UNIT 1 - INTRODUCTION – NATURE AND PURPOSE OF TAXATION IN ZAMBIA

This unit introduces the nature and purpose of taxation

1.1 Learning Outcome

After completing this unit, students should be able to:

• Define the term taxation
• Trace the history of taxation in Zambia
• Understand the principles of taxation
• Explain the classification of tax
• Identify the elements of tax

1.2 Time Frame:

You will cover the following time;

• 2 hour 30 minutes’ study time

• 1 hours in class

1.3 TAX DEFINED

Taxation may be defined as the process of raising revenue for central government through levies
on income and gains of resident persons.

1.4 BRIEF HISTORY OF TAXATION IN ZAMBIA

Taxation as we know it today, that is, the legislation and monetary aspect of it began with the
coming in of Europeans. As Africans, we had our own version of taxation, which included
provision of labor and various gifts and trophies to traditional chiefs including tilling fields of the
royalty as well as contribution of food to the traditional leaders. Men enlisting for fighting in
tribal warfare may be considered as a form of taxation.

Note: To discuss the history of taxation in Zambia, we will do well to identify important dates in
our history.
Period before 1890:

We were organized in tribal communities and by and large taxation took the form of paying in
kind to the traditional chief’s food and labour. It must be stated that in rural communities this
continues to this day.

Period between 1890 (1900) - 1924

Zambia as we know it today was ruled indirectly by Britain through the British South Africa
Company (BSAC). The white settlers imposed taxes such as the hut tax and the head tax etc.
Natives who could not find money to pay the taxes were forced to leave their villages to go and
look for work in the mines or outside Zambian in particular Southern Rhodesia and South Africa
Forced Labour.

Period between 1924 - 1964

Direct British Rule the above taxes continue. However, in 1954 we saw the first piece of
legislation being introduced the promulgation of the income tax Act, the precursor of today
Income Tax Act. It must be stated that this Act borrowed heavily from the British tax system.

1.4.1 The relationship between the Zambian tax system and that of Britain

At the time of the Napoleon wars in Europe, the British Government decided to come up with a
measure of raising revenue for the Army. This was in the form of tax on income at very low
rates. The rate of tax on income was about 5% at most. The introduction of tax on income was
intended to be only a temporal measure. The residents were levied this tax without major
problems. After the war had ended, the government realized that the system was very efficient
as huge amounts of revenue were collected from residents. As a result, the system of tax on
income was made permanent and tax rates had to rise gradually to marginal rates of about 98%.
The rates then dropped to reasonable rates which are currently prevailing.

When Northern Rhodesia (now Zambia) was colonized by Britain, the system was of tax on
income was extended here. Individuals who were in employment were required to pay the tax.
After independence, the system of tax on income continued to apply as previously. Apart from
income tax, new taxes were introduced in the United Kingdom such as corporation tax and
capital gain tax. To date, these other taxes are not available in Zambia. However, if they had
come into existence before Zambia became independent, they could have been extended as well.

Period after Independence (1964)

In 1966, the Income Tax Act was enacted and has been amended from time to time. In 1994,
there was a major revision to the Income Tax Act in Zambia.

1.5 FUNCTIONS OF TAXATION

Taxation can be used for the following three functions.

1. Fiscal or budgetary and allocation function

2. Wealth distribution function
3. Economic function

Budgetary and allocation function

The fiscal system deals with government revenue to finance government expenditure such as:
Financing the education system
• Financing the Health System
• Paying personal emoluments for government employees
• Financing the country's infrastructure development such as roads, bridges etc.
• Financing subsidies
• Providing social benefits etc
• The major items of government expenditure and its source of revenue are clearly shown in the
National Annual Budget.
• Apart from taxation, other sources of government revenue include:-
• Donor funding
• Borrowing from the International Financial institution such as the IMF and the IBRD (the
World Bank).
• Government domestic borrowing

Re-distribution of Wealth and Income

Taxation is one of the Government's ways of removing inequalities i.e. the government will
generally collect higher taxes from the well to do and re-distribute the funds collected to the less
well to do through the construction of public establishment such as schools, hospitals, public
universities etc.

Economic Function

Governments may use taxation as a tool to achieve specific economic goals.

Examples

(a) All governments desire that their national economies experience Growth.

Using taxation as a tool, governments may use money raised through taxation to establish strategic
industry such as iron and steel industry, thereby creating employment and facilitating economic
growth. Government investment in a national railway system and rural electrification programme
with taxpayer's money will achieve the same goal

(b) Protection of local Industry the infant industry argument.

Governments have a responsibility to protect local industry from unfair foreign competitions. To
protect the local Zambian industries from unfair foreign competition the tariffs levied on
imported goods aim at raising the prices of those goods that come from low production cost
countries and as such would put local industries at a disadvantage in terms of a pricing if no taxes
were levied on them.

Use of taxation
i. Economic regulation
ii. Macroeconomic stabilization. You may use your knowledge in Economics to answer this
question.

1.6 FEATURES OF A GOOD TAX SYSTEM

Adam Smith in 1776 coined the following four maxims or properties of good taxation.

1. The tax which each individual is bound to pay' ought To be certain, and not arbitrary. The
time of payment, the manner of payment the quantity to be paid, ought all to be clear.
 2. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be
convenient for the contributor to pay it, e.g., the withholding tax paid on rentals is paid at
the time, which is convenient for the contributor.

3. Every tax ought to be so contrived as both to take out and to keep out of the pockets of
the people as little as possible over and above what it brings into the public treasury of
the state.

4. The subjects of every state ought to contribute towards the support of the Government as
nearly as possible, in proportion to their respective abilities; that is, in proportion to the
revenue which they respectively enjoy under the protection of the state.

The other maxims were those enunciated by Stieglitz in 1980. Stieglitz characteristics of good
taxes can be summarized as follows:-

i. Economic efficiency - The tax should not prevent efficient allocation ofresources.
ii. Administrative simplicity- The tax should be easy and inexpensive to administer.
iii. Flexibility - The tax system should respond easily to changes in economic conditions.
iv. Transparency - Individuals should be able to ascertain their tax burdens so that burdens can
be politically tailored to what society considers desirable.
v. Fairness - The tax system should be fair in its treatment of different individuals observing
both horizontal and vertical equity.

