chapter 11 - papert5

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UNIT 7UNIT 7TAXATION OF SMALL ENTERPRISESTAXATION OF SMALL ENTERPRISES

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CHAPTER 11

TAXATION OF SMALL AND MEDIUM SIZE ENTERPRISES

After studying this Unit you are expected to understand the following:

Definition of small and micro enterprises (SMEs)

Qualification for classification as SME

The Zambia Development Act

Source of income

General deductions

Capital allowances peculiar to SMEs

Exemption from tax

Presumptive Taxes

Introduction to Turnover Taxes

11.1 - Introduction

Taxation is perhaps the most direct and visible way in which the government of theRepublic of Zambia affect the Small business environment. At present, the taxationsystem for small businesses in Zambia is among those that are receivingincreasing attention from tax policy drivers. This is more the reason why you need

to know some of the emerging tax incentives aimed at promoting smallbusinesses.

Many small businesses rely on accumulated earnings to provide the capital forinvestment and growth. Tax incentives, such are provided for under the smallenterprise development Act, are meant to help small businesses accumulate moreafter tax earnings for reinvestment and expansion. The incentives are alsointended to help small businesses to build their equity base, making them moreattractive to external investors. And this revelation leads us to another inevitablerevelation, and this is that many small businesses are concerned about the cost ofcomplying with the taxation system.

The burden of tax compliance does not fall evenly on all businesses. It varies bytype of business, by income level and by level of tax awareness!

Economic growth in every country is defined by the performance of its productionsector. In many highly developed countries a great share of production ismanufactured by small and medium sized Enterprises (SMEs) an important partof their market economies. For instance, the portion of SMEs in GDP of GreatBritain is 50 53%; of Germany 50 54%; of USA 52 55%.

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The development of SMEs is greatly affected by the level of taxation, itsadministration and compliance: the higher the tax rate is, or the greater the effortsto fulfil taxation requirements are, as well as to check how those requirements aremet, the lower the initiatives are for SMEs to perform well. Therefore, maintainingthe tricky balance between tax rate, compliance costs, tax administration andeconomic development should be a main goal of every tax policy. And Zambia as

a country seems to be moving towards this ideal tax policy creativity!

In Zambia, the SME sector has only began to receive some tax attention. Lack ofproper incentives as well as unfavourable government policy towards SMEs hashad a negative impact on the Zambian economy. Weak legislative support,administrative barriers and many such vices have in the past forced some of theSMEs to operate in the shadow.

All leading textbooks in taxation list three main features of a perfect taxationsystem: efficiency, equity and simplicity. Efficiency is understood as economicneutrality: taxation imposes no interference with private decision-making. Equitymeans equal treatment of equals as well as distribution of tax liabilities according

to the level of well being. Simplicity is often used as a synonym for easycompliance and simple administrating. All these are some of the issues weundertake to explore in the light of how each of these features of a perfect taxationsystem may impact on small business enterprises and ultimately on their survival!

DEFINITION

The definition of a small enterprise presents a number of problems for many taxadvisers. It is justifiable to feel that it is not satisfactory to attempt to define a smallenterprise in quantitative terms but in the European Union and even in Zambia,this quantitative approach is what is actually embraced.

THE MEANING OF ENTERPRISE

The Small Enterprises Development Act 1996 Act No. 29 of 1996 defines anenterprise as:

QUOTE

An undertaking engaged in the manufacture or provision of services, or anyundertaking carrying on business in the field of manufacturing, construction andtrading services but does not include mining or recovery of minerals

This means that for small companies engaged in mining activities, they do not

qualify as an enterprise by the provisions of SED Act 1996 regardless of their size,and by virtue of this exclusion such companies are not entitled to claim any taxincentives provided for under this Act.

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THE MEANING OF MICRO ENTERPRISE

Under the SED Act 1996 Micro Enterprise means any business enterprise:

Whose amount of total investment, excluding land and buildings, does not

exceed K10,000,000.

Whose annual turnover does not exceed K20,000,000; and

Employing up to 10 persons.

The proviso to Section 2 of the SED Act gives powers to the Minister of Finance tovary the thresholds of K10,000,000, K20,000,000 and the maximum number ofemployees of 10 by way of a statutory instrument.

