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.