An Evaluation of the Challenges of Turnover Tax Reform in Zambia: A Case of Micro and Small Enterprises in Trading Industry in Lusaka, Zambia

Abstract

This study evaluated the Turnover tax reform in Zambia and the challenges it imposes on Micro and small enterprises (MSEs) in trading industry specifically those operating in retail and wholesale sector in Lusaka, Zambia. In 2025, Zambia implemented notable tax reform changes to the Turnover tax system by raising Turnover tax threshold from K800,000 to K5 million with the aim of simplifying tax compliance for Micro and small enterprises (MSEs). The increase in Turnover tax threshold is notably a policy shift directly affecting thousands of Micro and small businesses across multiple industries in Zambia. Guided by three objectives, the study evaluated the challenges of Turnover tax reform, specifically the financial effects, Secondly, the study investigated the level of awareness and utilization of tax incentives among Micro and small enterprises, and thirdly, the study evaluated the extent to which  Zambia’s Turnover tax system align with principles of a good tax system. Theoretically, the study is anchored on two theories, “ The Ability-to-Pay Theory by Adam Smith and  Laffer Curve Theory by Laffer”, these theories provided theoretical foundation for evaluating tax fairness, equity, economic efficiency and simplicity.  A mixed-methods research design was adopted, integrating quantitative and qualitative approaches to strengthen the credibility and robustness of the findings. Quantitative data was collected from 175 Micro and small enterprises operating in major commercial trading hubs in Lusaka’s Central Business District, Kamwala, Carousel, Woodlands and Industrial centers. Furthermore, quantitative data was collected from Zambia Revenue Authority through a structured questionnaire administered to seven tax officials. Qualitative data was collected through semi-structured interviews with 15 Micro and small enterprises owners. Data analysis employed regression analysis, correlation analysis, descriptive statistics, and thematic analysis to integrate quantitative and qualitative findings. The study established three major challenges of  Turnover tax reform among Micro and small enterprises. A more concerning finding revealed (65%) of respondents reported paying turnover tax in loss making periods, while  (22%) of businesses relied on short-term borrowing to pay tax liabilities. Secondly, across MSEs profit decline of 5% was observed,  this decline in profitability represents a material economic consequence for Micro and Small Enterprises (MSEs), especially those operating on narrow profit margins and limited financial reserves.  The third challenge experienced is increased tax liabilities and penalties, tax burden emerged a prevalent challenge faced by MSEs, findings indicated (83%) of respondents “perceived the tax burden” as heavy. Regression analysis confirmed statistically significant association between turnover tax threshold adjustment, increase in tax rate and profitability decline, the models confirmed turnover tax threshold, turnover tax rate, and tax compliance collectively have a statistically significant relationship with decline in profitability. The first model is significant (F = 7.016, p < 0.001). The regression coefficients indicated that increase in Turnover tax threshold emerged as the strongest standardized predictor on profitability decline (β = 0.161), followed by tax compliance (β = 0.139) and turnover tax rate (β = 0.131. The second model showed positive relationship between turnover tax compliance and decline in profit margin (p = 0.007 < 0.05). Findings on objective two, revealed critical low awareness and utilization of tax incentives among MSEs, with majority of 80% respondents being unaware of any tax incentives or reliefs, about 20% of respondents indicated awareness of tax incentives.  Findings on objective three, established that Zambia Turnover tax system partially aligns with principles of a good tax system. The principles of simplicity and convenience emerged moderately strong, with a mean score of 3.35 while on administrative efficiency, 75% of respondents reported that Zambia Revenue Authority officials provide guidance on tax related matters and agreed that filling deadlines and payment procedure are certain. The system performed weak on the principle of equity, with 63% of respondents disagreeing that the tax burden is fairly distributed according to their ability to pay. The study concludes that changes in Turnover tax reform have negatively affected financial performance of Micro and small enterprises. It further concludes that while tax incentives are available, their utilizations as tax relief measure are constrained by limited awareness among micro businesses. Lastly, the study concludes that Zambia’s Turnover tax system partially aligns with the principles of a good tax system in comparison to principles of equity, fairness, certainty and economy.  The first recommendation is for the Ministry of Finance to increase annual or yearly Turnover tax exemption from K30,000 to K100,000  to support Micro and Small enterprises growth and reduce tax burden. The second recommendation is for the Ministry of Finance to consider introducing Tax holidays to qualifying Micro and Small enterprises in startup phases to foster growth.  The third recommendation is for the design of Turnover tax system that allows Micro and Small enterprises to carry losses forward incurred in the course of business, this will eliminate the practice of micro enterprises paying tax in loss making position.  The fourth recommendation is for Zambia Revenue Authority to incorporate an electronic tax incentives module into tax registration process to ensure businesses receive guidance on tax incentives and exemptions available on Turnover tax system.