Commentary 18th – 25th September, 09

In a few weeks, the Minister of Finance and National Planning Situmbeko Musokotwane will unveil the 2010 budget whose cycle now starts in January. One major expectation of the Zambian industry, especially the manufacturing sector, is for the government to come up with stringent measures to curb tax evasion and smuggling of products into the country.

Whereas well established industries making up the local manufacturing sector require a plethora of licenses to do business and abide by the legal provisions of the land such as paying all the various taxes, smugglers do not have to, and certainly do not pay anything to government. This set up has raised profit margins to very attractive levels making an incentive for the smugglers to continue with the vice.

As a consequence, the industries that pay taxes to government struggle to compete in a market where prices of commodities for those who do not comply with the law are much cheaper than those that are coming from the local manufacturing sector.

Common among the smuggled items are flour, cigarettes, soft drinks, beer and milk.
The impact is such that the companies that create jobs, pay the taxes, support the backward and forward linkages as well as deepen the investment potential of the country have struggled to grow. If Zambia is serious about strengthening its economy through an effective value chain where local production takes centre stage, then fiscal policy has the answer.

The government should provide the necessary incentives to local producers to enable them compete on a level playing field with imported products. This is not protectionism but a means of ensuring locally produced products do not suffer market loss due to violations by other market players on the basis of tax compliance. Those companies which support government revenue should have the leverage to increase volumes of their sales and this is the only way the multiplier effect will have significance in the Zambian economy.

In addition, there are local producers who evade tax for the purposes of selling their products cheaply. These companies, particularly in the alcohol industry, should be forced to comply with the law by selling their products through licensed outlets.

It is a well known fact that the bulk of importers are not licensed. They have established secret “satellite depots” which they have hidden away from the authorities for purposes of evading tax among many other legal requirements.