News Analysis

VAT demand from stockbrokers: another foot in the grave
Paul Nyakazeya


ZIMBABWE’S policy-makers continue to shoot themselves in the foot as amply illustrated by the recent decision to make stockbrokers pay Value Added Tax (VAT) backdating to 2004

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The decision appears set to not only hamper economic development but scare away prospective foreign investors.
If the Zimbabwe Stock Exchange were a private company, paying tax backdated to 2004, the firm would experience historical losses and the payment would represent a huge burden on shareholders.

Stockbrokers have warned that VAT payments could lead to a spate of company closures and loss of confidence in the local bourse.

The stock market, which has some of the highest transaction costs in the world, could have lost an estimated $500 billion in untraded shares last week due to disruptions of normal business as the cloud of confusion prevailed over tax.

There are genuine fears that if the outcome of the stalemate goes in the Zimbabwe Revenue Authority (Zimra)’s favour, payment by stockbrokers would mean a three-tier tax system — stamp duty, withholding tax and VAT-— for stock exchange investors.

But on the money market investors are only taxed through a 20% withholding tax on guaranteed returns, as opposed to the triple taxes on the unpredictable stock exchange. What this means is value added tax is being implemented on investors because brokers will simply pass on the cost to them.

Zimra on its part could have lost about $10 billion in uncollected stamp duty last week.

VAT is defined as an indirect tax, assessed on increments in the value of a product from the raw material stage through the production process to final sale.

At each stage, the tax is levied on the amount by which inputs purchased from the preceding stage have been augmented in value. The final sale price will incorporate all of the VAT payments made along the production chain.

The impasse between stockbrokers and Zimra has left investors with few options of where to place their money. Most turned to the money market resulting in the market being awash with funds.

Last week, the glut, coupled with treasury bill maturities, saw short-term interest rates declining to 50% for seven to 14 days.

The highest during the week was the increase in the bank rate to 850% for secured lending and 900% for unsecured lending.

The move was prompted by the Reserve Bank to quell speculation which resulted in the increase of the 91-day treasury bill rate to 401%. Central bank authorities have reduced the rate to 350%.

“The impasse is a disaster,” economist John Robertson said. “It sends very bad signals of an already tattered imagie to the outside world. This is a huge mess.”

He said Zimra was arm-twisting stockbrokers as there was a lot of money being made on the stock market.

Robertson questioned why stockbrokers should pay VAT when they are already being charged stamp duty and withholding tax. 

 “Most if not all companies were meeting their tax requirements since VAT was introduced two years ago. Why punish them now as if they ever hinted at evading it (tax)?” Robertson asked.

He also asked why stockbrokers should pay VAT, as there is no value addition to their daily duties?
“It is an impediment to the financial services sector. No one has done this anywhere in the world. Why should we start doing it here?”

A stockbroker with a commercial bank said brokers were exempted from paying this type of tax as per current VAT Act, Section 11 (a). The Finance Act 2003 was amended, which effectively exempted all stockbrokers from paying VAT.

“The Act does not provide for stockbrokers to be taxed that way,” the stockbroker said.

“What this means is Zimra is misinterpreting the VAT Act and, as a result, is now making unnecessary and misplaced demands.”

He said there was very little or no logic in fighting standing laws unless one was prepared to redefine and present them to parliament.

Other market watchers say the VAT stand-off is a well-calculated move to hold up the equities bubble, as stocks were on a bull run a fortnight ago.

Equities made a surprise burst in the last three weeks after months of being in the red, as short-term deposit rates fell sharply. The key industrial index shot to nearly 45 million in a single day’s trade from around 30 million.

Zimra has reportedly been going around investigating all stockbrokers to establish how much they had generated since 2004 from their brokerage fees.

Imara Edwards Securities became the first victim when government’s revenue collector ordered the company to pay $49,3 billion accrued since 2004.

Imara is required to pay within the next seven days and failure to do so would lead to unspecified action being taken against them.

Over the last three years, the figure Imara was supposed to pay as VAT was $16,1 billion and it accrued interest of $17 billion plus a penalty of $16,1 billion.

Assuming that Zimra remains firm on its position, the authority stands to rake in over $700 billion from 17 registered stockbrokers who have not been paying VAT since 2003 also.

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