Govt ignored ZSE advice on new tax

Godfrey Marawanyika/Thomas Mutswiti

THE Ministry of Finance (MoF) and the Zimbabwe Stock Exchange (ZSE) met on Friday last week in an effort to end the standoff caused by the introduction of a 10% withholdin

g tax on tradable securities.


It is understood that during consultative meetings between the ZSE and the MoF, government was advised against the withholding tax. This was ignored, forcing the current stalemate where there has been no trade on the bourse, causing a serious erosion of the nation’s wealth.


On a daily trading basis government rakes in at least $500 million in stamp duties.


ZSE chairman Bart Mswaka confirmed they had met MoF officials to find a solution to the crisis sparked by the introduction of the 10% withholding tax.

“It’s not correct that they ignored our advice because there is a difference between hinting at something and policy implementation. But when you implement that policy it becomes different altogether,” he said

“We met the ministry on Friday, but we write and talk to the ministry everyday. Consultations will always be there but we made our own input and they (Minister Herbert Murerwa and permanent secretary William Manungo) have their jobs to do.”


The ZSE crisis has been compounded by government’s decision to force pension funds to increase their minimum capital requirements as they are the key players on the bourse.


Mswaka said the same reasons that led to the non-implementation of the Capital Gains Tax in 2001 had again stalled operations on the bourse, but said a solution should be found soon.


The bourse failed to trade from Wednesday to early this week.


There are 79 firms listed on the local bourse, but on Monday only First Mutual Life traded.


Stockbrokers are clamouring for a review of the tax rate which they say will drive them out of business.


“Stockbrokers are realising a decrease in business as volumes traded are minimal. Revenue levels have already started falling,” said one stockbroker.

“Traditional buyers are the pension funds and currently they are selling. Speculators are selling, investors are selling, all creating a glut as no one is buying?”


Another stockbroker said no communication had been received from the ministry on how the tax would be collected.


“We don’t know how the tax will function. We might subsequently see the reintroduction of Capital Gains Tax at 15%,” one broker said.


“Investors will pay 10%, but when Capital Gains Tax is introduced, and if they are found to have realised an assessed loss, they will have to claim rebates. Given the red tape, by the time the investor gets the rebate, he/she would have wasted money and time.”


Brokers said information technology preparedness was key as they would have to customise their information systems to capture the tax information.


They said Murerwa assumed that by forcing insurance firms and pension funds to increase their holdings of government securities, they would liquidate their shares and in the process pay the 10% withholding tax, raising billions of dollars for a gluttonous government.


“Unfortunately for him, no revenue is flowing to the government. Hopefully, Murerwa will realise that he collects more money by levying 2% stamp duty than by levying 10% withholding tax,” a broker said.


“What this effectively means is that investors venturing into the stock market will now pay transaction costs amounting to 14%, that is the new 10%, 2% stamp duty and 2% brokers commission,” said a market watcher.


Currently, the appetite for equities is at its lowest ebb.


“The alternative would be to borrow from the money market. This too is unsustainable given that minimum lending rates are in excess of 300% due to rate hikes by the RBZ,” one banker said.


“The greatest impact will be on those institutions that will be floating rights issues to conform with new capital requirements. There will be no takers for their shares and some will be forced to pursue mergers or wind up.”


The banker said the downside was the added cost when a firm attempts to balance its weighted average cost of capital, since any share buyback decision by the company must take into account the potentially huge bill generated to investors by having to pay 10% tax on shares sold.


“No modern economy imposes such a burden on its wealth-generating companies,” the banker said.


“Zimbabwe is not a particularly rich country and needs wealth-creating investment to become one. Zimbabwe has long suffered from under-investment and is today significantly less capital-intensive than its main competitors.”


Because of increased transaction costs, a shift by foreign investors out of Zimbabwean equities is more likely.


Analysts also noted that high tax rates are a barrier to foreign investment.

“Investors will allocate less capital to Zimbabwean registered securities than would otherwise be the case because of increased transaction costs,” an analyst said.


“The tax will fuel parallel market activities as investors seek financial freedom. For wary investors who are thinking twice about buying shares, a reduction in withholding tax remains at the top of their wish-list.”

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