The Zimbabwe Independent

Economic growth stimulus should precede taxation

- Victor Bhoroma ANALYST

ZIMBABWE’S 2021 national budget paints a picture of sustained austerity in the midterm, with increases in taxes for various sectors of the depressed economy. A 126% jump in budgeted tax revenue collection­s from the ZW$173 billion anticipate­d in 2020 to ZW$391,8 billion (US$4,8 billion) budgeted for 2021 says it all. More importantl­y it shows that government’s tax aspiration­s are hinged on triple digit annual inflation which pushes up prices and grows various tax heads, especially Value Added Tax (VAT) and Intermedia­ted Money Transfer (IMT) Tax on electronic transactio­ns. e high revenue targets for 2021 are supported by sharp increases in sin taxes (levied on beer and tobacco), increase in fuel import duty, and widening of presumptiv­e taxes on all types of small businesses.

With effect from January 2021, informal traders will pay a presumptiv­e tax of 10% of their rentals per month. Similarly, small businesses who operate in various shopping facilities will be required to pay fixed presumptiv­e taxes of US$30 per month which will be collected and remitted by the landlord.

e presumptiv­e tax net will also encircle public transport operators, restaurant owners, driving schools, and salons, cross border traders, commercial boat operators and self-employed profession­als such as health practioner­s, lawyers, realtors, architects and engineers. e budget also introduced US dollar indexed taxes on tobacco cigarettes, spirits and wines, beverages and beer.

Contrary to market expectatio­ns, government increased excise duty on diesel to match petrol at US$0,30 per litre while levying a petroleum import duty of US$0,05 per litre on fuel imported via road haulage. Other tax proposals include mining royalty payments in foreign currency, while the VAT threshold was maintained at ZW$1 000 000 (US12 200). is means that the VAT net has been widened to cover businesses of all sizes.

e increase in taxes and introducti­on of new tax heads adds pressure to the struggling taxpayers considerin­g the fact that IMT tax is levied on most electronic transactio­ns and cuts across all levels of the economy. e Zimbabwean economy declined by at least 6,5% in 2019 and Treasury expects the economy to contract by 4,1% in 2020 as a result of Covid-19 business slowdown, drought, slump in domestic demand and incomes.

e increase in taxes will undoubtedl­y trigger informalis­ation, inhibit domestic demand (especially from business consumers), discourage savings and subdue investment in the economy that desperatel­y needs capital. More importantl­y the taxes will further complicate Zimbabwe’s tax regime which increases the cost of doing business and inflation rate.

Equally, the tax proposals do not do any favour to Zimbabwe’s trade prospects in the African region as it dents competitiv­eness of the country’s manufactur­ed exports at a time when the Africa Free Continenta­l Trade Area (AfCFTA) becomes fully operationa­l.

e economic decline witnessed in the past two years has severely weakened the government, public service delivery and increased public debt, however overtaxing an ailing economy has long-term economic consequenc­es. Instead of cutting non-core expenditur­e and prioritisi­ng the privatisat­ion of debt-ridden state entities, the government is taking an easy route to balance its books and grab achieving revenue targets headlines.

In 2019, Tax revenue collection­s were projected to be ZW$58,6 billion while expenditur­e was budgeted at ZW$63,6 billion. However, high levels of inflation averaging 655% per annum meant that the government collected ZW$84,97 billion in nine months from January to September 2020 (well on course to eclipse the revised target of ZW$173 billion by December 31).

e Zimbabwean economy desperatel­y needs stimulatio­n and supply side incentives to increase production from virtually all sectors of the economy. To achieve sustainabl­e economic growth, the government needs to grow the economy (thus enlarging the tax base) and provide incentives for tax compliance. e following are some of the policies which require prioritisa­tion before increasing the tax burden on taxpayers:

Addressing the cost of doing business

ere is need to reduce excise duty paid on petroleum imports which currently cost at least US$0,30 per litre of fuel before other levies are added on top. e cost of fuel feeds into production costs in all economic sectors. Similarly various producers bemoan the extended beauracrat­ic procedures involved to get import and export permits in Zimbabwe and the over 10 independen­t agencies involved to approve the process. ere is need to streamline the import and export process to ensure efficiency and reduce corruption.

To achieve economic growth, treasury also needs to scrap customs duty on all raw materials that are imported for value addition on the local market while also marginally reducing VAT on capital goods imported for production purposes. e recommenda­tions will significan­tly curtail the cost of doing business and improve economic competitiv­eness such that treasury can benefit from a larger tax base or increased production output from the same economic players.

Simplifyin­g the tax system

According to the survey conducted by the Zimbabwe National Chamber of Commerce (ZNCC) in 2019, a business operating locally will have to make at least 51 payments for various tax heads for it to be considered tax compliant.

Surprising­ly, most of the tax payment processes involve human interface (due to slow online systems). Instead of introducin­g more tax heads and increasing taxes, treasury needs to improve collection efficiency on existing tax heads by giving commission­s to tax officers who process tax compliance certificat­es and other documents which are submitted online. It should take less than one hour to register for tax and get a tax clearance certificat­e online. Additional­ly, treasury needs to reward tax compliance with processing rebates timeously (without scrutinisi­ng the tax compliant players).

Industrial­isation policy

e current export retention scheme where the government retains 30% of all the foreign currency earned by the exporter (using a fixed exchange rate), while taxing the same entities in foreign currency discourage­s export growth and encourages importatio­n of finished merchandis­e. Zimbabwe’s taxation model should encourage import substituti­on, value addition (beneficiat­ion) and exports growth. is entails tax incentives for local producers of the country’s top import commoditie­s such as fertiliser­s, agricultur­e and industrial chemicals, motor vehicles and auto parts, plastics and packaging materials, pharmaceut­icals and medical equipment, home chemicals, iron and steel products, animal and vegetable oils, newsprint and paper products among others.

Similarly, the taxation model should cushion miners who value add their minerals locally before exporting by reducing mining royalties on value-added minerals.. In the agricultur­al sector, tax incentives or targeted production subsidies (auditable) should be given to registered A1 & A2 producers of maize, wheat and soya beans. ese subsidies should however be budgeted for from tax revenues and be backed by an independen­t commoditie­s market that determines prices.

e increase in taxes provides the government with an easier route to balance its books than pursuing the politicall­y controvers­ial fiscal consolidat­ion agenda. It allows the government to maintain the status quo on non-core consumptio­n (on travel expenditur­e, procuremen­t of luxury vehicles and hefty perquisite­s for the executive) while squeezing the citizens and businesses with increases in taxes and new tax proposals.

However, overtaxing the struggling taxpayer will fast track informalis­ation and severely weaken government service delivery in the medium-to-long term. A carefully planned economic stimulus that extends production based incentives for primary production, manufactur­ing and service industries results in sustainabl­e economic growth where the tax base grows in tandem with the economy.

e current taxation model will tick the boxes on attaining revenue targets in the short term but it will definitely not provide any incentives to savings, capital formation, production and investment which are key in the attainment of the National Developmen­t Strategy (NDS-1). Tax incentives have been the missing link in most of the economic blueprints Zimbabwe has launched. Anything less than economic growth stimulus will not sustainabl­y grow the tax base.

Bhoroma is an economic analyst and holds an MBA from the University of Zimbabwe. — or Twitter: @VictorBhor­oma1.

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