MODULE 1: INTRODUCTION TO TAXATION LUBINDA NAMILUKO MBA, BAcc, ACCA, CIA, CISA, AZICA Module 1: Introduction to Taxation 1
What is Taxation Tax is a Compulsory monetary contribution to the state's revenue, assessed and imposed by a government on the activities, enjoyment, expenditure, income, occupation, privilege, property, etc., of individuals and organizations. A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name. Taxation is therefore the process through which governments impose and collect taxes from individuals and corporations. Module 1: Introduction to Taxation 2
The charge year A charge year, also referred to as the tax year, is a year for which tax is assessed or taxable. Incomes and gains arising in a particular charge year are taxable in that year. The Zambian charge year runs from 1 st January to 31 st December. Module 1: Introduction to Taxation 3
Why tax Broadly to collect government revenue. Other reasons include: a. Achieve allocative efficiency: Marketing Perfections e.g. monopolies, public goods may not be produced without government intervention, yet they are so important for the function of the economy e.g. road, bridge construction, cheap education and health facilities for the poor. Therefore government s role is to overcome or prevent market failures b. Achieve Equity: Refers to the adjustment of distribution of income and wealth to what society deems fair and just. Government tries to achieve allocative efficiency and equity by allocating resources using taxes, social security and influencing allocative distribution c. Achieve some macro-economic objectives: Macro economic objectives of the government is to ensure high levels of employment and economic growth, low inflation and interest rates, free stability and reasonable budget deficit and external balance of payment. Government uses fiscal and monetary policies to achieve economic objectives. Fiscal policy is government policy on taxation and government expenditure d. Regulate: Government legislates and enforces laws of contract, consumer protection, justice etc to ensure there is free competition in the market. Module 1: Introduction to Taxation 4
Canons of a good tax system Taxation should not hinder economic development. It should promote production of goods and services Taxation should be easy and cheap to administer. It should fall directly on the tax payer Taxation and its rules should be simple, predictive, certain and easily understood. Taxation should promote fairness and equity. It should bear equally so as to give no individual an advantage. Module 1: Introduction to Taxation 5
Canons of a good tax system Administrative Simplicity A good tax system needs to be easy and relatively inexpensive to administer. It needs to minimize both direct and indirect cost. Direct costs are cost of collection while indirect taxes are complaints costs. General overall administration costs depend on a) extent of record keeping, b) number of tax and rate structure, c) level of enforcement/ implementation, and d) type of income being taxed Module 1: Introduction to Taxation 6
Canons of a good tax system Equity (Fairness) A good tax system ought to be fair in its relative treatment of different tax payers. Fairness can be looked at in two ways 1) Horizontal Equity where individuals in the same position in all respects should pay equal amount of tax 2) Vertical Equity where individuals who are in a position to pay more should actually pay more. Progressive taxation promotes vertical equity Fairness is based on the ability to pay. To be fair, a tax system should be a) Predictable: not characterized by uncertainty about the tax due (know when to pay and how to pay b) Based on observable and measurable variables e.g. income expenditure c) Not to be an inconvenient with respect to timing on manner of payment d) Not that equity objectives might conflict with efficiency objectives Module 1: Introduction to Taxation 7
Canons of a good tax system Political Responsibility A good tax system should be designed in such a way that individuals can be ascertain what they are paying so that the political system can more accurately reflect preferences of individuals i.e the taxpayers should be able to scrutinize what they are paying tax for. The burden and benefit should be easy to ascertain. A politically responsible system is where changes in tax come about as a result of consequent legislated changes and where government and is appraised by the citizens on its expenditures platform. This is in order to ensure that resources are not used in favor of certain group interests. Module 1: Introduction to Taxation 8
Canons of a good tax system Flexibility A good tax system ought to be buoyant or elastic and be able to respond to economic circumstances to counteract fluctuations in the level of economic activities. For policy makers, the major concern is the responsiveness of tax revenues to national income Module 1: Introduction to Taxation 9
Canons of a good tax system Efficiency A tax system should be economically efficient. A good tax system should not interfere with the efficient allocation of resources as individuals try to minimize tax liabilities. A good tax system should minimize the distortions and dis-incentives effects to work and to serve which may affect the economy. A tax is said to be non-distortionary if there is nothing one individual can do to change his/her tax liabilities. Most if not all taxes are distortionary. Income taxes are distortionary if their imposition of taxes makes people work less. Module 1: Introduction to Taxation 10
Types of taxes There are various types of taxes, broadly divided into : 1. Direct (which is proportional e.g. PAYE) and Indirect tax (which is differential in nature e.g. VAT). 2. Byrates (Progressive taxation system, Regressive taxation system and Proportional taxation system) 3. Capital taxes (e.g Property transfer tax and Mineral Royalty Tax) and Revenue taxes (e.g. Income Tax, VAT) Note: Refer to class exercise on Byrates Module 1: Introduction to Taxation 11
