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Fuel smuggling hampers growth

by Staff reporter
20 Jun 2023 at 06:46hrs | Views
FUEL smuggling into Zimbabwe is hampering the Government's revenue collection, and has become a threat to economic growth, despite tax and law enforcement authorities' efforts to curb the scourge.

While it is easy and legal to import fuel into Zimbabwe, legal imports are charged excise duty, and the smuggling rackets have been set up so fuel can be imported without paying duty, boosting the profits of the smugglers.

According to the Zimbabwe Revenue Authority (Zimra), smugglers declare fuel coming over the borders as being in transit across Zimbabwe, in theory from one border to another and so not liable to excise duty as the paperwork shows it will not be sold or used in Zimbabwe. But the smugglers offload the fuel in Zimbabwe and use it or sell it here.

Zimra discussed the smuggling in an undated article on its website titled, "IMF spearheads Excise Management Technical Assistance".

In its 2020 annual report, Zimra noted that the fuel smuggling syndicate involved clearing agents, transporters and a group of its own officers who were falsifying descriptions and quantities.

Economist and former Reserve Bank of Zimbabwe Monetary Policy Committee member, Mr Eddie Cross, said smuggling was a major problem at the country's "porous" borders owing to corruption. It was compounded by dollarisation, which "makes informal and criminal trading practices easy", thus impacting negatively on legitimate businesses.

He highlighted that, although the impact of fuel fraud on the economy is "minimal", tax evasion causes the shrinking of the formal sector and loss of jobs.

"All domestic manufacturers and producers are now feeling the threat of cheap imports and trading practices that do not pay duties or taxes at the borders," Mr Cross said.

A recent investigation by The Herald revealed that criminal syndicates were taking advantage of disparities in prices around SADC.

At least four truck drivers interviewed said that fuel fraud was rampant.

Speaking on condition of anonymity, one of the truckers, Mr Musumare Mutasa (not his real name), said a driver from a logistics company on assignment to transport 40 000 litres of petrol from Mozambique to Zambia would declare it as transit cargo at Forbes Border Post by Mutare, and then offload it in Zimbabwe.

He would then refill the tanker with 40 000 litres of water, seal it, declare the water as petrol at Chirundu Border Post to complete the acquittal process, and cross into Zambia.

Once in Zambia, he would dump the water and buy 40 000 litres of petrol on the Zambian market to deliver to the customer. Because of the different taxes and prices this particular deal would make the driver a profit with the consignment.

Taxation on fuel sums up to US$0,49 for every litre consumed locally, with excise duty accounting for US$0,30/litre for fuel imported through the pipeline and to US$0,35/litre when imported by truck.

So that 40 000 litre consignment listed on the paperwork as being in transit will see the smuggler making a handsome profit.

Besides the excise duties, there are other taxes and levies charged on imported fuel, such as carbon tax, Zimbabwe National Road Administration (Zinara) levy, and debt redemption tax. These other taxes are less easy to avoid since many have to be paid by trucks in transit.

But that 40 000 litre consignment will give the smuggler US$14 000 in

unpaid excise duty to add to the profit, and that can cover a lot of other costs, legal and illegal, and even corruption payments and still show a profit.

Zimra's performance report for the fourth quarter ending December 31, 2022, shows that excise duty contributed 14,6 percent of total revenue, with fuel accounting for 71,76 percent of all excise duties. So just over 10 percent of the Zimbabwe Government's tax revenue, the money it uses to pay civil servants, build dams and other infrastructure and keep the country running and growing, comes from fuel duties.

Smugglers, in effect, limit the sort of money the Government can pay civil servants and limit the amount of infrastructure that can be built, since the Second Republic does not borrow.

According to the Global Initiative Against Transnational Organised Crime 2020 3rd quarter risk bulletin, the illicit trade in fuel, which poses significant environmental and public-safety risks, is prevalent throughout Southern Africa.

