Zimra gives small businesses tax reprieve

The Zimbabwe Revenue Authority (Zimra) has offered a six-month grace period for informal businesses to register for taxes in a move seen to boost State revenues.

Revised guidelines outlining specific channels for sourcing and selling goods now stipulate a 5 percent withholding tax on businesses not eligible for Value Added Tax (VAT) and not registered for income tax, the Government revenue collection agency said.

In a bid to level the playing field for formal businesses, the Government introduced trading guidelines aimed at addressing concerns about unfair competition from the informal sector and promoting a more equitable market environment.

The new regulations limited purchases from manufacturers to tax-compliant wholesalers in a bid to combat tax evasion and ensure fair market competition. By way of illustration, major supermarket chains such as OK and Pick ‘n' Pay, and manufacturers such as Delta, were not obligated to source raw materials through wholesalers.

Formal retailers enjoyed unrestricted purchasing from wholesalers, whereas non-VAT registered retailers, informal traders, and individuals faced a monthly cap of US$1 000 according to now revised Government regulations.

Customers making their first purchase of the year at a wholesale, or lacking a receipt from a previous purchase were limited to spend only US$20 or less on goods.

The regulations drew sharp criticism from a broad range of stakeholders, including manufacturers, wholesalers and business advocacy groups.

Under the new guidelines, manufacturers, wholesalers and retailers with valid tax clearance certificate and registered for VAT can directly buy from the manufactures.

In the case of manufacturers, they can purchase inputs for their production processes or industrial goods only. As part of the new route-to-market guidelines, Zimra has identified goods, such as milk, bread and building materials, that consumers can now buy directly from producers.

Under the initial trading rules, purchasing specific items, such as bricks and perishable goods like milk and bread, from wholesalers proved difficult and impractical.

Informal traders who are neither VAT-registered nor income tax-registered can now purchase directly from manufacturers, subject to a withholding tax payment.

To purchase from wholesalers, retailers must be VAT-registered with a valid tax clearance certificate. Non-VAT entities incur a 5 percent withholding tax on invoices.

However, the 5 percent withholding tax does not apply to purchases of medical supplies or by government ministries and departments (excluding statutory bodies).

The Confederation of Zimbabwe Industry (CZI) had earlier proposed a 3 percent presumptive VAT on all goods sold to registered traders who are not tax compliant.

This would ensure an immediate tax collection of the VAT equivalent to the 3 percent of the current volumes of trade between manufacturers and informal traders.

Zimbabwe's informal sector is estimated to make up a large portion of the economy, but it is largely untaxed. During the six months grace period, a withholding tax could bring additional revenue for the Government to fund essential services.

The six-month window aims to facilitate the formalisation and tax registration of informal businesses, including those in rural areas, with the anticipated outcome of boosting Government tax revenue.

Following the grace period, informal businesses, including those in rural areas, are expected to have formalised their operations.

Formalising the informal sector, some economic analysts say, would hinder tax evasion and foster a more equitable business environment, particularly for formal businesses.

"Formalisation presents a welcome opportunity to curb unfair competition faced by established businesses," said Mr Gerald Chari, development economist with a local university.

"With informal actors brought into the tax net, formal businesses can operate on a more equitable footing."

Confederation of Retailers Association president, Mr Denford Mutashu, welcomed the Government's focus on formalising informal businesses. He said he was engaging stakeholders to get feedback on the impact of the new measures.

"Formalisation agenda is welcome," he said.

"Currently, we are engaging the formal retailers and wholesalers to see if the new measures are acceptable," he added.