Budget Bulletin 2010

Beyond figures 2010 Budgetary changes

Beyond figures 2010 Budgetary changes

Commentary ‘’Enhancing Growth through Competitiveness and Diversification” retained as the theme Very few proposed tax changes

The title/theme of the 2010 budget has remained the same as that of the 2009 address “Enhancing Growth through Competitiveness and Diversification”.

The strategy of the Government continues to be ‘Enhancing growth through Competitiveness and Diversification

We hope this is an acknowledgement of unfinished business and a realisation that the development agenda is a long term one. It was unrealistic to refocus on an annual basis without any regard to the actual achievements, as the previous annual theme changes suggested.

Manufacturing and tourism decline...

Considering the turbulence in the global economy for the most part of 2009, the economy performed reasonably well. The projected GDP growth rate of 4.3%, or more, far exceeds the 1.3% projected for Sub Sahara Africa.

Mining, agriculture and construction grow 5% GDP growth target for 2010

Some proposed changes may impact negatively on agriculture and tourism

GDP Growth of 4.3% projected

However, it is not appropriate to gauge our performance against a rough aggregate such as the Sub Sahara rate. We should develop targets based on the resources and other competitive advantages we enjoy as a nation. In 2009, manufacturing and tourism are projected to decline by 1% and 15% respectively, whilst mining, agriculture, and construction are projected to grow by 13.1%, 5.2% and 10% respectively. If the economy can grow by 4.3% in a very difficult year, is the 2010 GDP growth target of 5% ambitious enough? We believe we should and can achieve higher rates of growth. To do that we need to set our priorities and then focus and execute them as one management guru put it. We appear to have set the priorities and to some extent have started focusing. Next we have to ensure we execute relentlessly.

Prior years’ budget addresses have been dominated by changes in the tax regime. The 2010 budget differs from prior years in that there are a few proposed changes to the tax regime. Considering the changes introduced in the past two budgets, this is a welcome relief, particularly to the mining industry. We are not suggesting that the current tax regime is perfect and does not need improvement. But as we all know changes have to be carefully planned and managed. We are not sure that can be said of some of the recent changes to the tax regime. Some of the proposed changes in the 2010 budget address might impact negatively on two priority sectors: agriculture and tourism. The increase in the fees payable under the Lands Act might hinder access to land. Further, the increase in the excise duty payable on the diesel will surely increase the cost of farming. The proposed tourism levy also has the potential to have similar counter-productive effect. We urge circumspection before its introduction. Beyond the figures, we believe the 2010 budget proposals are realistic, albeit a bit cautious.

Zambia Budget Review 1

Beyond figures 2010 Budgetary changes

The Economy A synopsis of the Zambia economy Amounts in %

Actual 2008

Projection 2009

Revised Estimate 2009

Projection 2010

GDP growth rate

5.8

5

4.3

5

Inflation

16.6

10

12

8.0

Government bonds

16.7

n/a

16.8

n/a

TB rates

17.2

n/a

19.5

n/a

Budget Deficit

2.7

2.3

2.5

2.9

Domestic borrowing

1.4

1.8

3.0

2.0

n/a – not available

An overview The global economy has slowly begun to climb out of the recession with key global markets showing modest growth in the second half of the year. The Minister presented the previous budget at the height of the global recession hence, in the context of tight global liquidity and a compressed commodity market. In our budget analysis in January 2009, we noted that the overall market painted a grim picture with: • Constrained markets negatively affecting commodity prices; • low global liquidity reducing the potential for foreign direct investment in the economy; and • a weakening kwacha and higher food prices causing inflation and reducing the disposable income of consumers.