Think tank ENACT, in a 2019 article, states that illicit trade in fuel is a global challenge that costs globally a total of an estimated US$133 billion a year due to theft, adulteration, fraud, tax evasion and subsidy abuse.

The article also states that proceeds from the illicit trade are often used to fund other organised criminal activities, presenting a threat to economic growth and security in the region.

Mr Pascoe Kurongwa (not real name), an expert in the logistics industry with vast experience in the public and private sectors, said fuel fraud was thriving and a collective effort was required to save the situation.

"The illegal fuel trade is complex and widespread.

"It involves a well-knit syndicate comprising logistics companies, truck drivers and rotten apples in the system that capitalise on price differences in SADC, taxation mismatches and regulation laxity.

"There is so much fraud going on, like adulteration and tax evasion. Most of the smuggled fuel is sold on the black market at ridiculously lower prices since no duty is paid, which is bleeding the Zimbabwean economy and harming legitimate businesses," Mr Kurongwa said.

In a 2022 article posted on LinkedIn, Cherif Bel Hadj Ali, says fuel fraud leads to loss of anticipated tax revenue and double losses on governments where certain petroleum products are taxed, while others are subsidised.

Under Zimbabwean laws, crude degummed soya oil and Jet A1 are exempted from duty, which creates opportunities for unscrupulous players in the fuel sector to forge import papers and mislabelling what is in the tanker.

Between 2017 and 2020, fuel prices in Zimbabwe were the lowest in SADC, which criminal elements capitalised on to smuggle fuel imported from Mozambique to South Africa, Zambia and the Democratic Republic of Congo at higher returns, causing shortages on the local market.

At least 42 local companies were investigated by the Zimbabwe Anti-Corruption Commission (ZACC) for fuel fraud in January 2020.

Now, the situation has changed as authorities sought to close the gap. Until recently, maximum retail prices were pegged at US$1,71 per litre of diesel and US$1,63 per litre of petrol.

According to figures from the Ministry of Energy and Power Development, Zimbabwe, on average, requires two million litres of petrol and three million litres of diesel a day, which translates to 730 million litres of petrol and 1,1 billion litres of diesel per year.

About 95 percent of the fuel is transported via the Beira pipeline route, which can be effectively monitored and where taxes can be accurately charged. But five percent is transported mainly by road, and rail from South Africa and Mozambique.

Zimbabwe's northern neighbour, Zambia, relies on ports in Mozambique and South Africa for fuel supplies using Zimbabwe as a transit route. Since Zambia-bound fuel is said to be in transit, it does not attract duty and taxes on the Zimbabwean side, yet some of that fuel is offloaded locally.

Ministry of Energy and Power Development deputy director in the petroleum department Mr Phanuel Muverengwi said adulteration, now "minimal", used to be a serious malpractice in the past, but the Government has since moved in to curb it.

It involved the adulteration of diesel with paraffin, since paraffin, considered a basic commodity then, was exempted from duty and levies.

"Unscrupulous fuel suppliers would mix diesel with paraffin to take advantage of paraffin's low price. This prejudiced the Government in the sense that paraffin, a product exempt from duty and levies, was substituting diesel, a product that attracts duty and levies. So, the Government lost revenue in that sense," Mr Muverengwi said.

He said it was not only the Government that lost out on revenue, but consumers were also short-changed as they were paying for poor-quality fuel that could damage their vehicles.

Mr Muverengwi said to curtail the subsidy abuse, the Government imposed the same duty and levies on paraffin as were imposed on diesel.

He highlighted that not all fuel suppliers adulterated petroleum products, or involved themselves in unethical practices, as there are "good companies" in the sector.

"Also, ZERA (Zimbabwe Energy Regulatory Authority) conducts quality tests on the fuel that is sold in the market," Mr Muverengwi said.

*This story was produced by The Herald. It was written as part of Wealth of Nations, a media skills development programme run by the Thomson Reuters Foundation. More information at The content is the sole responsibility of the author and the publisher.

Source - The Herald
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