Finance, Economic Development and Investment Promotion minister Mthuli Ncube last week presented the 2024 National Budget, just before the festive season.
Despite a 1 193% jump against the 2023 National Budget, the proposals in the 2024 budget statement have sent mixed signals on the prospects of surviving the headwinds, given the projected El Niño-induced drought in the region.
Among the sticking issues is the proposed reduction in revenue threshold for value-added tax (Vat) registration from US$40 000 to US$25 000, along with the banning of direct trading between manufacturers and traders not registered for Vat.
Zimbabwe is a highly informal market, with over 80% economic activities happening in that sector.
Over the past two years or so, the Zimbabwe Revenue Authority has been largely taxing the few formal market players, leading to subdued financial performance.
Calls were made for the government to level the playing field, as formal market players were losing business to informal sector, not subject to regulatory fees.
In response, the Treasury made efforts in the 2024 budget to enforce regulatory compliance on informal traders. These included a Vat standard rate of 15%.
Firstly, the economy of Zimbabwe has seen a significant shift in currency mix, with over 80% of transactions being denominated in United States dollars (USD).
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Most traders, particularly in the informal sector, have shunned the highly fragile Zimbabwe dollar (ZWL), preferring the greenback in a bid to avoid exchange losses.
Resultantly, informal traders pay suppliers in United States dollars. This has seen more suppliers favouring informal traders on supplies against formal retailers, who offer “risky” payment methods (ZWL credit).
To understand the impact of this, Vat is a type of tax that is assessed incrementally, and levied on the price of a product or service at each stage of production, distribution, or sale to the final consumer.
In other words, this tax is included in the final price of a product, increasing the product price by the proportional rate of Vat.
In prior years, informal traders did not account for this tax in their final price to consumers as it makes the product more expensive and thus less competitive.
The traders were also not subject to this tax from suppliers, hence no passing-down effect of the tax to final consumers. Most informal traders also did not meet the minimum taxable revenue threshold required to register for Vat, hence no enforcement of the tax in the informal market.
To maximise tax revenue for the government, Ncube introduced two measures in the budget, which include the reduction of the threshold from US$40 000 to US$25 000.
This way, more traders will be included in the bracket. The other measure is to ensure that only traders registered for Vat, with valid tax clearance certificates, can buy goods directly from manufacturers.
This is meant to reduce the favouritism of informal traders by manufacturers, as well as address the pricing competition between formal and informal traders as both will have to adjust prices for regulatory taxes.
Many informal retailers operate on thin profit margins, and adding Vat to their prices could make their goods less affordable for consumers.
Additionally, enforcing Vat collection could impose additional administrative burdens on small businesses, potentially driving them further into informality or out of business altogether.
When businesses are required to charge Vat on their sales, they often pass on this cost to consumers in the form of higher prices. This can lead to reduced consumer spending and lower overall economic activity.
Duma is a financial analyst and accountant at Equity Axis, a leading media and financial research firm in Zimbabwe. — [email protected] or [email protected], Twitter: TWDuma
