Eric Bloch Column: Taxation policy regime urgently needs reform

Substantive recovery of the economy is thus critically needed if the prevailing high unemployment is to be reversed.  A key element for achieving economic recovery is the re-drawing of our fiscal policies. The forthcoming mid-year Budget review by Finance minister Tendai Biti is such an opportunity. 

Amongst the numerous changes which need to be effected are:

l The reform of income tax rates and tax bands applicable to individuals. 

It is inhumane for government to continue to impose taxes on incomes which are below the poverty datum line (PDL).  Those who earn less than the PDL are suffering immensely and barely able to pay for the most basic needs.  Currently, the PDL for a family of six is approximately US$550 per month.

 

  Assuming that in most such families there are two income-earners  and more often than not one being in the informal sector income tax should only become payable on incomes in excess of US$330 per month. Whereas the current income tax threshold is pegged at $250.  As a result government is worsening the plight of many Zimbabweans.

Government argues that the fiscus is, to all intents and purposes, bankrupt, and that revenue has to come from somewhere. This is also accentuated by the need to stem fiscal deficits with expenditure being contained to actual revenues hence the need to maintain the prevailing tax threshold, tax bands, and rates.  However, this approach is an abdication of government’s obligation to ensure the economic wellbeing of the populace. 

Moreover, constructive revision of the taxes payable would result in substantial compensatory tax revenues.  Enhancement of individuals’ net after-tax income accords the individuals greater spending power. As well, much of the additional spending will yield value added tax  and other indirect taxes such as customs duties, whilst also increasing the taxable incomes of the enterprises benefitting from greater trade volumes as a result of greater consumer spending. 

 

Added to this enterprises will also benefit from the growth in trade volumes thereby realising greater taxable profits and employ more people; who will also become direct and indirect taxpayers.

Government can also foster the creation of jobs within the economy by according employers tax incentives commensurate with the number of people employed. The cost of those incentives would then be funded by the tax revenues received from those so employed.

Another avenue to advance economic recovery is to motivate new investment into the economy. For instance government can accord new ventures a transitional period in which they are exempted from paying income tax. Examples of this approach are the export processing zones instituted by government as well as the initiatives made by South Africa, Botswana, Israel and other countries which gave tax relief and incentives to new investments.  The approach the government has taken in pursuing indigenisation and economic empowerment also needs to be reviewed. 

The transfer of shareholding from non-indigenous shareholders to those who are indigenous should be exempted from capital gains tax.  In addition, any dividends payed by enterprises to community share trusts, employee share trusts and other indigenous new shareholders should be exempted from Withholding Tax. This would help the recipients of the shares to expedite their payment.

Another avenue for the Finance ministry is to stimulate exports.  A growth in exports would not only diminish Zimbabwe’s negative balance between inflows and outflows of money, but would contribute materially to achieving increases in volumes of production.  The resultant economies of scale would enable local market price stability, thereby reducing inflation.  The increased volumes would create employment and the concomitant economic benefits.  A reintroduction of export incentives would be both economically and fiscally beneficial.

In a bid to protect local industry from imports government imposed various duties on many commodities. However, the measures have proved to be grossly ineffective and, to some extent, prejudicial to Zimbabweans.  The export subsidies and incentives Far East countries give their enterprises nullify the duties imposed by government. 

 

The Finance ministry should address this anomaly by further modifying the customs duty regime.  However, they should recognise that some of the basic commodities are not sufficiently produced locally to meet consumer needs and demand. Such commodities should not be subjected to customs duties since consumers would be prejudiced.

Government should expedite the eradication of the frequent and pronounced delays in the clearance of goods at border posts.  On too many occasions officials seize and impound goods on spurious grounds. This is coupled by the lengthy delays in resolving such issues. 

 

Such situations have a devastating impact on importers in general and manufacturers and traders in particular. The losses sustained ultimately impair the taxable incomes of the affected businesses, thereby minimising the minister’s tax revenues.

These are but a few of the many measures which Biti needs speedily to address, as a constructive step towards accelerating Zimbabwe’s economic recovery.