27/01/2025
All Small businesses in Zambia pay tax at the rate of 5 % and this tax is called Turnover Tax. If your sales in a year are below K5 million, your business is under this category. Previously, the criteria was K800,000 of your sales in a year.
In Zambia, Turnover Tax (TOT) is a simplified tax regime for businesses with an annual turnover not exceeding K800,000, which now has been increased to K5 million.
Here's how it is charged:
Rate of Turnover Tax
• The rate is 4%, which now has been increased to 5% of the business's monthly gross turnover (total revenue before any expenses are deducted).
• This tax applies regardless of whether the business is making a profit or not.
Who Pays Turnover Tax?
• Businesses with a turnover of K800,000, which now has been increased to K5 million or less per year.
• Examples include small-scale traders, transporters, restaurants, and other similar enterprises.
Who Is Exempt from Turnover Tax?
Certain businesses and income streams are exempt, such as:
1. Businesses with annual turnovers exceeding K800,000, now changed to K5 million (these are subject to other tax regimes like VAT or corporate income tax).
2. Income from farming (this has a separate tax regime).
3. Passive income such as dividends, interest, and rental income.
Filing and Payment
• TOT is paid monthly based on the gross turnover for that month.
• Businesses must file their TOT returns and remit payments by the 14th day of the following month.
Advantages of TOT
• Simplified compliance for small businesses.
• No need to prepare detailed profit-and-loss accounts.
Disadvantages of TOT
While Turnover Tax (TOT) offers a simplified tax system for small businesses, it has several disadvantages that may pose challenges to businesses in Zambia:
1. No Consideration for Profitability
TOT is charged on gross turnover, not profits. This means businesses that are operating at a loss or with slim profit margins still have to pay the tax, which can strain their finances.
2. Burden on Low-Margin Businesses
Businesses with low-profit margins, such as those in retail or trade, may find the tax burdensome since it does not account for operational costs or expenses.
3. Discourages Business Growth
Businesses close to the turnover threshold of K800,000 may avoid expanding or accurately reporting their income to stay within the TOT bracket and avoid being subjected to the more complex corporate tax system.
4. Potential for Overpayment
Businesses with high turnover but low profits, such as those selling high-volume, low-cost items, may end up paying more in TOT compared to other tax regimes based on net profit.
5. Limited Applicability of Tax Credits
Under TOT, businesses are often ineligible for tax credits or deductions for investments, donations, or other qualifying expenses, reducing incentives for business growth and innovation.
6. Administrative Challenges
While simpler than corporate tax systems, TOT still requires businesses to maintain accurate records and file monthly returns. Small businesses with limited administrative capacity may struggle to comply.
7. Unfair to Seasonal Businesses
Seasonal businesses, such as those in agriculture or tourism, may face unfair tax burdens as TOT is charged monthly, even during low-income months.
8. Risk of Double Taxation
Certain income streams, such as passive income (e.g., rental or interest income), are taxed separately and may lead to double taxation when combined with TOT.
How to Calculate TOT
If your business has a monthly turnover of K50,000, your tax liability would be:
Turnover Tax=50,000×4%=K2,000\text{Turnover Tax} = 50,000 \times 4\% = K2,000Turnover Tax=50,000×4%=K2,000.
Overall, while TOT is designed to simplify taxation for small businesses, it can disproportionately affect those with thin margins, seasonal income, or high operating costs. Businesses need to carefully assess whether the benefits of simplicity outweigh these challenges and, if necessary, explore other tax regimes.
