More tax changes critical for Zimbabwe

via More tax changes critical for Zimbabwe November 15, 2013 by Eric Bloch Zimbabwe Independent

LAST week this column addressed some of the tax changes critical to facilitating recovery of the economy to a substantial extent, in contrast to the relatively minimal economic upturn achieved since 2009.Achieving considerable economic recovery is a prerequisite for the progressive containment and reversal of the great poverty suffered by an overwhelming majority of Zimbabweans. Some of the taxation policies essential to achieving a significant economic transformation were addressed in last week’s column, but more are tackled in this installment.

In order to determine comprehensively and constructively the policies that need to be introduced, and those existing that require rescission or substantive modification, the minister of Finance Patrick Chinamasa needs considerably greater dialogue and input from the private sector than his predecessors. It is for this reason that he has decided to postpone his budget presentation from late November (which traditionally has been the usual timing for presentation of the budget) until either December or January, and he should deservedly be commended for his recognition that significant consultation with commerce and industry, mines, agriculturalists, financial sector and many others is positive, and potentially the advice he receives, if effectively pursued, can be a major stimulant to greatly needed economic recovery.

However, many media columnists and private sector enterprises have been highly critical of the minister’s determination, contending that the delay precludes the businesses from making timeous plans for their operations in 2014. They have a total disregard for the reality that a marginally delayed national budget, if positively structured in relation to the economy’s needs, will markedly enhance the opportunities for the private sector in particular, and the populace in general.

Over and above fiscal management and taxation policies already addressed, others include:

• The new Income Tax Bill, currently awaiting presidential assent, prescribes that the only expenditure which may be deducted in the determination of taxable income is such expenditure as has been made “in the production of income, whereas the heretofore tax legislation allows for the deduction of not only expenditure incurred in the production of income, but also such expenditure as incurred for the purposes of trade. This is a grossly ill-considered policy change, for the non-deductibility of expenses such as insurances, subscription to business associations and business publications, bad debts, repairs and maintenance, and the like, are essential expenditures for most taxable income generators, albeit that they do not directly and identifiably relate to any specific taxable income generations.

• In like manner, the new legislation effectively disqualifies provisions for expenditure and losses, which may only be deducted when the losses are actually sustained. Thus, for example, already the Zimbabwe Revenue Authority (Zimra) is disallowing provisions for bad debts, only allowing deductibility when there is absolute evidence that the debts are not recoverable. However, very often the circumstances of the debtor, or the quantum of the indebtedness, is such that it is unavoidable for the taxpayer to pursue debt recovery and, therefore, in compliance with good business practice, such debts are provided for as potential bad debts.

• Another issue that requires the minister’s attention is that a few years ago the Value Added Tax (VAT) legislation was amended to provide that most of VAT Registered Operators must effect VAT payments by the 25th day of the month following on the month in which VAT was charged. However, as many economically viable, business operators require the extension of credit terms to customers (because of prevailing, nationwide illiquidity), and thus the VAT operators are obliged to effect payment to Zimra well before receipts thereof from customers. As the intensely great national illiquidity impacts as severely upon businesses as it does upon the public at large, the consequence is that many enterprises can no longer afford to sell on credit terms.

This further weakens their viability and survival, and the absence of such sales (even when the businesses manage to survive), diminishes the direct and indirect tax inflows to the fiscus. Reversion to the previous policy of VAT remittance to Zimra in the second month after VAT has been charged will benefit those who need access to credit terms, enhance the turnovers of the enterprises supplying goods or services on credit, and improve inflows to the fiscus.

• In the same vein, recent steep increases of the penalties payable by tax offenders (inclusive of those who have unintentionally and unknowingly defaulted, or only delayed in consequence of operation illiquidity), should be realistically reviewed downwards. Of course, penalties must be applied in all instances wherein taxpayers intentionally falsify their tax returns, or deliberately delay tax payments when due, but imposition of great penalties, disproportionate to the magnitude or circumstances occasioning the offence or the delayed payment, is unjust. It also impacts upon the continuance in generation of the taxpayer’s taxable income, jeopardises the economy, can destroy enterprises (thereby causing greater unemployment), creates a future prejudice to Zimra’s revenue inflows, and therefore to the fiscus, and many other ills.

• Similarly, the rates of mining royalties require review (not recurrently upwards as sought by government) to rates which are equitable and which are realistically aligned to those applicable on like minerals internationally. Mining can be a foremost stimulant to the recovery and growth of the Zimbabwean economy, but prohibitively high royalties (over and above the cost of claims registration, licence fees, income taxes and withholding taxes on dividends) are a major deterrent to mining sector investment.

• Chinamasa should also consider introducing taxation incentives to promote Indigenisation (such as waiver of Capital Gains Tax on shares disposed of by the non-Indigenous to the indigenous), and similarly create incentives to motivate the establishment of Small and Medium Enterprises, and transfer of informal sector economic operations into the formal sector.

These are some of the many issues that must be appropriately addressed in the 2014 budget.