Governments introduce tax incentives to attract investments, stimulate economic activities, and create jobs. Whereas incentives have been attributed to such gains, there is a growing body of evidence that many tax incentives are harmful and can be viewed as ‘illicit’ in nature. The revenue foregone is exacerbated, especially when applied to products that negatively affect human health and development. Zambia's tax incentive for tobacco manufacturing provides a striking example of how such policies can undermine domestic resource mobilisation (DRM), worsen public health crises, and ultimately erode rather than build sustainable economic growth.
In 2016, through the Customs and Excise (Amendment) Act, 2015, Zambia introduced an investment incentive to encourage local cigarette manufacturing. This excise tax exemption (75%) for locally produced cigarettes has no sunset clause. The policy was marketed as an economic stimulus to create employment and generate foreign direct investment in the tobacco sector. Indeed, two new manufacturing plants were established, creating about 170 direct jobs. Yet, the trade-off has proven deeply unfavourable when weighed against the broader economic and social costs, and it generates little to no foreign direct investment in the tobacco sector.
The fiscal implications of this tax incentive have been stark, as recently highlighted by the Tobacco Excise Tax Simulation model during the recently concluded Inaugural Southern African Conference on Tobacco Taxation. The model developed by the University of Cape Town Research Unit on the Economics of Excisable Products (REEP) has been a game-changer for governments and civil society actors in simulating tax scenarios for data-driven decision-making.
The Zambia model developed by REEP applied a retrospective analysis of Zambia's tobacco excise tax incentive to understand the real implications of the incentives. The study shows that between 2016 and 2022, Zambia lost 1.6 billion kwacha in revenue that the Zambia Revenue Authority should have collected from cigarette excise taxes. Instead of bolstering the treasury, excise tax revenues stagnated and declined despite a growing population. This outcome reveals one of the central flaws of poorly designed tax incentives: they erode the domestic tax base and limit the government's ability to mobilise resources for essential services.
The policy created a market distortion favouring local producers; the government made these products increasingly affordable by reducing the tax burden on locally manufactured cigarettes. Research consistently shows that affordability, rather than mere price, is the key driver of tobacco consumption. When cigarettes become cheaper relative to income, consumption tends to rise. This weakens one of the most effective public health measures available to governments—using tobacco taxation to reduce smoking. In addition, the absence of a sunset clause has entrenched illicit financial flows within Zambia’s revenue system.
The implications for public health are profound. Tobacco use in Zambia is a significant risk factor for non-communicable diseases (NCDs), including cancers, cardiovascular disease, and chronic respiratory conditions. NCDs place a substantial burden on the health system, families, and the broader economy.
A 2021 study estimated that tobacco use costs Zambia approximately ZMW 2.8 billion (USD 299 million) annually in healthcare expenditures and productivity losses, amounting to around 1.2 per cent of GDP, and results in 7000 deaths annually. In comparison, the tobacco industry's total contribution to the GDP is a mere 0.4 percent. In other words, the economic costs of tobacco use far outweigh the sector's contributions, and the tax incentive exacerbates this imbalance by fostering greater consumption.
Beyond the immediate fiscal and health costs, Zambia's incentive raises questions of governance and policy coherence. The country has been a signatory to the World Health Organisation's Framework Convention on Tobacco Control (WHO FCTC) since 2008. Article 5.3 of the treaty obligates parties to safeguard their public health policies from the commercial interests of the tobacco industry, including by refraining from offering incentives or privileges that support its growth. Zambia contravened this obligation by granting tax advantages to tobacco manufacturers, undermining its international commitments and weakening its credibility in global health governance.
The experience also highlights a broader issue: the opportunity cost of tax incentives. Revenue foregone through the tobacco tax break represents funds that could have been invested in critical areas such as healthcare, education, infrastructure, or social protection. Furthermore, these funds could have been used to enforce policies and other efforts to reduce the harm caused by consumption, which could lead to greater reductions in use and consequences. Every kwacha matters for a country like Zambia, where domestic resource mobilisation remains a persistent challenge. Forgoing revenue in favour of an industry that imposes significant health and economic costs is economically irrational and socially regressive.
Proponents of tax incentives often argue that such policies are necessary to attract investment and generate employment. While job creation is undoubtedly important, the evidence from Zambia demonstrates that the gains in this case were marginal. The creation of 170 jobs, while valuable for those employed, does not justify the scale of revenue losses or the public health costs incurred. Moreover, tobacco-related jobs often expose workers to harmful conditions and are concentrated in industries whose long-term sustainability is questionable as global demand for tobacco declines.
The Zambian case, therefore, offers several lessons for policymakers across Africa and beyond. First, governments should scrutinise tax incentives for their net economic and social impacts, rather than assessing solely on their potential to attract investment. Incentives granted to industries producing harmful products are particularly problematic, as they generate costs far exceeding their contributions. Secondly, African governments must strengthen transparency and accountability mechanisms to ensure that the design and granting of tax incentives are subject to rigorous evaluation. On many occasions, such decisions are influenced by industry lobbying rather than evidence-based policymaking. Furthermore, governments should align fiscal policies with their health and development objectives. Offering tax breaks to industries that harm public health undermines efforts to achieve universal health coverage, reduce NCDs, and meet Sustainable Development Goals(SDGs).
Looking forward, Zambia will have an opportunity to correct the course. The government could simultaneously increase revenue and reduce tobacco consumption by abolishing the tax incentive and adopting a simplified, uniform excise tax structure. Regular adjustments to excise taxes, indexed to inflation and income growth, would help maintain the effectiveness of taxation as both a revenue-generating and public health tool. Such reforms would signal Zambia's commitment to policy coherence, international obligations under the WHO FCTC, and prioritising citizen welfare over corporate interests.
The broader African context amplifies the urgency, as many countries in the region face mounting fiscal pressures, particularly in the wake of declining donor assistance and increasing demands on health and social systems. Domestic resource mobilisation has become an imperative, and tax policy is one of the most powerful levers available to governments. However, when incentives erode the tax base and privilege harmful industries, the potential of taxation to drive development is compromised. The result is a double loss: weaker public finances and worsening public health outcomes.
TJNA calls for rigorous impact assessments to evaluate the effectiveness of tax incentives in generating employment, fostering innovation, and promoting inclusive growth. This evidence-based approach will inform policymakers' decisions on whether to retain, modify, or eliminate specific incentives.
In conclusion, there is mounting evidence that harmful tax incentives, such as in the Zambian tobacco sector, weaken domestic resource mobilisation, exacerbate public health crises, and undermine sustainable development. We call on policymakers to draw lessons from this experience and ensure that tax incentives are used sparingly, transparently, and only in ways that genuinely contribute to national development priorities.
The blog is co-authored by Mr. Isaac Mwaipopo, Executive Director, Centre for Trade Policy and Development (Zambia) and John Njenga, Tax Justice Network Africa.