THE MEANING OF SMALL ENTERPRISESmall Enterprise means any business enterprise:

Whose amount of Total Investment, excluding land and buildings does not exceed:

In the case of manufacturing and processing enterprises K50,000,000 in

Plant and Machinery.

In the case of trading and service providing enterprises K10,000,000.

Whose annual turnover does not exceed K80,000,000.

Employing up to 30 persons.

Again you must take note that the Minister of Finance is given powers under thisAct to vary any of the variables by means of a Statutory Instrument.

Registration of Micro and Small Enterprises Any person undertaking a business enterprise may apply for a certificate under

the provisions of Section 7 (1) of Small Enterprises Development Act.

An application for a certificate is made to Director of the small enterprises

development board after paying a fee, which is determined by the board fromtime to time.

Upon receiving an application for a certificate the Director submits the

application to the board for further consideration.

11.2 ISSUE OF CERTIFICATE

Within 4 weeks of receipt of an application for a certificate, the board will registeran enterprise as a micro or small enterprise and issue a certificate, which entitlesthe registered enterprise to benefit from the incentives provided for under the Act.

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11.3 INCENTIVES TO MICRO AND SMALL ENTERPRISES

Small and medium enterprises perform several important functions in the Zambianeconomy:

SMEs help form a competitive environment.

They are actively involved in research and development, promoting fast

implementation of new technical and commercial ideas.

They quickly react to market changes and thus, provides necessary flexibility to

the economy; and

They assist in decreasing unemployment through creation of new working

places.

Thus, promoting the development of small and medium enterprises should receiveproper attention while, at the same time, the authorities that be are engaged in

implementing complementary stabilising macroeconomic policy.

11.4 ROLE OF TAX POLICY IN PROMOTING SME SECTOR DEVELOPMENT

There are many factors that can influence the development of SMEs in theZambian economy. The most frequently mentioned among them are state supportof the sector, proper legislative support and mechanisms of its fulfilment, access tofinancial resources and investment incentives. However, one of the mostimportant single factor that promotes development and growth of SMEs is ofcourse the taxation system.

Research made in different countries has shown that the countries where thelevels of tax rates, the costs of fulfilling taxation requirements are high, the sectorof small and medium enterprises is comparatively small. For instance, in Ukraine,where policy of SME sector taxation is considered to be too burdensome, theshare of the sector in GDP was only 5.5% in 1997 according to the AnalyticalReport on State Committee for Entrepreneurship Development.

Specific Tax IncentivesAn enterprise registered under the SED Act is therefore entitled to the followingTax incentives:

Exemption from payment of tax on income for: -

The first three years of operation for an enterprise operating in an urban area.Although the Act does not define the term 'urban' it can be construed accordingto its popular meaning in the English language.

The first five years of operations for an enterprise in a rural area. Again the Act

does not define 'rural area' but it does give a very general direction. In section2 the Act states that rural area shall have the same meaning assigned to it inthe local Government Act of 1991.

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TUTORIAL NOTE:

For a small business owner or those considering starting a business for the first

time, they do need to get registered under the small enterprise development Act1996 and don't have to worry about ZRA for their first 3 years of operations if theyare in an urban area or their first 5 years of operations if they are in a rural area.

As you can see, the taxman is not absolutely intolerant!

11.5 LETTING OF BUILDINGS BY PRIVATE PERSONS

The small enterprise board may, in consultation with any person, institution,organisation or company, let out any building or premises for use by micro or small

enterprises as an industrial or commercial estate.

An owner of any building or premises let out for use by micro or small enterprisesis entitled to the following:

(i) Capital allowances which shall be deducted in ascertaining the gains or profitsat the following rates:

Where a building is used as an industrial estate - a 5% wear and tear

allowance on cost, plus a 10% initial allowance on cost in the year in which thesaid building is first used.

For implements, machinery and plant exclusively used in farming andmanufacturing - a wear and tear allowance of 50% of the cost in each of thefirst two years.

(ii) Exemption from payment of tax on income received from rentals on suchpremises; and

(iii) Exemption from the payment of rates on factory premises.

Though tax policy for SMEs in Zambia is still far from being perfect, a lot ofattempts are being made to improve it. If all the future policies are thoroughlyevaluated, there is hope that in future the taxation system of Zambia will achieve

the three main objectives of taxation: efficiency, equity and simplification. In thatcase, taxation would not hinder but rather stimulate the development of the SMEsector and it would become an important part of the Zambian production sector.

