Close informal sector tax loophole

THERE is a cliché gaining traction nowadays, especially after the tax scandals distressing most of the world’s best footballers and it goes: “there are two things certain in life — death and taxes”.

Taxes in other jurisdictions are sacrosanct and cannot be avoided. They are essentially the lifeblood of any nation.

It is ironic that countries that are affluent and have sufficient means to support their budgets are the most fussy about tax collections, while, on the other hand, those that have the barest of necessities seem to be decidedly non-committal.

Perhaps it is fair to assert that countries become either rich or poor because of their tax collection systems.

The recent working paper that was published by the International Monetary Fund (IMF) on Monday, which states that the Zimbabwe’s informal sector is probably the sixth-largest on the continent is quite revealing.

While projections have traditionally ranged from the $2 billion estimate made by the Reserve Bank in 2012 and $7,5 billion by Finscope MSME (micro, small and medium enterprises survey), the new study essentially comes close to the figure ($7 billion) that could possibly be circulating in the informal sector.

Again, while this figure might be comforting for a country that has gone for almost two decades under sanctions from the United States and the European Union bloc — for it arguably indicates how workers have been able to adjust in a difficult environment — it points to a potential problem for the fiscus.

The bulk of small to medium scale businesses (SMEs) are not paying taxes — that is a fact acknowledged by Government and the Zimbabwe Revenue Authority.

This reluctance by the SMEs is mainly informed by the need to avoid operational costs and expenses that might make their ventures unviable.

Most of such businesses rely on retailing fast-moving consumer goods on shop verandas and on the streets.

In other words, they have found a sweet spot where they monetise non-compliance.

But this has proved to be disruptive to retailers who have to contend with bills such as rentals, salaries and taxes, while the same goods they sell can be found easily on their doorstep at cheaper prices for that matter.

Another report released on July 7, and this time from the World Bank — Enterprise Survey: Zimbabwe 2016 Profile — concluded that an estimated 74 percent of Zimbabwean firms are feeling the pressure from competition posed by the informal sector.

Apparently, as company revenues shrink, the more the temptation grows for Government to squeeze them further in order to meet revenue targets.

This in turn increases the cost of business, which is already high.

However, the more they struggle, the more business accrues for SMEs and the informal sector. And the leakages are massive.

Government needs to act quickly to formalise the informal sector and tap into the billions that are changing hands by ensuring that they pay tax.

This should be done in a smart way, without unnecessarily disrupting the informal sector.

The SMEs sector is a very sensitive one, but currently providing livelihood to the bulk of the local population.

Any intervention should, therefore, necessarily incentivise compliance, at the same time laying the foundation to inculcating the culture of paying taxes so that it becomes a generational expectation. The current state is untenable. We hope that Government moves quickly to formalise the informal sector and benefit in tax revenue from the $7 billion circulating in that sector.