Is Zambia's 2025 tax hike a necessary cure or a dangerous constraint on growth? With the government rolling out a sweeping range of new and increased taxes—from Turnover Tax to a controversial Minimum Alternative Tax—the immediate goal is clear: bridge the budget deficit and avoid more external debt. But at what cost?
Countries around the world raise revenue to run their economies through borrowing, increasing production of raw materials or finished goods, exploiting natural resources, and, of course, increasing taxes. Whilst Zambia is actively pursuing all these avenues, there's more emphasis on growing current taxes and introducing new ones to help bridge revenue gaps. These taxes may be an effective injection of much-needed funding in the short term, but their implications are far-reaching.
The 2025 tax policies unveiled a range of tax reforms and amendments aimed at bolstering public finance by addressing the national budget deficit and expanding the national tax base. This spectrum of changes ranged from increasing turnover tax and withholding tax, all the way through to the introduction of a Minimum Alternative Tax (MAT) to ensure broader company participation, including those reporting low or no profits.
This article aims to navigate the delicate balancing act required to address potential consequences, explore alternatives, and seek sustainable revenue generation that does not place excessive strain on key economic players.
A sweeping overview of the changes to the key tax measures shows an increase in the annual revenue threshold for the following:
Turnover Tax (TT)
Increased to K5 million, at a rate of 5% up from 4% on a previous K800,000 revenue ceiling. The plus side of turnover tax is that it simplifies the tax process; however, it taxes gross revenue instead of actual profits, thereby constraining cash flow and impacting reinvestment capacity.
Withholding Tax (WHT)
Increased from 15% to 20% on interest on treasury bills and government bonds, effective from 19 August 2025, with the enactment of the Income Tax (Amendment) Act. This broad increase extends to income from government securities, likely with a view to equalising fair gain across income sources. The potential implications of this increase include a reduction in the appetite for treasury bills and bonds due to a lower net return.
Advance Income Tax (AIT)
In an effort to increase tax compliance and reduce leakages in cross-border transactions, a 15% AIT now applies to exports or bank remittances exceeding USD 2,000 where the taxpayer does not hold a valid Tax Clearance Certificate (TCC).
Minimum Alternative Tax (MAT)
This newly introduced tax requires a 1% levy on company turnover, excluding businesses already subject to turnover tax or other presumptive regimes, which serves as a buffer to ensure broader participation, including companies reporting low or no profits, in contributing to state revenue.
In a deviation from the common practice of all tax changes effective from 1 January 2025, the amendments to WT on interest from government securities took effect on 19 August 2025 with the enactment of the Income Tax (Amendment) Act, while MAT was introduced in the same legislative package for the 2025 charge year—a bold and drastic step to address a drastic situation.
In addition to these reforms, further adjustments have been made, namely:
- VAT will only be claimable on invoices issued through the ZRA Smart Invoice system, thereby strengthening compliance and curbing fraudulent claims.
- Increase in tax on rental income to 16% (up from 12.5%) for landlords with annual earnings exceeding K800,000.
- Expanded compliance requirements mean that a TPIN is now mandatory for accessing services such as utilities, mobile money, Internet providers, NHIMA, and NAPSA. At the same time, TCCs are required for higher-level transactions, including property transfers and licensing.
Whilst this may seem like a heavy load to bear for citizens and businesses alike, the alternative paints a much grimmer picture: more external debt. Indicating that this bitter pill may be more palatable for Zambians to reap the healing benefits.
The Ministry of Finance projects that around 63% of total national revenue in 2025 will come from taxes. This measure is expected to shore up fiscal gaps, fulfil debt servicing obligations, and maintain a funding flow for public social programmes.
But this plan comes at a cost. Heavy dependence on tax increases the risk of liquidity constriction, especially among SMEs, who may struggle to balance higher tax obligations and operational costs while fulfilling recurring bills such as wages and statutory payments. The more complex the tax requirements, the greater the accounting capacity required. Many SMEs run rudimentary accounting systems for day-to-day transacting and simple returns; a position that will no longer be tenable, requiring dedicated professional accounting support.
This begs the question: What alternatives or supplementary revenue generators exist? Potential solutions may be found in the informal sector by implementing similar systems to Smart Invoicing, thus reducing the burden on already compliant taxpayers.
The enhancement of property and environmental taxes could provide a stable and sustainable locally regulated revenue, with climate-protecting environmental levies driving sustainable practices as they fund climate-friendly initiatives and projects.
The now-unearthed gem of Public-Private Partnerships (PPPs) has the potential to spread and lighten the load of infrastructure development by taking a significant component of their funding from tax revenue and allocating it to private funders, thus freeing much-needed fiscal space.
Delving into the realm of natural resources, a literal treasure trove of financing awaits in the creation of a sovereign wealth fund by channelling a portion of mining royalties and mineral export earnings into a well-administered investment vehicle to hedge against commodity price fluctuations, whilst allowing for investment into long-term growth.
However, navigating the tightrope that is revenue generation while stimulating growth is not for the faint-hearted. It requires robust policy implementation while softening the impact of taxes on taxpayers.
- Phasing Implementation:Â Such policies could include phasing the implementation of staggered tax increases over a couple of years, while providing targeted relief for SMEs, particularly those in high-growth focus areas.
- PAYE Sabbaticals: Especially in lower brackets, could uplift disposable income and drive consumption patterns.
- AI-Driven Tools: Investing in these tools could optimise efficiency on all fronts – collection, audit, and verification - thus allowing for seamless transaction monitoring to foster better compliance and reduce fraud in real-time.
Perhaps the most critical component is the one saved for last – communication, transparency and public awareness. Ignorance is certainly not bliss, and as long as the public remains unclear about how taxation can work in their favour, it will continue to be viewed with distrust and suspicion. Linking new tax measures to clearly visible benefits such as medical facilities, schools, and improved infrastructure can go a long way in strengthening public trust in fiscal policy.
Zambia has taken a bold step with its 2025 tax reforms. Succeeding in this endeavour requires finding the sweet spot between fiscal ambition and economic practicality. Stringent implementation of these measures could enhance compliance levels, diversify revenue streams, and protect potentially vulnerable economic players. If done correctly, this could mitigate the inherent risks of slowed economic growth and weakened investment climate.
A survey conducted by the Zambia Institute of Chartered Accountants (ZICA) in 2023 identified key tenets of an effective tax system. They can be summarised thus:
- Tax Neutrality: Taxes should not distort economic decisions.
- Transparency: Taxpayers should understand what taxes they are paying and why.
- Keep it Simple: Tax laws should be simple and convenient enough for compliers to follow without being costly.
- Certainty: Taxpayers should be able to understand their tax obligations without undue complexity.
- Accountability: Tax systems should be regularly reviewed to ensure they still serve the public good.
- Efficiency through Technology: Tax systems should reduce administrative burdens and utilise technology to facilitate easier compliance.
- Avoid Double Taxation: If tax has already been paid on income, it should not be taxed again when re-circulated.
If these are implemented, then maybe Albert Einstein's words, "The hardest thing to understand in the world is income tax," will be a thing of the past.