Zambia Budget Review 2

The impact of these conditions has been evidenced by a significant slowdown in demand-driven sectors of the economy such as tourism, manufacturing, wholesale and retail trade and transport & communication. The following factors have affected the economy in the nine months to September 2009: 1 A fluctuating Kwacha that started the year at K4,200 to US$ to a high of K5,800 in February, and a low of K4,600 in September; 2 Increasing prices of crude oil from $33 per barrel in January to $69 per barrel in September; 3 Reduced donor funding to Government programmes mainly arising from allegations of misappropriation of funds at the Ministry of Health; 4 Reduced Government revenues from taxes and therefore increased domestic and foreign borrowing; and

Beyond figures 2010 Budgetary changes

5

Average inflation of 14.3%compared to a projected rate of 10%.

copper production. It is generally believed that copper prices will stabilise due to a consistent and ready market for the product in most economies and its relatively low price compared to other base metals. Copper production is projected to increase by 5 % to 700,000 tons in 2010 from a projected 662,000 tons in 2009, and an actual production of 575,000 tons in 2008. The increase is expected to come from ramped up production at Lumwana and the resumption of production at Luanshya Copper Mines.

The above negative factors have limited the Government’s ability to raise funds to finance operations as estimates indicate that overall domestic revenues will be 7% behind budget. The shortfall in revenue generation, coupled with the withdrawal of some donor support has forced the Government to borrow more from the domestic market. This has increased domestic borrowing to 3% of GDP compared to a target of 1.8%. Whilst the above factors have had a negative effect on the economy, various other factors have supported its growth, particularly the commencement of commercial copper production by Lumwana Mining Company and improving metal prices in the global market. These resulted in improved dollar flows into the economy strengthening the Kwacha against major currencies. The increasing price of fuel should however be a continued cause for concern. In the following sections, we give a synopsis of the key sectors of the economy.

Agriculture

1

Stabilising fertiliser prices while making it more widely available through the Fertiliser Support Programme (now known as the Farmer Input Support Programme);

Mining

2

Improving credit availability to rural areas in partnership with donors though there is insufficient detail on the exact modalities of this arrangement); and

3

Encouraging increased investment into the sector by both small- and large- scale farmers through the development of infrastructure to support Farm Blocks across the country.

Mining industry continues to be a primary source of earnings to the economy. In the nine months to September the mining industry has slowly recovered from the worst of the economic slow down with copper prices increasing from c$3,100 in January to c$6,000 in October driven by improved demand in China and India, and also because of the overall low world

Agriculture, whilst contributing to 16% of GDP, employs 85% of the country’s workforce. It continues to encounter difficulties, such as: • • • • • • •

High cost of credit; Fluctuating cost and unreliable delivery of inputs: Limited access to inputs and extension services; Inadequate infrastructure; Poor livestock management; Weaknesses in the Fertiliser Support Program; and Failure to attract adequate private investments in the sector. The Government has planned to address the above challenges by

Zambia Budget Review 3

Beyond figures 2010 Budgetary changes

The production of maize, tobacco, soya beans, sunflower, sorghum and wheat improved significantly in the 2008/9 farming season. Total maize production grew by 31% in the 2008/2009 compared to the 2007/2008 farming season.

The Government intends to reduce fees for international gateway by the end of 2009.

Recognising the importance of the sector, Government has increased the allocation to the sector in 2010 to K1,139 billion representing 6% of the total budget. Government has proposed to undertake a comprehensive review of the Fertiliser Support Program (now called the Farmer Input Support Program) in an effort to improve it’s effectiveness.

To develop the road infrastructure within the country, Government has provided funds to upgrade and rehabilitate various roads and feeder roads around the country.

The Government also proposes to introduce an Agricultural Marketing Bill that will allow small-scale farmers to market their produce directly to buyers. Manufacturing Manufacturing sector continues to be an area of focus for the Government in its plan to divest from the traditional mining revenue base. The core objectives include: • Reducing the cost of doing business in the Zambia; and • Development of the Multi-Facility Economic Zones. However, increases in electricity tariffs by 36% in 2009 and 26% in 2010 may have a negative impact on the above objectives. In 2009, the Government progressed the development of the Multi-Facility Economic Zone in Chambishi and Lusaka South. Transport and Communications Telecommunication had minimal growth in the first quarter of 2009, however this has gradually picked in the period from April to September, driven by improved consumer incomes. The industry still encounters challenges due to the cost of international and cross network calls. Zambia Budget Review 4

To resolve the problem of poor infrastructure, Government has reiterated its commitment to the partial privatisation of ZAMTEL in 2010.