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Progression to Micro or Small Enterprise Status:

Tax Benefits

Example:

Bangweuru Enterprises was set up a year ago. Since then it has been operating asthe major supplier of Tomato jam to the Chilubi Island Mission Hospital. TheEnterprise director has heard about tax incentives given to micro or smallenterprises in rural areas like Chilubi Island and he has accordingly applied for aSmall Enterprise Certificate. He rents a small room, which was once, used as ahospital mortuary in the early 1980s, in which he carries out the manufacturing ofhis Tomato Jam.

Explain to the director in clear terms the specific tax incentives available to himand his small enterprise assuming that his application for a small enterprisecertificate goes through.

Answer:Bangweuru Enterprises

As the Enterprise's application for a micro or small enterprise certificate has gonethrough, the enterprise can enjoy the incentives provided for under the smallenterprise development Act 1996 as follows:

Tax Advice:

The enterprise will not be liable to income tax in the first five years of operationas it is set up in a rural area. Since the enterprise was set up a year ago, one-year of the benefit period has already elapsed. This means that in effect theenterprise will only enjoy a tax holiday of four years. One year has beenwasted.

The equipment used to manufacture the Tomato Jam qualifies as plant under

the Income Tax Act and this will qualify for a wear and tear allowance of 50%starting in year five when the tax holiday elapses.

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Enterprisesets up in

business

Apply for Smallenterprise

certificate

Receive certificateconfirming small

enterprise status.


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The Small room, which was used as a mortuary in the early 1980s, qualifies as

an industrial building on which a wear and tear allowance of 5% on cost isavailable. But it is not Bangweuru Enterprises who will benefit from this but theHospital. Even at the end of the fifth year, the industrial building will still belongto the hospital who will gain have the right of claiming capital allowances. Inthis respect, the incentive is not directly extended to the small enterprise but to

the organisation that offers a business opportunity to a small enterprise. Unfortunately, the industrial buildings will not qualify for an initial capital

allowance because at the time it was first used as an industrial building, theEnterprise was not yet a registered small enterprise.

11.6 PRESUMPTIVE INCOME TAXATION

Presumptive Income Taxation is employed primarily in economies wherehard to- tax taxpayers comprise the majority of the population andadministrative resources are scarce. In these Countries, most taxpayers

lack the financial transparency that allows for effective taxation by thegovernment. The result is that governments estimate or presume theappropriate income on which taxes should be levied. Zambia is certainlyone of these countries whose population is largely characterized by hardto tax potential taxpayers.

In developed Countries, the transition from presumptive to actual basedtaxation paralleled the shift from agricultural to industrial economies.Economic advancements replaced self- employment in farming andsmall-scale trade with concentrated employment in fewer and largeentities such as governments and large corporations. Whereas tax liabilitywas formerly derived from indices such as estimated crop yield ofagricultural lands, it gradually became a factor of actual income receivedfrom salary and wages. Movements towards more modern forms of taxadministration emerged, as businesses became more sophisticated andfinancial transparency increased. As accounting practices became moreprevalent, self-assessment of tax liability and withholding tax at sourceinevitably followed.

In developing countries like Zambia, however, presumptive taxation maystill be the most appropriate method of tax administration for specificgroups of taxpayers. In Zambia, the reality is that most taxpayers do notpossess the administrative resources to maintain accurate books. As aresult, tax evasion has been rampant. To this effect there has beengrowing concern in government and among various stakeholders.

Who is the target?As a first step, presumptive taxes have been introduced to bring bus,mini-bus and taxi operators into the tax bracket. This is intended tobroaden the too often complained about narrow tax base.

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Benefits of Presumptive taxes

Presumptive taxation is considered an optimal method of curbing

widespread non-compliance without excessive government resourcesbecause it addresses the concerns of both taxpayers and the taxauthorities. Presumptive taxation provides taxpayers with a simplified

option for tax compliance without requiring full financial transparency. Presumptive taxation also allows the government to tax its citizens in a

more equitable fashion while rewarding efficient businesses with financialincentives.

Presumptive taxation entices Small and Medium Enterprises (SMEs) into

the tax net by disregarding high tax rates.

