Introduction

Canons of taxation simply means the characteristics or qualities which a good tax system
should possess. In fact, canons of taxation are related to the administrative part of a tax.
Adam Smith first devised the principles or canons of taxation in 1776. Even in the 21st
century, Smithian canons of taxation are applied by the modern governments while imposing
and collecting taxes. This paper will discuss the purpose and canons/principles of taxation in
general. It will present the sources of government revenue in Zambia and suggest any reforms
that Zambia can undertake to make its tax policy and administration effective and efficient.

Canon of Equality:

Canon of equality states that the burden of taxation must be distributed equally or equitably
among the taxpayers. However, this sort of equality robs of justice because not all taxpayers
have the same ability to pay taxes. Rich people are capable of paying more taxes than poor
people. Thus, justice demands that a person having greater ability to pay must pay large
taxes.

If everyone is asked to pay taxes according to his ability, then sacrifices of all taxpayers
become equal. This is the essence of canon of equality (of sacrifice). To establish equality in
sacrifice, taxes are to be imposed in accordance with the principle of ability to pay. In view of
this, canon of equality and canon of ability are the two sides of the same coin.

Canon of Certainty:

The tax which an individual has to pay should be certain and not arbitrary. According to A.
Smith, the time of payment, the manner of payment, the quantity to be paid, i.e., tax liability,
ought all to be clear and plain to the contributor and to everyone. Thus, canon of certainty
embraces a lot of things. It must be certain to the taxpayer as well as to the tax-levying
authority.

Not only taxpayers should know when, where and how much taxes are to be paid. In other
words, the certainty of liability must be known beforehand. Similarly, there must also be
certainty of revenue that the government intends to collect over the given time period. Any
amount of uncertainty in these respects may invite a lot of trouble.

Canon of Economy:
This canon implies that the cost of collecting a tax should be as minimum as possible. Any
tax that involves high administrative cost and unusual delay in assessment and high collection
of taxes should be avoided altogether.

According to A. Smith: “Every tax ought to be contrived as both to take out and to keep
out of the pockets of the people as little as possible, over and above what it brings into
the public treasury of the State.”

iv. Canon of Convenience:

Taxes should be levied and collected in such a manner that it provides the greatest
convenience not only to the taxpayer but also to the government.

Thus, it should be painless and trouble-free as far as practicable. “Every tax”, stresses A.

Smith: “ought to be levied at time or the manner in which it is most likely to be
convenient for the contributor to pay it.” That is why, after the harvest, agricultural
income tax is collected. Salaried people are taxed at source at the time of receiving salaries.

These canons of taxation are observed, of course, not always faithfully, by modern
governments. Hence these are basic and classic canons of taxation.

The other canons of taxation:

i. Canon of Productivity:

According to a well-known classical economist in the field of public finance, Charles F.

Bastable, taxes must be productive or cost-effective. This implies that the revenue yield from
any tax must be a sizable one. Further, this canon states that only those taxes should be
imposed that do not hamper productive effort of the community. A tax is said to be a
productive one only when it acts as an incentive to production.

ii. Canon of Elasticity:

Modern economists attach great importance to the canon of elasticity. This canon implies that
a tax should be flexible or elastic in yield.

It should be levied in such a way that the rate of taxes can be changed according to exigencies
of the situation. Whenever the government needs money, it must be able to extract as much
income as possible without generating any harmful consequences through raising tax rates.
Income tax satisfies this canon.
iii. Canon of Simplicity:

Every tax must be simple and intelligible to the people so that the taxpayer is able to calculate
it without taking the help of tax consultants. A complex as well as a complicated tax is bound
to yield undesirable side-effects. It may encourage taxpayers to evade taxes if the tax system
is found to be complicated.

A complicated tax system is expensive in the sense that even the most honest educated
taxpayers will have to seek advice of the tax consultants. Ultimately, such a tax system has
the potentiality of breeding corruption in the society.

iv. Canon of Diversity:

Taxation must be dynamic. This means that a country’s tax structure ought to be dynamic or
diverse in nature rather than having a single or two taxes. Diversification in a tax structure
will demand involvement of the majority of the sectors of the population.

