Paying Taxes

Something of interest (tax- wise) happened today.

I had a discussion with a work mate about para-statals and their tax payments. And I think we all need take this seriously and see how we can help our country develop.

Who should pay taxes

All companies and entities in the republic need to pay tax. Be it a Ministry, a government institution, an agency, an NGO, etc. That is the normal way things are supposed to work especially for VAT. For income tax, the situation is different. All institutions that earn an income is supposed to pay income tax. That obviously eliminates government institutions as they never earn an income.

The few exceptions are military personnel or agencies, the presidency and such, through the duty-free goods and drinks. So as to make things cheap. And enable them work without disruptions of chasing refunds or fundings. Ok that's my understanding (limited as it may be).

Now my point of interest, most institutions don't want to pay taxes. They want to be a bottom-less pit which can be funded or use its privileges to get favourable treatment but also don't want to contribute to the revenue generation. I'm not talking about the obvious. Think about it, for example why should ZNBC or ZESCO not pay VAT? VAT is a consumption tax (I will always remind people about that), so anything being consumed should be paid for. Since its being consumed and everyone will pay VAT, it will be easier for administration purposes if all paid it. For anyone producing an intermediate product, they will claim it back and only those consuming the product will have the tax stick on them. I buy a Fanta, I pay VAT, ZNBC or ZESCO does not pay? Will that be fair? After all, drinks are to be consumed. Unless they can prove as being an input, then they claim it. After all, the idea of claiming the VAT if one is not the final consumer is in place to enable businesses handle costs.

And another thing. We as a people should take interest in knowing what taxes are being paid by institutions regarded as "public" or of importance. We should not only be interested in knowing what the mines pay. We should know what the mines and other big institution  How much does tax does ZESCO, ZNBC, Shoprit, Game, etc. I think we should also be given an opportunity to see what incentives are being given and the justification of such a move. I would like to know what items are coming in free of taxes and for which companies. I have a stake in this country and a permanent share holder, so I should know. Such disclosure will ensure officers are doing the right thing.

Right now, there is this belief that officers are bribed in issuing tax incentives or allowing items to be treated favourably. So is this true or mere speculations? It can only be best sorted out by disclosing what company A received. And how much revenue loss has resulted from such a move.

Maybe I shold stop here before I get political... seems to be a fine line between politics and economics especially in Zambia.

The More Things Change, The More They Remain The Same!!!

I had a problem with the way the previous government handled issues related to economic well being of the country. They created sacred cows that would be treated differently when it comes to taxes, tax incentives and so on! Tax payers should be protected. Moreover, we should ensure there is a balanced approach to the way people pay taxes! (I'm passionate about taxes - try to understand).

If you are going to let people go without paying taxes, let everyone go! Let us teach people to realize that they need to do things in a proper way! There is no alternative to doing it right. I believe that is the only single lesson you would teach your child. That is the only single think that a government can teach its citizens. Everything else would be dependent on doing it right. You pay the right taxes, you conduct the right business, you engage the right suppliers, you keep the right records for your business and so on.

The Past

We had some businesses which enjoyed "sacredness" under the old regime. I did not like that! Some companies got incentives, while others where taken out of business for the same actions. You needed to know someone up high to get some things done! If you don't rub the right shoulders, your business goes under! That is not a way to run an economic. It looks political, but the whole arrangement affected economics in massive proportions. Rent-seeking was the order of the day. It reached levels that government officials received calls from higher offices to implement certain things (sometimes I'm shocked when I read the papers on what led to some decisions - and always called it political pressure). We have to work at this, economic progress cannot be achieved if politics are involved. I have reminded myself not to be political on this issue as I expect progress and the day we add political aspects, we compromise progress.

The Present

I loved the pronouncements related to corruption and the "hands-off" on the economic that came from the new regime. But I has been disappointed, we have now started promoting street vendors at the expense of shop owners! Some one told me, this is done so as to improve the lives of people by giving them a means to earn a living. They can now afford to buy food, clothes, medicines, etc. This is more so because they have no trading places where they would sell their goods.

It really was a good point. And I looked at it as a right measure. But after reflecting, we need to come back to reality on the ground. The streets are dirty, diseases came spring up any time. There is no order. And there is no taxes being paid by these traders. I have not seen a ZRA officer on the streets! So we have promoted tax evasion and wonder why there are no trading places? What would make the shops in Freedom Way, Cha Cha Cha and Cairo road want to pay taxes? They face competition from the vendors - who don't pay taxes or rent! Its an imbalance in economics with no supporting argument. This is one single disappointment that the present has presented to the economic well being of this nation. I seriously hope it is temporal. We have eroded the tax base even more.

The Real Effect

It looks like the measure is aimed at encouraging entrepreneurship. People can buy and sell without paying taxes. But the real effect is teaching people to look at taxes as optional. An Indian shop owner would see the benefits of trading on the streets than paying rent and taxes!  Mind you, most shops in Freedom Way, Cha Cha Cha and Cairo road are owned by local business men and women. Their businesses are being torn to pieces. Most people avoiding this chaos on the streets stop buying in town and move to malls. They promote foreign shop owners and push their businesses to greater heights. And we wonder why local businesses don't do well? There is no sense in saying "buy Zambian, promote and develop Zambia" when all Zambia is, on the street in chaos yet foreign companies are in nicely ventilated shops, with air-condition and smooth music.

