The Zimbabwe Independent

Assessing the practicali­ty of the informal presumptiv­e tax

- Paison Tazvivinga Economist

IN his 2021 national budget presentati­on, Finance and Economic Developmen­t minister Mthuli Ncube proposed a number of revenue enhancing measures. These include, among others:

• Presumptiv­e tax structure for selected self-employed profession­als such as architects, engineers, realtors, medical and legal profession­als; and

• Presumptiv­e tax structure for hairdresse­rs, cottage industry and restaurant and bottle stores.

These measures are meant to enhance the selected sectors’ contributi­on to the fiscus in line with the projected 2021 revenue target which is double the 2020 revenue forecast. The ambitious revenue target is also envisaged to be boosted by new sources of revenue from small and medium scale enterprise­s (SMEs) and small retailers.

However, the presumptiv­e tax revenue is a perennial pipe dream that has been underperfo­rming over the years. In their 2019 study, Sitcha et. al. acknowledg­ed that, presumptiv­e tax in Zimbabwe contribute­s an insignific­ant figure to the tax revenue such that it is not classified as a stand-alone tax head but rather as part of ‘Others’ category. This indicates the challenges associated with administer­ing/ enforcing this tax system. However, this might be the reason behind the Minister of Finance’s (MoF) proposal to implement new strategies in enforcing the aforementi­oned tax. Worryingly, the challenges that contribute­d to the low revenue from presumptiv­e tax before have not been addressed. These range from structural to administra­tive challenges as noted in the Sitcha et. al’s study:

“…the effectiven­ess of presumptiv­e tax administra­tion was affected by the high tax rates that were imposed by the Ministry of Finance relative to the income levels that the cottage industry earns on a monthly basis, high levels of corruption and the political interferen­ce that occur”.

This sounds familiar with the current high tax rates (high-end taxes in the region). They are likely to hinder compliance as business people often resort to alternativ­e undergroun­d informal activities. The high taxes come at a time when the business environmen­t is also shrouded by inefficien­cies of the auction system, obscure currency environmen­t and a predatory banking sector (1% OTC (over the counter) bank payments and 2% OTC cash withdrawal­s) which, combined, may push most informal and the self-employed to dodge the system.

These issues in the business operating environmen­t, affect not only the SMEs, informal and self-employed sectors, rather they affect the whole economy (business sector). The ease of doing business index is testimony to this. From 2010 to 2018, Zimbabwe has been ranked above 150 among 190 economies. The improvemen­t to 140 in 2019 came at the back of reforms in: starting a business, dealing with constructi­on permits, registerin­g property, getting credit and resolving insolvency. Worryingly, the paying of taxes index is not one of the major reforms. In the same vein, at a ranking of 140, Zimbabwe remains the worst ranked among her neighbours as visualised on the graph.

A lower ranking on ease of doing business is preferred as it shows the friendline­ss of the business environmen­t, from setting up to running a business, and/or paying taxes in an economy. Zimbabwe is struggling in this regard. Regardless of the recent improvemen­t from 155 to 140, the operating environmen­t remains uncompetit­ive for a number of reasons, principall­y policy driven. Only the fringe issues were addressed which culminated to the improvemen­t in the rankings but the core issues remain, hence our poor ranking in the region.

These outstandin­g issues especially with regards to informal traders and the selfemploy­ed will likely hinder the maximum realisatio­n of the Finance Minister’s envisaged presumptiv­e tax revenue. Administra­tively, for example, the Zimbabwe Revenue Authority (ZIMRA) does not have a database of the informal traders and most councils do not have such database too. Therefore, it is difficult to track the operators in these sectors for tax payment. Informal traders are reluctant to obtain tax clearance certificat­es which make the whole process futile.

After all, simply demanding more tax (on top of other taxes such as the 2% IMTT) from informal traders and the selfemploy­ed places a huge tax burden on the struggling businesses, which are trying hard to remain operationa­l. Eventually, these businesses will abscond or worse still, they will close.

The heavy tax burden sends a very bad signal to the business community. It shows our insatiable desire for revenue collection today with no plan to grow the revenue base into the future.

This is not feasible. We have been there before — as at May 31, 2018, the Zimbabwe Revenue Authority (Zimra) had a huge uncollecta­ble debt book of around US$4,3 billion — a consequenc­e of harsh taxes in a stable currency environmen­t. According to Zimra, the debt was difficult to recover due to factors such as operationa­l challenges faced by companies. We are going back there, if money supply growth remains curtailed as planned.

Against this backdrop, a projection of a 100% revenue growth, as in the 2021 national budget, seems unrealisti­c, more so in a static exchange rate environmen­t. A static exchange rate would mean no growth in money supply and therefore inflation is also curtailed. In the absence of inflation, revenue cannot grow 100% unless production goes up by 100% which is unlikely if not impossible. This could have been the reason why the authoritie­s resorted to ratcheting taxes. However, the consequenc­es will be devastatin­g to the economy. We cannot just tax our way out of the current economic hardships.

Rather we need to address underlying issues in the operating environmen­t. This suggests that we must create a more competitiv­e and friendly business environmen­t over and above a stable exchange rate and inflation rate. The idea that a stable currency rate is a panacea to all our economic challenges is misplaced.

When a friendlier business environmen­t has been created, a more suitable policy option will be to focus on the pursuit for better livelihood­s and for a more self-reliant informal sector. In this regard, government interventi­on in the informal and self-employed sector will concentrat­e on enablement and support rather than taxation and regulation.

The enablement and support strategies may come in different forms such as, skills developmen­t training, access to suitable premises, provision of water and electricit­y, provision of lines of credit and business insurance, extending government subsidies and prioritisi­ng SMEs in public sector supply chains. These strategies require registrati­on for the informal and self-employed businesses to be part of beneficiar­ies, making it easier to formalise them and tax them in future.

After all, the current state of the Zimbabwean economy, that is, a shrinking formal sector and high poverty rates, calls for smarter interventi­ons to tape into the tax potential of the informal and the selfemploy­ed sectors. The main policy drive should be to enable and strengthen them so that they become more viable and capable of increasing their contributi­on towards poverty eradicatio­n and employment creation. As they become more empowered and viable, they will gravitate towards formalisat­ion and contribute more to the tax base.

Tazvivinga is a Zimbabwean developmen­t economist based in South Africa. These weekly New Perspectiv­e articles are co-ordinated by Lovemore Kadenge, an independen­t consultant and past president of the Zimbabwe Economics Society. – or mobile +263 772 382 852.

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 ??  ?? These issues in the business operating environmen­t, affect not only the SMEs, informal and self-employed sectors, rather they affect the whole economy.
These issues in the business operating environmen­t, affect not only the SMEs, informal and self-employed sectors, rather they affect the whole economy.
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