Hakainde Hichilema: Why Zambia Should Cut Corporate Tax to 25 Percent and Bet on Economic Growth
Zambia should reduce its standard corporate income tax rate from 30 percent to 25 percent as part of a broader strategy to attract investment, support local businesses, expand manufacturing and grow the country’s tax base.
The usual concern with reducing corporate taxes is that Government will lose revenue. That concern is valid, but it is incomplete. The more important question is whether Zambia is currently losing investment, jobs and productive capacity because the cost of doing business remains too high.
Based on recent company tax collections, a reduction from 30 percent to 25 percent could initially cost Government several billion kwacha in annual revenue if the size of the corporate tax base remained unchanged. However, economies do not remain unchanged when incentives change. Businesses respond to tax policy, investors compare jurisdictions and capital tends to move toward markets where it can earn better returns.
A lower corporate tax rate would allow companies to retain a larger share of their profits for reinvestment. That additional capital could be used to purchase machinery, expand factories, hire workers, open new branches, increase inventory and finance new projects. As businesses expand, Government can recover part of the initial revenue loss through higher collections of PAYE, VAT, withholding taxes and other taxes generated by increased economic activity.
The mathematics are straightforward. If a company earns K100 in taxable profit, Government collects K30 at a corporate tax rate of 30 percent. At a rate of 25 percent, Government collects K25. For Government to recover the same K30 at the lower tax rate, the taxable profit base would need to rise from K100 to K120. This means the corporate profit base would need to grow by about 20 percent.
Such growth would not happen immediately, and Government should not pretend that a tax reduction would pay for itself overnight. The policy should instead be viewed as a medium- to long-term investment in economic expansion. Zambia must decide whether it wants to maximise tax collections from the economy it has today or build a much larger economy from which it can collect more revenue in the future.
This question is particularly important because Zambia is competing for investment with other African countries. Investors looking at Africa compare tax rates, energy costs, transport infrastructure, access to markets, regulatory efficiency and political stability before deciding where to locate their businesses. Several African economies already have standard corporate tax rates around 20 to 25 percent, while Zambia’s standard rate remains at 30 percent.
Zambia therefore has an opportunity to improve its competitiveness by reducing the standard corporate tax rate to 25 percent while simultaneously simplifying the broader tax environment. The objective should be to make Zambia one of the most attractive locations in the region for companies that want to manufacture, process, distribute and export goods.
The country’s geography gives it a major advantage. Zambia sits at the centre of several important regional markets and shares borders with eight countries. A company producing goods in Zambia can potentially serve customers in the Democratic Republic of Congo, Tanzania, Malawi, Mozambique, Zimbabwe, Botswana, Namibia and Angola, while also benefiting from regional trade arrangements.
This geographic position should be treated as an economic asset. Zambia should aim to become a manufacturing and distribution hub for Southern and Central Africa. The country should be producing more food products, fertiliser, pharmaceuticals, construction materials, electrical equipment, agricultural machinery, mining supplies, packaging, textiles and other goods currently imported from outside the region.
A lower corporate tax rate would support that ambition, but it would not be enough on its own. Government would also need to reduce unnecessary licensing requirements, improve access to reliable electricity, lower logistics costs, speed up regulatory approvals and make it cheaper to import productive machinery and equipment.
There is little economic sense in heavily taxing equipment that will be used to build factories and employ Zambians for many years. Where appropriate, machinery used for manufacturing, agro-processing, mining supply chains and other productive industries should receive favourable tax treatment. Zambia should make it easier to import productive capital while ensuring that companies create jobs and real economic activity in return.
The same principle should apply to local entrepreneurs. Corporate tax reform should not be seen only as an incentive for foreign investors. Zambian-owned businesses would also benefit from being able to retain more capital for expansion.
A Zambian entrepreneur who keeps an additional five kwacha from every K100 of taxable profit has more money available to buy equipment, employ another worker, expand into another province or finance additional inventory. When thousands of businesses make similar decisions, the impact on employment and economic output becomes significant.
Government would, however, need to manage the short-term fiscal impact carefully. A reduction in corporate tax should not be financed through uncontrolled borrowing or larger budget deficits. It should be accompanied by stronger tax administration, improved compliance, reduced wasteful expenditure and policies that encourage more businesses to operate formally.
The long-term objective must be to broaden the tax base. Zambia should not depend on repeatedly increasing tax rates on the same relatively small group of formal businesses and workers. A stronger economy with more companies, more employees and higher levels of production would provide a more sustainable source of public revenue.
My position is therefore clear. Zambia should reduce the standard corporate income tax rate from 30 percent to 25 percent and use the reform as part of a wider industrialisation strategy.
Government should combine the tax reduction with targeted incentives for manufacturing, lower taxes on productive machinery, faster regulatory approvals and policies that reward companies that reinvest in Zambia.
The country already has many of the ingredients required for rapid economic expansion. It has minerals, agricultural land, a young population, regional market access and an excellent geographic position.
The next step is to create an economic environment in which capital is encouraged to stay, businesses are encouraged to grow and investors have a strong reason to choose Zambia.
Government should not focus only on collecting more taxes from the economy that exists today. It should focus on building a much larger economy from which it can collect significantly more revenue tomorrow.
That is how Zambia will create jobs, expand its middle class, industrialise and compete successfully with the rest of Africa.
George Mtonga, MBA