If a single tax system is introduced, only a particular sector will be asked to pay to the
national exchequer leaving a large number of population untouched. Obviously, incidence of
such a tax system will be greatest on certain taxpayers. A dynamic or a diversified tax
structure will result in the allocation of burden of taxes among the vast population resulting in
a low degree of incidence of a tax in the aggregate.

The above canons of taxation are considered to be essential requirements of a good tax
policy. Unfortunately, such an ideal tax system is rarely observed in the real world. But a tax
authority must go on maintaining relentlessly the above canons of taxation so that a near-
ideal tax structure can be built-up.

Characteristics of Canons of Taxation:

A good (may be a near-ideal) tax system has to fulfil the following characteristics:

i. The distribution of tax burden should be equitable such that every person is made to pay
his ‘fair share’.

This is known as the ‘fairness’ criterion which focuses on two principles:

Horizontal equity— equals should pay equal taxes; and vertical equity—un-equals should
pay unequal taxes. That is to say, rich people should pay more taxes.
ii. But equity must not hamper productive efficiency such that burdens should be provided to
correct inefficiencies. This ‘efficiency’ criterion says that it should raise revenue with the
least costs to the taxpayers so that tax system can allocate resources without distortion.

iii. The two other criteria are: ‘flexibility’ and ‘transparency’.

A good tax system demands changes in tax rates whenever circumstances change the system.
Further, a good tax must be transparent in the sense that taxpayers should know what they are
paying for the services they are getting.

iv. A good tax system is expected to facilitate the use of fiscal policy to achieve the goals of

(a) stability

(b) economic growth.

For the attainment of these goals, there must be built-in-flexibility in the tax structure.

From the above discussion, it follows that taxation serves the following purposes:

(i) To raise revenue for the government

(ii) To redistribute income and wealth from the rich to the poor people

(iii) To protect domestic industries from foreign competition

(iv) To promote social welfare.

SOURCES OF GOVERNMENT REVENUE IN ZAMBIA

Zambia currently relies on a mix of revenue sources mentioned above. However, some of
these sources are less predictable and unreliable. This section discusses some common
sources of development funding and the associated opportunities and challenges.

Overseas Development Assistance

Development aid or development cooperation (also called development assistance, technical

assistance, international aid, overseas aid, Official Development Assistance (ODA) or foreign
aid) is aid given by governments and other agencies to support the economic, environmental,
social and political development of developing countries. It is distinguished from
humanitarian aid by focusing on alleviating poverty in the long term, rather than a short-term
response. The term development cooperation is used to express the idea that a partnership
should exist between donor and recipient, rather than the traditional situation in which the
relationship was dominated by the wealth and specialised knowledge of one side. Most
development aid comes from the Western industrialised countries but some poorer countries
also contribute aid. Aid may be bilateral: given from one country directly to another; or it
may be multilateral: given by the donor country to an international organisation such as the
World Bank or the United Nations Agencies.

which then distributes it among the developing countries. In the world, the proportion is
currently about 70 percent bilateral 30 percent multilateral8 About 80-85 percent of
developmental aid comes from government sources as Official Development Assistance
(ODA). The remaining 15-20 percent comes from private organisations such as “. Non-
governmental organisations" (NGOs), foundations and other development charities. In
addition, remittances received from migrants working or living in diaspora form a significant
amount of international transfer. Foreign Direct Investment (FDI) is a common source of
funding for development. FDI has the advantage of offering technological transfer and filling
funding gaps. Figure 2.1 shows the trend in the ratio of FDI to Gross Domestic Product
(GDP). The trend has been upward meaning that Zambia has been doing comparatively well
in attracting FDI inflows especially in the last decade. In comparison to the rest of Africa,
since the 1970s, Zambia faired above the average for Africa.

FDI as a source of funding is, however, volatile, as it is dependent on investment parameters

that include political stability and performance of the global economy. This is evident from a
noticeable dip seen in 1991 just before Zambia changed to a multi-partisan system and
another dip in 2008, during the global economic crisis. With such volatility, FDI may not be
relied upon to provide predictable flow of funding. Like Mutesa, F (2008)10 noted during the
global economic crisis of 2008, “the political climate in the capitals of donor nations may
dictate that priority be given to dealing with domestic problems before extending a helping
hand to people in remote places”.