Tourism The sector has been hit by the global credit crunch as most of the guest arrivals are primarily from South Africa, Europe, and the US. The number of international tourists visiting the country declined in the first half of the year compared to the figures for same period in 2008. The tourism sector is expected to pick up in 2010 with the 2010 FIFA World Cup in South Africa. There is insufficient information on how the Government intends to capitalise on the opportunity. Government remains focussed on its plans to transform the Northern Tourism Circuit into a high quality tourism destination. Inflation Underlying inflation to September 2009 stood at 12.1% compared to 12.4% in 2008. Overall inflation (including food and fuel) was 13% (2008 16.6 %). The Government projects that inflation will reduce to 12% by the year end and 8% by the end of 2010. Budget Deficit Government expects to end the current year with a budget deficit of 2.5% and this is targeted to increase to 2.9% by the end of 2010. To finance the deficit, Government plans to borrow over the medium term.

Beyond figures 2010 Budgetary changes

COMPARATIVE ANALYSIS – INCOME AND EXPENDITURE

Projection

Revised

Projected

2009

Estimate 2009

2010

Income (K'billion) Domestic revenues and grants

13,414.50

11,647.80

14,533.70

15,279.00

14,013.00

16,717.80

Expenditure (K'billion) General services exp, public order, environment, housing , health etc Deficit

(1,864.50)

(2,365.20)

(2,184.10)

The amount of Government borrowings is still within sustainable levels. We hope the “more expansionary fiscal stance in 2010” that the Minister mentioned in his address will not threaten this hard earned position.

Zambia Budget Review 5

Beyond figures 2010 Budgetary changes

Direct Taxes Increase in exempt threshold for taxes 2010/2011 Income First K9,600,000

No change in annual tax bands

Increase in tax credits for differently-abled persons

No change in standard rate of corporation tax

2009/2010 Tax rate 0%

Tax rate

First K8,400,000

0%

From K9,600,000- K16,020,000

25%

From K8,400,000- K 16,020,000

25%

From K16,020,000- K 49,200,000

30%

From K 16,020,000 – K 49,200,000

30%

Above K 49,200,000

35%

Above K 49,200,000

35%

Personal Tax

Housekeeping Measure

The exempt threshold has been increased by K1, 200,000 per annum. This represents an increase of 14.29%.

The words ‘charities’ or ‘charitable organisations’, wherever they appear in the Income Tax Act, have been replaced by the name ‘public benefit organisations’. Income earned by these organisations from commercial transactions is charged at 15%.

The annual tax bands have not changed from 2008/2009. However because the annual exemption limit has increased, all individuals earning more than K9,600,000 per annum will be better off by K25,000 each month. The tax credits for persons with disabilities are increased by K660, 000 to K1, 560,000 per annum, an increase of 73%. The above measures take effect from 1 April 2010. It is planned that in future, the tax year, which currently runs from 1 April to 31 March, will be the same as the fiscal year which commences on 1 January. This will enable changes announced in the budget to be effective from 1 January in the following year. Corporate Tax The standard rate of corporation tax remains at 35%. There are no other changes relating to corporation tax.

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Income

The definition of mining licence in the Income Tax Act is to be amended to align it with the definition included in the new Mines and Minerals Development Act of 2008.

Beyond figures 2010 Budgetary changes

Indirect Taxes VAT on sale of commercial properties to broaden the tax base Value-added Tax Sale of commercial properties to be subject to VAT. Sale of commercial properties to be subject to VAT

Insecticide treated curtains to be zero rated

The VAT Act to provide clarity on financial and insurance services / charges that will be exempt for VAT purposes