It is argued that presumptive taxation can help reduce corruption in tax

administration. However, the success of presumptive taxation in reducingcorruption will depend both on the structure of the scheme and the overalladministrative environment and capacity in the tax administration. Apresumptive taxation scheme can in fact increase the discretionary power

of tax officials and a worst-case scenario increase corrupt practices. Acarefully designed presumptive taxation scheme can help reducecorruption, but can never be a substitute for much needed capacitybuilding and administrative reforms within the tax administration.

Presumptive taxation provides taxpayers with a simplified process. There

is no need to file in the Income tax Returns and keep elaborate records.

Presumptive taxation provides taxpayers with an opportunity to manage

their cash flow efficiently.

Taxpayers need not spend money on professional consultancy services.

Are all operators of busses, minibuses or taxis liable to paypresumptive tax?

This question is almost inevitable. Presumptive tax has been introducedwith the exemption of limited companies. Therefore only individuals andpartnerships are included. The ZRA feels that compliance is not a bigproblem for limited companies as they have the capacity to comply fullywith all the standard requirements under the Income Tax Act. But theinclusion of partnerships on the list of those to benefit from presumptivetax is counteractive. It is common in Zambia to see very largepartnerships, which, in my view, ought to be classified among limitedcompanies in terms of their ability to comply with the variousrequirements of the Income Tax Act.

How much will each category of vehicle be charged?

The Income Tax (Amendment Act 2003) has introduced a new NinthSchedule to the Income Tax Act. This new Ninth Schedule contains therates for presumptive tax as follows:

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NINTH SCHEDULE

-----------------------------------------------------------------------------------------Type of Vehicle Amount of Tax per vehicle(Sitting Capacity) (Per Annum)

64 seater and above K7,200,00050 63 seater K6,000,00036 49 seater K4,800,00022 35 seater K3,600,00018 21 seater K2,400,00012 17 seater K1,200,000

Below 12 seater (including Taxis) K600, 000------------------------------------------------------------------------------------------

Tax Audits

Perhaps the best news of all for tax payers is that since presumptive taxis a levy, there is no longer any need for tax payers to keep records fortax purposes and as such no audits will be conducted on a transportersbusiness. The only requirement will be for the transporters to pay theirpresumptive tax as stated by the law.

11.7 TURNOVER TAXES

The 2004 National Budget announced a significant amendment to Section 64A (2)

of the Income Tax Act by introducing a presumptive tax on businesses whoseannual turnover does not exceed and up to K200 million. The rate of tax is 3%.

Turnover

Turnover is defined as including the Gross:

Earnings

Income

Revenue

Takings

Yield, and

Proceeds.

Who is liable to pay turnover tax?

Any person carrying on any business with an annual turnover of K200 million or

less.

Any person whose business earnings are subject to withholding tax and that

withholding tax is not the final tax. These include rental income, commissions,interest earned by companies and royalties earned by Zambian residents.

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Who is not liable to pay turnover tax?

The following persons are not liable to turnover tax:

Those whose turnover exceeds the threshold of K200 Million.

Any individual or partnership carrying on business of Public service vehicle

for the carriage of persons.

Partnerships carrying on any business irrespective of whether the annual

turnover is K200 million or less.

Partners Income from the partnership is also excluded from turnover tax.

Any person whose business earnings are subject to withholding tax and

that withholding tax is a final tax such as Bank interest for individuals,dividends, Interest on government bonds, interest earned on treasury billsfor charitable Institutions and other exempt persons, etc.

11.8 - MANAGING SMALL AND MEDIUM TAXPAYERS (SMTs)

Small and medium taxpayers (SMTs) are grouped with the traditionally hard-to-tax (HTT) group, which may also include large entities such as commercialfarmers and retail outlets. Since, recent trends in tax administration reforms inZambia have placed large entities in a large taxpayer unit [LTU] and roughlyequate medium entities with VAT-registered taxpayers (i.e. outside LTUs), smallentities are automatically deemed to fall below VAT registration thresholds.However, these classifications overlap since LTU and VAT thresholds may be setat high levels to ease tax reforms. The reference to SMT-formal and SMT-informal entities in this chapter is meant to stress the potential of taxpayers tocomply with, and be subject to, formal accounting and enforcement principles. Itis not necessarily related to the informal sector in which all SMTs thrive. In

general, SMT-formal entities are structured and have the capacity to keeprecords that conform to the accounting standards and Zambian Company or taxlaws. In contrast, SMT-informal entities are not well structured and they mayhave genuine difficulty in keeping adequate records.