Public–private partnership (PPP)

Public–private partnership (PPP) describes a government service or private business venture

that is funded and operated through a partnership of government and one or more private
sector companies. These schemes are sometimes referred to as Public–Private Partnership
(PPP). PPP involves a contract between a public-sector authority and a private party, in which
the private party provides a public service or project and assumes substantial financial,
technical and operational risk in the project. Public–Private Partnership.
In some types of PPP, the cost of using the service is borne exclusively by the users of the
service and not by the taxpayer. In other types (notably the private finance initiative), capital
investment is made by the private sector on the strength of a contract with government to
provide agreed services and the cost of providing the service is borne wholly or in part by the
government.

Government contributions to a PPP may also be in kind (notably the transfer of existing
assets). In projects that are aimed at creating public goods like in the infrastructure sector, the
government may provide a capital subsidy in the form of a one-time grant, so as to make it
more attractive to the private investors. In some other cases, the government may support the
project by providing revenue subsidies, including tax breaks or by providing guaranteed
annual revenues for a fixed period. The Government of the Republic of Zambia has
recognised that the national treasury has limited resources for economic programmes which
include infrastructure development and delivery of social services. For this reason, the
Government has facilitated the provision of infrastructure development through PPPs. In this
regard, most construction, rehabilitation and maintenance of infrastructure is now being
contracted out in order to further increase private sector involvement. Overall, PPPs have
been identified as a viable means of infrastructure development that can effectively address
the constraints of finance and management faced by the public sector. The PPP concept
allows the public sector to source private sector providers for the delivery of public
infrastructure and related services which the private sector can provide more effectively and
efficiently.

Debt Inflow

Many countries have to borrow money in one form or another in order to meet their planned
investments. Countries like Brazil, Uruguay, and Philippines issue bonds to borrow from
foreign investors. Ghana has also issued bonds before in order to borrow externally. Debt
inflow Trend in ration of external debt to GNI for Zambia and Africa or much of its history,
Zambia has had external debt levels far higher than the average in Africa.

The debt levels, however, started to fall after debt cancellation in 2005 and 2006 following
the county’s attainment of the Highly Indebted Poor Countries (HIPC) completion point and
after benefiting from the Multilateral Debt Relief Initiative (MDRI). The MDRI provided for
100 percent relief on eligible debt from three multilateral institutions (IMF, the International
Development Association (IDA) of the World Bank, and the African Development Fund
(AfDF)) to a group of lowincome countries that reached the completion point.

Zambia's external debt position currently stands at about US$3.3billion, Government external
debt is around half. Debt as a source of funding comes with a cost since the money is pegged
to an interest rate. If not properly managed, there is a risk of getting into a debt trap if the
country’s capacity to pay back falls. The period before 2005 emphasises the point that there is
a possibility of ‘runaway debt’ levels. According to CSPR studies (2008), debt can be more
useful if Government takes steps to provide a legislative environment to ensure transparency
and accountability in its use. Unless this attained, there is little scope to rely on borrowing to
fund economic development.

Remittances

Remittances or contributions sent by citizens living abroad can be potential sources of

revenue for economic development and citizens’ welfare. In some countries, like Mexico, the
amounts are very substantial and make up an important part of financing economic activity.
For example, in 2004, remittances became the tenth largest source of foreign income.
According to Christopher Lydon, migrant workers in the world remitted more than US$232
billion to their families in 2006. Noticeably, US$232 billion is twice what the world paid out
in international aid in 2005; and in Latin America it was more than aid and foreign direct
investment combined.

IN 2009 In Philippines, despite the global economic downturn, foreign remittances held up
well, providing the economy a desperately needed capital boost. It was reported that overseas
Filipino workers' remittances reached nearly US$7 billion in the first quarter of 2009,
representing a 2.8 percent increase from the US$6.79 billion recorded over the same period in
2008. It was predicted that remittances will likely reach a record $17 billion in 2009, with the
bulk of inflows coming mainly from the United States, Canada, Saudi Arabia, United
Kingdom, Japan, Singapore, United Arab Emirates, Italy and Germany. An estimated 10
million Filipinos sent home US$16.4 billion in 2008, making the Philippines the world's
fourth largest recipient of remittances, trailing only India (US$45 billion), China (US$34
billion) and Mexico (US$26 billion), according to the World Bank

