaming of the divisions.

1.3.6 Amend the Property Transfer Tax Act so as to provide for anti-
avoidance clauses.

This measure is intended to apply the anti-avoidance provisions under the

Income Tax Act to the Property Transfer Tax. Currently the Property Transfer
Tax Act has no provision for anti-avoidance practices.

2011 Budget overview of Tax changes 5

2.0 VALUE ADDED TAX
2.1 CONCESSION

2.1.1 Zero-rate Hammer Mills of HS code 8436 1000

This measure is intended to harmonise the treatment of Dehullers and

Hammer Mills in order to further encourage small scale entrepreneurs in line
with government policy on agriculture. Currently, Dehullers are zero rated
while Hammer mills are standard rated despite both being complimentary
inputs in the small scale milling industry.

2.2 COMPENSATING MEASURES

2.2.1 Standard rate fee-based banking services

This measure seeks to broaden the tax base by standard rating the following
fee-based banking services that where hitherto exempt.

1 Commission on Certified Vouchers, Managers/Bank cheques

2 Commission on Postage
3 Commission on lost connect cards
4 Commission on status enquiry
5 Excess withdrawal fees
6 Administrative Charge (imposed on a customer who exceeds overdraft
limit)
7 Stop payments
8 Standing Orders
9 Commission on guarantees negotiable
10 Commission on invoices disco unted
11 Own acceptances
12 Cable charges
13 Commission on on-line and TT transactions
14 Commission on drafts and transfers
15 Commission on foreign drafts and transfers

2.2.2 Standard rate property and casualty insurance.

This measure is intended to broaden the tax base and generate additional
revenue by standard rating property and casualty insurance.

6 2011 Budget overview of Tax changes

2.3 HOUSEKEEPING MEASURES

2.3.1 Amend the Value Added Tax Act so as to align it with the current re-
structuring process under the Zambia Revenue Authority.

This measure seeks to re-align the Value Added Tax Act to take cognisance
of the re-structuring processes currently underway at ZRA such as the
merging and renaming of the divisions.

2.3.2 Amend the VAT Act to replace the word “VAT Appeals Tribunal” with
the words “Revenue Appeals Tribunal” wherever it appears.

This measure is intended to amend the Value Added Tax Act by replacing the
word “Value Added Tax Appeals Tribunal” or “VAT Appeals Tribunal”
wherever it appears in the Act with the words “Revenue Appeals Tribunal” as
the former has since been incorporated in the later.

2.3.3 Consolidate the various Value Added Tax regulations:

The measure is intended to consolidate all amendments made pertaining to

Value Added Tax regulation orders, zero-rating orders and exemption orders
respectively and simplify VAT administration.

2.3.4 Amend Section 2 of the Value Added Tax Act by the deletion of the
words: 'shopping mail' and substitution with 'shopping mall'.

This measure is intended to correct the drafting error.

2.3.5 Increase the threshold for the value of gifts or promotional materials
supplied to a particular individual to a maximum of K100, 000 from K25,
000 per annum.

This measure is intended to align the threshold with that provided for in the
Income Tax Act.

2.3.6 Amend sub-paragraph (b) of Group 6 of the First Schedule of the

VAT Act to provide for the standard rating of developing dwelling
houses for sale.

This measure is intended to provide for standard rating of the sale of dwelling
houses which was inadvertently not legislated in 2009.

2.3.7 Specify the funeral services that are exempt in Group 6 of the First
Schedule.

The measure is intended to specify goods and services that qualify for VAT
exemption in the provision of funeral services, to avoid misinterpretation and

2011 Budget overview of Tax changes 7

 make administration easier as, Group 6 of the First schedule currently does
not specify goods and services which qualify for exemption under funeral
services. The qualifying goods and services are as set out below;

i. Caskets and coffins;

ii. Tombstone;
iii. Embalming of a dead person;
iv. Provision of undertaker and mortuary services; and
v. Services provided at the burial of a person by a funeral home like
hire of hearse, and provision of furniture, tents and other funeral
accessories but excluding meals, beverages and other hospitality
services.

2.3.8 Delete Regulation 4 which provides for charging of VAT on assets

disposed by Government Agencies.

This measure is intended to remove the redundant provision that requires

Government Ministries, Departments and Agencies to register for VAT for
the purpose of claiming input tax as the law was amended to allow
Government Ministries, Departments and Agencies to be funded inclusive of
VAT and to be deregistered for VAT unless they are making taxable supplies.

2.3.9 Amend Group 10 of the First schedule of the VAT Act, to provide for
cross- reference to the Customs and Excise (Rebates, Refunds and
Remissions) (General) Regulations.

This measure is intended to effect any changes made to this provision in the
Customs and Excise (General) regulations, applicable to the VAT Act as any
amendment in the Customs and Excise (General) Regulations requires a
corresponding amendment in the VAT Act.

8 2011 Budget overview of Tax changes

3.0 CUSTOMS AND EXCISE
3.1 CONCESSIONS
3.1.1 Remove customs duty on Electricity

This measure is intended to remove customs duty on imported electric

energy as importation of power is aimed at minimising disruptions to the
economic activities. Currently, customs duty on imported electricity is at 15
percent.

