It is a proven fact that value added tax (VAT) is a regressive tax which burdens the poor more than the rich.
Opinion: Cephas makunike
Overall, this is true for all consumption or indirect taxes of which VAT, customs and excise duties are some of the indirect taxes. According to the Zimbabwe Revenue Authority (Zimra) 2016 revenue performance report: “In terms of the revenue mix, the revenue for 2016 comprised individual tax (22,68%), excise duty (19,71%), VAT on local sales (18,51%), company tax (10,49%) and customs duty (8,39%).” Total contribution of indirect taxes to total tax revenue in this case was 46,61%, which shows a significant regressivity element in the Zimbabwe tax system.
It is also important to note that the gross VAT figure was much higher than 18,51% as a significant figure went to refunds (this is also acknowledged by Zimra) mainly to big businesses led by the mining sector.
This is ironic because it clearly demonstrates that it is the ordinary citizen, who bears the burden of VAT as the final consumer. It is also important to note that those who earn less (often the poor) use the greatest portion, if not all of their income on basic commodities as opposed to those who earn more/the rich. This ultimately means that the poor (the majority of whom are women, children and the vulnerable groups) bear the greatest burden of the VAT or consumption tax.
It is disheartening to note that a developing country like Zimbabwe, which has one of the world’s lowest per-capita incomes ($924,1 as at 2015), which is far less than the sub-Saharan Africa per-capita income ($1 588,5 as at 2015), decided to introduce 15% VAT on basic commodities such as meat, margarine, rice, potatoes and cereals with effect from February 1 2017 (Statutory Instrument 20 of 2017) as proposed in the 2017 Zimbabwe National Budget Statement. This form of fiscal reform, which favours the predominant use of the VAT has hugely been pushed by the International Monetary Fund, as they have seen it work mostly for developed countries without taking serious consideration of the fact that a one-size-fits all approach to policy reforms does not always work.
Moreover, the idea of increasingly removing VAT zero/multiple rates targeting priority sectors or special cases such as basic commodities to alleviate the burden of the poor majority in developing countries perpetuates poverty and inequality. While the policy objective to increase the tax base and hence increase revenues to finance basic public services and infrastructure might be noble, it does not always follow that it will happen, especially in developing countries. Evidence is abundant in many African countries, Zimbabwe included.
Unlike in developed countries, where high revenue collections have often resulted in good expenditure on basic public services such as education and health it is not the same in Africa. African countries have a reputation of poor revenue management (accountability and transparency rarely exist).
This means that increasing revenue collection does not guarantee a better life for the poor, who depend on public services. For example, in Zimbabwe public expenditure on health over the years has been below the Abuja commitment for African governments (15% of annual budget) as well as the Dakar Commitment (9% of GDP). According to the 2017 Zimbabwe National Budget Statement the public expenditure allocation for health is about 7% of the 2017 national budget while that on primary and secondary education is about 7% of the 2017 GDP.
It is, therefore, better to use the revenue collection side to redistribute wealth/income rather than the expenditure side as per the “IMF approach”. In this case a “smart” VAT, which is predominantly a VAT that applies a standard rate on all goods and services does not achieve the redistribution role of a tax but rather it perpetuates poverty and inequality. On the other hand, it is not always true that moving towards a predominantly standard/single rate/ smart VAT guarantees an increase in tax revenue, as it looks from a helicopter view of a tax system.
If proper impact analysis is conducted before these sort of reforms the results will reflect that other factors come into play, which may result in a very marginal or negative effect to the intended objective of increasing tax revenue in developing countries.
Examples of VAT effects along the business supply chain include the death of other players eg small businesses such as agriculture producers, who might find demand significantly dropping. In addition, while businesses might try to push all the VAT increase effect to the final consumer, they may find out that the sales will be negatively affected because of subdued spending power for final consumers.
Business may then try to share the VAT effect to reduce the burden on consumers, which will have a negative effect on their profits, thereby, negatively affecting their corporate tax payments, employment levels, wages and so forth.
It is high time that Zimbabwe transforms its signature into action so that the Sustainable Development Goals (SDGs) are fulfilled. The SDGs include Goal 10, which aims to reduce inequalities between and within countries by 2030. In pursuit of fair taxation and the global fight against inequality, Tax Justice Network Africa (TJN-A), Oxfam Novib and partners, in February 2016, launched a tool called the Fair Tax monitor (FTM). The FTM is an important tool that can be used to further monitor how tax regimes are either reducing or increasing the global inequality challenge.
The inequality debate is important to TJN-A because it dovetails with TJN-A’s vision of “A new Africa, where tax justice prevails to contribute to an equitable, inclusive and sustainable development”, as well as its 2016 to 2020 overall strategic goal of championing for “Improved policies and laws that enhance tax revenue mobilisation in Africa by 2020”.
Cephas Makunike works with the Tax Justice Network – Africa.
This article was written before Finance minister Patrick Chinamasa shelved the introduction of SI20. — EDITOR