Horizontal equity advocates that individuals who are the same in all relevant aspects should be
treated equally; and vertical equity advocates that individuals who are better able to pay higher
taxes should bear a higher share of total taxes.

The above maxims by the two authors, Adams and Stieglitz can be synthesized and summarized
as follows:-

1. EQUITY

Equity means fairness. The tax system should be seen to be fair. This would mean that persons
with a higher income should pay more tax than those with lower incomes. This is called
 vertical equity. It also means that given two persons with the same amount of income, the two
should pay the same amount of tax this is horizontal equity.

2. ECONOMY

The cost of collecting the tax should not exceed the revenue raised or benefit sought.

3. CONVENIENCE

A tax system should not unnecessarily cause undue hardship on the taxpayer. It should be
convenient to both taxpayer and administer.

One way of making the payment of taxes convenient to the taxpayer is to deduct the taxes at
source (withholding tax). For instance, PAYE and other withholding tax schemes in place.

4. SIMPLICITY

The tax system must be simple and easy to understand by the taxpayer. The tax laws and
regulations must be comprehensive to the taxpayer. They must be unambiguous and certain,
both to the taxpayer and the tax administrator.

5. The tax system should be able to generate adequate revenue to cover government expenditure
at all levels.

1.7 CLASIFICATION OF TAXES

Taxes can be classified as direct taxes, indirect taxes, capital taxes, revenue taxes, progressive
taxes, regressive taxes and proportional taxes as follows:-
Direct Taxes

These are taxes that are levied directly on the income and gains. Normally a percentage of the
income or gain is paid in the form of a tax. Examples of Direct taxes in Zambia are:-

• Income Tax such as PAYE

• Mineral Royalty tax

• Property Transfer Tax

In general, direct taxes are Progressive. The amount of tax payable is dependent on the level of
income. The higher the income, the higher the tax and the lower the income, the lower the amount
of tax. Persons whose income levels are low, therefore, will not pay the same amount of tax as
those whose income levels are high.

Indirect Taxes

These are taxes that are imposed indirectly. They are expenditure taxes and therefore, they are
borne by consumers. Traders who are registered for charging indirect taxes charge these taxes on
the supplies they make and collect the tax on behalf of the Zambia Revenue Authority (ZRA).
The indirect tax collected must be paid to ZRA by set date.

The amount of indirect tax payable does not depend upon the level of income of the consumer.
Both those who are in the low income group as well as those who are in the high income group
pay an equal amount in the form of taxes. Example include Value Added Tax; Excise Duty, Import
Duty etc.

Capital Taxes
These are taxes on capital receipts. A capital receipt is an amount of receipt resulting from a
disposal of a capital item. An example of a capital tax is Property Transfer Tax.

Revenue Taxes

These are taxes which are levied on revenue receipts. A revenue receipt is a receipt arising from
a sale of a non-capital item. Items acquired with a view to subsequent resale are non-capital items.
When they are sold, the amount received is a revenue receipt or income and is subjected to a
revenue tax, e.g. Income Tax.

Regressive Taxes
These are taxes that represent a small proportion of a person's income as the income of that person
rises. The average rate of tax fall. VAT is a regressive tax because the rate of VAT is the same
on the good whether that good is bought by a rich person or by a poor person.

Progressive Taxes

These are taxes that represent a larger proportion of the person's income as that person's income
rises. The average rate of taxation rises. The rates of tax for lower income levels are less than the
tax rates for higher income levels. Income tax is generally an example of a progressive tax where
it is levied at different tax rates such that low income is taxable at lower rates. In Zambia, this is
the case concerning personal income tax. Lower income is chargeable at lower income tax rates
and higher income is chargeable at higher tax rates.

Proportional taxes
These are taxes where the percentage of income paid in taxation always stays the same. The
average rate of taxation is constant irrespective of the level of income.

1.8 SOURCES OF TAX LAW IN ZAMBIA

It is apparently clear that the operation of a tax system requires rules and regulations. These rules
and regulations constitute tax law. There are typically three sources of tax law in Zambia,
namely:-

(a) The statutes

(b) Decided Court Cases - Case Law
(c) Statutory Instruments

The Statutes

These are statutes or Acts of Parliament. They form the principal law. The Main Acts of
Parliament, which control the tax affairs of the Republic of Zambia, include the following:-

(a) The Zambia Revenue Act;

(b) Income Tax Act, and its Annual
Amendments;
(c) The Customs and Excise Act;
(d) The Value Added Tax Act

Case Law

There is no common tax law in Zambia. Judges cannot make tax law.

However, decided cases in taxation will assist with the interpretation of a particular statute which
relates to the specific circumstances of a case.

Statutory Instruments

These are a form of legislation issued by a Government Minister. Statutory instruments related to
tax matters are issued from time to time by the Minister of Finance and National Planning.

Other sources of legislation derive directly from the Zambia Revenue Authority. While these do
not have a legal effect, they assist in the smooth running of the taxation system. These sources
include the following:-

Practice Notes

These are issued by the ZRA to indicate the ZRA's interpretation of a statute. The practice notes
are normally issued following amendments to Taxes Acts.
UNIT 2 – TAX ADMINISTRATION IN ZAMBIA

2.1 Introduction

This unit introduces you to the operations of the Zambia Revenue Authority, the organ mandated
by law to administer and manage taxes on behalf of the Zambian Government.

2.2 Learning Outcome

After completing this unit you should be able to: -

• Understand the structure of the Zambia Revenue Authority (ZRA)

• Understand the Operational Activities of the ZRA

• Explain the various tax collection methods such as withholding taxes and provisional tax

• Explain the grievance handling procedure regarding tax disputes.

1.3 Time Frame:

You will cover the following time;

• 2 hour 30 minutes’ study time

• 1 hours in class

1.4 THE ZAMBIA REVENUE AUTHORITY (ZRA)

The Zambia Revenue Authority (ZRA) is a corporate body responsible for the imposition and
collection of taxes in Zambia. It falls under the Ministry of Finance and Economic Planning. ZRA
was established on 1 stApril 1994 by an Act of Parliament. A Board oversees ZRA's operations.
The Chief Executive Officer of ZRA is the Commissioner General who is appointed by the
Republican President.
The authority was created to redress the serious shortfall in revenues. The goal of the Zambia
Revenue Authority is to maximise tax compliance and increase domestic revenue yield.ZRA is
expected to advise the Government on matters of taxation policy.

