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UPDATE 2-Zambia scraps sales tax plan in concession to miners

* Finance minister trying to mend fences with miners

* Sales tax had been a major source of friction (Adds mining chamber reaction, context)

LUSAKA, Sept 27 (Reuters) - Zambia will not replace its value-added tax (VAT) with a non-refundable sales tax as previously planned, Finance Minister Bwalya Ng’andu said on Friday, in a concession to mining companies that had fiercely opposed the proposal.

Zambia, Africa’s second-largest copper producer, is grappling with high debt levels and the effects of a severe regional drought which has depressed economic growth.

The sales tax plan had been a major bone of contention between government and the mining industry, a critical sector.

“Government has decided to maintain the Value Added Tax, but address the compliance and administrative challenges,” Ng’andu said in a budget speech.

Ng’andu has sought to mend fences with the mining industry since being appointed in July. Relations had soured over proposed tax changes and a dispute between government and Vedanta Resources over its Konkola Copper Mines unit.

Sokwani Chilembo, chief executive of Zambia’s Chamber of Mines, told Reuters that the mining industry welcomed the scrapping of the sales tax plan but was dismayed by other measures contained in the budget.

Ng’andu said Zambia would reduce the capital allowance for capital expenditure to 20% from 25% and limit VAT claims on electricity to 80% from 100%, among measures affecting miners.

“These new measures will make rehabilitation and maintenance more expensive at a time when we are already struggling to keep our plants in good shape,” Chilembo said.

Economist Chibamba Kanyama said continuing with VAT would provide a degree of certainty for business.

He called the speech a “stabilisation budget,” reflecting government’s desire not to take austerity measures too far before a general election in 2021.

Ng’andu said he would limit Zambia’s fiscal deficit to 5.5% of gross domestic product in 2020 from 6.5% this year.

To make its debts more sustainable, government would slow debt accumulation, postpone or cancel some undisbursed loans and cease issuance of government guarantees, he added.

Zambia is targeting GDP growth of at least 3% next year from an estimated 2% this year, after a drought dented crop production and electricity generation at hydropower plants. (Reporting by Chris Mfula Editing Alexander Winning and Toby Chopra)