SMT BACKGROUND ISSUES

There are several reasons why SMTs fail to comply with tax legislation but, at thesame time, significant benefits can be derived from making it easy and cost-effective for them to meet their obligations. Many developing countries usepresumptive tax regimes to improve SMT compliance but they are often not wellmanaged as is the case in Zambia. While the Presumptive Tax regime needs

significant improvement, Zambia can also use modified or simple accounting,audit and enforcement rules to make SMTs comply better and also improveprocedures in tax offices within the ZRA structures.

Why SMTs fail to comply:

Apart from factors related to their operations, SMTs also fail to comply with taxlaws because the ZRA often lacks effective mechanisms for controlling tax fromthem. The poor infrastructure and large informal sector in Zambia (i.e. about 50

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and 65 percent) result in informal approaches to setting up, changing andwinding up SMT businesses. The sector is characterized by inadequate record-keeping and weak financial or internal controls by a network of close familymembers, business associates, employees or friends. Often business and privatetransactions are not separated and there may be no oversight boards orcommittees. These factors often give rise to malpractices such as suppression

and falsification of accounting transactions. Finally, the absence of clear SMT taxaccounting guidelines tends to increase compliance costs and dissuade themfrom meeting their tax obligations.

Importance of improving SMT compliance:

Effective control of SMTs can promote fairness among small taxpayers (e.g.many self-employed persons earn more income but pay less tax than employeessubject to wage withholding). Second, administrative decisions often depend ona 20/80 percent rule of thumb that implies that SMTs are many but pay only asmall part of total revenue. There is less emphasis on the inverse 80/20 cost rulethat implies that management often uses more resources to generate the small

SMT revenue. The ZRA can reduce costs and stabilize or increase revenue byimproving SMT compliance. Third, the potential revenue from medium entities issignificant but it can be eroded through non-compliance, despite the fact thatmedium entities can keep modified accounting records. Fourth, weak SMTmethods can undermine compliance among all taxpayers. Perceptions ofunfairness and a high tax burden can motivate large entities to evade and avoidtaxes with more adverse consequences for the ZRA. Finally, while SMT reformsmay not increase revenue in the short-term, they can stabilize or even enhance itin the medium-to-long term.

Traditional methods of controlling SMTs

As noted, many developing countries depend on presumptive tax systems toenhance SMT compliance. The two broad categories are often used to comparetaxpayer declarations and support enforcement:

Standard assessments applied to groups of taxpayers,

businesses or economic sectors; and

Minimum, often individual, assessments. SMT-informal standard

assessments may be treated as final (i.e. non-creditable)because these taxpayers do not file tax returns. In principle,however, medium entities expect a credit for the monthly orquarterly installment of minimum taxes paid.

Weak management of presumptive regimes

Presumptive taxes are policy measures but they are also regarded as feasibleadministrative options for controlling SMTs described as a win-win propositionbecause they simplify administration and compliance. In practice, the regimesare not well managed for several reasons. Surveys are not regularly updatedand, therefore, the assessments tend to be arbitrarily applied to vulnerable smallentities. They may also be indiscriminately extended through informal

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negotiations to medium entities that should self-assess. Most presumptiveschemes are also not linked to Flat rate or equalization taxes may be imposed onSMTs in lieu of consumption taxes such as VAT.

IMPROVING SMT ADMINISTRATIVE PROCESSES

There are two basic approaches to improving SMT administration andcompliance.

First, the improvements in presumptive tax processes must be

seen as a top tax administration priority.

Second, the functional activities (i.e. registration, accounting,

collection, enforcement and audit) must be simplified to make itcost-effective for the ZRA and taxpayers, especially mediumSMT-formal entities.

