CHAMBER OF MINES' PROPOSALS TOWARDS 2015 NATIONAL BUDGET

TODAY, I have decided to feature an abridged version of the Chamber of Mines of Zambia (CMZ) submission on the mining sector budget proposals for the 2015 national budget and 2015-2017 Medium Term Expenditure Framework (MTEF).

The document reads:

Following the call by the Ministry of Finance to stakeholders to make submissions on tax and non-tax revenue measures to be considered by Government as it prepares the 2015 National Budget and 2015-2017 Medium Term Expenditure Framework, the CMZ ... we would like to put forward the proposals below for inclusion in the overall submissions.

VALUE ADDED TAX (VAT) RULE 18

Measure: We propose amendments to Rule 18, specifically amending sub-section (ii), to read as follows:

"Rule 18 of the principal Rules is amended by the deletion of sub-rule (1) and the substitution therefor of the following:

 (1)     Unless the Commissioner General shall otherwise allow, a taxable supplier claiming that a supply is zero-rated under the Second  Schedule to the Act on the grounds that the supply is an exportation
of goods, shall produce to an authorised officer-

 i.      Copies of export documents for the goods, bearing a certificate of shipment provided by the Authority or Import documentation into the next country of passage or destination provided by the customs authority of that country.

 ii.     Tax invoices for the goods exported;

 iii.    Proof of payment, made by the customer, for the goods;

 iv.     Documentary evidence, proving that payment for the goods has been
made into the exporter's bank account in Zambia; and

 v.      Such other documentary evidence as the authorised officer may
reasonably require."

a)      Reason: Current VAT practice as guided by Rule 18(1) VAT (General) Rules, 1997, allows an export of goods from Zambia by or on behalf of a taxable supplier to be zero-rated, subject to provision of evidence of exportation as the commissioner general may require.

In its current format, Rule 18 prescribes, among others, the following documentary evidence to support exports:

"ii)    certified copies of customs import documents at the country of destination, bearing a certificate of importation into the country of destination by the customs authority for that country;"

Finance Minister Alexander Chikwanda is expected to present the 2015 National Budget to Parliament on Friday next week.

The mining sector has had no problems producing documentation all the way up to the border or point of exit as these documents are within our control.

The mines, however, have had difficulties with fulfilling sub-section (ii) above as they sell their products to commodity traders, who have their own commercial arrangements with various customers all over the world.

In addition to the fact that they cannot trace documentation in the final country of destination for the goods as they have no access to the final customers, it is further implausible that the ZRA would demand documentation beyond what its own officers have verified as exported as indicated above, and would instead want to rely on third party documentation from other tax jurisdictions.

The failure to provide documentation required in (ii) above has resulted in the ZRA withholding huge sums of their VAT refunds, which has resulted into various operational problems with severe impact on cash flows impacting very negatively on their ability to fund critical expansion projects as well as normal operations.

Specifically, the withholding of this VAT has resulted into inability to fund critical expansion projects, corporate social responsibility projects as well as maintain cash flow to support normal operations.

CAPITAL ALLOWANCES

Measure: The capital allowances on mining plant, machinery and equipment should be reverted to 100 per cent per annum for the cost to be fully claimable within one year.

Reason: Under Section 33 of the Income Tax Act currently, capital allowances are claimable at the rate of 25 per cent on cost and upon commissioning of an asset, meaning that this cost can only be claimed
in full after four years.

In the mining industry, it is not uncommon for expansion projects to take for instance three to four years before completion and commissioning.

During this period of construction the companies will be spending money without getting any tax relief on what they spend.

Even upon commissioning of an asset, it will still take another four years for them to fully claim the related capital allowances.

PREMIUMS DISCOUNTS

Measure: The Reference Price for sale of metal products between related parties should allow adjustments for premiums and discounts that are made based on the quality of the metal products at
finalisation.

Reason: The Income Tax Act under Section 97A currently requires an adjustment of all sales between related parties to the LME price, even when the price actually charged is justified based on international best practice.

This has resulted in finalization adjustments for premiums and discounts not being taken into account, despite this being a commercial reality.

 The Act should therefore be amended to permit use of alternative prices where these are commercially or otherwise justified.

 EXPORT DUTY ON CONCENTRATES

Measure: The government should consider revoking the tax on concentrates exports.

Reason:  The revoking of Statutory Instrument number 89 that allowed concentrate exports to be duty exempt need to be re-introduced as a good number of mines had large stocks of concentrates which for some technical reasons could not be processed locally.

These include high insol materials that may not be able to be smelted locally and Government needed to understand that the industry only exported the concentrates it could not technically and/or economically treat.

This would also help tackle the perception that companies were smuggling other metals within the concentrates.

VAT ON IMPORT OF COBALT CONCENTRATES

 Measure: The Government should reintroduce permanent VAT deferment on cobalt concentrate imported.

 Reason: Due to shortage of higher grade cobalt concentrate in Zambia, Zambian processing/tolling plants have to import most raw materials from the Democratic Republic of Congo to maintain cobalt production in Zambia.

 Currently Zambia produces approximately seven to eight per cent of the world's cobalt metal. Over 90 per cent of this is produced from imported cobalt concentrate.

 For comments call: 260 0955 431442, 0977 246099, 0964 742506 or email:jmuyanwa@gmail.com.

2014 NATIONAL BUDGET TO REMEDY CURRENT DEFICIT

THE Zambian economy is this year expected to post mixed results with some splendid macroeconomic indicators amid stunted growth.

