Sales Tax Bill

High Level Summary - GC

The Sales Tax Bill has now been shared. It is intended to repeal and replace the Value Added Tax
that was enacted in 1995.

The objectives of the Bill are, amongst others, to:

· Introduce sales tax on the supply of goods in Zambia on/ by manufacturers,
producers, distributors, wholesalers and retailers and on importers of goods into
Zambia;
· Impose a sales tax on the supply of services in Zambia by service providers and
importers of services; and
· Exempt certain supplies, imports and exports of goods and services from sales tax.

From an initial look at the Bill, the following is a high level summary of some key issues.

The Bill proposes a two tier rate system: 9% Sales Tax (“ST”) to be imposed on all qualifying
domestic supplies of goods and services and 15% on imports of goods and services.

The Bill empowers the Minister of Finance to exempt from sales tax, via Statutory Instrument,
· Capital goods;
· Inputs;
· Designated basic and essential goods or services;
· Designated supplies to privileged persons; or
· Exports.

The Bill does not provide a definition, in the definitions section, of capital goods. It defines
inputs as “”…goods and services used or acquired to be used by a taxable supplier in the course
of furtherance of a business that takes place in the Republic”.

From previous pronouncements by the Government, the registration threshold for registration
will be reduced from K800,000 ( approx. USD 67,000) under the VAT Act to K500,000 (
approx., USD 42,000).

The Bill empowers the Minster to exempt, via Statutory Instrument, a person or class of persons
from registering or imposing ST.

The Bill proposes the extension of the Statute of Limitations from the current six (6) years,
under the VAT Act, to ten (10) years.

All in all (other than in cases where the items (or persons) within a supply chain are exempt
from ST), if the Act is ultimately implemented so that the imposition of ST occurs at multiple
stages/points within any given value chain (as opposed to a single stage/point), then ST is likely
to create a cascading effect. Put simply, it will be a “cascade tax”.

A simple definition of “Cascade tax” is provided by Investopedia as follows:

 “A cascade tax is tax that is levied on a good at each stage of the production process up to the
point of being sold to the final consumer. A cascade tax is a type of turnover tax with each
successive transfer being taxed inclusive of any previous cascade taxes being levied. Because
each successive turnovers includes the taxes of all previous turnovers, the end tax amount will
be greater than the stated cascade tax rate.”

The cascading effect is nicely illustrated by the following example from Investopedia:
“Cascade tax can create higher tax revenues compared to a single stage tax, because tax is
imposed on top of tax. For example, a government levies a 2% cascade tax on all goods produced
and distributed. A company sells $1,000 worth of stone for a tax-inclusive price of $1,020
($1000 + 2% cascade tax) to an artist. The artist makes a sculpture out of the stone and wants to
make $2,000 when he sells it to an art dealer, so he adds this figure to what he paid for the stone
to get $3,020, and then adds on the cascade tax to bring the total to get $3,080 ($3020 + 2%
tax). The art dealer wants to make $5,000 for the sculpture, adding this to $3,080 for a pre-tax
$8,080. She then adds the 2% cascade tax for a total price of $8,242. In sum, the government
collected taxes of $20 + $60 + $162 = $242, which is actually an effective tax rate of
$242/$8,000 = 3.025%.”