ZRA’S MISSION STATEMENT

The mission of the Zambia Revenue Authority is to maximise and sustain revenue collection
through integrated, efficient, cost effective and transparent systems, professionally managed to
meet the expectations of all stakeholders.

ZRA is divided into two operational division namely:

(a) Domestic Taxes Division

(b) Customs Services Division

Each of these operational divisions is headed by a Commissioner who reports to the Commissioner
General.

OPERATIONAL STRUCTURE AT ZRA

 NOTE

1. Board of Directors - These oversee ZRA's operations. Board members are appointed by the
Minister of Finance and Economic Planning and are predominantly drawn from the private sector.
The Board elects its own Chairman thence the Chairman of the Board is elected from among the
Board members by the Board members themselves.

2. Commissioner General - Is the Chief Executive Officer who reports to the ZRA Board. He is
appointed by the Republican President.

3. Domestic Taxes Division - Headed by a Commissioner. Domestic taxes, this division is

responsible for the administration of Income Tax, property transfer tax, mineral royalty tax and
domestic value added tax. In as far as VAT is concerned, the division grants registration for VAT
purposes to eligible traders so that they are able to charge Vat on their taxable supplies and pay
that Vat to ZRA.
4. Customs Services Division - This is the division that has been set up to deal with customs and
Excise duties and Import Vat. It is headed by the commissioner - customs services

OTHER DIVISIONS AND DEPARTMENTS OF THE ZRA

Apart from the three operational divisions mentioned above, ZRA had three corporate
divisions namely:-

• Finance, which incorporate the treasury function

• Human Resource Division
• Support Services Division

There are other three departments:

• Legal Services Department

• Information technology
• Internal Audit Department

PURPOSE OF THE ZAMBIA REVENUE AUTHORITY

i. Efficiently collect tax on behalf of government.

ii. Assess taxes for the charge year.
iii. Ensure compliance

RESPONSIBILITIES OF ZRA

To ensure that all relevant statutory provisions are enforced, i.e. the ITA; VAT and customs
and Excise Act.
(ii) To assess and collect taxes and duties at the right time without causing undue burden to the
Public.
(iii) Encouragement of the public to come forward and pay tax voluntarily
(iv) Facilitation of International trade
(v) Give advice to Ministers on aspects of tax policy.
POWERS OF THE COMMISSIONOR GENERAL

The Commissioner General has the following powers to:-

• Request a return to be submitted at anytime

• Request accounts and document to be submitted for examination

• Examine any person for the purpose of obtaining information

• Search and seize money, documents and property.

UNIT 3 - TAXATION OF INDIVIDUAL PERSONS

3.1 Introduction

This unit introduces us to the computation of income tax for individual persons. We look at the
calculation of income tax liability to an individual person with various sources of income be it
from employment, business profits or investments or indeed any combinations of these.

3.2 Learning Outcome

After completing this unit you should be able to:-

• Explain the meaning of the terms:-
Residence, Ordinary Residence and domicile as they relate to individual persons.
• Describe the categories of taxable and exempt persons
• Aggregate an individual's income and compute the total taxable income.
• Calculate income tax payable by individuals given various sources of income.

In order for us to compute the tax charge for an individual person, we need to be clear on the
following terms.
• Charge Year
• Taxable Persons
• Exempt Persons
• Taxable Income
• Exempt Income

TAXABLE PERSONS

Income tax is chargeable on the income of persons "resident" and "ordinarily resident in
Zambia.

INDIVIDUALS

An individual is resident in Zambia if he or she is physically present in Zambia for a period of not
less than 183 days in a charge year.
For example, if Mr Ali is physically present in Zambia for 183 or more days in the charge year
2020, he will be resident in Zambia for that charge year.

RESIDENCE

An individual person is resident if:-

(l) He or she is physically present in Zambia for a period of not less than 183 days in a charge year.
(2) He or she habitually stays in Zambia for at least 3 months in a year for a consecutive period
of three years.
(3) He or she has intention to permanently stay in Zambia (Applicable to persons coming to
Zambia for the first time- if such persons express intention to stay in Zambia permanently
then they are accorded the "residence status" in Zambia under tax law).

ORDINARY RESIDENCE

Individuals who normally live in Zambia are resident and ordinary resident in Zambia.

Individuals who come to Zambia with the intention of remaining here for more than 12 months
are deemed to be resident and ordinarily resident in Zambia from the date of arrival.

DOMICILE
A person is domiciled in the country that is his or her permanent home. The two types of domicile
are domicile of origin and domicile of choice.

• Domicile of origin is the domicile acquired at birth. This means that individuals are domiciled
in the country in which they are born.

• Domicile of choice is the domicile that is acquired by choice. Individuals can make a choice
as to what country should be their permanent home once they attain the age of sixteen years.

The concept of domicile may affect the amount of income that will be assessed on a taxable
individual where such an individual has income from all over the world. Individual who are
domiciled in Zambia would be liable to Zambian income Tax on their world wide income whether
the foreign income is remitted to Zambia or not, unless the income is specifically exempt from
income tax.

EXEMPT PERSONS
Persons who are not resident in Zambia are exempt from Zambia Income Tax.

Certain Persons are exempt from Zambia income tax although they are resident and ordinarily
resident in Zambia. These persons include:

• Republican President on the income received as President

• The Income of Chiefs received from the Government

• Local Authorities

• Commonwealth Development Corporation

• Club, society or association organized only for Social Welfare or recreation and improvement
etc. If its income may not be received in any way by a member or shareholder.

• Registered Trade Unions

• Political parties registered as a statutory society under the societies Act.

• Persons receiving social cash transfers

TAXABLE AND EXEMPT INCOME

Income that is liable to tax is income that arises from a source within Zambia or deemed to be
within Zambia.

TAXABLE INCOME

Taxable income includes the following:-

• Rental Income from letting of property in Zambia

• Profits or gains derived from Business

• Emoluments from holding an office or from being employed

• Interest from Banks and Building societies

• Loan and Debenture interest

• Dividends

• Royalties received

• Income received by way of annuities

EXEMPT INCOME

Certain Income is exempt from tax. These include:-

• Scholarships or bursaries payments for education and maintenance during education.