Zambia is among Africa’s fastest growing economies and for the last few years its economic performance has continued to be positive, registering the Gross Domestic Product (GDP) growth rates of 6.8 per cent in 2011 and 7.3 per cent in 2012, for instance.

The rate of inflation has remained within the single-digit bracket and last month slid to seven per cent from 7.1 per cent the previous month, according to the Central Statistical Office (CSO) latest data.

Generally, the international economic bodies like the International Monetary Fund (IMF), the World Bank and World Economic Forum (WEF) are happy about the strides the government and the private sector are making in meeting some of the benchmarks.

Recently the WEF named Zambia as the continent’s number seven most competitive economy.

Last week on Tuesday an IMF team which visited Lusaka during September 17-24 period to conclude the 2013 Article IV Consultation discussions with Zambia praise the government for the country’s economy.

Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with its member countries, usually every year.

A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the Executive Board.

The team said that the Zambian economy has continued to expand at a rapid pace with overall output growth, however, projected to reduce from 7.2 per cent in 2012 to six per cent under the current national budget

The 1.2-per cent is attributable to lower agricultural production. The yield for maize, the country’s staple food for instance, has gone down from 2.7 million tonnes recorded in the 2011/2012 farming season to 2.5 million tonnes in 2012/2013.

This reduction is partly attributed to poor rainfall distribution, especially in southern, eastern, Lusaka and central provinces and the army worms which raided some fields during the season.

In a statement, the IMF team led by John Wakeman-Linn (above) noted the continued increase in Zambia’s copper production amid the lowering prices of the commodity at the internatioal market.

The team had met with Finance Minister Alexander Chikwanda, Bank of Zambia (BoZ) Governor Michael Gondwe, and other senior government officials, as well as representatives from the private sector and civil society.

“The Zambian economy has continued to expand at a rapid pace, although experiencing pressures in some areas. Overall output growth is projected at 6 percent in 2013, with the decline from 7.2 percent
growth in 2012 largely due to lower agricultural production.

“Copper production has continued to increase strongly despite lower prices on the international market, and the economy has also benefitted from high levels of foreign direct investment and rapid
growth in non-traditional exports,” reads the statement at the end of the mission.

There is, however, need for the Zambian authorities to heed to the team’s advice on how to resolve the various challenges haunting the economy.

These major economic challenges are in fiscal area hence the need for the government and spending agencies to adhere to fiscal discipline to ensure that the rest of the budget is executed prudentially.

As noted by the IMF team, the government expenditure in the 2013 national budget will be considerably above the budget due to various factors including the cost of fuel subsidies incurred before the removal in May 2013.

Other factors are the newly-effected increased salaries for civil servants as well as the costs related to the running of and debts by the Food Reserve Agency.

“The main economic challenges are in the fiscal area. Government expenditures in 2013 will be significantly above budget, including from fuel subsidies incurred before retail prices were raised on May 1, the civil service wage increase that came into effect this month, and costs of covering the Food Reserve Agency’s operations and outstanding debt,” partly reads the statement.

The government has a shortfall in revenue on the projected figures.

On aggregate the budget deficit for 2013 is now expected to rise to about 8.5 per cent of GDP as opposed to about five per cent it usually hovers around.

To remedy the situation, the government is in the 2014 national budget expected to introduce measures to increase revenue and tighten expenditure controls.

These and several other measures are expected to help reduce the budget deficit in 2014 to about five per cent and ensure the economy remained buoyant.

“The mission very much welcomes the authorities’ plans to comprehensively address the fiscal challenges in the budget for 2014. With a combination of stepped-up revenue collection and tight expenditure control, the draft budget aims to bring the deficit to about five per cent of GDP, similar to what was originally planned for
2013.”

Ensuring that this budget is adhered to will be important for macroeconomic stability and hence that is the foundation that will support continued strong growth of the Zambian economy.

The IMF advises that, to maintain strong economic growth, it will also be important to safeguard competitiveness and build bumpers against external shocks.

For the increase in the salaries for civil servants to remain economically meaningful there should be a corresponding rise in production and productivity by the workers.

The workers, therefore, have to ensure that they earn (work for) their salaries so that they could help in maintaining or even increasing the competitiveness.

“Last year’s sharp increase in minimum wages and this year’s large pay award to civil servants are putting upward pressure on labor costs in both the private and the public sectors.

“Competitiveness may suffer if the higher wages are not matched by higher productivity. In addition, while recent progress in this area is encouraging, a further build-up of reserves from the current level of less than three months of imports is needed in light of risks stemming from a potentially deteriorating external environment,” further reads the statement.

The IMF Executive Board is expected to complete the 2013 Article IV consultation in late November or early December 2013.

On the same issue, Zambia’s Secretary to the Treasury Fredson Yamba says the Government has set out an extensive capital expenditure programme aimed at increasing investment in education, health, transport, energy, water and sanitation as well as social safety net.

These projects are an important prerequisite in achieving meaningful economic growth, poverty reduction and social justice.

According to Mr Yamba, in addition,  there would be a divergence from the over-reliance on the mining sector to the other areas of comparative advantage such as manufacturing, tourism, agriculture and agro-processing to ensure that growth was broad based and inclusive.

MR Yamba

The mining sector has remained Zambia’s economic mainstay for some time now, accounting up to about nine per cent of the GDP and hence the need to change the scenario through economic diversification.

Mr Yamba says the 2013 fiscal deficit was unavoidable as Government had to clear the backlog of arrears on fuel and maize subsidies as well as higher wage bills.

By and large, the broad medium term goals of the economic policy for Zambia now seem to be the maintaining of strong growth, lowering the budget deficit and keeping hold of low inflation rate to ensure stability in the prices of commodities locally.