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Informal economy hard to tax

An old adage says, “Only two things in life are certain: death and taxes”.

Collins Rudzuna

For a long time in Zimbabwe this saying has only been half true.

It is an open secret that many firms and individuals have been enjoying a free ride at the expense of law abiding citizens by neglecting to fully meet their tax obligations.

Due to the chronic shortage of revenue Zimbabwe Revenue Authority (Zimra) has recently become more aggressive in collecting tax, and rightly so! Recent reports point to an increasingly aggressive and impartial attitude by the tax authority. Although there has been an outcry from the affected companies, many view Zimra’s newfound resolve in a positive light.

Legal provisions in many countries, Zimbabwe included, allow for the tax authorities to garnish bank accounts of errant taxpayers to recover unpaid taxes and fines. When a garnishment order is issued, a bank which holds money for a firm, called the garnishee, is required by law to remit such monies to the tax authority to cover the unpaid taxes.

Reports of such garnishment orders have recently made headlines. Notably, most of the targeted firms are quasi-government institutions.

Zimra Commissioner-General, Gershem Pasi, appeared before parliament in early April, promising to garnish bank accounts of State-linked enterprises whose top management he accused of manipulating records and using political influence to avoid paying taxes. Shortly after, Harare City Council was garnished US$40 million.

Other enterprises that have also fallen victim to this measure are Premier Services Medical Aid Society (Psmas) which was garnished for US$41 million and the Civil Aviation Authority of Zimbabwe. At some point Zimra also reportedly sought to garnish diamond mining firms which owed US$45 million.

There have been mixed feelings regarding the wave of garnishment orders.

Some businessmen have cried foul, accusing Zimra of driving them out of business. Others have even challenged the garnishment orders in court. But many Zimbabweans who feel that Zimra is doing its duty in collecting what is rightly due to government are ecstatic.

Zimra may have been seen as applying its collection efforts in a partisan manner before but its latest collection drive is helping spruce up its image by portraying it as impartial.

Efforts to collect more revenue for government by Zimra are not limited to just issuing garnishment orders on errant companies. Zimra apparently also wants to have tighter control over revenue collection.

A case in point is the stated intention to collect road toll fees which are not being remitted by the Zimbabwe National Road Authority (Zinara). Another way that Zimra intends to increase revenue is by widening its collection efforts to include the informal sector.

Zimbabwe’s unemployment rate is reportedly very high, estimated by some to be in the region of 80%.

The reality though is that a lot of these ‘unemployed’ people are working in the informal sector. Most informal sector participants do not pay taxes, are not even properly registered and do not keep formal records.

In essence the bulk of Zimbabweans are involved in enterprises that do not pay tax, putting the burden on the few that do pay tax to fund government activities.

Taxing the informal sector has its own challenges. First is the issue of practicability.

Informal traders are spread far and wide and most are very small, unregistered businesses. To be able to document them and tax them properly is difficult if at all doable.

In many cases their operations are actually illegal. They range from food vendors selling from undesignated places to transport operators who run fleets driven by unlicensed drivers. Naturally, these people are likely to shy away from registering for tax purposes.

Their profit margins are also very small hence their propensity to want to evade tax is likely to be very high. Even if Zimra did find a way to collect tax from these informal operators, that alone would be viewed as putting a stamp of approval on their illicit operations.

Given this conundrum, where Zimra needs to increase revenues to meet government expenditure in an economy dominated by the informal sector, is there a practicable way out? It would seem that formalising the economy is the only way to collect tax effectively.

In a formal economy, businesses are usually bigger and less disparate and hence easier to police. Collecting tax from them in many instances means dealing with very few people at head offices that represent nationwide operations.

Also, formal businesses usually do a better job of maintaining their books.

The reality is therefore that although government can get a bit more revenue by increasing aggression in their collection methods, ultimately an informal economy is one from which it is hard to collect tax.

Unless Zimbabwe returns to a more formal economy, it is highly likely that government spending will continue to outstrip revenue collection. Big corporations on whom most of the tax burden falls may even become frustrated with the collection authorities, risking even more evasion.

 

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