Workshop: The Informal Sector in Zambia

The IGC Zambia team, with the help of the Economics Association of Zambia and in collaboration with the Zambia Revenue Authority, held a workshop on the informal sector on the 16th of November in Lusaka, Zambia.

The workshop consisted of two presentations. The first presentation was by Christopher Mulenga of the Zambia Revenue Authority entitled ‘SME Taxation in Zambia’. The second was by Manju Shah, the IGC consultant, entitled ‘Informal Sector in Zambia; Can it Disappear? Should it Disappear?’

The aim of the workshop was to present the works of Manju Shah, the IGC Consultant as well as the complementary work of the Zambia Revenue Authority on the Informal sector. It was also envisaged that the discussions of the workshop participants will help shape Manju Shah’s work as well as help feed into ZRA’s work on SMEs. The workshop was also an opportunity to re-introduce the IGC to relevant stakeholders in the wake of the new government.

The workshop was chaired by Mr. Isaac Ngoma, President of the Economics Association of Zambia, and closed by Robert Liebenthal, IGC-Zambia Co-Director.

Sessions

SME Taxation in Zambia

The paper looked at the operational challenges of the Zambia Revenue Authority (ZRA) in collecting tax from the informal sector. Notably, the study notes that while the informal sector contributes minimally to tax revenues, the Small Tax Payers unit of the ZRA which collects revenues from the informal sector has the largest workforce. Operational challenges faced by ZRA include among others varying levels of literacy among many informal sector players; definition issues regarding the classification to the informal sector and low perception of the benefits of paying tax among SMEs, leading to tax evasion.

Participants at the workshop discussed the need for ZRA to show value for their taxes. It was argued that while ZRA’s primary responsibility was tax collection, it should also show value for the people’s taxes, which, arguably most informal sector agents do not see. This has inevitably lead to the perception of many in the informal sector that ZRA is a ‘Tax Police’ which does not work with people it taxes. It was also proposed that ZRA changes its mode of operation to incorporate Tax payers’ concerns, and in the quest of promoting equity, called for the need to broaden the tax base.

It was also argued that ZRA has in the past introduced a number of Tax reforms which may not have been guided by research. The participants called on ZRA to conduct research to guide the introductions of taxes in the informal sector and the need for evaluations of these reforms. Further, most private sector participants called on ZRA to show to the people the benefits of formalization.

The German Development Cooperation (GIZ) briefed the workshop on the work they are doing with ZRA in good financial governance as well as studies on how to raise revenues from SMEs taxation in Zambia.

In terms of efficiency in taxing the informal sector, the participants called on ZRA to conduct more cost benefit analysis studies to show the long run efficiency gains in taxing an otherwise not cost effective informal sector.

Informal Sector in Zambia; Can it Disappear? Should it Disappear?

The study looked at the Informal sector in Zambia in general. Its main focus was on the size, distribution and characteristics as well as factors determining growth and formalization.

The study notes heterogeneity of firms in the informal sector from firm size to firms’ financial standing. Notably, Larger Informal Sector firms have entrepreneurs with higher education, greater access to infrastructure facilities, and greater use of mobile phones and banking services. The study argues that the potential tax base in the informal sector is enormous. However, the challenge is in bringing these firms under the tax umbrella. The larger firms can be brought under the tax umbrella through greater education and enforcement. Increasing education, infrastructure and banking sector access will increase microenterprise revenues and have the complementary effect of increasing formalization and hence taxation.
Participants, notably the Patents and Companies Registration Authority (PACRA) outlined the government’s commitment to registration and thus formalisation of many informal sector enterprises. PACRA, in its efforts, has introduced mobile registration of business and is in the advanced stages of decentralisation of registration points throughout Zambia.