This article seeks to simplify the concept of the digital economy and the role it can play to enhance domestic resource mobilization (DRM) in Zambia. Economic digitalization has been ongoing in Zambia for many years. In the last five years, economic digitalization has grown very fast with components such as online shopping and digital advertising rapidly expanding. The rise in the digitalization of economies and societies is changing the ways in which people and businesses interact. For instance, with online shopping, almost any product can be purchased from a global market and delivered to your doorstep. Even when one decides to go shopping physically, an online taxi-hailing company will provide the ride with just a click of a button. Adverts have shifted from TV stations and newspapers to social media apps.

The term Digital Economy refers to the joining of computing and communication technologies through the internet and the resulting flow of information and technology that stimulates electronic commerce (EC) and spurs vast organizational changes. Information and Communication Technology (ICT) is an important part of the digital economy. Besides making communication easy and fast, ICTs are equally vital for enhancing trade through the provision of e-commerce platforms as well as deepening financial inclusion. The most common businesses that fall in this category include; trade-in electronic transmissions including online delivery of software, music, eBooks, films, and video games; online platforms such as Google, Tiktok, Facebook, Yango, Amazon, eBay, and Airbnb and Mobile technology applications including money transfer, borrowing, and serving services.

In Zambia, digital technologies continue to be a key aspect of the country’s development agenda as evidenced by the constant inclusion of ICTs in national and sectoral development plans. The Eighth National Development Plan (running from 2022-2026), emphasizes the need to advance the digitization agenda by rolling out digital communications infrastructure, including the launch of a satellite. In the 2023 National Budget, the Government has also made several plans to accelerate the development of the digital economy. It intends to implement the National Digital Transformation Strategy and review the Information and Communication Technology Act No.15 of 2009 to create an enabling environment for the uptake of digital services. In addition, the government has also zero-rated the supply of selected ICTs and telecommunications equipment. It has also adjusted the tax regime around the gig economy by extending the turnover tax regime to service providers in the gig economy with the aim of improving tax compliance for small businesses in the digital economy.

While digital technologies offer a vast potential to enhance the welfare and living standards of societies as they raise product and service quality as well as productivity growth, there is often a cost in the form of uncollected tax revenues which could have been collected if the businesses had been done the old traditional way. Take for instance, an increase in the number of online taxi-hailing services in Zambia, there has been a significant reduction in the number of cars being registered for public transport purposes, translating into a significant loss of revenue. The increase in online adverts has seen a reduction in advertisements on TV and radio stations. TV stations and radio ordinarily pay their VAT and Corporate Income Taxes to the Zambia Revenue Authority (ZRA), however, most online platforms do not remit these taxes.

Despite some of the outlined pitfalls, the digital economy is an opportunity in itself for Zambia to improve tax revenue collection and enhance domestic resource mobilization. There are several ways in which the digital economy provides this opportunity. To begin with, the digital economy offers an opportunity to collect taxes from suppliers of digital content. Most transactions involving digital content tend to escape taxes. ZRA can improve tax collection by capturing such transactions.

Furthermore, the digital economy makes it feasible for the imposition of digital service taxes. This tax is imperative in accounting for digital services that traditional tax rules fail to account for. Currently, Zambia has no digital service tax putting it behind countries such as Ghana and India. Moreover, if ZRA can easily collect a digital service tax for services provided to the domestic market by foreigners, this may spur confidence in the revenue authority and improve tax compliance. In addition, tax collection can be enhanced through the use of digital technologies as the economy digitalizes. For example, the usage of online systems can improve tax collection making the process faster and more efficient. Digital technologies allow pre-filling tax declarations using third-party information, thereby easing the tax compliance burden because taxpayers can easily check and confirm the pre-filled information.

Digital payment systems have also enhanced the functions of traditional business models. With digital payments such as electronic fund transfers (EFT) and mobile money playing a pivotal role in business growth, stimulating the growth of these digital payments can significantly contribute to economic growth and thereby improve business contribution to tax revenues. Most importantly, digital payments are easy to track and monitor. Thus, payments for transactions of digital nature that usually escape the net of tax authorities can easily be spotted. Similarly, digital communication plays a critical role in business development. Easy communication means fast business decision-making as well as access to untapped markets. New online markets accessible through the internet will not only benefit large businesses but also small entrepreneurs who are just starting up.

While the digital economy provides opportunities to enhance tax revenue collection, it comes with its own risks and challenges. The major challenge of taxing the digital economy lies in the identification of digital transactions. Unlike physical transactions involving the exchange of physical goods that may be paid either using digital payments or traditional payment forms, digital transactions involve digital content which is not only hard to identify but also difficult to quantify. Thus, as the country progresses with digitization, benefits on tax revenue will depend on measures the revenue authority takes to improve the monitoring of digital transactions as well as people’s accessibility to digital technology. Government can increase accessibility by ensuring that taxes such as customs duties and excise duties that have an influence on the price of these technologies are not very high to distort consumer choices.

Issued by:

Ellen Makinishi (Ms)
Private Sector Enhancement Expert
Tel: +260211264409
Phone: +260968015985
Email: pse@zambiataxplatform.com

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