Local Government Taxation

This study argues that tax revenue mobilisation must not only be a preserve of the national
tax authority because council levies and charges can supplement revenue collections and
developmental expenditure. Local governments have a role to play in economic development
through provision of local social and economic services. However, in the recent past, local
governments have faced a steady fall in the local revenue sources available to them. This
situation has been worsened by ad-hoc, discretionary funding from central government that is
erratic and unpredictable. Over time, the revenue base of local authorities has eroded due to
Government policies like the withdrawal of grants from some councils, and water services
and housing, which were a major source of revenue but were privatised The councils still
have sources of revenue like markets and bus stations, but they have very little power and
influence to fully utilise this revenue base.

Reforms that Zambia can undertake to make its tax policy and administration effective
and efficient.

Government must leverage other forms of development funding. Government must explore
and create conducive policies on alternative sources of funding so that they supplement the
domestic tax revenue base sustainably. This includes policies on FDIs, debt contraction and
use, and inflow of remittances. A stable and predictable investment policy climate (fiscal and
monetary) can guarantee reasonable and steady flow of FDIs. The role of Government is to
ensure that the kind of FDIs that flow into the country are productive and yield positive
results in terms of improving the welfare of citizens and reducing poverty, for example,
through employment creation and value addition. Debt management must be prudent so that
debt traps are avoided and that funds obtained through debt are used on productive
expenditures. This requires Government to take steps towards providing a legislative
environment to ensure transparency and accountability in the sourcing and use of debt.
Remittances as a source of revenue for government must be explored further by developing
appropriate data capture, monitoring and financial systems that can quantify its contribution
to social and economic development.

Explore revenue potentials of the local councils. The study recommends that the revenue
potentials of councils be exploited further by adopting appropriate policy and institutional
changes that will enable councils to increase their revenue sources and effectively and
efficiently collect local revenues. This includes re-empowering councils to enable them have
the power and authority to collect from markets and bus stations, which currently have
political stakeholders playing a major part. In communities were crop and livestock levies are
affordable, such as predominately commercial farmer communities, the councils may be
allowed to impose the crop levies. However, the level of the levy must be reached in
consultation with the farmers.

Enhance wealth taxation to improve the tax base. The study recommends that some taxes that
reflect wealth be introduced or enhanced. This can be done by taxing capital gains.

Continue strong support of the tax authority. Government must commission a study to assess
the optimal support to ZRA.

Review funding of ZRA. There is need to support the operations of ZRA by providing it with
adequate funding which must be predictable and enable it to have adequate staff and
operational infrastructure.

Conclusion

The Zambian tax system has performed well in terms of meeting set targets and increasing
domestic revenues in the national budget. However, Zambia has not fully exploited other
sources of revenue that can supplement tax revenues. Notwithstanding its successes, the tax
system has many tax types, rates and incentives and therefore relatively complex and faces
numerous challenges. Some incentives used in Zambia represent serious problems for
revenue leakage and administration. Despite the growing importance of the informal sector in
the economy, its contribution to tax revenue has been poor. Nevertheless, the informal sector
presents an opportunity for growing Zambia’s tax base. Zambia has in place a tax regime for
the informal sector although its performance has not been impressive. Administrating the
informal sector has several challenges such as a cash-based economy that reduces ability to
audit transactions, improper record keeping and political interference.

References

Arblor-Quarco, (2005). "The re-launch of the Stamp Tax", IRS, 28/09/2005

Ayee, Joseph, (2007). “Building Tax Compliance through reprocity with government” paper
presented at FIAS regional Conference on ‘Enterprise Formalization in Africa’

Ayee, Joseph, (2007). “The Organizational Culture of Tax Officials in Ghana”, African
Journal of Public Administration and Managemen
Chau Gerald and Patrick Leung, (2009), “A critical review of Fischer tax compliance model:
A research synthesis”, Journal of accounting and Taxation Vol. 1(2)

Chen. N, 2005. “Disaggregate Theories and Firm Compliance Behavior”, IGSD/INECE

discussion paper.

Cling, Nguyn, Hnu Chí, Mireille, Roubaud and Torelli, (2010), "Comparing the informal
sector in Vietnam and Africa"