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Zambia's finance minister says tax reforms needed to cut debt

Chris Mfula

* Some businesses have complained about new sales tax plan

* IMF has warned Zambia is struggling with its debts

* State-controlled ZCCM seeking more foreign partners

LUSAKA, May 3 (Reuters) - Zambia will pay off all outstanding legitimate VAT refunds, but plans to press ahead with a new non-refundable sales tax despite criticism from some businesses as it strives to cut debt, its finance minister said on Friday.

The proposed tax change in Africa's second biggest copper producing nation has upset the mining community, which has said the country is deterring new investment it desperately needs.

In a speech in Lusaka, Finance Minister Margaret Mwanakatwe told business leaders, who are involved in extended consultations over the tax change, that the move was necessary to stop "debt escalation".

She also said it would help pay outstanding refunds "and more importantly increase revenue collection to support the government's social development programmes".

The new sales tax was meant to have been introduced on April 1, but has been postponed until July to allow more consultation.

Industry insiders have said the government owes an estimated $600 million in VAT refunds.

The International Monetary Fund has repeatedly warned Zambia is struggling with high debts and shrinking foreign currency reserves.

Mwanakatwe said the government was accruing about 1.8 billion kwacha ($140 million) in VAT refunds every month.

"Why should the government go through this pain of refunds every month? Do I need to go through that pain? No. Let's bring up a simpler, more efficient system," she said.

Zambia last year announced a range of tax reforms, leading some miners to warn of job losses, although some threats have failed to materialise.

In January, for example, Canada's First Quantum Minerals , scrapped plans to layoff 2,500 workers in Zambia, saying it would continue dialogue with the government over the tax changes.

Zambia is not alone in seeking to change the terms of engagement with its foreign investors. Neighbouring Democratic Republic of Congo, Africa's biggest copper producer, and Tanzania have also increased their tax demands.

The acting CEO of Zambia's mining investment arm ZCCM told Reuters at a mining conference in New York this week that he was seeking to attract investment partners and Zambia was an attractive long-term investment proposition.

ZCCM is a partner of First Quantum and Glencore in Zambia.

"Mining is a long-term investment. In the long term, the prospects for investment are still very high. The government is managing that issue (tax) very well," Mavuto Chipata said. (Additional reporting by Barbara Lewis and Karin Strohecker in London and Ernest Scheyder in New York; Editing by Mark Potter)