HomeBusiness DigestShrinking revenue collections reflective of sinking economy

Shrinking revenue collections reflective of sinking economy

ZIMBABWE’S economic woes characterised by a shrinking formal economy, low productivity and industry closures, among other challenges, continue to weigh down the country’s revenue collection efforts as shown by the latest figures published by the tax collector.

Taurai Mangudhla

Although the accuracy of collection targets has been questioned, government’s reluctance to change its policies and governance style — deemed hostile to investment, together with the country’s failure to capitalise on benefits of a dollarised economy as well as economic stability brought by the inclusive government — is hindering economic performance.

Since the adoption of a multi-currency regime in 2009 and the formation of an inclusive government between President Robert Mugabe (Zanu PF) and opposition MDC leaders Morgan Tsvangirai and Welshman Ncube in the same year, which brought confidence into a market that had suffered a decade of hyperinflation and economic stagnation, Zimbabwe missed its revenue collection target by 6% in 2009 before surpassing it by 15% in 2010.

Growth was maintained in 2011 when the country collected US$2,8 billion — 11% above target.

Despite downward revisions on GDP growth — from initial targets of 9,4% to 5,6% by mid-year and finally to 4,4% by the end of 2012 — on account of lower-than-expected industrial activity given a downward revision on projected industry capacity utilisation from 60% to 50% in the year, the Zimbabwe Revenue Authority (Zimra) managed to surpass its collection targets by 7% to collect US$3,45 billion in 2012.

Zimra missed its 2013 collection targets by 6% after the end of the inclusive government and formation of an entirely Zanu PF government.

According to the Zimra 2013 annual report, the fourth quarter of 2013, which was the period in which a new cabinet was formed, brought in net collections of US$877,6 million against the Ministry of Finance’s target of US$1,1 billion, resulting in a negative variance of 18%.

In 2014, the situation appeared to have improved with gross collections for the year amounting to US$3,84 billion against a target of US$3,82 billion, resulting in a positive variance of 1%. However, fourth quarter net collections were US$996,94 million against a target of US$1,11 billion, translating to a negative variance of 10%.

By Zimra commissioner-general Gershem Pasi’s own admission, revenue collections mirror economic performance.

“The economy was characterised by low economic activity in 2014. Revenues were suppressed by liquidity challenges, company closures and scaling down of operations. These factors, among other things, resulted in the revision of the expected Gross Domestic Product (GDP) growth downwards from 6,1% to 3,1% in the Mid-Term Fiscal Policy Review Statement,” said Pasi in a 2014 annual revenue report.

On an annual basis, Zimbabwe’s revenue collections grew from US$988 million in 2009 to US$2,2 billion in 2010, and even further to US$2,8 billion in 2011.

In 2012, annual revenue collection grew to US$3,45 billion before they shrunk to US$3,43 billion in 2013. In 2014, collections amounted to US$3,84 billion.

Latest figures for the third quarter of 2015 show a country in dire straits as net collections of US$878,22 million, which is 91,1% of the target of US$964 million. The revenue collector said there was a 0,71% decline in net revenue collections from the same period last year where US$884,46 million was realised.

“Net cumulative revenue collections as at 30 September 2015 amounted to US$2,54 billion which is 67,54% of the 2015 annual target of US$3,76 billion. This translates to an 8,55% decline in revenue collections as compared to the same period last year where the cumulative revenue collections were US$2,78 billion,” said Zimra chairman Willia Bonyongwe.

The performance followed a 3,75% negative variance in individual tax targets, a 15,43% variance on Vat on local sales as well as negative 10,68% variance on customs duty. Company tax missed collection targets by 31,34% while mining royalties also missed the targets by 55,62%

So stressed is the Zimbabwean economy that companies are struggling to a point of closure or downsizing. The ones remaining operational are struggling to honour their tax, salary and other statutory obligations.

Bonyongwe said the year 2015 started with a debt of US$1,4 billion which, after recoveries and new debts being raised, ended the third quarter at US$1,9 billion apparently showing the extent of woes in industry.

Zimbabwe National Chamber of Commerce CEO Christopher Mugaga says declining revenue collections were difficult to address as long as policy measures in the economy are not pro-growth and developmental.

Mugaga says one needs to interrogate how realistic the set tax targets were as the nation may bemoan unrealistic targets that are barely informed by appropriate methodology.

He however said the decline in revenue collections and failure to meet targets was clearly a symptom of an economy going informal by day. Government estimates small and medium enterprises account for about 40% of the country’s GDP.

Apart from increased informalisation of the economy, Mugaga argued that company closures took a toll on revenue collections and the country’s ability to generate taxes given that latest figures show industry capacity utilisation slid to 34,3% in 2015 from 36,5% last year.

He says declining capacity utilisation was shown by falling corporate taxes.

“The rampant smuggling of imports notably form South Africa means people are foregoing paying Vat and most local product are being outcompeted. In addition, a number of goods never reach shelves of shops therefore the significant black market remains elusive to tax authorities,” Mugaga says.

He said declining commodity prices also hindered contributions from mining companies.

Mugaga however says declining revenues could be partly because Zimra is failing to honour Vat refunds and in the process is causing taxpayers to adjust by avoiding and evading taxes.

“As a short-term mitigation measure, the government has to deepen and widen the collecting agency for presumptive tax, all those operators and traders of no fixed abode should have a licence code to be allowed to trade,” Mugaga says.

Independent economist John Roberston said poor revenue performance was evidence of a shrinking economy, adding a bad policy environment has caused company closures due to lack of capital and technology.

The economist said government was slow at making necessary changes to facilitate economic development and this manifests in declining revenues.

“The main issue is they (government) have to make changes because you need a sound industry before you tax corporate profits; employees before you tax pay-as-you-earn; and products before you collect Vat,” Robertson said.

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