INTRODUCTION
The informal sector plays a critical role in the
economy of Zambia. This sector is said to employ at least over 70% of the
workforce and contributes significantly to the GDP of the country. Despite
these revelations, the sector remains largely outside the formal tax net. This
sector encompasses a wide range of activities, from street vending and
small-scale trading to artisanal services. All these activities are often
characterized by cash-based transactions, the lack of registration and very
little to no regulation. Entrenching this sector into the tax bracket has been
a longstanding priority for the Zambian government as it is a pressing concern
as regards revenue generation. This inclusion will broaden the revenue base,
reduce dependency on formal sector taxes and foster inclusivity of all economic
sectors. However, efforts to integrate informal operators into the tax system
face substantial challenges. This article explores the current taxation
framework, key challenges, impacts on revenue and society and potential
strategies for improvement. The paper argues that the informal sector being a
major part of the Zambian economy must be included into the tax system so as to
enhance the sustainable economic growth of the country.
BACKGROUND ON THE INFORMAL ECONOMY IN ZAMBIA
The informal economy in Zambia is huge and accounts
for a good percentage of the Gross Domestic Product (GDP). A study conducted by
the International Labour Organisation (ILO) and the World Bank in 2024 revealed
that an estimated 40.3% of Zambia’s GDP comes from the informal sector—approximately
USD 11.3 billion of the country’s USD 28 billion economy. In urban areas like
Lusaka, it employs around 70% of the labour force, with activities concentrated
in markets dealing in second-hand goods, food and services such as hairdressing
and more recently online businesses. The sector’s growth has outpaced formal
employment as it employs about 4.2 million people compared to just 500,000 in
the formal sector. Despite its scale, contributions to government revenue are
minimal, with only about 3% of total collections, a phenomenon that leads to an
estimated $1 billion in unpaid taxes as of earlier assessments. This disparity
has continued to burden the formal taxpayers and limits the revenue need for
funding public goods and services.
The untaxed status of the informal sector stems from
historical factors such as rapid urbanization, economic liberalization after
the re-introduction of multi-partism in 1991 and limited government capacity to
monitor small-scale operations. Over time, policies have evolved to address
this, with the Zambia Revenue Authority (ZRA) introducing targeted measures to
capture revenue without stifling the growth of this sector. Despite these
measures the revenue authority has continued to face challenges in taxing this
sector of the economy as sometimes the players in this sector have no permanent
trading structures.
WHY TAX THE INFORMAL SECTOR? THE PRESSING NEED
1.
Revenue
mobilization.
Domestic revenue is said to be the bloodline of any
sustainable economy world over. Therefore, broadening the tax base will boost
domestic resources for funding public goods such as roads, markets, sanitation
and social protection. For the government to provide the public with services
such as education and health, revenue generation must be at its peak. The
author notes that Zambia’s recent public finance diagnostics have stressed the
importance of growing domestic revenue as income tax and consumption taxes continue
to evolve. However, debt servicing and social expenditures continue to mount
pressure on the government as seen in the budget presentations of the last 10
years. With this revelation, it is therefore, a pressing need to broaden the
tax base as this is not just an accounting exercise but an important agenda for
economic development.
2.
Inclusion
and formalisation.
It is noted that taxation when structured equitably
can serve as a pathway to the development of all sectors of the economy,
thereby leading to the sustainable economic development of the country. This tax
registration can open doors for recognition and access to credit for some of
the players in the informal sector. However, this can only happen when the
state pairs taxation with visible benefits to the informal sector especially in
areas where they conduct their operations. When taxes are collected without
improving basic services like sanitation and security in the informal trading
areas—compliance levels reduce significantly. The goal therefore, should not
just be to collect money but should be to build the trust of the tax payers. With
that said, tax payers who trust the government will easily comply with taxation.
3.
Equity
and competition.
The aspect of equitable taxation is also about
fairness in competition. Surveys conducted reveal that many formal businesses
in Zambia argue that they bear disproportionate tax burdens in comparisons with
their counterparts in the informal sector who sometimes sell similar goods or
provide similar services without remitting taxes. In the opinion of the author,
this has created a dual economy and has made compliance a huge disadvantage to
other businesses. Therefore, reasonably enforcing taxes will level the playing
field between informal vendors and the formal businesses that already comply to
taxation. When all income groups are seen to contribute and when contributions
are visibly used for the provision of public goods—the citizens are more likely
to accept their obligation to pay tax. This in turn will strengthen the social
contract that exists between the state and its people, thereby laying a
foundation for the democratic accountability of the state and participatory
governance of the citizens.
THE CURRENT TAXATION FRAMEWORK
The Zambia Revenue Authority administers several taxes
tailored to the informal sector. The authority has focused on simplicity and
presumptive methods to overcome the challenges of record-keeping that have
continued to grapple the informal economy.
Some of the key instruments include:
Presumptive Tax
This is an estimated tax based on assumed income or
turnover, applied to hard-to-tax activities like public transport, small
traders and market vendors. For instance, it targets businesses with low or
unknown revenues. This has helped to reduce evasion at minimal administrative
costs. The rates vary as they depend on the particular business activity that
is being conducted by that tax payer.