3.2 COMPENSATING MEASURES

3.2.1 Introduce an excise duty of 10 percent on plastic bags of HS Code

3923.21.91 in order to protect the environment.

This measure is intended to curb pollution and mitigate the impact of

shopping plastics on the environment as this poses a serious disposal
challenge.
3.2.2 Increase customs duty on Deformed Bars of HS 7213.10.00 from zero
percent to 25 percent

This measure is intended to take cognisance of existing local capacity to

produce various steel products.

3.2.3 Increase customs duty on Cold Rolled Coils under HS heading 7209
from zero percent to 15 percent and Galvanised Cold Rolled Coils
(HS heading 7210) from free to 25 percent.

This measure is intended to take cognisance of existing local capacity to

produce various steel products.

3.2.4 Introduce a specific classification for palm 'olein' of HS code

1511.90.20, which will now attract a 5 percent import duty rate.

This measure is intended to harmonise the treatment of palm 'stearin' and

palm 'olein'.

2011 Budget overview of Tax changes 9

3.3 HOUSE KEEPING MEASURES

3.3.1 Increase the threshold at which an individual requires the use of a

clearing agent from US$500 to US$2,000.

This measure is intended to support cross border trade and also streamline
and harmonise the value for imported goods considered non-commercial.

3.3.2 Amend the Second Schedule of the Customs and Excise Act in order to
introduce consistency in the use of units to calculate Excises

This measure is intended to harmonise the units of measurements between

and within the tariff and excise schedules.

3.3.3 Introduce specific tariff lines for dangerous chemicals in line with the
World Customs Organisation (WCO) recommendations.

The measure is intended to conform to the Convention on prohibition of the

development, production, stockpiling and use of chemical weapons and their
destruction. It will also allow for the capture of correct trade statistics with
regards to these products to inform decisions and policy on the movement of
such products.

3.3.4 Remove the requirement for importers to apply for entry of goods for
pre-clearance prior to importation.

This measure is intended to remove the requirement for the importers to

apply to the Commissioner-General for approval before they can access the
pre-clearance facility. This will streamline the administration of the pre-
clearance facility as a trade facilitation measure.

3.3.5 Amend Regulation 118 of the Customs and Excise which provides for
charging of interest by aligning computation of interest from
compounding basis to simple interest.

This measure is intended to harmonise the computation of interest that is

currently at variance between section 171 and Regulation 118 of the
Customs and Excise Act. This is consistent with the current provision of the
law disallowing the use of compound interest when calculating charges.
3.3.6 Amend Regulation 96 of the Customs and Excise (General) Regulations
to specify the machinery, equipment and special purpose motor
vehicles that qualify for duty remission, to include:

This measure is intended to remove the ambiguity on the type of mining

machinery, equipment and special purpose motor vehicles that qualify for
duty remission under this regulation by specifying the items that qualify for
duty remission to include;
10 2011 Budget overview of Tax changes
 i. Dump trucks-off highway 87042300
ii. Mine –Locomotives 84285000
iii. Transmission or conveyor Belt 59100000
iv. Conveyors 842831, 32,33 - 84289000

3.3.7 Amend Regulations 78 and 83 to provide for a limit of 10 days within

which the daily penalty will apply pending seizure in respect of motor
vehicles and goods that are admitted temporarily but remain in Zambia
beyond the authorised period.

This measure is intended to limit the number of days within which the daily
penalty will apply to 10 days failing which the item may be seized as in some
cases this has resulted in penalties accumulating beyond the value of the
goods in question.

3.3.8 Increase the fees for manually processing bills of entry from 10 fee
units (K1,800) to 278 fee units (K50,040), harmonising with the fee
charged for automated processing. In addition, adjust the fee for
amending a bill of entry from 182 fee units (K32, 760) to 278 fee units
(K50, 040).

This measure is intended to harmonise the manual and automated

processing fees as there is no difference between the two services.

3.3.9 Introduce a new provision for the registration and submission of

entries for customs purposes where ZRA must be notified at least 7
days prior to the importation of goods of a commercial nature, or 24
hours in the case where the goods are accompanied by the importer.

This measure is intended to shorten the period within which registration of

imported goods should be done. The measure will facilitate prior
determination of clearance needs by customs and therefore quicken
clearance process when goods arrive at the port and ultimately reduce the
cost of doing business by reducing dwelling time. It will further help reduce
congestion at port facilities.

3.3.10 Amend the Fourth Schedule of the Customs and Excise Act to include
Motor Vehicles of HS 87.01

This measure is intended to correct a drafting error where trucks of HS 87.01

were inadvertently omitted from the Fourth Schedule of the Customs and
Excise Act for purposes of charging Carbon Emissions Surtax.

2011 Budget overview of Tax changes 11

3.3.11 Remove the requirement for service providers to apply for a licence for
provision of services liable to excise duty.

This measure is intended to remove the requirement for service providers to

apply for a licence for provision of services liable to excise duty. This is in line
with the government's business licensing and regulatory reforms aimed at
reducing the number of licenses required to register or do business in
Zambia.

12 2011 Budget overview of Tax changes