Zimbabwe economy urgently needs tax reforms

For the fourth consecutive year, the Zimbabwe Revenue Authority (ZIMRA) has been exceeding budgeted quarterly and annual revenue targets (in ZW Dollar and in US Dollar terms). Even though the economy declined by more than 12% in 2019 and 2020, government revenues kept going up from a shrinking tax base.  Key contributors to government revenues being Value Added Tax (VAT) on imports and on local sales, Corporate Tax, Personal Income Tax, and Intermediated Money Transfer Tax (IMTT). In the fourth quarter of 2021, ZIMRA collected ZW$161 billion in gross revenue collections, which was 49% above the target. In 2021, the revenue agency collected a total of ZW$473 billion against a target of ZW$387.4 billion. Critically, the growth in real terms defies the fact that tax compliance levels have fallen below 30% and most formal business are finding ways to evade taxes or go informal on certain operations. This means that the government is overtaxing the few compliant business and increasing the cost of doing business locally.

Taxation as an economic stimulus
Taxation is one of the fundamental policies used by the government to influence consumption in the economy and boost economic growth. It can stimulate economic growth through giving profit incentives to business or slow down economic growth (unintentionally, in most cases). By continuously increasing taxes and instituting new tax heads, the government is scoring on a short-term goal of meeting an insatiable appetite to spend without taking care of the cows being milked. The unintended effects of hiking taxes have often been missed in the process. These effects inevitably come back to haunt the government as slow economic growth or decline, informalization, limited investment, tax defaults, evasion, company closures, product dumping, deindustrialization, uncompetitive pricing and smuggling.

Zimbabwe's tax regime is considered as one of the most cumbersome and expensive in the world, with the country ranking very low on the ease of doing business. Zimbabwe's taxes are a burden to companies and investors and require remodeling to ensure competitiveness in the economy.

Termly Licenses and Levies
Taxpayers especially businesses must apply for quarterly, biannual, or annual licenses to various government ministries and agents that do not add value to the process while those revenues do not contribute to the consolidated revenue fund managed by treasury. This is mainly pronounced on import and export procedures where various ministries are involved, and certain applications can only be made in Harare. Over and above the usual trading licenses, certain products can only be sold after getting permits or licenses from government ministries. Currently local authorities across the country are charging varied amounts to businesses depending on the city or town and the area of operation. These taxes need to be synchronized and unified across the market.

Excise Duty on Fuel
Despite the recent adjustment in pump prices of liquid fuels, the government is making a giant killing on Import and Excise duty levied on fuel. Taxes and levies account for $0.49 of every litre sold at the pump. Businesses in the petroleum value chain especially the thriving retailers, will then pay ZERA license fees and additional taxes levied on operating income. The cost of fuel heavily feeds into the cost of production across every sector and reduces competitiveness for Zimbabwean products on the local market against imports. It means Zimbabwe will continue to be a lucrative destination market for merchandise produced in South Africa, Zambia and other SADC countries which are landing in the local market at cheaper prices than locally manufactured products. Similarly, export trade in value added commodities cannot grow with such cost barriers. The current taxation levels on fuel are excessive and not in sync with trends in the SADC market for landlocked oil importing countries such as Zambia, Swaziland, and Malawi. Treasury needs to address the cost of fuel by reducing Import and Excise Duty paid on fuel to less than US$0.20 per litre, Carbon Tax to US$0.01 and ZINARA Road Levy to below US$0.03 to manage the cost of production in the economy.

IMMT Tax Review
Intermediated Money Transfer Tax (IMTT) currently provides 10.5% of government revenues, pointing to the importance of the tax to government coffers. However, the tax is a transaction tax accrued at various production levels by businesses from purchasing raw materials (inputs) to selling products in the market. Since the tax is also levied on formal businesses that pay corporate tax, the transaction tax should be made deductible from corporate tax or Value Added Tax (VAT) as is the case with other transaction taxes. This will provide relief to all hard-pressed tax compliant businesses.


Tax contribution in Q4 of 2021

Managing rate of informalization
The complex tax environment, multiple tax heads, low levels of confidence in the country's banking sector and frequent changes in monetary policies are the major causes of the increased rate of informalization in Zimbabwe. Most Small to Medium Enterprises (SMEs) are not tax compliant while formal organizations are finding ways to evade taxes to stay afloat. A 2018 study by the International Monetary Fund (IMF) discovered that 60% of the Zimbabwean economy is informal, second in the world only to Bolivia's 62.3%. The level of informalization in the country is now estimated to be between 70-75%. This means that the shadow economy in Zimbabwe transacts billions more than the formal economy. The shadow economy weighs heavily on economic recovery efforts as tax revenues dwindle and the treasury is forced to institute more taxes on the compliant few. To manage this, the government would need to simplify its taxation model and create robust enterprise systems that monitor business transactions in real time and enforce tax compliance.

Incentivizing fiscalisation
The government has put in place fiscalisation measures to monitor business transactions in real time for taxation purposes. This is a noble initiative that needs incentives to increase uptake. Currently, the full cost of fiscalisation is borne by the taxpayer and often runs into millions for large corporates. Moreover, businesses must redo the process every time there are currency changes. To incentivize fiscalisation, the government should make the cost of fiscalisation tax deductible or arrange standing financing facilities for tax applicants through commercial banks so that the cost of fiscalisation is staggered and shared between the taxpayer and government.

Incentivizing manufactured exports
Zimbabwe's exported commodities worth US$6.2 billion in 2021, which is a 41% increase from the US$4.39 billion recorded in 2020. However, the growth in exports is mainly attributed to firm mining commodity prices on the world market especially for Gold, PGM metals and Nickel. The smelting of PGM metals locally has also improved export value. However, it is imperative to point that over 95% of export earnings come from raw or semi processed minerals and tobacco. Manufactured exports only accounted for less than US$130 million (2% of total exports and declining yearly). There is need for deliberate efforts from the government to diversify export earnings, lean towards value addition and industrialize the economy before the Africa Free Continental Trade Area (AfCFTA) pact comes into full effect. Cumulatively, exporters are paying up to 45% of the proceeds in taxes and losing 25% of their real export earnings due to exchange rate disparities between the formal and parallel market rates. To provide incentives to exports (especially manufactured ones), the formal exchange rate should be market determined. Exchange rate distortions are threatening the viability of manufactured exports. Failure to provide tax incentives to manufactured exports (value addition and beneficiation) and ignoring exchange rate disparities will lead to the demise of local industries.

Simplifying Tax Compliance
The tax compliance process in Zimbabwe is cumbersome with businesses investing heavily in resources to track ZIMRA procedures and making periodic applications for tax clearance documents. 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. More often, businesses go for long periods without getting tax clearance certificates (ITF 263) from the tax agency due to system bottlenecks, manual intervention, and backlogs. To address this, renewal dates for tax clearance certificates should be staggered and clearance certificates should be issued 3 months ahead. On top of that, ZIMRA needs to make tax compliance easy for compliant businesses who are already in their database.

Currently the process is punitive and does not encourage voluntary compliance. It is easier for businesses to corruptly pay ZIMRA agents to get a tax clearance than to get one through the full tax compliance process.

Ultimately, there must be an optimal balance between achieving short term budget targets and creating a business and investment friendly economy. Taxes and levies need to be aligned and simplified. Taxation should not be reactionary as it hurts business, it should be a deliberate and long-term strategy to incentivize investment, create jobs and meet core government expenditure in a sustainable manner.

Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email vbhoroma@gmail.com or Twitter @VictorBhoroma1.