The sale of commercial property is currently exempt for VAT purposes. As a result companies currently involved in constructing properties for sale are unable to reclaim input VAT incurred on construction expenditure. This increases the cost of building and construction. The Minister proposes to charge VAT on sale of commercial properties. Assuming that properties are generally sold at a profit this measure should increase tax revenues for the Government. It will also benefit developers’ cash flows as they will be entitled to re-claim input VAT on construction expenditure on a monthly basis whilst only paying output VAT at the time of sale. The move by the Minister to standard rate the sale of commercial properties is welcomed as it is likely to encourage further development of commercial properties and related infrastructure. This should also reduce the cost of purchase and lease of commercial property in Zambia in the longer term. However, it may divert builders from the domestic sector as it will be less lucrative to construct domestic property. We would encourage the Government to introduce similar changes for residential properties. This would address the current shortage of residential accommodation in urban areas whilst at the same time maintain or increase the level of construction activity in

the country. An increase in the quantity and quality of residential accommodation should also lead to lower rentals in the longer run, which are generally perceived to be higher than other countries in the region. The above measure is effective from 1 January 2010. VAT on insecticide treated curtains to be zero rated In order to effectively fight the scourge of death and illnesses attributed to malaria, the Minister proposes to remove import duties on importation of insecticide treated curtains and also zero rate their sales to make them more affordable. The move to reduce the cost of importing and selling treated curtains is welcomed. The above measure is effective from 1 January 2010. Housekeeping measures Clarity on classification of financial and insurance services for VAT purposes The VAT Act will be amended to provide clarity on those financial and insurance services that qualify for VAT exemption. Currently, the law does not specify the various financial and insurance services/ charges that are exempt for VAT purposes. As a result there is much ambiguity on the VAT treatment currently applicable. Zambia Budget Review 7

Beyond figures 2010 Budgetary changes

Legal requirement for “valid tax invoice” for the purpose of claiming input VAT.

The VAT Act to incorporate the requirement for suppliers to issue a valid tax invoice for proposes of claiming input tax.

Supply of paste or liquid polymers to be exempted.

The VAT Act is to be amended to make it a legal requirement for taxpayers to have valid tax invoices in order to claim input tax. Taxable suppliers must issue invoices in a “prescribed format” to successfully claim input tax. Previously, although ZRA sought to enforce this, it was not backed up by legislation. They Supply of paste and liquid polymers is to be exempted for VAT purposes. The First Schedule to the VAT Act is to be amended to include paste and liquid polymers to be classified as exempt supplies. These are used in the manufacture of polypropylene bags. This measure is intended to align the treatment of paste or liquid polymers to that of plastic granules which are currently exempt. Unregistered suppliers to be liable for VAT immediately they attain the turnover threshold of K200m. The VAT Act is to be amended to incorporate a provision that will require an unregistered supplier to be liable to account for VAT immediately they attain the turnover threshold irrespective of the actual time of registration. This means that in case of late registration, a taxable person’s registration will be back dated to the time when they first reached the turnover threshold of K200 million and they will be liable to pay output tax on all supplies made since that date irrespective of the fact that the tax may not have been collected from the customers. This measure is intended to compel taxable suppliers eligible for VAT registration to apply for registration immediately they reach the turnover threshold of K200m per annum.

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Beyond figures 2010 Budgetary changes

Customs and Excise Increase in excise duty on diesel

Excise duty on diesel increased from 7% to 10%

In 2008, the Government reduced excise duty rates on diesel from 30% to 7% to mitigate the impact of record high international fuel prices. Given the fall in global oil prices from it’s peak of US $150 per barrel in 2008 to the current levels of around US $70 per barrel, the Minister now proposes to increase excise duty on diesel from 7% to 10%. If all of the increase in duty is passed on the consumer there will be an increase in diesel costs of approximately K110 per litre.

businesses have had to invest in back up facilities in the form of diesel generators. The cost of operating such generators can be significant and the increase in duty rates however insignificant, will add to the burden and cost of operating a business in Zambia. The overall increase in cost for operators in the transport, mining and agricultural sectors is likely to be significant particularly where high volumes of diesel are consumed. Businesses that sell their products on commodity markets may find it difficult to pass this cost on to their customers and the higher cost is likely to result in lower profits. The above measure is effective from 1 January 2010. Abolishment of penal bond system The Minister proposes the abolishment of the penal bond system applicable to manufacturers of excisable goods. Under the current system, manufacturers are required to put in place a bond to guarantee payment of excise duties to ZRA on the manufacture of goods.