• The emoluments of the Republican president which are received as a result of holding that
office
• The emoluments of chiefs including those of the Litunga
• War disability pensions
• Income received by way of grant as compensation for loss of office or disturbance by an officer
admitted to the permanent and pensionable establishment of the government.
• Income received in conjunction with the award of military, police, fire brigade or decoration.
• Income received as an old age pension paid out of public funds.
• Income received as compensation or benefit paid under any written law in respect of injury or
disease suffered in employment.

INTRODUCTION TO PERSONAL TAXATION COMPUTATIONS

CHARGE YEAR
A charge year is a year for which tax is chargeable. It is also known as a year of assessment, a
fiscal year or an income tax year. Income and gains arising in a particular charge year are taxable
in that charge year.
In Zambia, a charge year runs from 1 January to 31 December. For example, the year from 1
January 2020 to 31 December 2020 is the charge year 2020.

PERSONAL TAX COMPUTATION

An individual’s income that arises in a given tax year is aggregated to arrive at the total taxable
income for that year. Income tax rates applicable to that tax year are then applied on the income
to calculate income tax payable. Certain income is not subjected to assessment at the end of the
tax year because it is taxable at source.
For the tax year 2020, the income tax rates are as follows:
Income band Total income Rate
K %
First K1 – K39, 600 39,600 0
Next K39, 601 – K49, 200 9,600 25
Next K49, 201 – K74, 400 25,200 30
Over K74, 400 37.5

The rate of income tax on income from farming is 10%. This means the excess of farming profits
over the tax free amount (the first K39, 600 for the tax year 2020) is taxable at the rate of only
10% for individuals.
EXAMPLE
Mr. Chushi has business profit of K79, 000 for the tax year 2020. The turnover of the business for
the tax year 2020 was K900, 000.
Required
Calculate the income tax payable by Mr. Chushi for the tax year 2020.
SOLUTIONS

MR. CHUSHI

PERSONAL INCOME TAX COMPUTATION FOR 2020

Business profit 79, 000

Less tax free income (39, 600)
39, 400
Income tax
25% × K9,600 2,400
30% × K25,200 7,560
37.5 % × K4, 600 1,725
Income Tax Payable 11,685

EXAMPLE 2

Mrs. Tundu runs a farm on a commercial basis in the Central Province of Zambia. The annual
turnover from her business has always exceeded K800,000. Her farming profits for the tax year
2020 were KI09,500. She has no other sources of income.

Required
Calculate, for Mrs.Tundu, the income tax payable for the tax year 2020.
SOLUTION

MRS. TUNDU

PERSONAL INCOME TAX COMPUTATION FOR 2020

K
Farming profit 109,500
Less tax free income (39,600)
69,900
Income tax payable: 15%X K69, 900 6,990
UNIT 4 - TAXATION OF INDIVIDUALS IN EMPLOYMENT

4.1 Introduction

This unit introduces us to the taxation of individuals in employment and the operation of the PAYE
system.

4.2 Learning Outcome

After completing this unit you should be able to:

• Explain the tax treatment of various payments made to employees.

• Compute income tax on the payments made on termination of employment.
• Explain the operation of the pay as you earn system.

4.3 Time Frame:

You will cover the following time;

• 2 hour 30 minutes’ study time

• 1 hours in class

EMOLUMENTS
The term emoluments include all payments made to an employee or office holder, whether before
the commencement of employment or upon the cessation of employment.Such payments include
wages and salaries, allowances, bonuses, tips and service charges, overtime pay and payments on
termination of employment.

OFFICE
Is a position that exists independently of the person presently occupying it. It must be capable of
being declared vacant.
 EMPLOYMENT
Exists where there is a legal relationship of master and servant. The master will be the employer
and the servant the employee. The legal relationship of master and servant may be evidenced by a
contract or it may be implied by conduct

EMPLOYMENT VS SELF EMPLOYMENT

In order to establish whether an individual performing a task is an employee or a hired self-
employed person, some factors to be considered are as follows:

i. Type of contract

If there is a contract of service it will indicate the existence of relationship of master and servant
i.e. (employer-employee relationship). A contract for service will indicate the existence of self-
employment.
ii. Work performance
Employees must perform the duties assigned to them themselves while the self-employed may
hire other people to perform the work for them.
iii. Control
The work of an employee is controlled by the employer who will normally stipulate working
hours and other conditions. A self-employed person will decide when to perform the duties
and how to perform them.

iv. Payment and financial risk

Employees are paid an agreed salary on a monthly or weekly basis and incur form of financial
risk.
In order to earn an extra sum employers will have to work overtime.
Self-employed persons are normally paid a proportion of the contract price based on the
amount of work performed. They will also bear the full financial risk of their business-absorb
all the losses and enjoy all the profit whichever maybe the case.

v. Place of work
Employees will normally be told where the duties are to be performed from. This is normally
at the employer's premises or at the premises of the client.
 Self-employed persons will perform the duties at a place of their choice.

vi. Equipment
An employer will provide the tools and equipment which the employees are to use. Self-
employed persons will provide their own tools and equipment.

vii. Correction of work

Employees will normally rectify any faulty work during the normal working hours and there
will still be paid for those hours. Self-employed persons will rectify any faulty work outside
the contract time and they will not be paid for that extra work.

viii. Engagement and dismissal

The employer will take on and dismiss employees. A self-employed person will normally enter
into a contract with a client specifying the beginning and end.

ix. Exclusively
Employees normally work for only one employer. A self-employed person will normally work
for a number of clients.

x. Integration
An employee's work is fully integrated within an organization.

xi. Insurance
Employers will normally provide insurance cover for the actions of their employees —
Vicarious liability. Self-employed person usually answer for their actions.

TAXABLE AND EXEMPT EMOLUMENTS

The following are the tax treatments of the various payments which employees may be entitled to.

SALARIES, WAGES
These are taxable emoluments without any exemption, taxable in full on that employee.
The exception is where the salary is equal to or less than the tax free pay, which for the tax year
2020 is K39, 600. If this is the case and the salary is the only entitlement that the employee
receives, then that salary will not be taxable. Similarly, if the net amount of emoluments after
deducting the pension contributions is not more than the tax free pay, then employee will not pay
tax.