Improvements in presumptive tax procedures

It is important not to over-estimate the capacity of SMT-informal entities to applymodified accounting rules. The presumptive taxes may be the only feasibleoption for controlling many of them and therefore they need to be improved. First,the primary and secondary surveys used to determine standard and minimumassessments should be updated regularly to ensure that they represent a fair andreliable basis for estimating SMT tax liabilities. Second, the ZRA must establishlinks between the presumptive regime and their conventional accounting, datagathering/analysis, and enforcement programs. For example, SMTs must beissued with TPINs and separate manual or automated ledgers used to recordand monitor assessments, payments, penalties and adjustments (credits andrefunds). Third, detailed but standard guidelines must be provided to tax officesto ensure uniform application of tax rules, especially collection enforcementactivities. Finally, procedures need to be established to ensure that a sample of

SMT-formal and informal entities are included in the audit programs of the ZRA.

Registration, identification and taxpayer service programs

Most SMTs, with the probable exception of medium-sized corporate entities, donot register voluntarily. Once registered, they fold-up or change identity with littleor no formality - for example, by simply obtaining a new local governmentlicence. SMTs must be included in taxpayer identification number (TPIN)programs, in close collaboration with the local authorities that have jurisdictionover their operations. SMTs with formal outlets (e.g. retail shops) must displaythe registration certificate and TPIN as required by tax laws. The ZRA must useroutine audit or enforcement programs and special registration drives to check

non-registration and assist taxpayers to comply with their obligations-

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Improvements in accounting procedures

The purpose of accounting is to ensure that taxpayers keep adequate records tosupport the tax returns they file. Different methods can be used to make SMT-formal and SMT-informal entities meet this obligation. The ZRA must alsoimprove their accounting procedures to ensure effective control of the financial

transactions of taxpayers, including assessments, payments, penalties andadjustments. While significant concessions should be made for small taxpayers,the tax regulations need not be unduly relaxed for SMT-formal entities, especiallycorporate entities that are required by law to prepare modifiedaudited financialstatements.

Exclusion from accounting requirements:

The majority of SMT-informal entities that pay only standard assessments neednot be required to keep records or file tax returns. In this regard, the personalincome tax exemption and VAT registration thresholds must be set at high levelsto exclude as many small entities as possible from accounting requirements.

However, those contesting assessments must keep basic documents (e.g.invoices) and cash records to support their appeals. The current VAT Thresholdof K200 Million looks sufficient to address this requirement.

Cash accounting records:

The majority of SMTs need to keep only a cash book to record daily transactionsinvolving purchases, sales and expenses. No ledger records are required but, ifdesired, assets and liabilities can be listed to track debtors, creditors and assets.Taxpayers must keep copies of purchases and sales invoices and be ready toproduce evidence of other payments to support transactions such asapportionments between personal and business expenditure (e.g. splitting fuel

and utilities between business and private use).

Simple accrual accounting:

Medium entities must keep a ledger in addition to the cash book to supportsimple accrual accounting and audited financial statements. The accounting rulesare modified with respect to specific transactions such as depreciation andexpenses. Profit and loss accounts (i.e. income statement) and balance sheetare required but in abridgedform only thus making it unnecessary to show sub-classifications and detailed notes of assets and liabilities .... on grounds of sizeor relative lack of public interest.

Tax office accounting measures:

The accounting process in the ZRA TCU must be improved to enhance SMTcompliance. At a minimum, manual ledgers must be kept for all SMTs evenunder presumptive regimes. Where feasible, automated ledger records should bekept to reduce tedious manual processes and better augment audit andcollection enforcement. The ZRA must publish guidelines for taxpayers andencourage them to use practitioners in order to reduce the direct involvement oftax officials in preparing taxpayer records. The practitioners must be registered

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but only non-qualified professionals need to be formally trained and certified bythe ZRA. Medium entities must be given incentives (e.g. immediate write-offs) toacquire accounting software and equipment.

Audit, examination or inspection procedures

The purpose of tax audits is to examine an entitys accounting records to ensurethat disclosures made in the accounts and tax returns are true, fair, reliable andaccurate. The professional accounting standards state explicitly that small andmedium entities (SMEs) must not be treated as un auditable. Moreover,auditing is the primary means of controlling tax evasion and avoidance andshould be taken seriously for all categories of taxpayers.

Nature of SMT audits:

SMT audits must follow the conventional view that it is costly and practicallyunnecessary to examine all taxpayers and their records in given audit cycles.The so-called 100 percent inspections must be replaced with sampling

techniques that involve profiling, stratification and risk analysis. The audit planmust follow two broad approaches (a) using simple audit programs to routinelyaudit an annual sample of SMT-formal entities; and (b) applying audit techniquesto review the presumptive regime (i.e. management assurance), including therecords of samples of SMT-informal entities.

