HomeAnalysisUrgent need for equitable tax regime

Urgent need for equitable tax regime

Angellah Mandoreba
DOMESTIC resource mobilisation (DRM) has been at the centre of contemporary discourse of financing for development. DRM can be basically understood as the manner in which a country mobilise and utilise resources internally.

At the centre of DRM is taxation, which the majority of developing countries, Zimbabwe included depend on to raise funds to meet public needs. Taxation provides a platform for development through raising funds needed for sustainable growth and development. Taxation also acts as an antidote to aid and debt dependence. In debt trapped countries like Zimbabwe, the need to strengthen DRM anchored on effective taxation becomes apparent to wean the country from debt dependence and increasing the country’s capacity to repay its debts.

According to the Ministry of Finance and Economic Development, the country’s total debt stock stands at US$13,7 billion as at September 2021, whilst the International Monetary Fund (IMF) in its 2022 Article IV Consultation with Zimbabwe projects public debt at US$19 billion as at December 2023. The fact that the bulk of this debt is in arrears clearly shows that the country’s capacity to repay its debt is comprised; thereby affecting credit rating and diminishing prospects of accessing credible and concessionary lines of credit.

The need to strengthen taxation cannot be over emphasised. However, this must be done in a manner that strikes the delicate balance between revenue collection and ensuring that the burden of taxation is shared fairly across the different sections of the society including ordinary citizens, corporates and the elites.

This must also take into consideration other social indicators like poverty and inequality to ascertain the extent to which these are alleviated or otherwise perpetuated.

Against the backdrop of a struggling economy, debt crisis and collapsed public service delivery, the government of Zimbabwe has since 2018 been on an overdrive to expand the tax base to collect as much revenue as possible. This witnessed the minister of Finance and Economic Development, Mthuli Ncube implementing austerity measures during the 2019 fiscal year.

This witnessed the introduction of a number of taxes including the infamous 2% tax on all electronic transactions.

Nevertheless, the capacity and effectiveness of taxation to spur much-needed sustainable development and growth requires good tax governance more than anything.

In the case of Zimbabwe, there are a number of inhibitive factors to realise this potential.

Although taxation is one of the avenues to finance the national purse, a number of factors determine the extent to which this can be realised. In a context of poor tax administration, taxation can only widen inequalities and deepen poverty. In the country’s case, the Zimbabwe Revenue Authority (Zimra) is making efforts to promote voluntary tax compliance and one of the key result areas in its 2019-2023 Strategic Plan is to increase voluntary compliance.

There are a number of probable factors behind lack of voluntary tax compliance and according to the Organisation for Economic Co-operation and Development (OECD) Global Forum on Development, “Citizens may be unwilling to pay tax, frequently reflecting an often accurate perception that officials themselves may be corrupt, that governments consistently misuse public funds and that expenditure patterns may not reflect their wishes”.

To some extent this explains why Zimbabwe grapples with the lack of voluntary tax compliance. On one hand, the country is grappling with systemic corruption, which has penetrated every facet of public life with the Transparency International ranking Zimbabwe 159 out of 180 at the Corruption Perception Index for 2021 which is way below average.

Thus the prevalence of public sector corruption has the capacity to influence the general public perception that their tax contributions might be abused. Year in year out, the Auditor General’s reports expose acts of abuse of public funds in various government ministries, departments and agencies further eroding public trust in the country’s public finance management.

Lack of voluntary tax compliance also explains rampant tax avoidance, which further undermines the state’s capacity to collect sufficient revenue and ultimately to provide public services.

It also suffices to say that ordinary citizens are demotivated to voluntarily comply with their tax obligations because they have nothing to show for the funds they remit to the government.

The amount of taxes collected must be commensurate to the quantity and quality of public services delivered. It is ironic that, through a number of consumptive taxes including Income Tax and Value Added Tax citizens are heavily taxed but the state of public service delivery is not reflective of the many taxes collected.

In tax justice discourse, the amount of taxes collected and how it is used matter.