BONUSES
Like salaries and wages, bonuses are taxable emoluments without any exemption. The actual
amount received is taxable in full on the employee.

ALLOWANCES PAID TO EMPLOYEES

All allowances qualify as emoluments and as such, they are fully taxable. "If an employee,
however, is reimbursed any expenditure incurred while performing the duties of employment, then
only the excess of the reimbursed amount over the actual expenditure incurred by the employee
shall be taxable. This normally occurs in cases where an employee is required to spend personal
money when performing duties and then submit receipts to the employer for reimbursement.'

BENEFITS IN KIND
A benefit in kind is a benefit of some sort which is not money. Benefit in kind include the benefits
derived from employment through the use of personal to holder vehicles and through the provision
of free residential accommodation by the employer.

Benefits which cannot be converted into cash are not treated as emoluments of the employees.
These benefits are taxable on the employer instead. They include the accommodation benefit and
the personnel to holder car benefit.

Benefits which can be converted into cash are taxable on the employees receiving them.

MAINTENANCE OF A RESIDENCE BY THE EMPLOYER

Any amounts paid by the employer to assist an employee in meeting the cost of the upkeep of the
residence are, as a general principle, taxable as emoluments of the employee.
If the employer undertakes to pay all the outgoings in respect of the house including rate, rent,
taxes, insurance, security, electricity, telephones, entertainment and the general maintenance of
the residence including the surrounding, then this constitutes money's worth and is taxable on the
employee as emoluments.
CLOTHING OR UNIFORM ALLOWANCE
If an employee receives an allowance for the purchase of uniforms for official purposes or
functions, the allowance received is taxable as an emolument of the employee. Employees may,
however, claim for expense relief in respect of any amounts incurred on the purchase of uniforms
for use in the performance of official duties.

MEDICAL EXPENSES

Expenses incurred by the employer on behalf of an employee, his or her family or household,
for the cost of medical treatment are not chargeable emoluments. However, a medical
allowance paid to an employee is a taxable emolument.

CASH VOUCHERS

A cash voucher is any document or stamp capable of being exchanged, either immediately or
after a time for a sum of money equivalent to the stipulated value. Where a cash voucher is
provided to an employee by reason of employment, the employee is treated as having
received a taxable emolument.

NON – CASH VOUCHERS

A non-cash voucher is usually a document capable of being exchanged for goods or services.
It may be exchanged immediately or after some time. Examples are: Christmas vouchers,
shopping vouchers fuel vouchers etc. Where an employee receives a non-cash voucher, the
employee is taxable on the value of the goods which that voucher can obtain.

BOARD, LODGING AND MEALS

Where an employee is provided with meals or board and lodging by the employer, there is
no taxable emolument on the employee concerned.

If, however, an employee receives an allowance in lieu thereof, the allowance received would
be a taxable emolument.

If an employee is required to work late at night such that it would be unreasonable to expect
him to use public transport for his journey home, then the cost to the employer of providing
such an employee with private transport home is not a taxable emolument of the employee.
 COMPULSORY PAYMENTS FOR BOARD

Where arrangements exist to pay wages to employees gross, out of which a certain amount
must go towards the payment for board, then the gross amount payable to the employee is a
taxable emolument

RESTRICTIVE UNDERTAKINGS

A payment made by an employer in respect of an agreement entered into by an employee, the

effect of which is to restrict the activities of the employee, or the ability of the employee to
compete with the employer is a taxable emolument of that employee.

TIPS AND SERVICE CHARGES

If an employer operates a scheme under which he pays employees tips from customers or
service charges, the amounts paid to employees are taxable emoluments on those employees.

ALLOWABLE EXPENSES
Allowable expenses are revenue expenses which are incurred wholly and exclusively for the
purposes of the employment and include:
i. Subscription to professional bodies which are relevant to the employment.Subscriptions to
professional bodies whose membership is not relevant to the employment are not deductible.
Subscriptions which would be deductible are those paid to the Zambia Institute of Chartered
Accountants by accountants who are members. Those paid to the Law Association of Zambia
by lawyers who are members and subscriptions to all other bodies paid by members.

ii. Mortgage Interest in respect of the property acquired for occupation by the employee and his
or her family if interest is being payable at the rate at which a building society would charge
it.

iii. Capital allowances on implements, plant and machinery used wholly and exclusively in the
performance of the duties of employment. This is in cases where employees are required to
provide their own tools and equipment as in the case of tradespeople.

iv. Travelling expenses incurred in the course of employment.These are expenses an employee
incurs whilst performing the duties of employment. They include the following:
• Costs incurred in travelling between two places at which the duties are to be performed.
• Costs incurred in travelling between home and work if the duties commence at home, as in the
case of medical doctors who are on call. For such Doctors, duties commence when they get a
phone call that they are required at the hospital.

The following travelling expenses are not deductible:

• Costs incurred in travelling between two employments, as in the case of employees working
on a full time contract with one company and on a part time contract with another. The costs
incurred in travelling between the premises of the full time employment and the premises of
the part time employment are not deductible.
• Costs incurred in travelling between home and work, unless duties commence at home as
explained above.

The distinction between deductible travelling expenses and those which would not be deductible
is illustrated in the following cases.

CONTRIBUTIONS TO PENSION FUNDS

Employee’s pension contributions to the national pension scheme authority (NAPSA) and any
other pension fund are not deductible when computing taxable employment earnings.

Employee’s NAPSA contributions are calculated as 5% of the employee’s earnings subject to the
social security contribution ceiling. Employer’s NAPSA contributions are also calculated as 5%
of employee’s earnings, again subject to the social security contribution ceiling.

The employer is mandated under the law to remit both the employee’s NAPSA contributions
deducted from employee’s earnings and the employer’s NAPSA contribution by the 10th day
following the end of the month to which the employee’s earnings relate.

NATIONAL HEALTH INSURANCE SCHEME CONTRIBUTIONS

Employee’s contributions to the National Health Insurance Scheme which is managed by National
Health Insurance Scheme Authority (NHIMA) or any other medical or health scheme are not
deductible when computing taxable employment earnings.
The statutory employee’s National Health Insurance Scheme Contributions (NHISCs) are
calculated at the rate 1% of the employee’s monthly basic salary. The statutory employer’s
NHISCs are also calculated as 1% of the employee’s monthly basic salary.

