Cyclone VAT on basic goods lands on New Year

Implementing Value Added Tax ( VAT) on essential goods like cooking oil, bread, and meat in a struggling economy like ours can have multifaceted effects, and we are here to experience them in 2024.

WHILE VAT is a common tool for revenue generation, its impact on basic commodities can be particularly challenging for vulnerable sectors such as smallholder farmers and other Small and Medium Enterprises (SMEs).

To start the year, we explore the potential repercussions of imposing VAT on these essential goods and the specific challenges likely to be faced by small-scale producers.

The legislation before January 1, 2024 provided for VAT zero rating and exemption of specified goods and services, in particular, goods predominantly consumed by vulnerable members of the society, as well as other critical services.

However, provisions in the new budget removed the zero rating preference on most goods including basic commodities.

“I, therefore, propose to limit VAT exemptions to medicines and medical services, goods for use by the physically challenged, sanitary wear, fuel and fuel products, agricultural inputs, implements and produce (excluding live animals, groundnuts, cotton seed, soyabean and products thereof), wheat (excluding bread), milk and salt.

“The exemptions will apply through the entire value chain and the remaining goods and services would, thus, be standard rated,” the Minister of Finance, Economic Development and Investment Promotion, Professor Mthuli Ncube said.

One immediate consequence of introducing VAT on basic goods is the increased financial burden on consumers. As the prices of essential items rise due to the inclusion of VAT, the cost of living escalates for the already financially strained population.

This will lead to a reduction in purchasing power and negatively impact household budgets, particularly for those with limited income and the economy at large.

Imposition of VAT also affects smallholder farmers who are not VAT registered. These farmers, often operating on a subsistence level, may find it challenging to absorb the additional tax burden.

The 30 percent withholding tax further exacerbates their financial challenges, as it directly reduces their profit margins. This, in turn, may discourage cattle rearing activities and contribute to a decline in food production.

SMEs, another critical segment of the economy, face similar challenges as many of these enterprises may not be VAT registered, as their turnover might not meet the registration threshold.

The 30 percent withholding tax on their transactions creates a significant hurdle, impacting their cash flow and hindering reinvestment or expansion efforts. This can lead to stagnation in the growth of SMEs, which are often considered the backbone of a dynamic and diversified economy.

Additionally, the VAT on basic goods can create a ripple effect throughout the supply chain.

Producers of raw materials used in the manufacturing of these essential items may also experience increased costs, further pushing up the overall production expenses.

As a result, downstream businesses, such as retailers and distributors, may face challenges in maintaining competitive prices and may pass on the increased costs to consumers, exacerbating the economic strain on households.

One potential consequence of these economic pressures is an increase in informal trading.

In an attempt to avoid VAT-related costs, both consumers and small businesses might turn to informal markets, which can have implications for tax collection and regulatory oversight.

The Government may find it challenging to monitor and regulate transactions in these informal sectors, potentially leading to revenue losses.

To mitigate the adverse effects of imposing VAT on basic goods, government should explore targeted exemptions or reduced rates for essential items.

This approach will protect vulnerable populations and support sectors crucial for food security.

Additionally, efforts to simplify the VAT registration process for small businesses could encourage compliance without imposing an excessive administrative burden.

Furthermore, investing in social safety nets and financial support mechanisms for smallholder farmers and SMEs will help alleviate the immediate financial strain.

In conclusion, while VAT on basic goods can be a tempting revenue-generation strategy, particularly in struggling economies, its implementation requires careful consideration of the potential repercussions.

The impact on smallholder farmers and SMEs, coupled with the 30 percent withholding tax, poses significant challenges to economic stability. Balancing revenue needs with the well-being of vulnerable populations is crucial, and policymakers must explore targeted measures to ensure the sustainability and inclusivity of economic policies in such contexts.

As we begin the year, let us brace ourselves for a myriad of Statutory Instruments (SIs) to reverse some of the issues to do with VAT.

With this, I would like to wish you the loyal reader of this column, a Happy New Year 2024 and more columns to you!

◆ Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter, Tapiwanashe Willoe Mangwiro on LinkedIn and mangwirowt@gmail.com