Assessing the practicality of the informal presumptive tax

Paison : Tazvivinga
Economist

IN his 2021 national budget presentation, Finance and Economic Development minister Mthuli Ncube proposed a number of revenue enhancing measures. These include, among others:

Presumptive tax structure for selected self-employed professionals such as architects, engineers, realtors, medical and legal professionals; and
Presumptive tax structure for hairdressers, cottage industry and restaurant and bottle stores.

These measures are meant to enhance the selected sectors’ contribution to the fiscus in line with the projected 2021 revenue target which is double the 2020 revenue forecast. The ambitious revenue target is also envisaged to be boosted by new sources of revenue from small and medium scale enterprises (SMEs) and small retailers.

However, the presumptive tax revenue is a perennial pipe dream that has been underperforming over the years. In their 2019 study, Sitcha et. al. acknowledged that, presumptive tax in Zimbabwe contributes an insignificant figure to the tax revenue such that it is not classified as a stand-alone tax head but rather as part of ‘Others’ category. This indicates the challenges associated with administering/enforcing this tax system. However, this might be the reason behind the Minister of Finance’s (MoF) proposal to implement new strategies in enforcing the aforementioned tax. Worryingly, the challenges that contributed to the low revenue from presumptive tax before have not been addressed. These range from structural to administrative challenges as noted in the Sitcha et. al’s study:

“…the effectiveness of presumptive tax administration was affected by the high tax rates that were imposed by the Ministry of Finance relative to the income levels that the cottage industry earns on a monthly basis, high levels of corruption and the political interference that occur”.

This sounds familiar with the current high tax rates (high-end taxes in the region). They are likely to hinder compliance as business people often resort to alternative underground informal activities. The high taxes come at a time when the business environment is also shrouded by inefficiencies of the auction system, obscure currency environment and a predatory banking sector (1% OTC (over the counter) bank payments and 2% OTC cash withdrawals) which, combined, may push most informal and the self-employed to dodge the system.

These issues in the business operating environment, affect not only the SMEs, informal and self-employed sectors, rather they affect the whole economy (business sector). The ease of doing business index is testimony to this. From 2010 to 2018, Zimbabwe has been ranked above 150 among 190 economies. The improvement to 140 in 2019 came at the back of reforms in: starting a business, dealing with construction permits, registering property, getting credit and resolving insolvency. Worryingly, the paying of taxes index is not one of the major reforms. In the same vein, at a ranking of 140, Zimbabwe remains the worst ranked among her neighbours as visualised on the graph.

A lower ranking on ease of doing business is preferred as it shows the friendliness of the business environment, from setting up to running a business, and/or paying taxes in an economy. Zimbabwe is struggling in this regard. Regardless of the recent improvement from 155 to 140, the operating environment remains uncompetitive for a number of reasons, principally policy driven. Only the fringe issues were addressed which culminated to the improvement in the rankings but the core issues remain, hence our poor ranking in the region.

These outstanding issues especially with regards to informal traders and the self-employed will likely hinder the maximum realisation of the Finance Minister’s envisaged presumptive tax revenue. Administratively, for example, the Zimbabwe Revenue Authority (ZIMRA) does not have a database of the informal traders and most councils do not have such database too. Therefore, it is difficult to track the operators in these sectors for tax payment. Informal traders are reluctant to obtain tax clearance certificates which make the whole process futile.

After all, simply demanding more tax (on top of other taxes such as the 2% IMTT) from informal traders and the self-employed places a huge tax burden on the struggling businesses, which are trying hard to remain operational. Eventually, these businesses will abscond or worse still, they will close.

The heavy tax burden sends a very bad signal to the business community. It shows our insatiable desire for revenue collection today with no plan to grow the revenue base into the future.

This is not feasible. We have been there before — as at May 31, 2018, the Zimbabwe Revenue Authority (Zimra) had a huge uncollectable debt book of around US$4,3 billion — a consequence of harsh taxes in a stable currency environment. According to Zimra, the debt was difficult to recover due to factors such as operational challenges faced by companies. We are going back there, if money supply growth remains curtailed as planned.

Against this backdrop, a projection of a 100% revenue growth, as in the 2021 national budget, seems unrealistic, more so in a static exchange rate environment.

A static exchange rate would mean no growth in money supply and therefore inflation is also curtailed. In the absence of inflation, revenue cannot grow 100% unless production goes up by 100% which is unlikely if not impossible. This could have been the reason why the authorities resorted to ratcheting taxes.

However, the consequences will be devastating to the economy. We cannot just tax our way out of the current economic hardships.

Rather we need to address underlying issues in the operating environment. This suggests that we must create a more competitive and friendly business environment over and above a stable exchange rate and inflation rate. The idea that a stable currency rate is a panacea to all our economic challenges is misplaced.

When a friendlier business environment has been created, a more suitable policy option will be to focus on the pursuit for better livelihoods and for a more self-reliant informal sector. In this regard, government intervention in the informal and self-employed sector will concentrate on enablement and support rather than taxation and regulation.

The enablement and support strategies may come in different forms such as, skills development training, access to suitable premises, provision of water and electricity, provision of lines of credit and business insurance, extending government subsidies and prioritising SMEs in public sector supply chains. These strategies require registration for the informal and self-employed businesses to be part of beneficiaries, making it easier to formalise them and tax them in future.

After all, the current state of the Zimbabwean economy, that is, a shrinking formal sector and high poverty rates, calls for smarter interventions to tape into the tax potential of the informal and the self-employed sectors. The main policy drive should be to enable and strengthen them so that they become more viable and capable of increasing their contribution towards poverty eradication and employment creation. As they become more empowered and viable, they will gravitate towards formalisation and contribute more to the tax base.

Tazvivinga is a Zimbabwean development economist based in South Africa. These weekly New Perspective articles are co-ordinated by Lovemore Kadenge, an independent consultant and past president of the Zimbabwe Economics Society. – kadenge.zes@gmail.com or mobile +263 772 382 852.