The employer is mandated under the law to remit both the employee’s NHISCs deducted from
employee’s salaries and the employer’s NHISCs to the NHIMA by the 10th day following the end
of the month to which the salaries relate.

EXAMPLE

Chilu has been employed as a Sales Representative at a Zambian resident company for many years.
In the tax year 2020, he was entitled to the following benefits:

Annual basic salary K180,000

Lunch allowance per month K1,200

Housing allowance per month K3,500

Throughout the tax year 2020, he was provided with a company owned Toyota Camry Motor car
(with a cylinder of 1,800cc) on a personal to holder basis. The company paid all the motor car
running expenses relating to the car which amounted to K4, 000 per month.

On 1 May 2020, he was given a labour day award compromising K3,000 cash and a television set
worth K5,000, for being the most hard working Sales Representative in the country.

In December 2020, Chilu received bonus of 2% of his annual basic salary for meeting his sales
targets for the year.

During the year to 31 December 2020, the company deducted employee’s NHICs from his
earnings at the rate of 1% of his basic salary and paid employer’s NHICs at the rate of 1% of his
basic salary on his behalf. The company additionally deducted employee’s NAPSA contributions
at the rate of 5% of his earnings on his behalf.

Chilu made the following payments from his employment earnings in the tax year 2020:
Donations to political party K2,000

Professional subscriptions relevant to the duties of his employment K2,500

Required:

a. Calculate Chilu’s employee’s NHICs and employer’s NHICs paid in the tax year 2020.
b. Calculate Chilu’s employee’s NAPSA contributions and employer’s contribution paid in the
tax year 2020.
c. Compute the income tax payable by Chilu for the tax year 2020. ( clearly indicate in your
computation by the use of zero 0 any items of income or expense which are not taxable or not
allowable)

SOLUTION

a. Employee’s NHISCs = 1% × K180,000 = K1,800

Employer’s NHISCs = 1% × K180, 000 = K1, 800
b. Employee’s NAPSA contributions = 5% × K240,000(W) = K12,000
Employer’s NHISCs = 5% × K240, 000(W) = K12, 000

COMPUTATION OF GROSS EARNINGS

Gross earnings for NAPSA contribution purposes comprises the basic salary plus all allowances,
bonuses, commission, overtime pay, leave pay, commuted leave days, severance pay etc

Chilu’s gross earnings for the tax year 2020 will be computed as:

Annual basic salary 180,000

Lunch allowance (K1,200× K12) 14,400

Housing allowance (K3,500× K12) 42,000

Bonus (K180,000× 2%) 3,600

Gross earnings 240,000

c. CHILU

PERSONAL INCOME TAX COMPUTATION FOR THE YEAR 2020

K K
Salary 180,000
Lunch allowance (K1,200× K12) 14,400
Housing allowance (K3, 500× K12) 42,000
Bonus (K180,000× 2%) 3,600
Personal to holder motor car benefit 0
Payment of motor car running expenses
Personal to holder motor car 0
Labourday award (cash & TV set) 0
Employer’s NHISCs 0
Employer’s NAPSA 0
Gross earnings 240,000
Less allowable deductions:
Professional subscriptions 2000
Donation to political party 0
Employee’s NHISCs 0
Employer’s NAPSA contributions 0
(2,000)
Taxable earnings 238,000
Income Tax
K39,600× 0% 0
K9,600× 25% 2,400
K25,200× 30% 7,560
 K163,600× 37.5% 61,350
Income tax payable 71,310

PAYMENTS MADE ON TERMINANTION OF EMPLOYMENT

Employment ceases when the employee or employer terminates it. Employment may cease by way
of dismissal, resignation, end of contract term, redundancy/retrenchment, retirement or death.
Certain payments may be made to the ex-employee as a result of the termination of employment.
Some of these payments are taxable while others may be exempt.

THE PAY AS YOU EARN (PAYE) SYSTEM

PAYE is the system that is used for collecting income tax on the emoluments from holding an
office or from employment.

Under the PAYE system, the procedures relating to tax compliance are transferred from the
employees to the employer. The employees receive their emoluments net of income tax.This
reduces the number of problems that would be encountered if employees where required to pay
income tax on the emoluments several months after those emoluments had been earned and
consumed.

DOCUMENTATION REQUIRED TO OPERATE PAYE

A person who sets up in business is required to contact ZRA if he is going to engage some people.
The inspector will then provide a package containing the following:

• The employer's guide to PAYE

• Tax tables

The main documents and forms required to operate PAYE which include:

• The tax deduction cards, known as form ITF/P8

• Employee leaving forms known as form ITF/P 13 (part I)
• Details of old employment known as form ITF/P 13 (part 11)
 • Particulars of employee commencing employment, known as form ITF/P20
• Certificate of pay and tax deducted known as form ITF/P22
• Remittance card known as form CF/P 16
• Employer's annual declaration and certificate known as form CF/P 18

CALCULATION OF TAX PAYABLE UNDER PAYE

The following steps are followed in order to calculate income tax payable under the PAYE system
each time that emoluments are paid:

1. The total amount payable to the employee for the month should be calculated. This is an
employee's gross pay for the month.
2. Contributions to approved pension funds and other allowable expenses are then deducted
from the gross pay for the month.
3. The total chargeable emoluments paid to the employee since the commencement of the
tax year are added to the taxable emoluments for the month in order to arrive at the
chargeable emoluments for the year to date.
4. The proportion of the employee's free pay to date should be determined from the tax
tables.This is the proportion of the total free pay applicable since the beginning of the tax
year on 1st January.
5. The amount of tax on the chargeable income to date is then worked out using the tax
tables.
6. The amount of tax already paid should then be deducted from the result determined instep
5 above to arrive at the amount of tax payable for the current month. The amount of tax
payable for the current month is the tax that should be deducted from the employee's pay
for the current month.

PAYMENT OF TAX DEDUCTED UNDER PAYE

Tax deducted under the PAYE system is payable by the tenth day of the end of the month in
which the emoluments were paid.
If the tax is not paid by that date, penalties and interest on overdue tax are charged. These are
borne by the employer and not by the individual employees.

