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Taxation and Infrastructure Financing

Presentation by

Danies K. Chisenda

Lusaka, Zambia

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Presentation Outline

IntroductionFinancing for DevelopmentTaxation versus Infrastructure

DevelopmentSome ChallengesConclusion

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Introduction

The Zambian Government has approved and launched the Vision 2030 and the Fifth National Development Plan (FNDP) 2006 - 2010 (Five year Plan).

Emphasis in the FNDP is mainly on infrastructure development due to its pivotal role in supporting private sector investment (economic growth).

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Introduction (Cont’d)

In order to undertake this development, there is need for resource mobilisation both domestically and internationally

Many big infrastructure projects have largely been financed by borrowing from multilateral or international institutions.

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Introduction (Cont’d)

In Financing the Budget (Resource Mobilisation) Tax revenue

Direct taxes - income tax, corporate tax, withholding taxes, etc. Indirect taxes - VAT, import taxes, excise duties, etc.

Non-Tax RevenueFees, fines, levies and others

Grants from cooperating partners Budget Support and project Grants

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Introduction (Cont’d)

Domestic financing

- Bank and non bank borrowing Foreign financing

- Project and programme loans

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Introduction (Cont’d)

Spending of Resources (Expenditure) Recurrent Expenditure

- Personal emoluments and operations of Government.

Capital expenditure

- Fixed Assets - Infrastructure (roads, railways, dams, building, power stations, water supply plants, etc.

- Movable Assets - motor vehicles, equipment, etc.

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Financing for Development

This mainly involves fixed assets (Infrastructure). In Zambia, financing for infrastructure is by both domestic and foreign resources

Domestic resources not adequate to finance major infrastructural projects

Hence reliance on foreign borrowing and grants

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Financing for Development (Cont’d)

Some new ideas or innovations- Earmarking of some Domestic revenues for infrastructure i.e. portion of excise duty (fuel levy) for road maintenance, and excise duty on electricity also earmarked for rural electrification.

But resources not adequate. Other alternatives

- Public Private Partnership (PPP) BOT (Build Operate Transfer)

- Private sector investment- user charges

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Taxation versus Infrastructure Development

Some questions/Issues:

Should infrastructure projects be exempt from taxation?

In practice, infrastructure projects financed by co-operating partners are tax exempt.

Reasons advanced-

- infrastructure projects will be too costly

- mainly Government projects, not taxed.

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Taxation versus Infrastructure Development (cont’d)

Should privately undertaken infrastructure projects also be exempt from tax?

Tax Exemptions are bad because

- distortionary

- unfair

- reduce revenues/ reduce tax base

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Some Challenges

Tax policy and administration must be tailored in such way that they yield adequate resources to Government but must be fair and effective in order to promote economic growth.

Some problems in tax administration: - Transfer pricing, tax sparing, smuggling,

non-tax compliance have negative impact on total revenue,

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Some Challenges (Cont’d)

Tax exemptions have an effect of shrinking the tax base i.e. less revenue to Government.

Taxing infrastructure projects financed by multilateral institutions or cooperating partners may face problems as they may not provide extra resources and they will ask recipient country to find extra money.

User charges as a means of financing may be ineffective if services are rendered to the poor.

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Some Challenges (Cont’d)

Financing of infrastructure for developing countries involves colossal amounts of money, hence the multilateral institutions and cooperating partners will continue to play an important role.

The private sector involvement in infrastructure financing is very much needed especially in sectors that are commercially viable i.e. energy sector.

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Conclusion

Financing access to basic utilities is a costly venture requiring huge amount of resources and the challenge for tax policy and administration is to mobilise adequate financial resources.

The linkage between taxation and infrastructure financing is not always direct for developing countries because of the pooling of different resources in one basket.

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I thank you for your attention.

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