Public spending is on the decline and social protection funding for the past years has been way below the Africa Social Policy threshold of at least 4,5% of the national budget. This is despite the existence of social vulnerabilities fuelled by the Covid-19 pandemic shocks.

The government has also been consistently failing to meet the Dakar Declaration on education for all which mandates governments to allocate at least 20% of the national budget towards the education sector.

The country’s health sector is in shambles, roads infrastructure is dilapidated and most urban suburbs have gone for more than decades with dry taps. This is an act of tax injustice that demotivates citizens to engage in voluntary tax compliance.

A progressive taxation is one that facilitates equitable distribution of the tax burden and in the case of Zimbabwe progressive taxation is provided for in Section 298 (1)(b)(i) of the Constitution of Zimbabwe, which stipulates that the burden of taxation must be shared fairly. Nevertheless, Zimbabweans are currently experiencing a regressive tax regime where the poor and ordinary citizens contribute much to the fiscus yet the rich and few elites are not paying their fair share of taxes as to be highlighted below.

As developing countries seek to participate in the global market of investment, they tend to compete to provide conducive environments which lure foreign direct investment, including relaxing tax regulations and environmental and labour principles.

The designation of certain areas as Special Economic Zones in Zimbabwe is also an attempt by the government to attract investment in key sectors of the economy.

Investors tend to land at those jurisdictions with most favourable environments which maximise their profits.

However, this often comes at economic and social costs with ordinary citizens being at the receiving end as those conditions will be biased towards the investor.

The ‘Race to the Bottom’ syndrome
Furthermore, the race to bottom principle tends to prejudice governments of the much-needed revenue to finance public needs through relaxation of tax regulations and awarding of unsustainable tax incentives.

There are notable contradictions in the country’s tax administration regime. At a time, the country seeks to mobilise as much revenue as possible, the government is on an overdrive to offer harmful tax incentives to multinational corporations.

The quest for foreign direct investment under the mantra Zimbabwe is Open for Business seems to have put the country in a vulnerable position, which seems to have taken away the government’s bargaining power in the negotiation of investment deals. Some multinational corporations have been awarded unsustainable tax incentives thereby depriving the country of the much needed revenue for public spending. Cases in point are Huawei Technologies income tax exemption and the five-year tax exemption to Great Dyke Investments (GDI). This is happening at a time citizens are overly taxed through direct and indirect taxes. The 2% tax double and triple taxes the poor and ordinary Zimbabweans whilst the rich and few elites are cushioned by their huge incomes.

The increase of Withholding Tax from 10% to 30% assented in the Finance Act No 7 of 2021 also witnessed an indirect further contraction of the disposable incomes of the poor. It has also proven difficult for the government to effectively tax the elites because of the latter’s capacity to manipulate the porous tax administration system.

Efforts to raise revenue domestically has therefore been undermined by the scourge of illicit financial flows (IFFs) largely aide by the existence of a weak tax administration system and corruption.

Whilst taxation has the capacity to foster good governance through enforcement of the social contract between citizens and government, in Zimbabwe, this has been undermined by corruption and weak accountability systems.

In 2022, Transparency International Zimbabwe and the Reserve Bank of Zimbabwe estimated that the country lost about US$3 billion from 2015 to 2017 to IFFs. There is therefore an urgent need for Zimbabwe to come up with a robust and sustainable domestic resource mobilisation framework.

The starting point must be strengthening taxation systems to combat leakages towards maximising revenue collection.

This must be coupled with ensuring that the burden of taxation is shared fairly in a manner that facilitates equitable resource redistribution, alleviates poverty and reduce inequalities.

  • Mandoreba is the national coordinator at Fight Inequality Alliance Zimbabwe. These weekly New Horizon articles published in the Zimbabwe Independent are coordinated by Lovemore Kadenge, an independent consultant, past president of the Zimbabwe Economics Society (ZES) and past president of the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zimbabwe). Email: kadenge.zes@gmail.com and mobile No. +263 772 382 852.

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