Turnover tax is designed for small businesses, but not all small businesses qualify. The Income Tax Act excludes several categories regardless of how low their turnover is. If your business falls into one of these categories, you must use the standard income tax regime instead.
Check your turnover tax liability with our turnover tax calculator.
The excluded categories
The following businesses cannot use the turnover tax regime, even if their annual turnover is below K5,000,000:
1. Consulting and professional service firms
If your business provides consulting, advisory, or professional services, you are excluded. This includes accountants, lawyers, architects, engineers, management consultants, and similar professions. The rationale is that these businesses typically have very low costs relative to revenue, meaning turnover tax would result in significantly less tax than income tax on their profits.
2. Mining operations
Businesses operating under the Mines and Minerals Development Act are excluded. Mining companies have their own tax regime with specific royalties, mineral processing tax, and corporate income tax provisions.
3. Voluntarily VAT-registered businesses
If you have chosen to register for VAT (even though your turnover is below the mandatory K800,000 threshold), you cannot simultaneously use turnover tax. The two regimes are mutually exclusive. To return to turnover tax, you would need to deregister from VAT first.
4. Partnerships
Partnerships are excluded regardless of turnover. Each partner must declare their share of partnership income on their individual income tax return. This applies to all partnerships, whether general or limited.
5. Public service vehicle operators
Businesses that carry persons for hire (minibuses, taxis, buses) are excluded. This specifically applies to the carriage of persons - freight and logistics businesses are not excluded under this provision.
6. Income subject to final withholding tax
If your income is subject to final withholding tax (dividends, bank interest, rental income from non-resident landlords, etc.), those earnings cannot be included under turnover tax. If your entire income falls into this category, you cannot use the regime.
What to do if you are excluded
If your business falls into an excluded category, you must:
Register for standard income tax with ZRA
Keep detailed records of both income and expenses
File annual income tax returns (companies) or include business income in your personal return (sole traders)
Register for VAT if your annual turnover exceeds K800,000
The upside of standard income tax is that you can deduct legitimate business expenses - rent, salaries, materials, utilities, depreciation - reducing your taxable profit. For businesses with high costs, this can result in less tax than the flat 5% turnover tax.
Common grey areas
Freelancers and gig workers
A freelance graphic designer or content writer is not automatically a "consulting firm." Whether you are excluded depends on the nature of your services. ZRA has not published a definitive list, so if your work could be classified as consulting or professional services, seek clarification from ZRA or a tax adviser before opting for turnover tax.
Mixed businesses
If you run a shop (eligible) but also provide consulting services (excluded), the consulting income disqualifies you from turnover tax for the entire business. You cannot split your income between the two regimes.
Businesses approaching the K5,000,000 threshold
If your turnover is close to the threshold, monitor it closely. Exceeding K5,000,000 during the year means you must switch to income tax from the following year. There is no mid-year transition.
For the full calculation method, see How to calculate turnover tax. To compare turnover tax with VAT, read Turnover tax vs VAT in Zambia.