A study of the factors affecting the collection of withholding tax on rental income from the informal sector: a case of Zambia Revenue Authority.

Taxation is the pillar of public sector finance and is therefore critical to the short-term performance and long-term growth of the economy. However, the challenges of collecting taxes in less advanced economies such as Zambia is well documented in the empirical literature, particularly in relation to taxing forms of income directly. These challenges are compounded by the large informal sectors in such countries. The World Bank estimates that 90% of adults in Zambia earn their income from the informal economy for example. This study involved empirical investigation of the factors that affect the collection of withholding tax
(WHT) on rental income from the informal sector in Zambia. It involved a case study of the Zambia Revenue Authority (ZRA). It was motivated by evidence that WHT on rental income remitted to the ZRA had been falling despite countrywide exponential growth in rental properties over the past decade. The study examined the relationship between informal sector compliance with rental income tax and the tax rate, aspects of tax administration, and individual
characteristics such as age, gender, Income of individual tax payer and level of education. Specifically, the relationship between the perceptions of the tax rate on rental income, administration, individual characteristics of respondents(regressors) and likelihood of potential taxpayers making full disclosures relating to their liabilities (response variable) was examined using logistic linear regression. Data was collected by self-administered questionnaire interviews from a nonprobability sample of 139 respondents. Logistic regression results showed that perceptions of the tax rate being high lowered the probability of compliance with the tax as did aggressive reminders of obligations to taxpayers by authorities. On the other hand, results suggested that taxpayer engagement by authorities, taxpayer education, as well as the development of a comprehensive database of eligible taxpayers as part of tax administration
would enhance likelihood of compliance. positive coefficients implying that they increased the likelihood of compliance. However, all results were not statistically significant. From results of the study, policy recommendations are that authorities should consider revising the tax rate or creating banded rates to boost collections amongst taxpayers with different levels of rental income. The Authority to consider collecting rental income from Landlords rather than
tenants. Further, engagement with taxpayers and creation of comprehensive taxpayer database should be used by authorities to improve compliance with the tax in sections of Zambia’s informal sector.