We need to look at this issue and find ways to help people but not by destroying the sanity that town had. We have to do things right. And vendors on the street is not right. They need to feed their families yes, but I think they can feed them better if bigger shops paid taxes which would construct schools for their children and create employment. They can do with selling the same quantity in markets than lose all trade to malls with fresh clean vegetables.

Tax Incentives :(

I have always had problems with tax incentives.... simply because I believe if someone is investing, he is not doing you (as a country) a favour. He is in it for the money, he knows he can make enough profit without incentives before he starts, and the tax incentives simply make him "super-normal" profits! Prove me wrong! No one single person would invest if the profit margin is non-existing or if the profit is only coming in after the tax incentive!!!

My looking at tax incentive maybe wrong to some of you. But in the same vein, thats why I have little understanding of the role of Zambia Development Agency (ZDA). I seriously need someone to educate me! If you are doing a course and the school says do all your assignments, tests, etc, but to encourage, we wont mark them as we will give you those marks (about 50%) and you just need to get more than 50% from both the assignments and the final exam to pass the course - who would let such a chance go begging???? That my people is how I see the tax incentive.

I have always said, to an economist, only two things are certain: death and paying of tax! We will all die, and we all should pay tax! So the logic of tax incentive violates my belief - and I can prove it!

Tax Needs

Taxes are paid for infrastructure, security and other public goods which governments put up. So if a real investor asks for tax incentive, ask him if he can do the roads, pay the police, hospital staff and their buildings while he is running his investment. If he refuses, he shouldn't get the tax incentive! No one investor would be willing to not pay taxes if he wont be assured of security through the police, courts of law, access roads, etc. So if he asks for tax incentive, he simply wants someone else to pay for those services! Just on this point, whats the role of ZDA? To unfairly ask people to pay for services used by these wealthy companies?

Incentive Benefits

I have been looking at a report that will show me the benefits of tax incentives in Zambia (as opposed to the benefits the country would have had if taxes were  paid)! I believe that is the single most important reason for continuing with incentives in this country. Without it, we shouldn't even think about it. What benefit would tax incentives bring if they provide no benefits? We would be doing a dis-service to ourselves, our children, and our children's children!

Getting High on Incentives

I think we have reached a point that we get high on incentives, we may even start asking companies to invest through an incentive of not requiring them to register as a company. Seriously when we reach a stage of allowing companies to steal, as an incentive, we can't sink lower than that. This is through what someone called the VAT "incentive". My little education would not understand this, but I believe people think this is possible.

Let me explain my failure to understand the VAT incentive.

VAT is a consumption tax paid by you and me on final goods that we buy for consumption. For example cooking oil, soft drinks, etc. So the company selling you these things will "hold the tax" and submit to the revenue authority. You pay, they take it to government. If you give that company a tax holiday for that kind of tax, you are asking people to pay to the company (for their operations) and not for public services! Is this normal? I think there is no difference in that action with some someone thieves high-jacking an armored vehicle taking taxes to the Bank of Zambia! Money is illegally being pumped into the company by people who don't want to invest in that company and for no benefits. Its like you simply change the one who is supposed to tax from the tax authority (in this case ZRA) to the company. I think the issue would actually make sense to someone people if you explain it better like this:

The action is like asking government to give back the taxes paid by the people to the company to do with it as it wishes. So the government goes and cuts a cheque equivalent to what that company brought in as taxes. 

There is no basis, no logic! The tax burden is born by people, the company has nothing to do with VAT. They don't pay it, they simply collect it for government. So if you give them what you call an "incentive", you simply giving them money or investing in their company as a government! I would add and say, thats theft! 

I think the only logical tax incentive is to allow every single entity to pay the correct amount of tax due, so that in time, they can pay less as the requirements are met. Without this, they actually open up an imbalance in taxes required, and would lead to more taxes paid in future. I always say, paying less taxes, is actually asking to pay more taxes!

If our taxes don't meet today and tomorrow's requirements, we will need to pay more taxes in future! Don't believe me? What taxes do you think people in Greece are paying compared to what they paid some years ago? Any failure to raise money by a government will lead to people paying more to meet those demands. I know a government can borrow, but ultimately, those loans will be repaid from taxes in the end! There is no one single source of revenue for government that can replace taxes. Actually with tax incentives, you may end up paying taxes to make up for the taxes that a company needed to pay. More so if that is a foreign company which would just pack its bags and leave!

We have to one day call for the end of a thinking that one needs to incentivize investment! Investment comes with or without incentives. As long as someone knows that they will make a great incentive, the business environment itself is enough incentive. Zambia has incentives in that area, investments are safe, we just need to get the taxes and build great infrastructure as the last incentive - not giving companies money!