PAYE PENALTIES

Penalties are charged under PAYE when all the procedures concerning payments of tax and
submission of the returns are not complied with.

If tax is not remitted by the due date, then a penalty of 5% per month or part thereof, of the
outstanding tax is charged. Interest is also charged from the due date to the date of payment at the
Bank of Zambia discount rate plus 2%.

If there is a loss of tax due to fraud, will ful default or negligence of an employer, the employer
may be liable to penalties mounting to 52.5%, 35% or 17.5% respectively of the omitted income.

UNIT 5 - TAXATION OF BUSINESS PROFITS-THE CASE OF A SOLE PROPRIETOR

5.1 Introduction

This unit will introduce you to the taxation of business profits as regards a sole proprietor. Business
organizations may be operated as a company or partnership or sole trading/proprietorship. In this
course we shall study how each of these business forms are taxed. We start here with a case of sole
proprietor i.e. taxation of business profits of a sole trader.

5.2 Learning Outcome

After completing this unit you should be able to:-

• Explain the badges of trade

• Explain the general rule used to determine whether expenses are deductible for tax purposes
or not.

• Compute the taxable business profits for sole traders.

• Computation of Taxable Business Profit

5.3 Time Frame:

You will cover the following time;

• 2 hour 30 minutes’ study time

• 1 hours in class

BUSINESS STATUTORY DEFINITION

BUSINESS STATUTORY has been defined in S.2 of the Act as any profession, vocation or trade
and includes: Any adventure or concern in the nature of trade whether singular or otherwise,
manufacturing, and farming

A PROFESSION was defined in the case of IRC v Maxse as an occupation requiring either the
use of purely intellectual skill or manual skill directed by the intellectual skill of the operator.

A VOCATION was defined in the case of Partridge v Mallandaine as the way in which a person
passes his or her life.

The statutory definition cannot be relied upon to establish whether a trade exists or not. In order
to establish whether a trade exists, the badges of trade are used. These were developed in the UK
by the royal commission on taxation.

THE BADGES OF TRADE

The main badges of trade are as follows:

The subject matter of realisation

Some assets are normally held as trading stock while others are not. If the asset that has been sold
is one which is normally held as trading stock the presumption that a trade is being conducted will
be greater.

The length of the period of ownership

Guidance has been provided that trading stock is not normally held for a long period of time. As a
result if a person disposes off an asset that he/she held for a long period of time it will be quite
difficult to determine whether the asset had been held as trading stock. Assets held for long periods
of time are normally investments.

The frequency of similar transactions

If the frequency of similar transactions is high, chances of classifying a taxpayer as a trader are
high. In Pickford v Quirke, the taxpayer was one of the syndicates who purchased the shares of
companies, liquidated them and sold the assets at a profit. The taxpayer had entered into four
transactions each resulting in a profit. It was held that he was trading.

Supplementary work and marketing

If an asset is acquired when it is in a poor state and supplementary work is carried out to improve
the asset by making it more marketable, then such an asset when sold will give rise to trading
profit. The argument is that supplementary work is performed so that the assets could be sold at a
higher price than its value just acquired.

Circumstances giving rise to realisation

It is not always that whenever an asset has been sold, that asset will give rise to taxable profits.

Circumstances that gave rise to the sale are also taken into account. If a taxpayer disposes off an
asset in order to raise money to help solve some financial problems it will be difficult to establish
whether the asset was trading stock.

The Tax payer's intention

Intention to trade clearly constitutes trading. However, intention to make a profit may not
constitute trading. As such it has to been established as to whether a taxpayer sold an asset because
the intention was to trade. In addition to the six badges of trade there are additional factors which
have to be taken into, account. These are as follows:

The Tax payer's other circumstances/activities

If the other activities of a taxpayer indicate the existence of a trade then even the current transaction
is likely to be interpreted as an indication of the existence of the trade

The way the asset sold was acquired

If the asset sold was acquired by inheritance or by way of gift, the transaction may not be
considered to be a trading transaction.

The method of finance:

If the asset sold was bought using some borrowed money the presumption that the asset was trading
stock is high. The presumption is even greater if some interest was paid on the amount of money
borrowed at a high interest rate. All the above factors are applied in trying to determine whether
there is a trade in existence.

COMPUTATION OF TAXABLE BUSINESS PROFITS

K’000 K’000
Net profit as per accounts X

Add:

Expenses charged in the A/Cs but not deductible for tax purposes X

Taxable income not credited to A/Cs X

Less:
Income credited to accounts but not taxable X

Expenses for tax purposes not deducted in the A/Cs X

(X)

Taxable business profits X

RULES FOR DETERMINING DEDUCTABLE EXPENSES WHEN COMPUTING

TAXABLE PROFITS.

THE GENERAL RULE FOR DEDUCTION OF EXPENSES

1. It must be Revenue not Capital Expenditure.

2. It must be incurred in the year wholly and exclusively for the purpose of the business.

CAPITAL EXPENDITURE
This is specifically disallowed. There are three main points to remember when computing taxable
profits.
a) All expenditure incurred on the improvement of fixed assets cannot be deducted in the
computation of taxable profits.
b) Depreciation of fixed assets and losses on disposal of fixed assets are non-deductible expenses.
c) Profits on disposals of fixed assets are also not taxable income.

When expenditure is made once and for all but with a view to bringing into existence an asset or
advantage for the enduring benefit of a business, that expenditure will reasonably be treated as
capital Loses suffered expenditure.

ALLOWABLE EXPENSES

This list is extracted from M. Kamanga (1994), income Tax in Zambia.

l . The cost of materials, components and goods purchased for resale.

