Victor Bhorom :analyst
Zimbabwe’s 2021 national budget paints a picture of sustained austerity in the mid-term, with increases in taxes for various sectors of the depressed economy. A 126% jump in budgeted tax revenue collections from the ZW$173 billion anticipated in 2020 to ZW$391,8 billion (US$4,8 billion) budgeted for 2021 says it all. More importantly it shows that government’s tax aspirations are hinged on triple digit annual inflation which pushes up prices and grows various tax heads, especially Value Added Tax (VAT) and Intermediated Money Transfer (IMT) Tax on electronic transactions. The high revenue targets for 2021 are supported by sharp increases in sin taxes (levied on beer and tobacco), increase in fuel import duty, and widening of presumptive taxes on all types of small businesses.
With effect from January 2021, informal traders will pay a presumptive tax of 10% of their rentals per month. Similarly, small businesses who operate in various shopping facilities will be required to pay fixed presumptive taxes of US$30 per month which will be collected and remitted by the landlord.
The presumptive tax net will also encircle public transport operators, restaurant owners, driving schools, and salons, cross border traders, commercial boat operators and self-employed professionals such as health practioners, lawyers, realtors, architects and engineers. The budget also introduced US dollar indexed taxes on tobacco cigarettes, spirits and wines, beverages and beer.
Contrary to market expectations, government increased excise duty on diesel to match petrol at US$0,30 per litre while levying a petroleum import duty of US$0,05 per litre on fuel imported via road haulage. Other tax proposals include mining royalty payments in foreign currency, while the VAT threshold was maintained at ZW$1 000 000 (US12 200). This means that the VAT net has been widened to cover businesses of all sizes.
The increase in taxes and introduction of new tax heads adds pressure to the struggling taxpayers considering the fact that IMT tax is levied on most electronic transactions and cuts across all levels of the economy. The Zimbabwean economy declined by at least 6,5% in 2019 and Treasury expects the economy to contract by 4,1% in 2020 as a result of Covid-19 business slowdown, drought, slump in domestic demand and incomes.
The increase in taxes will undoubtedly trigger informalisation, inhibit domestic demand (especially from business consumers), discourage savings and subdue investment in the economy that desperately needs capital. More importantly the taxes will further complicate Zimbabwe’s tax regime which increases the cost of doing business and inflation rate.
Equally, the tax proposals do not do any favour to Zimbabwe’s trade prospects in the African region as it dents competitiveness of the country’s manufactured exports at a time when the Africa Free Continental Trade Area (AfCFTA) becomes fully operational.
The economic decline witnessed in the past two years has severely weakened the government, public service delivery and increased public debt, however overtaxing an ailing economy has long-term economic consequences. Instead of cutting non-core expenditure and prioritising the privatisation of debt-ridden state entities, the government is taking an easy route to balance its books and grab achieving revenue targets headlines.
In 2019, Tax revenue collections were projected to be ZW$58,6 billion while expenditure was budgeted at ZW$63,6 billion. However, high levels of inflation averaging 655% per annum meant that the government collected ZW$84,97 billion in nine months from January to September 2020 (well on course to eclipse the revised target of ZW$173 billion by December 31).
The Zimbabwean economy desperately needs stimulation and supply side incentives to increase production from virtually all sectors of the economy. To achieve sustainable economic growth, the government needs to grow the economy (thus enlarging the tax base) and provide incentives for tax compliance. The following are some of the policies which require prioritisation before increasing the tax burden on taxpayers:
Addressing the cost of doing business
There is need to reduce excise duty paid on petroleum imports which currently cost at least US$0,30 per litre of fuel before other levies are added on top. The cost of fuel feeds into production costs in all economic sectors. Similarly various producers bemoan the extended beauracratic procedures involved to get import and export permits in Zimbabwe and the over 10 independent agencies involved to approve the process. There is need to streamline the import and export process to ensure efficiency and reduce corruption.
To achieve economic growth, treasury also needs to scrap customs duty on all raw materials that are imported for value addition on the local market while also marginally reducing VAT on capital goods imported for production purposes. The recommendations will significantly curtail the cost of doing business and improve economic competitiveness such that treasury can benefit from a larger tax base or increased production output from the same economic players.
Simplifying the tax system
According to the survey conducted by the Zimbabwe National Chamber of Commerce (ZNCC) in 2019, a business operating locally will have to make at least 51 payments for various tax heads for it to be considered tax compliant.
Surprisingly, most of the tax payment processes involve human interface (due to slow online systems). Instead of introducing more tax heads and increasing taxes, treasury needs to improve collection efficiency on existing tax heads by giving commissions to tax officers who process tax compliance certificates and other documents which are submitted online. It should take less than one hour to register for tax and get a tax clearance certificate online. Additionally, treasury needs to reward tax compliance with processing rebates timeously (without scrutinising the tax compliant players).
The current export retention scheme where the government retains 30% of all the foreign currency earned by the exporter (using a fixed exchange rate), while taxing the same entities in foreign currency discourages export growth and encourages importation of finished merchandise.
Zimbabwe’s taxation model should encourage import substitution, value addition (beneficiation) and exports growth. This entails tax incentives for local producers of the country’s top import commodities such as fertilisers, agriculture and industrial chemicals, motor vehicles and auto parts, plastics and packaging materials, pharmaceuticals and medical equipment, home chemicals, iron and steel products, animal and vegetable oils, newsprint and paper products among others.
Similarly, the taxation model should cushion miners who value add their minerals locally before exporting by reducing mining royalties on value-added minerals.. In the agricultural sector, tax incentives or targeted production subsidies (auditable) should be given to registered A1 & A2 producers of maize, wheat and soya beans. These subsidies should however be budgeted for from tax revenues and be backed by an independent commodities market that determines prices.
The increase in taxes provides the government with an easier route to balance its books than pursuing the politically controversial fiscal consolidation agenda. It allows the government to maintain the status quo on non-core consumption (on travel expenditure, procurement of luxury vehicles and hefty perquisites for the executive) while squeezing the citizens and businesses with increases in taxes and new tax proposals.
However, overtaxing the struggling taxpayer will fast track informalisation and severely weaken government service delivery in the medium-to-long term. A carefully planned economic stimulus that extends production based incentives for primary production, manufacturing and service industries results in sustainable economic growth where the tax base grows in tandem with the economy.
The current taxation model will tick the boxes on attaining revenue targets in the short term but it will definitely not provide any incentives to savings, capital formation, production and investment which are key in the attainment of the National Development Strategy (NDS-1). Tax incentives have been the missing link in most of the economic blueprints Zimbabwe has launched. Anything less than economic growth stimulus will not sustainably grow the tax base.
Bhoroma is an economic analyst and holds an MBA from the University of Zimbabwe. — firstname.lastname@example.org or Twitter: @VictorBhoroma1.