HomeOpinionSubsquent treatment of 30% withholding tax

Subsquent treatment of 30% withholding tax

Owen Mavengere

There has been extensive coverage on the increase in the withholding tax on tenders from 10% to 30%.

Businesses have been raising concern about this as some have indicated that it will essentially wipe out any reasonable margins.

The reasoning and purpose of this have been extensively covered. Leading expert Zvino Mapetere wrote about this topic in the ZimInd of the week January 21 to 27, 2022.

For this article, I wish to answer a question which has been flooding my inbox on what happens after your client has deducted the 30% should one not be compliant at the time of transacting.

Most individuals feel that this tax is going to eat into their margins.

From some of the comments, I also get the sense that people view it as some kind of tax expense or tax penalty which would then require to be posted to the income statement (statement of profit or loss and other comprehensive income).

I will look at the tax again, but this time with a focus on how it is subsequently treated, by doing a step-by-step review of the processes involved when dealing with the withholding tax on tenders.

30% withholding tax – step by step

Just as a reminder as most would be aware, it is important to note that, first and foremost, when making a payment, one must request the supplier to furnish a valid tax clearance.

In the absence of this then the withholding tax kicks in.

The next steps are not necessarily in the best or correct order.

However, for me the next step, after advising the supplier, is to issue out a certificate.

This is as per section 80 (3) of the Income Tax Act which says: “Where a paying officer has withheld any amount in terms of subsection (2) he shall furnish the payee concerned with a certificate, in a form approved by the Commissioner, showing the amount so withheld.”

The key requirement is to show the amount of the 30% withheld from the payment.

The form to be used must be cleared by the tax authorities.

Thereafter, one must remit the 30% withheld to Zimra by the 10th day of the next month.

Zimra per the law, will hold on to that money.

This statement is what I really wish to draw attention to. Section 80 (4) of the Income Tax Act says: “The Commissioner shall retain any amount remitted to him under subsection (2) until the income tax payable by the payee concerned for the year of assessment referred to in that subsection has been assessed, whereupon—

(a) the amount shall be allowed as a credit against the income tax so payable by the payee; or

(b) where the amount exceeds the income tax so payable by the payee, the Commissioner shall forthwith refund the excess to the payee.”

This section is quite loaded and I will expand on it.

It clearly states that ZIMRA shall retain (hold on) to the funds pending assessment.

This is very important particularly in scenarios where one is yet to obtain a tax clearance due to some discussions still on-going with the tax authorities.

The amount will be retained until the supplier’s income tax is now due.

Once all assessments have been carried out and the supplier’s obligations to ZIMRA are clear with regards to income tax, the amounts deducted previously are then set off against the balance due to the tax authorities.

The section goes further and highlights that, should the credit due to the taxpayer exceed their obligation to ZIMRA, the tax authorities will process a refund, forthwith.

Failure to deduct the withholding tax

The law also states that it is the responsibility of the paying entity to ensure compliance.

If one fails to withhold or remit the tax on the due date, they will then become liable themselves.

Over and above that there is risk of a 100% penalty on the amount due as well.

Cash flow impact of the tax

This therefore shows that the withholding tax is not really an “expense” but just a measure to enhance compliance.

The major downside in my view is that the withholding tax essentially forces one to prepay their income tax.

The general assumption, of course, is that one will ultimately be compliant and the tax affairs will be in order at some point.

As much as the withholding tax is not an “expense”, its major drawback is that it will significantly hurt your cash flows.

In the current environment with inflation, though slightly tamer than before, at around 60,6% per annum, it is still important to plan around cash flows effectively.

Furthermore, the ability to restock can also be adversely affected if the 30% is deducted upfront when this was not factored into the budgeting and planning processes.

Earlier today before I sat down to pen this article, I met a senior member of the Institute of Chartered Accountants of Zimbabwe (ICAZ) who qualified in the 80’s.

He told me of an old adage which I cannot quite remember word for word but it was something like sales is vanity, profit is sanity and cash flows is reality.

This just serves to really point out the importance of managing cash flows as that could easily destroy one’s business if not managed well in general.

Therefore, this tax as much as it will not necessarily hurt one’s profit. It is still critically important that it is avoided by being compliant with taxation requirements.

The information in this article is of a general nature. This article is not intended to and does not constitute legal advice.

  • Mavengere is the Acting CEO at the Institute of Chartered Accountants of Zimbabwe (ICAZ), which is the largest and longest standing Professional Accountancy Organisation in Zimbabwe. Owen can be contacted on technical@icaz.org.zw or twitter: @OwenMavengere.

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