Tax regulation in Zambia The Zambia Revenue Authority (ZRA) was established. as a semi-autonomous body through an Act of 1994 to take over the functions of the then Department of Income Taxes and Department of Customs & Excise, under the Ministry of Finance. It was envisioned that the ZRA would be more efficient and effective in its main function of collecting revenue for the Central Government, than its predecessor departments. Module 1: Introduction to Taxation 12
Pursuant to the ZRA Act, the ZRA is charged with the responsibility of collecting revenue on behalf of the Government of the republic of Zambia under the supervision of the Minister of Finance. The main responsibilities of the Authority are:- 1) To properly assess and collect taxes and duties at the right time Functions of ZRA 2) To ensure that all monies collected are properly accounted for and banked 3) To properly enforce all relevant statutory provisions 4) To provide statistical information on revenue to the Government 5) To give advice to Ministers on aspects of tax policy 6) To facilitate international trade Module 1: Introduction to Taxation 13
ZRA Governing structure In accordance with the Zambia Revenue Authority Act 321, the Authority is under the Governing Board whose specific responsibilities are: 1. to oversee the organization and administration of the Authority and management of its resources, services, property, and personnel and 2. to develop the corporate strategic plan and such other administrative policies as are necessary for the smooth running of the Authority. The Commissioner General, who is appointed by the Republican President, is assisted by Senior Management Members (SMM). The Commissioner General is responsible for the day to day running of the Authority's business under the direction of the Governing Board. Divisional and Departmental Functions The Authority has two operating divisions which are Customs Services Division and Domestic Taxes Division. In carrying out their mandates, these two divisions are supported by the following; the Corporate Services Division; Finance Division; Human Resource Department; Research and Planning Department; Project Management Department; Internal Audit Department; Investigations Department; and Information Technology Department. Module 1: Introduction to Taxation 14
Structure of the Senior Management of Zambia Revenue Authority ZRA Organisation Chart Module 1: Introduction to Taxation 15
Sources of tax law a. The statute or Acts, which make it legal for taxes to be levied. b. Statutory instrument, a form of delegated legislation issued by the Minister. c. Case law, decided cases that assist in interpretation of a particular statutes d. Practice notes, issued by the Zambia Revenue Authority. The Practice notes are usually issued after amendments to statutes. Module 1: Introduction to Taxation 16
Liability to Income Tax Our discussion will first focus on Income Tax. Income tax is chargeable on the income of persons resident and ordinarily resident in Zambia. Residence means both taxable individuals and other taxable persons For an Individual residence is defined by: If s/he is physically present in Zambia for a period not less than 183 days in a charge year If s/he normally lives in Zambia If s/he comes to Zambia with the intention of staying for more than 12 months. For a person other than an individual, such as companies, residence is determined by: If that person is incorporated or formed in Zambia The central management and control of the person s business affairs are exercised in Zambia. A company is centrally managed and controlled in Zambia if the Board of Directors for that company meets in Zambia for the purposes of decision making affecting the company. Module 1: Introduction to Taxation 17
What is Income? Income has several definitions according to our daily lives. In taxation terms, income is defined in relation to what is taxed and not according to what one receives Not all that one receives is taxable. Income is money received during a given period of time in the form of salaries, trading receipts, interest from investments, dividends, rentals, income from farming All the mentioned is supposed to be taxed. But tax is at defined rates depending on what sort of income it is and the source of that income. Though we have listed what can be classified as income, not all incomes listed above will be taxed. Similarly not all people are taxed Module 1: Introduction to Taxation 18
Taxable and Exempt Income Taxable income includes: Rental income from letting of property in Zambia Profits or gains derived from a business Emoluments from holding an office or from being employed Interest from Banks, Loans, Debentures and Building Society Dividends Royalties received Exempt income includes: Scholarships or bursaries for education and maintenance during education The emoluments of the Republican President The emoluments of the chiefs War disability pensions Income received by way of grant as compensation for loss of office or disturbance of a permanent and pensionable officer Income received in conjunction with the award of military, police, fire brigade or as an old age pension paid out of public funds Module 1: Introduction to Taxation 19
Exempt persons Persons who are not resident in Zambia are exempt Others include: The Republican President on the Income received as President Chiefs in respect of the income received from the government Local Authorities Approved Funds Commonwealth Development Corporation Clubs, Societies or Associations organised and operated only for the social welfare or recreation, and improvements etc Registered trade unions Political parties Other persons listed in Part III of the second schedule of the Income Tax Act Module 1: Introduction to Taxation 20