This blog is part of the CEP blog series on Tax Expenditure Policy Making and the Role of Parliaments.
Tax Expenditures (TEs) are used widely in most jurisdictions to achieve a variety of policy objectives including economic, social and political ones, as well as to attract investment. At the same time, as discussed by Sladoje (2017), they narrow a country’s effective tax base, reduce the potential revenue and fiscal space.
The role of the legislature in tax policy differs from one jurisdiction to another depending, among other things, on the available provisions in that country. The Zambian Government annually presents the National Budget, including tax measures and some incentives, to the National Assembly. In addition to TEs granted through budget policy, other incentives are granted through various government institutions including the Zambia Development Agency (ZDA), the Zambia Revenue Authority (ZRA), the Ministry of Commerce, Trade, and Industry (MCTI) and the Ministry of Finance and National Planning (MoFNP) with a significantly higher level of discretion.
The Zambia Development Agency (ZDA) Act offers a wide range of fiscal and non-fiscal incentives in the form of allowances, exemptions, and concessions for companies. For instance, investors who invest not less than US$500,000 in the Multi Facility Economic Zones (MFEZ) or a priority sector (mining, agriculture) or product under the ZDA-Act, are entitled to:
(i) zero percent import duty rate on capital equipment and machinery including trucks and specialized motor vehicles for five years; and
(ii) accelerated depreciation on capital equipment and machinery including trucks and specialized motor vehicles for five years.
Furthermore, in the 2024 Budget, a number of TEs were introduced, but still with very little background information to help Parliament scrutinize their objectives. For instance, the Minister promoted local investment in the manufacturing sector, and proposed the following measures:
a) remove customs duty on importation of motorcycles and tricycles imported in complete knock-down form for companies that assemble and source at least 5 percent inputs locally;
b) introduce, remove, and increase Selected Goods Surtax on some products;
c) increase the customs duty rate to 25 percent from 15 percent on electrical panels;
d) reduce excise duty rate by 50 percent on locally produced clear beer for small and medium manufacturers that produce less than 500,000 litres per annum.
About the National Assembly of Zambia
The National Assembly of Zambia is a unicameral legislature responsible for making laws, approving proposals for taxation and public expenditure, and keeping the work of the Government under scrutiny and review. The Constitution empowers the National Assembly to approve the National Budget presented to it. At each stage of the multi-stage budget process (formulation, approval, implementation, auditing, and evaluation), the National Assembly plays various roles which have evolved over time. Checking the Government on TE policy has eluded the National Assembly for a long time. Nowadays, TEs are presented in the budget and approved annually but still with very limited information for Parliamentarians to make informed decisions.
Legal Framework on the National Budget Process
Prior to the enactment of the Planning and Budgeting Act No. 1 of 2020, the law that integrates the national planning and budgeting process, the Parliamentarians only played a limited role in the pre-budget process, if any. The enactment of the Act presented an opportunity for the participation of Parliamentarians and the National Assembly at this stage. This early involvement, however, has not helped much in ensuring a robust review of TEs in the budget. The Medium-Term Budget Framework, which shows direct budgetary revenues and expenditures, is availed for consultation but only with very limited background information on TE policy.
Treatment of the National Budget at National Assembly of Zambia
Upon presentation of the National Budget in the National Assembly, it is referred to the Expanded Planning and Budgeting Committee (EPBC) for scrutiny. This is an ad-hoc committee whose composition includes all Members of the Planning and Budgeting Committee (PBC) and all chairpersons of portfolio and general purposes committees of the National Assembly. During its consideration of the Budget, the EPBC invites stakeholders to make submissions on budget policy. The referral of the Budget to the EPBC is critical not only because it facilitates in-depth scrutiny of the Budget, but also because it receives submissions on the implications of various measures proposed by the Government in different sectors of the economy. Yet, the report of the EPBC is not submitted for adoption to the National Assembly, a fundamental departure from the best practice on the treatment of parliamentary reports that are adopted by the House. This has significantly hindered a follow-up and assessment on the performance of TE policy.
The Budget and TE Policy in Zambia
In the Budget Policy, the executive outlines TEs to be implemented in the following financial year. Although TEs are outlined in the budget speech, the objectives and timelines are usually not given. This results in limited scrutiny, coordination, analysis and reporting of their costs and benefits. Similarly, the reporting and evaluation of TEs are also not incorporated into the National Budgeting Process.
Currently, there is a paradigm shift, through which several Members of Parliament (MPs) have started to demand for comprehensive and detailed information on TEs to be supplied by the Executive Arm of Government. Up to a large extent, this has been triggered by the Parliamentary Budget Office (PBO). The PBO plays an essential role by providing technical and professional support to Committees, as well as Parliamentarians in their individual capacities on all matters related to the Public Finance Management and budgets. Against this background, the PBO has continuously encouraged Parliamentarians to demand for more information on TEs from the Executive, e.g. through analytical briefs. The analytical briefs presented to the EPBC highlighting the effects of TE policy on domestic resource mobilisation are a case in point. This increasing interest in getting access to more and better TE information has also been attributed to various reports that have shown significant losses in tax revenue (see, for example, PBO, 2023, Fumpa-Makano, 2019; Tuomi 2012).
Access to information
Although the National Assembly through the Powers and Privilege Act, has power to request information on TE policy from the Executive through Committees, it is difficult to dig out critical information on TEs. Despite the fact that Committees are considered as miniature parliament with powers to request for such information, the inadequacy of the legal framework on TE policy regarding the introduction, modification, or elimination of TEs makes it difficult to assess those policies in detail. Indeed, this lack of transparency makes the scrutiny of TE policy including (but not only) by Parliament very difficult, if not simply impossible. However, the change in paradigm mentioned before brings some hope for a change. Even more so, after making the Parliamentarians aware of the magnitude of the revenue forgone stemming from the TEs contained in the budget and in other pieces of legislation.
In order to have meaningful progress, reporting on and evaluation of TEs need to be integrated into the annual budget process to support policy decisions. This will help to form a more robust National Budget, ensuring that TEs are subject to the same budgetary controls as fiscal outlays. Moving in this direction will also contribute to mitigate the risks associated with TEs by limiting the impact on revenue, ensuring better coordination of government resources, and promoting the effective and efficient use of TE provisions as a policy instrument.