Implementation of SMT audits:

The goal of implementation is to obtain audit evidence to confirm the validity oftransactions used to process tax returns. The ZRA must be issued with standardaudit guidelines to cover background, compliance or control, and transactions or

substantive checks. The standard guidelines must ensure that specificprocedures are followed and adequate feedback provided to audit managers. Aswith VAT, the duration and scope of SMT-control audits must be limited toapproximately 2-3 days and initially cover only a limited number of returns andrecords. Given the inadequate record - keeping culture of SMTs, Tax Inspectorsmust be trained to use indirect audit and single-entry bookkeeping techniquesto improve examinations and, if necessary, rewrite the accounts. Complex casesare encountered during desk or control audits should be referred tocomprehensive or integrated audit teams. All audit assignments must be properlysupervised and adequately covered in the annual budget of the ZRA.

Collection and enforcement procedures

The goal of collection and general enforcement is to control tax arrears andoffences. The SMT enforcement strategy must follow a mild-to-aggressiveapplication of powers and sanctions. Priority must be given to debt managementprocedures because many conventional debt recovery procedures tend to becostly and may involve lengthy procedures and litigation of SMTs that contributeinsignificant amounts of revenue. Nonetheless, even SMTs must bear theconsequences of persistent non-compliance through stringent measures.

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Debt management and recovery measures:

SMT arrears rapidly accumulate and become irrecoverable. The SMT debtproblem is linked to poor liquidity management and the non-separation of privateand business activities. The ZRA must implement recovery plans at an early

stage by updating ledger records, sending reminder notices, and enforcinginstallment payment rules often supported by tax clearance procedures. Thiswill prevent the use of drastic measures with low fiscal yields and with little or nochance of success because they drive SMTs into liquidation or underground. Theregular update of ledgers will also ensure effective imposition of interest andpenalties as well as collection enforcement.

Interventionist measures:

The ZRA now requires taxpayers to obtain annual tax clearance certificates(TCC) to show that they have settled or made satisfactory arrangements to settletheir liabilities. Without the certificates, they cannot engage in specific

transactions such as tendering for government contracts or obtaining anoperating licence from Local Government Authorities. While these measures maybe effective, they are often mismanaged and they easily lead to abuse of powerand corruption. Another measure which is quite effective against SMTs is thetemporary closure of businesses that do not comply. It prompts compliancebecause of the potential loss of family incomes, contracts and customers.

Seizures, sales, levies (Destraint or garnishment) and prosecution:

The ZRA must apply stringent measures against persistent SMT non-compliance. The first option is to recover the arrears from third parties, notablycommercial banks and debtors. This may be effective against medium-size SMTs

but not the majority small SMTs in large informal economies that deal in cashand make little or no use of banks. The ZRA can also seize and sell personal andbusiness assets to recover tax arrears. Ultimately, SMTs engaged in seriousdelinquent behaviour must be prosecuted to serve as a deterrent against generalnon-compliance.

Simplification of judicial and appeals processes:

It is less costly to resolve SMT cases through special schemes like specialcourts, tribunals, administrative boards, and advocates. They are suitable fordealing quickly with large numbers of small cases that often slow downoperations in regular courts. The rules must be simplified and made flexible to

make it easy and cost-effective for small entities to seek redress includingrepresentation in their personal capacity or by practitioners who may not belawyers.

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TUTORIAL QUESTIONSTUTORIAL QUESTIONS

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QUESTION IWhat is an Enterprise?(Para. 11.1)

QUESTION IIWho qualifies for Registration under the Small Enterprise Development Act of 1996?(Para. 11.1)

QUESTION IIIList some of the Tax Incentives enjoyed by Micro and Small Enterprises under theSmall Enterprise Development Act of 1996?(Para.11.2)

QUESTION IVWhat is the meaning of Presumptive Taxation and to which category of Taxpayers isit usually applied?(Para.11.6)

QUESTION VList some of the Benefits of having a Presumptive taxation System in Zambia.(Para. 11.6)

QUESTION VIWhat is Turnover Tax and when was it introduced in Zambia?(Para. 11.7)

QUESTION VIIWho is liable to pay Turnover Tax?(Para.11.7)

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