DOMESTIC TAX INCENTIVES Boxes 4.1 and 4.2 show some of the major domestic tax incentives that someeconomic sectors currently enjoy for income taxes and VAT respectively in Zambia.Box 4.1 Income tax incentives by sectorSector Tax incentivesAgriculture • Income tax is at a reduced rate of 15%.• Farm improvement allowance is at 100% on fencing, brick or stonewall and anallowance of K10 million for farm dwelling occupied by farm workers.• Farm works allowance is at 100% for the full cost of stumping and clearing,works for prevention of soil erosion, boreholes, wells, aerial and geophysicalsurveys and water conservation.• Dividends paid out of farming profit are exempt from tax for the first five yearsthe distributing company commences farming.• Development allowance is given for any person who incurs expenditure on thegrowing of tea, coffee, or banana plant or citrus trees or other similar plants ortrees. An allowance of 10% of such expenditure shall be deducted inascertaining the gains or profits of that business.Manufacturing • Income from chemical manufacturing of fertilizers is taxed at a reduced rate of15%.• Capital allowances on industrial buildings used for the purposes ofmanufacturing shall be entitled to a deduction of 10% in case of low costhousing (low cost housing does not exceed K20 million) and 5% for otherindustrial buildings of the cost of the building.• Persons who incur capital expenditure on an industrial building are entitled toclaim a deduction called initial allowance at 10% of the cost incurred in thecharge year in which the industrial building is first brought into use.• Any person who incurs capital expenditure on an industrial building is entitled toan investment allowance at 10% of such expenditure in the first year used formanufacturing purposes. Mining • Any mining company holding a large-scale mining license carrying on the miningof base metals is taxed at 30%.• Other mining companies are taxed at 35%.• Dividend paid by a mining company holding a large-scale mining license andcarrying on the mining of base metals is taxed at 0%.• 100% mining deduction on capital expenditure on buildings, railway lines,equipment, shaft sinking or any similar works.• The debt equity ratio has been reduced from 2:1 to 3:1 to encourage furtherinvestment in the Mining sector.Tourism • Capital allowances at 50% of the cost of plant and machinery.• Investment allowance at 10% of the cost of an extension to an hotel (being anindustrial building).• 5% wear and tear allowance to an extension to a hotel (being an industrialbuilding).• 10% initial allowance on an extension to a hotel (being an industrial building) inthe year the building is first brought into use.General IncomeTax Incentives• Income from non-traditional exports is taxed at a reduced rate of 15%.• The income of a person operating an enterprise designated as micro or smallenterprise under the Zambia Development Agency Act operating in:o an urban area shall be exempt from tax for the first three (3) yearso a rural area shall be exempt from tax for the first five (5) years• Dividends receivable from a company engaged in the assembly of motorvehicles, motor cycles and bicycles are exempt for the first five years from thedate of first declaration.• Withholding tax deductible from payment of any management fees, consultancyfee, interest or payment to a non-resident contractor by a person developing amulti-facility economic zone or an industrial park under the ZambiaDevelopment Agency Act shall be deductible at zero per cent for a period of fiveyears from the first date the payment is due.• On the income of a business operating in priority sector declared under theZambia Development Agency Act, tax shall be charged as follows:o At zero per cent for a period of five years from the first year profits arereturned;o At fifty per cent from year sixth to eighth year after profits arereturned;o At seventy-five per cent from ninth to tenth year;o At one hundred per cent after year ten after profits; ando At zero per cent on dividends declared by a company operating withina priority sector for a period of five years from the first declaration. With the information above, please discuss each of the sector incentives highlighted in this section and state whether you agree with the current incentive policy and amount of incentive or if you would modify or eliminate the incentives for that sector and why. Be specific regarding any adjustments you would make and why.
DOMESTIC TAX INCENTIVES
Boxes 4.1 and 4.2 show some of the major domestic tax incentives that some
economic sectors currently enjoy for income taxes and VAT respectively in Zambia.
Box 4.1 Income tax incentives by sector
Sector Tax incentives
Agriculture • Income tax is at a reduced rate of 15%.
• Farm improvement allowance is at 100% on fencing, brick or stonewall and an
allowance of K10 million for farm dwelling occupied by farm workers.
• Farm works allowance is at 100% for the full cost of stumping and clearing,
works for prevention of soil erosion, boreholes, wells, aerial and geophysical
surveys and water conservation.
• Dividends paid out of farming profit are exempt from tax for the first five years
the distributing company commences farming.
• Development allowance is given for any person who incurs expenditure on the
growing of tea, coffee, or banana plant or citrus trees or other similar plants or
trees. An allowance of 10% of such expenditure shall be deducted in
ascertaining the gains or profits of that business.
Manufacturing • Income from chemical manufacturing of fertilizers is taxed at a reduced rate of
15%.
• Capital allowances on industrial buildings used for the purposes of
manufacturing shall be entitled to a deduction of 10% in case of low cost
housing (low cost housing does not exceed K20 million) and 5% for other
industrial buildings of the cost of the building.
• Persons who incur capital expenditure on an industrial building are entitled to
claim a deduction called initial allowance at 10% of the cost incurred in the
charge year in which the industrial building is first brought into use.
• Any person who incurs capital expenditure on an industrial building is entitled to
an investment allowance at 10% of such expenditure in the first year used for
manufacturing purposes.
Mining • Any mining company holding a large-scale mining license carrying on the mining
of base metals is taxed at 30%.
• Other mining companies are taxed at 35%.
• Dividend paid by a mining company holding a large-scale mining license and
carrying on the mining of base metals is taxed at 0%.
• 100% mining deduction on capital expenditure on buildings, railway lines,
equipment, shaft sinking or any similar works.
• The debt equity ratio has been reduced from 2:1 to 3:1 to encourage further
investment in the Mining sector.
Tourism • Capital allowances at 50% of the cost of plant and machinery.
• Investment allowance at 10% of the cost of an extension to an hotel (being an
industrial building).
• 5% wear and tear allowance to an extension to a hotel (being an industrial
building).
• 10% initial allowance on an extension to a hotel (being an industrial building) in
the year the building is first brought into use.
General Income
Tax Incentives
• Income from non-traditional exports is taxed at a reduced rate of 15%.
• The income of a person operating an enterprise designated as micro or small
enterprise under the Zambia Development Agency Act operating in:
o an urban area shall be exempt from tax for the first three (3) years
o a rural area shall be exempt from tax for the first five (5) years
• Dividends receivable from a company engaged in the assembly of motor
vehicles, motor cycles and bicycles are exempt for the first five years from the
date of first declaration.
• Withholding tax deductible from payment of any management fees, consultancy
fee, interest or payment to a non-resident contractor by a person developing a
multi-facility economic zone or an industrial park under the Zambia
Development Agency Act shall be deductible at zero per cent for a period of five
years from the first date the payment is due.
• On the income of a business operating in priority sector declared under the
Zambia Development Agency Act, tax shall be charged as follows:
o At zero per cent for a period of five years from the first year profits are
returned;
o At fifty per cent from year sixth to eighth year after profits are
returned;
o At seventy-five per cent from ninth to tenth year;
o At one hundred per cent after year ten after profits; and
o At zero per cent on dividends declared by a company operating within
a priority sector for a period of five years from the first declaration.
With the information above, please discuss each of the sector incentives highlighted in this section and state whether you agree with the current incentive policy and amount of incentive or if you would modify or eliminate the incentives for that sector and why. Be specific regarding any adjustments you would make and why.
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