Base Tax and Levies
Since 2004, a flat base tax has been levied on those
whose income cannot be estimated by the revenue authority and the authority has
no information to estimate such income. This tax is often collected daily or
monthly through local authorities like the Lusaka City Council (LCC) or market
cooperatives. In 2018, Statutory Instrument No. 48 of the Income Tax Act
mandated base taxes to be paid via mobile providers so as to enhance collection
efficiency. The amount of tax due per charge year is K365 per business that is
eligible to pay this tax. Additional levies fund local services, such as
garbage collection and sanitation. This tax is commonly levied by marketeers as
their income is not known.
It is observed that compliance rates are relatively
high in markets that are structured as around 80% of the informal workers in
Lusaka report paying to ZRA, LCC or cooperatives. However, this compliance drops
in relation to street hawkers who have been said to avoid paying taxes by
having no permanent trading place. Recent innovations such as the electronic
invoicing systems introduced in 2023 aim to reduce leakages in value-added tax
(VAT) refunds and also enhance real-time monitoring of businesses in a bid to
curb tax evasion.
CHALLENGES IN IMPLEMENTATION
Taxing the informal sector is troubled with obstacles,
as highlighted in recent analyses and policy reports. Some of the primary
constraints include:
Political Interference
Frequent mentions in studies (35% of reviewed
literature) point to political interference. This interference undermines ZRA’s
enforcement which then creates inequities and inefficiencies in the administration
of taxes. For example, politicians may influence tax exemptions or enforcement
leniency in certain regions or for particular groups. These acts have been seen
to lead to the inconsistent application of the enforcement rules. Some
businesses in the formal sector have complained that politicians have a
tendency of favouritism for the informal sector by shielding them from paying
tax. Critics have argued that the informal sector are treated this way because
they account for a huge number of voters during elections in most
circumstances.
High Collection Costs and Limited Revenue Potential
The mobile nature of certain players in the informal
sector makes it costly for the revenue authority to audit their activities. The
returns of most businesses in the informal sector are often negligible as a
result of cash transactions and the lack of record keeping by most businesses.
This in turn makes it difficult for the revenue authority to monitor businesses
and their transactions. Recent data has revealed that administrative expenses
for informal sector taxation are relatively high, this is in contrast with the
revenue that is generated from this sector of the economy.
Lack of Formality and Awareness
Many operators evade taxes due to poor understanding
of their obligation to pay tax or weak enforcement by the revenue authority.
Since the year 2004 there has been an irregular compliance drive by players in
this sector, as some contribute then later on stop contributing. Additionally, a
good number of informal sector traders have complained of facing coercive
payments to non-state actors like political cadres despite the change in
regimes over the years. This has eroded the trust of those working in the
informal sector as they are not sure whether the money paid goes to the central
government or is shared amongst cadres. It is for this reason that the Zambia
Revenue Authority has continued to undertake tax payer education in markets and
trading places that are not formalized to educate traders on the importance of
paying their taxes.
These issues are deepened by the sector’s
vulnerability to economic shocks, such as inflation and supply chain disruptions.
Such factors have been seen to drastically reduce taxable income of the players
in this sector of the economy who have no information or strategies they can
use to absorb such economic shocks.
IMPACTS ON REVENUE AND SOCIETY
The under-taxation of the informal sector represents a
lost opportunity for the country to generate enough income to fund public goods.
This sector has potential revenues equating to 42% of total tax collections if
fully captured into the tax bracket. However, current contributions remain low
and continue to strain the budgets of the government. The lack of compliance in
the informal sector drastically shifts the burden of taxation to the formal
payers, a phenomenon that defeats the principle of equity in a tax system. On
the positive side, the payment of taxes fosters a sense of citizenship for all
those persons who uphold the constitutional duty to pay tax. Thus, the payers
demand for better services and accountability from the government as well as
prefer policies that re-invest revenues in markets for their own benefit. For
instance, compliance would rise if the tax payers see visible improvements in
sanitation and infrastructure, a thing that supports and validates the fiscal
exchange theory.
RECENT DEVELOPMENTS AND RECOMMENDATIONS
As of 2025, discussions at forums like the Taxing
Smarter conference held in June 2025 emphasized that the tax base should be
widened through mobile levies and the integration of the informal sector. The
2008 SME policy has shown promise in formalizing businesses, with ZRA’s
compliance efforts yielding measurable results so far but leaving potential for
better results. To address these gaps, the author recommends:
• Earmarking revenues for improvement of markets and
trading places so as to boost compliance in the informal sector.
• Enhancing transparency and the use of digital tools
to reduce costs and leakages in the administration of taxes.
• Evaluating the trade-offs that exist between revenue
goals and economic growth, including skills training for informal operators.
• Eliminating coercive practices and quantifying local
payments for a holistic view.
CONCLUSION
While the informal sector in Zambia holds huge revenue potential, for taxation to be effective, efforts must be made to balance enforcement with the support for growth. Taxing the informal sector must be less about extracting revenue by force and more about building a bargain, this can only be done by having small predictable payments in exchange for things such as legal recognition, the tangible provision of public services and pathways to the growth of the sector. Zambia already has useful tools, but their potential will only be realized if taxes are transparent. These taxes should be linked to tangible benefits and administered with dignity rather than harassment. When vendors see their money at work—cleaner markets, safe stalls and reliable waste collection—compliance will follow naturally. The author argues that by addressing these constraints and linking taxes to tangible benefits, the government can enhance compliance, equity and economic resilience, thereby paving the way for sustainable economic and social development.
