New tax measures weigh on viability of manufacturers: CZI

THE decision to allow only registered and tax-compliant players to buy from the manufacturers will have serious implications on manufacturing business viabilities, especially due to curtailed ability to push volumes, the Confederation of Zimbabwe Industries (CZI) has warded.

In its 2024 National Budget Response Paper (Response Paper), the Business Member Organisation (BMO) said if the new measure is enforced as announced, current models of operations that were being used to drive demand will no longer be possible.

To push volumes, manufacturers were putting in place various strategies including arrangements with pushcart vendors as well as selling groceries through tuckshops.

But in his 2024 National Budget proposals, Finance, Economic Development and Investment Promotion Minister, Professor Mthuli Ncube, said the business model used by micro and small enterprises structurally avoids regulatory requirements that include compliance with taxation, Local Authority by-laws on operating infrastructure, health, sanitation and licensing.

He said the growth of the micro and small enterprises has, thus, undermined domestic resource mobilisation efforts, particularly as formal businesses deliberately informalise operations and trade through tuckshops that predominantly trade in foreign currency.

As a result, Mthuli said, it is crucial to restore the trading structure, where the bulk of goods are retailed through the formal sector that contributes to the Fiscus.

“To restore the supply chain from the manufacturer, wholesaler to retailer, I propose that only licensed and Tax Compliant Operators procure goods from manufacturers and wholesalers.

“I, further, propose that only traders registered for VAT purposes and in possession of valid Tax Clearance Certificates be eligible to procure goods from manufacturers,” proposed Mthuli.

However, CZI said while the intention is noble, it could have some negative consequences.

The business lobby group said the informal sector provides a vital lifeline to formal firms, enabling them to access foreign currency and survive.

“Closing this vital source of income will have severe negative effects on legitimate enterprises and decrease government revenue,” CZI said.

Fears are that informal firms will respond to this simply by going further underground given that the requirements for informal firms to be licensed, tax compliant and VAT registered to buy from formal business is a very high bar.

“In addition, it is just impractical to add thousands more taxpayers to the ZIMRA systems, which are already having trouble handling the current base,” reads part of CZI’s Response Paper.

CZI gave an example of the alcoholic beverages sector where it said over 60 percent of the Lager and Sorghum beer is sold through bottle stores, nightclubs, and general dealers that do not meet the threshold for VAT registration of turnover of US$25,000 per annum.

“The proposed change will impact 15,000 traders and have serious implications on their welfare and their dependents.

Manufacturers of soft drinks and bread sell mainly through general dealers, supermarkets and quick service restaurants.

However, a significant proportion of the general dealers, bottle stores, and tuck shops are not registered for VAT because they do not meet the threshold.

The informal traders (largely the trolley vendors) account for about 5 of soft drink sales and according to CZI, the requirement for VAT registration will affect over 20, 000 traders, which also has serious implications on welfare.

“Preventing manufacturers from selling to agents without tax clearance certificates also implies that manufacturers cannot have shops that sell directly to customers, for examples factory shops that would sell directly to customers have now been outlawed.

“This will also have some negative impact on affordability, as it means that margins need to be added through intermediaries,” CZI argued.

It added that there is no capacity for the formal channels such as the modern supermarkets and wholesalers to fully service the market demand, “hence there is always room for the informal sector”.

“Closing the room for manufacturers to sell to them directly implies that illicit imports from neighbouring countries will continue to increase. Given the porous nature of borders, government will continue to be deprived of revenue.

CZI believes that the same objectives of enhancing government revenue as well as ensuring that the Zimbabwe dollar is widely accepted can be achieved through other means.

The business representative body proposed that an additional levy of 2.96 percent be levied on the price to “ensure that government gets the tax revenues which would have accrued to it if the players were paying tax”.

“Note this 2.96 percent is very much in line with the 3 percent flat rate turnover tax recommended in the Rapid Results Study on SME taxation done in 2019 and is in line with the turnover taxes apply in other countries such as Kenya.”