ANGST-RIDDEN stock market dealers were this week bracing for legal action against the Zimbabwe Revenue Authority (Zimra) as they faced insolvency fr
om the tax collector’s backdated tax claims over which they failed to break a three-day impasse.
Trade on the Zimbabwe Stock Exchange (ZSE) had remained suspended on Wednesday, going into yesterday’s holiday without brokers and tax officials agreeing on the way forward.
There were fears Zimra was planning to move against money market dealers if stockbrokers succumbed to its demands amid entrenched resistance from the market against Zimra’s move.
Sources indicated that a number of financial institutions, most of which have stockbroking arms created under the one-stop-shop frenzy that gripped the banking sector a few years ago, were already mobilising resources to fend off any planned raids on their firms by Zimra, which has previously garnished bank accounts belonging to companies evading tax payments.
Zimra is making the claims under a Value Added Tax (VAT) system adopted in 2004, despite assurances given by Finance minister Herbert Murerwa that financial instruments would be tax-exempt under the system.
The revenue collector is disputing stockbrokers’ claims that they are not supposed to make VAT payments under the VAT Act, saying the equity dealers’ interpretation of the law was “erroneous”.
As a result, Zimra is demanding that brokers pay tax on brokerage fees backdated to January 2004.
But businessdigest was this week informed by tax experts that under the VAT Act, the issue of transfer of ownership of shares was exempted from tax payments, an exemption that had been carried forward from the now previous Sales Tax law.
On that basis, there were prospects Zimra would lose a court challenge to its claims, they said.
Brokers indicated they had already sought legal counsel on the issue, and this had been buttressed by support from the Zimbabwe Stock Exchange (ZSE), which appeared to support the view that brokers were not meant to pay tax under current laws.
Sources indicated that the stock brokers, who were refusing to give in to demands from Zimra for tax payments on brokerage fees, were also under pressure from colleagues in the money market who feared the cash-hunting antics by the government’s desperate national revenue collection arm was likely to disturb the entire financial services sector.
“We fear if we let them ride roughshod over us, their next port of call would be the money market,” a dealer told businessdigest this week.
Before the introduction of the VAT system, which replaced the sales tax system, Murerwa assured investors, both in 2003 and 2004, that there would be no tax on securities traded on the local bourse.
Sources indicated that Zimra, under pressure to outperform its revenue collection targets against the backdrop of a shrinking economy, was seeing the stock market, which has staged a stellar performance over the past six years despite a haemorrhaging economy, as a potentially lucrative money galore.
Dealers said Zimra was demanding that equity dealers pay 15% VAT on brokerage income, their main stream of revenue.
According to ZSE regulations, stockbrokers are entitled to a fixed 2% brokerage fee for any deal they handle on behalf of a client in respect to the selling and buying of shares.
In any case, dealers said, they were already paying stamp duty, currently pegged at 2% of a transaction, which went directly into the coffers of Zimra.
This was over and above a 5% Capital Gains/Withholding Tax charged on sales by the dealers on behalf of Zimra.
Fears were that Zimra’s claim of a 15% tax on brokerage fees backdated to January 2004 would render many brokerage firms insolvent, but worries had crept into the market that Zimra could also claim tax on brokerage income from financial institutions once it had finished its push for tax from stockbrokers.