Zim’s budget outlines indigenisation policies
Minister gives clarity on many issues, but a lack of resources and the allocation of funds come in for criticism
ZIMBABWEAN Finance Minister Patrick Chinamasa presented the 2014 budget to parliament on December 19 2013. The budget estimates expenditure at $3.628bn, of which $3bn (73%) will cover the government’s public-sector wage bill and the remaining $492bn capital expenditure.
The revenue target is set at $4.12bn, of which $3.82bn will be financed through tax proceeds and the remainder from dividends from diamond mining operations and proceeds from investment in property. Total imports are expected to grow from $7.6bn in 2013 to $8.3bn in 2014, while exports are expected to increase from $2.8bn to $4.43bn. The growth rate for 2014 is set at 6.1%, with agriculture (9% growth), mining (11.4% growth) and construction (11% growth) expected to show the biggest contribution to growth performance.
The government recognises the importance of re-engaging with creditors for debt relief and securing an endorsed staff monitoring programme with the International Monetary Fund (IMF) and renewed its commitment to the “multicurrency” regime.
The minister acknowledged that a large number of investors have been seeking clarification regarding the country’s indigenisation and economic empowerment regulations. He reiterated that in all sectors of the economy the 51%/49% shareholding structure applies. However, where the enterprise does not benefit from a natural resource or raw material derived from Zimbabwe, the 51% stake for Zimbabweans is not available for free and the business partners in the investment may make their own decisions on how and when, within the gazetted framework, the 51% contribution is to be financed or achieved. It was also emphasised the investor is free to choose his Zimbabwean partner; only where this arrangement has failed would the government intervene.
The Departmental Draft Bill for the Finance Act 2013 presented to Parliament on the same day as the budget provides for tax relief in respect of indigenisation transactions. Proposals include a tax deduction in respect of contributions or donations by a taxpayer to a community share ownership trust or scheme in terms of the Indigenisation and Empowerment Act and interest payable by an indigenous person on any loan advanced to purchase shares in terms of an approved indigenisation implementation plan. It is also proposed that amounts received by or accrued to a person form the sale or disposal of shares to an indigenous person or a community share ownership trust or scheme should be exempt from capital gains tax.
Zimbabwe received $1.6bn in the form of remittances by Zimbabweans living abroad during the eleven months ending November 2013. The government intends to develop and implement a framework to facilitate access to this resource, including funding small-scale hydro-electric schemes through the issuance of diaspora bonds. Investment by the diaspora is also to be promoted through tax and import duty incentives for qualifying investments in the manufacturing and other capital intensive industries.
The minister also announced the planned establishment of special economic zones offering trade incentives to stimulate business and job creation. Focus industries include agro-processing, diamond beneficiation, gold value addition, low carbon manufacturing, healthcare, medical technologies, renewable energy, waste management and logistics and port of entry corridors. The government is developing the relevant regulatory framework based on similar initiatives by China, India, South Korea, Malaysia, Singapore and Dubai and will be requesting inputs from stakeholders in the private sector.
The negative impact on productive sectors of the inadequate supply and high cost of electricity has necessitated the government to support initiatives to improve electricity supply and reduce the cost to the consumer. A VAT exemption for electricity imports and the releasing of funds for the maintenance and replacement of aged equipment by the Zimbabwean Electricity Transmission and Distribution Company are proposed.
The need for an efficient and transparent licensing system in the allocation of mining rights as a means of promoting sustained mineral exploitation has been emphasised. To reinforce the previously introduced “use it or lose it” principle it is proposed that unworked claims be forfeited to the government after a period of three years. The export of unbeneficiated minerals is to be further penalised by the introduction of an export tax on unbeneficiated platinum and diamonds, while the sale of rough diamonds to local industry has been zero-rated for VAT purposes with effect from January 1 this year.
Currently, the Zimbabwe Mining Development Corporation pays out dividends to shareholders at the discretion of the board, which provides no certainty on the quantum of the dividends that may be received by the government on an annual basis. To ensure a consistent flow of funds to the fiscus, a revenue sharing formula of 10% on gross proceeds of diamond sales was proposed from January 1 this year. The amount is to be withheld at source, after conclusion of each sale.
To incentivise small-scale gold producers to sell their produce through the formal channels, a reduction in royalties from 7% to 3% on gold producers whose output does not exceed 0.5 kg per month has been proposed.
Since the inception of the SADC Trade Protocol in 2000, SA has no longer been offering customs duty preferences in terms of the Zimbabwe South Africa Bilateral Trade Agreement entered into in 1964. The minister proposed that the current customs duty preferences available to SA be suspended until the parties agree to reciprocate the application of the agreement.
Following on the increase of the highest marginal tax rate to 45% on income exceeding $10,000 in 2012, the rate was increased again to a flat tax of 50% on income exceeding $20,000 from January 1 in an attempt to address growing income disparity between rich and poor.
Local media criticised the budget as not having enough resources to back up the planned expenditure and the allocation of funds to the agricultural and mining sectors not enabling the growth rates expected from these industries.
Celia Becker is an executive in the tax department at ENSafrica.