2. Gross wages and salaries.
3. Redundancy payments
4. Compensation for loss of office
5. Business rates, rent and telephone
6. Business fuel, water and electricity
7. Maintenance and repair expenses
8. Printing and stationery expenses
9. Bank and loan interest used for business purposes
10. Hire purchase interest and payments
11. Advertising which is Revenue in natlile and not permanent advertising considered as capital

12. Training expenditure usually' related to staff training.

13. Bad debts and debt collection costs
14. Research expenditure that considered as Revenue..
15. Insurance
16. Legal expenses arising from trading
17. Other allowable deduction specifically mention bv ITA are;

• Donation to charity

• Handicap person allowance Employment of a handicapped person would entitle the

business to claim a handicapped person's allowance which is Kl 000 000 per annum per
handicapped person employed as long as such person are registered with the association
of the handicapped.
18. Gifts such as calendars carrying advertisements, provided it does not exceed Kl 00 000 per gift
per individual.
19. Normal business losses
20. Employer's contributions to an approved fund (National
Pension Scheme Authority and such others
21. Staff welfare expenses
21. Licence renewal costs but not application fee for the first time.
22. Specific provisions
23. Losses of stock in trade
24. Capital allowances
25. Travelling and accommodation expenses for business purposes, but not those concerned with
the acquisition of an asset which should be capitalized.
 26. Losses and defalcation of employees

DISALLOWABLE EXPENSES

1.Depreciation of Fixed Assets

2. General provision such as bad debts and preventive maintenance.
3. Legal expenses in connection with acquisition of capital items.
4. Entertainment and hospitality expenses other than for purely staff function
5. Capital improvement costs
6. Fines for illegal acts
7. Donations unless specifically approved
8. Any tax or penalty charged — Statutory penalties
9. Costs associated with the purchase of assets e.g. carriage and installation charges
10. Cost of registration of trademarks, copyrights patents etc.
11. Defalcation and misappropriation by senior officers of the business.
12. Drawings by sole trader or partner
13. The costs of acquisition of a main agency including travelling expenses incurred in that
connection.
14. Goodwill of a business
15. Costs incurred for increase of share capital
16. Licence application costs except for renewable costs
17. Loans to employees of the business
18. Bad debts incurred before incorporation
19. Private and domestic expenses of the business officers
20. Legal expense incurred in defending the tax payer from a charge of breaking the law.
21. The cost of tax case appeal to the Revenue Appeals Tribunal
22. The cost of refresher course for sole trader/partnership
23. Bad debts of a subsidiary
24. Entrance fees paid to Association such as Manufacturers Association of Zambia.
25. Any loss or expense which is recoverable under any insurance contract or indemnity

INCOME NOT TAXABLE AS BUSINESS PROFITS

Examples of income taxable at source through the withholding tax system are:

• Rental income
• Interest income such as debenture interest, bank interest and building society interest
• Royalties
• Dividends

If such amounts are credited to the profit and loss account, they have to be deducted and if they
are taxable, the gross amount is to be included in the final personal tax computation, as will be
seen later under personal income tax computations.

EXAMPLE

Mulongoti has been in business on his own account as a retail grocery for many years. His
business Premises consist of a shop with living accommodation above, which houses Mulongoti
and his family. For the year ended 31 December 2020, his income statement showed the
following:

K K

Staff wages 74,160 Gross profit 303,260

Wife’s wages 6,240 Profit on sale of plant 2,400
Rent and rates 6,300
Light and heat 21,720 profit on sale of investments 10,320
Motor car expenses 3,360
Telephone 780 bank interest received 540
Postage, Stationery and wrapping 10,800
Repairs and renewals 4,760
Bad debts written off 1,000
Miscellaneous expenses 3,460
Advertising 10,240
Loan interest 11,300
Depreciation – plant 4,800
Motor car 1,200
Net profit 156,400
316,520 316,520

The following information is also relevant:

1. The Zambia Revenue Authority has agreed that one – third of the expenditure on rent, rates,
heat and light is applicable to the living accommodation.
2. One – seventh of the motor car expenses relates to private motoring.
3. Repairs and renewals comprise:
K
Painting shop internally 1,550
Plant repairs 1,010
Constructing extension to stock room 2,200
4,760
4. Bad debts amount

K K
Bad debts written off 1,020 Balances b/f
General reserve 2,000
Balances c/f Specific reserve 3,600
General reserve 4,000 Bad debts recovered 2,400
Specific reserve 3,980 Profit and Loss 1,000
9,000 9,000
5. Miscellaneous expenses included:
K
Donation to local charity 100
Subscriptions to the Zambia Chamber of Commerce and Industry 180
Entertaining customers 900
Christmas gifts to customers – bottles of gin and whisky (each costing K50) 700
Payment to employee in lieu of notice 200
 Legal expenses – debt collecting 150
Sundry allowable expenses 1,230
3,460
The charity to which the donation was made is an approved one.
6. The profit on the sale of investment relates to the sale of a holding or ordinary shares in a
company quoted on the Lusaka Securities Exchange. These shares were acquired by
Mulongoti on 1 January 2020 for K84,600 and sold on 30 June 2020 for K94,920.
7. Mulongoti estimates that during the year, he has withdrawn goods from stock costing K3,400
for the use of himself and his family.
8. Mulongoti estimates that his gross profit percentage on turnover is 15%.
9. Mulongoti is entitled to a nominal salary of K4,000 per annum. This amount is included in
the figure for staff wages. Mrs Mulongoti worked full time in the business.
Required:
Compute Mulongoti’s income tax payable on the tax adjusted business profits for the year
ended 31 December 2020 giving reasons for any adjustment made by you.

SOLUTION
MULONGOTI
COMPUTATION OF TAX ADJUSTED BUSINESS PROFITS FOR THE YEAR ENDED
31 DECEMBER 2020

Note K K
Net profit as per accounts 156,400
Add:
Rent and rates (1/3 × K6,300) 1 2,100
Heat and lighting (1/3 × K21,720) 1 7,240
Motor car expenses (1/7 × K3,360) 1 480
Building extension to stock room 2 2,200
Increase in general bad debt provision 3 2,000
Entertaining customers 4 900
Christmas gifts – bottles of gin and whiskey 4 700
Goods for personal use (100/85 × K3,400) 5 4,000
Mulongoti’s nominal salary 6 4,000
Depreciation of motor car 7 1,200
Depreciation of plant 7 4,800
29,620
186,020
Less:
Profit on sale of plant 8 2,400
Profit on sale of investments 8 10,320
Bank interest received 9 540
(13,260)
Taxable business profits 172,760
Less tax – free income 39,600
133,160
Income tax
25% × K9, 600 2,400
30% × K25, 200 7,560
37.5% × K98, 360 38,885
Income tax payable 46,845