THE foreign currency-starved government will demand value-added tax (VAT) on imported goods and services in foreign currency and codify the payment of VAT in the currency transacted.
This will be implemented as the Zimbabwe Revenue Authority (Zimra) complained that the multiple-pricing system for goods and services bred a fertile ground for revenue leakages.
Among these leakages are retailers selling goods in foreign currency while issuing receipts and declaring tax returns in local currency.
VAT on the sale of imported goods and services can be paid in local currency. However, with the economy relying on such types of goods and services, Treasury wants duties on these imported items.
In the 2022 mid-term budget review and supplementary budget yesterday, Finance and Economic Development minister Mthuli Ncube announced plans to change the Value Added Tax Act to allow enforcement of VAT forex payments.
“Notwithstanding provisions of the Reserve Bank Act, whereby bank notes, coins and electronic currency issued by the central bank are solely defined as legal tender, there is an obligation to remit value added tax in the currency of trade,” Ncube said.
“The Value Added Tax Act, however, does not recognise electronic currency as legal tender. I, therefore, propose to align the Value Added Tax Act to the provisions of the Reserve Bank Act.”
The move comes at a time when the central bank estimates that US$1,5 billion is circulating in the informal market.
- Exports are expected to reach US$7,3 billion, imports to reach US$8,1 billion by year end.
- Current account deficit expected at US$800 million by year end.
- Foreign currency VAT to be codified into law, and payments to be backdated to February 1, 2019
- Companies that owe Zimra to be temporarily closed.
- Cross-border traders are now liable to 10% withholding tax.
- ZW$929 billion (US$2,11 billion) supplementary budget where 53% will go towards employment costs to cushion public servants against increasing cost of living.
- Revenue collections to year end are now projected at ZW$1,7 trillion (US$3,87 billion) while expenditures are now estimated at ZWL$1,9 trillion (US$4,32 billion)
- Domestic debt at ZW$1,3 trillion (US$3,5 billion) with external debt standing at US$13,2 billion
- GDP growth revised downwards to 4,6% from the initial 5,5% due to inflationary headwinds.
- Tax-free threshold on local currency remuneration adjusted to ZW$50 000 (US$113) per month from ZW$25 000 (US$56,93)
- Tax bands to end at ZW$12 million (US$27 334) from the current ZW$6 million (US$13 667) per annum, above which tax will be levied at a rate of 40% with effect from August 1, 2022.
- A 5% royalty rate to be applied to other platinum group metals effective January 1, 2023. The royalty rate of 5% will also apply on lithium.
- VAT registered operators to pay duty in foreign currency to facilitate offsetting of output and input tax in the same currency.
According to the central bank’s May economic review, the money supply reached ZW$971,54 billion (US$3,34 billion) in May, up 44,71% from April’s ZW$671,37 billion (US$4,21 billion).
From the May figure, foreign currency deposits were 57,55%, local currency deposits at 42,13% and the remainder was the currency in circulation.
The new changes by the government indicate that they are trying to tap into those deposits and informal forex transactions.
However, the move will act as a second tax on retailers as the Reserve Bank of Zimbabwe retains 20% on all domestic foreign currency transactions.
“Value Added Tax: Input Tax. Mr Speaker Sir, current legislation permits businesses to trade in either local or foreign currency. Consistent with this legislative provision, VAT registered operators are compelled to account for tax in the currency of trade. In order to assess the amount of VAT payable or refundable, output tax should be offset against input tax incurred in the same currency,” Ncube said.
“This, however, creates an administrative burden for some VAT registered operators whose sales and purchases are transacted in different currencies. This is particularly common on foreign currency sales of imported goods and services that are liable to import VAT in local currency.”
He continued: “I, therefore, propose to provide VAT registered operators with the option to pay duty in foreign currency to facilitate offsetting of output and input tax in the same currency, with effect from 1 September 2022”.
The minister has also widened the Intermediated Money Transfer Tax (IMTT) on foreign currency transactions.
“In the case of foreign currency denominated transfers, I propose to review the maximum tax payable per transaction from US$10 000 to US$20 000 on transactions with values exceeding US$500 000. These measures take effect from 1 August 2022,” he said.
IMTT foreign currency transfers already attract a 4% charge per transaction.
In terms of taxable transactions, internal transfers among money transfer agents will now also be taxed as they were previously excluded.
“The definition of financial services, however, excludes authorised dealers with limited authority (money transfer agents) registered in terms of the Exchange Control Act, hence, are not required to withhold IMTT. As a consequence, these institutions have an unfair competitive advantage over mobile banking services and other banking institutions registered in terms of the Banking Act in the money transfer business,” Ncube said.
“I, therefore, propose to extend IMTT to the internal transfer of money by authorised dealers with limited authority registered in terms of the Exchange Control Act. For the avoidance of doubt, IMTT will not apply to inbound foreign currency remittances.”
Ncube has announced that two separate tax returns shall be prepared starting from October 1, 2022.
“In order to mitigate against the risk of over or understating tax, I propose that taxpayers prepare two separate tax returns in the currency of trade,” Ncube said.