‘VAT withholding tax threatens companies’

The Confederation of Zimbabwe Industries (CZI) is calling for removal of the 10 percent VAT withholding tax levied on both manufacturers and distributors arguing it threatens the two sectors’ viability.

With effect from July 1, 2017, the Zimbabwe Revenue Authority (Zimra) appointed a number of VAT withholding tax agents in the manufacturing and retail sectors to withhold 10 percent of turnover — which implies 67 percent of VAT from companies they trade with. The turnover withheld by the agents would be remitted to Zimra.

However, CZI — the country’s biggest representative for the manufacturing sector — has since written to Zimra acting commissioner general Happias Kuzvinzwa, seeking a reprieve to ensure the viability of manufacturers.

In a document seen by The Herald Business dated July 10, which is addressed to Mr Kuzvinzwa, CZI said most manufacturers in the country have outsourced the distribution of their products to distribution companies, which is in tandem with international trends and results in significant gains in efficiency of the supply chain.

According to CZI, such a business model is “simple” and involves the purchase of the goods by the distribution company from the manufacturer and resale to the retail and wholesale sectors.

“This is a low margin high volume business. The net VAT payable by a typical distribution company is in the range of 2 to 3 percent of net turnover (that is turnover net of VAT).

“The rate of withholding is at a rate of 10 percent of net turnover. This creates a massive cash flow gap which will cripple the distribution industry and have a significant negative knock on impact on the local manufacturing industry.

“Furthermore, the negative impact also affects manufacturers which supply direct to retailers and wholesalers and as more agents are appointed, this negative impact will mount.

“It is because of this impending crisis that this paper has been prepared for and on behalf of CZI and the distribution companies in Zimbabwe,” said CZI.

“The industry representative body is therefore imploring the Ministry of Finance and Zimra to “look into this issue and help manufacturing and distribution companies to remain in business.”

CZI argues that its calculations based on actual VAT positions, show that the introduction of the VAT withholding tax of 10 percent would result in “serious cash flow challenges for the distribution sector”.

“Assuming a monthly turnover of $10 million at a GP (gross premium) of 9 percent, after withholding the 10 percent VAT withholding tax, a distribution company will be in a VAT net refundable position of US$865 000 from a net payable position of $135 000. In order to put back the distribution company to its original cash flow position, only $135 000 or 1,4 percent of turnover should be withheld from it,” said CZI.

The organisation suggested that VAT withholding tax agents should only withhold on average 2,5 percent of turnover of distribution companies in order to maintain their current cash flow position. If the VAT withholding tax is not reduced, it is feared that distribution companies would be in a dire cash flow position.