Penal bond system abolished

This requirement affects the ability of taxpayers to raise additional finance for their business operations thereby increasing financing costs whilst at the same time reducing the prospect for further investment. The new measure is welcomed, as it should reduce the cost of doing business. However, it is not clear whether other measures will be introduced to safeguard the collection of excise duties by ZRA. Whilst at face value the increase may appear insignificant, one must consider this in the context of the challenges currently faced by businesses operating in Zambia. The recent increase in electricity tariffs averaging 36% coupled with increased power outages and load shedding has meant that many

The above measure will be effective from 1 January 2010.

Zambia Budget Review 9

Beyond figures 2010 Budgetary changes

Measures to effectively collect carbon tax on domestic vehicles

Basis for assessing excise duty on airtime clarified

Carbon emission tax on motor vehicles

Reduction of duty on cranes and garbage dumpers

Since the introduction in 2006 of the carbon emission tax, the ZRA have only managed to collect the tax on vehicles temporarily entering the country. They were unable to collect taxes due on domestic motor vehicles due to administrative challenges.

To support the “Keep Zambia Clean and Healthy Campaign”, the Minister proposes to remove the 15% duty on cranes and garbage dumpers.

The Minister has indicated that measures are now in place to implement the collection of the annual carbon emission tax on domestic vehicles. However, the detailed measures are not specified and it remains to be seen how efficient/ effective the collection mechanism will be.

This measure will be effective from 1 January 2010.

In addition to implementing new measures for collecting the tax, the Government has extended the validity of the Carbon Emission Tax Certificates to 90 days for vehicles in transit and for those vehicles that enter the country for short periods only. This means that vehicles that leave and re-enter the country within 90 days can use the original tax certificates and will not have to pay the carbon emission tax each time they re-enter the country. Current carbon emission taxes on motor vehicles are as follows:

Engine size < 1,500 cc

K50,000

Engine size > 1,500 cc, < 2,000 cc

K100,000

Engine size > 2,000 cc, < 3,000 cc

K150,000

Over 3,000cc Vehicles propelled by non pollutant energy sources

Nil

The new collection measures are expected to be implemented with effect from 1 January 2010. Zambia Budget Review 10

This measure is intended encourage investment and reduce the cost of capital investment.

Reduction of duty on insecticide treated curtains In line with the Roll Back Malaria Programme under the Abuja Declaration, and in an effort to reinforce the fight against malaria, the Minister proposes to remove duty on insecticide treated curtains. This is currently levied at 25%. This measure will be effective from 1 January 2010. Housekeeping measures Excise duty on airtime The Customs and Excise Act is to be amended to clarify that the total excise duty payable in an accounting period shall be based on air time consumed, lost or otherwise foregone by a consumer. Reduction of duty on inputs used in the blending of fertilizer Customs duty on fertilizer micronutrients of sulphur, zinc, iron, bentonite pastilles, and manganese used in the blending of fertilizer has been removed. This measure is intended to reduce the cost of inputs in the agriculture sector.

Beyond figures 2010 Budgetary changes

Incentives granted must be gazetted

Amend Customs and Excise Regulations to list investments that access incentives under the ZDA Act This measure will provide for the gazetting of investments which have been granted tax incentives by the Minister of Finance, under the ZDA Act. In practice this means that any incentives granted will only be valid if they are gazetted. Minister to be allowed to delegate powers to the Commissioner General, to grant tax rebates on mining equipment to holders of mining rights Under this measure the Commissioner General of ZRA will be empowered to grant tax rebates on mining equipment to holders of mining rights. Miscellaneous Item

Increases in fees payable under the Lands Act

The Minister has proposed an increase in fees payable under the Lands Act. These will be as follows: • Consideration Fees: Increase of 50% • Ground rents: Increase of 80% • Consent fees: Increase of 100%.

Zambia Budget Review 11

Beyond figures 2010 Budgetary changes

Disclaimer The information in this budget bulletin is for general guidance purposes only. PricewaterhouseCoopers and or any of it’s associates will not be held liable for any errors or loss incurred due to reliance placed on this. The budget pronouncements of 9 October 2009 as highlighted in this bulletin are subject to enactment by an Act of Parliament.

Beyond figures 2010 Budgetary changes

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Beyond figures 2010 Budgetary changes

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